UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarter ended JUNE 30, 1998
-------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 2-85008-NY
----------
MEDICAL STERILIZATION, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer specified in its character)
NEW YORK 11-2621408
- ------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 UNDERHILL BOULEVARD, SYOSSET, NEW YORK 11791
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(516) 496-8822
- --------------------------------------------------------------------------------
(Issuer's telephone number)
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15 (D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Number of shares of Common Stock, $.01 par value, outstanding as of June 30,
1998.
3,170,496 shares
---------
Transitional Small Business Disclosure Format (Check One) Yes |_| No |X|
<PAGE>
MEDICAL STERILIZATION, INC.
INDEX
Page No.
--------
Part I. Financial Information
Balance Sheet as of June 30, 1998 (unaudited) ........... 3 - 4
Statements of Operations for the six months
ended June 30, 1998 and June 30, 1997
(unaudited) ............................................. 5
Statements of Operations for the three months
ended June 30, 1998 and June 30, 1997
(unaudited) ............................................. 6
Statements of Cash Flows for the six months
ended June 30, 1998 and June 30, 1998
(unaudited) ............................................. 7
Notes to Consolidated Financial Statements .............. 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 10 - 13
Part II. Other Information ....................................... 14
Signatures .............................................. 14
2
<PAGE>
MEDICAL STERILIZATION, INC.
Balance Sheet
June 30,1998
(unaudited)
------------
ASSETS
Current assets
Cash $ 43,375
Accounts receivable, less allowance for
doubtful accounts of $167,825 1,674,860
Inventory 53,068
Prepaid expenses 268,863
----------
Total current assets 2,040,166
----------
Fixed assets, at cost, less accumulated
depreciation and amortization 5,762,771
Other assets 143,605
----------
Total assets $7,946,542
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $1,234,273
Short term note payable 59,528
Current obligation under capital lease 539,831
----------
Total current liabilities 1,833,632
----------
Long-term liabilities
Long-term debt, less current maturities 945,127
Obligation under capital lease 1,870,030
----------
Total liabilities 4,648,789
----------
Commitment and contingencies (Note 4):
Preferred Stock
Convertible redeemable cumulative preferred
stock, par value $.01 per share, Series B
Authorized 1,000,000 shares, issued and
outstanding 687,500 shares 1,832,266
----------
Continued
See notes to financial statements
3
<PAGE>
MEDICAL STERILIZATION, INC.
Balance Sheet
Continued
June 30, 1998
(unaudited)
-------------
Shareholders' equity
Convertible Preferred Stock Series C
Authorized 2,000,000 shares, issued
and outstanding 1,945,625 shares 1,945,625
Common stock, par value $.01 per share
Authorized 10,000,000 shares, issued
and outstanding 3,170,496 shares 31,704
Additional paid-in capital 7,678,222
Accumulated deficit (8,190,064)
-----------
Shareholders' equity 1,465,487
-----------
Total liabilities and shareholders' equity $ 7,946,542
===========
See notes to financial statements
4
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Operations
(Unaudited)
For the six months
ended June 30,
---------------------------
1998 1997
----------- -----------
Income
Revenue $ 3,896,352 $ 4,732,894
----------- -----------
3,896,352 4,732,894
Costs and Expenses
Operating 2,503,925 2,905,900
Distribution 367,138 248,480
Selling, general and administrative 1,019,412 1,161,193
Interest 235,217 216,607
----------- -----------
4,125,692 4,532,180
----------- -----------
(Loss) income before income taxes (229,340) 200,714
Income taxes 0 0
----------- -----------
Net (loss) income (229,340) 200,714
Preferred stock dividends 54,762 61,776
----------- -----------
Net (loss) income applicable to common
shareholders $ (284,102) $ 138,938
=========== ===========
Earnings per common shares - basic $ (.09) $ .04
=========== ===========
Earnings per common shares - diluted $ (.05) $ .03
=========== ===========
Weighted average common shares 3,170,496 3,145,496
=========== ===========
Weighted dilutive common shares 5,322,807 5,354,965
=========== ===========
See notes to financial statements
5
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Operations
(Unaudited)
For the three months
ended June 30,
---------------------------
1998 1997
----------- -----------
Income
Revenue $ 1,885,250 $ 2,466,879
----------- -----------
1,885,250 2,466,879
Costs and Expenses
Operating 1,263,166 1,462,279
Distribution 190,506 137,715
Selling, general and administrative 542,203 645,026
Interest 119,113 113,145
----------- -----------
2,114,988 2,358,165
----------- -----------
(Loss) income before income taxes (229,738) 108,714
Income taxes 0 0
----------- -----------
Net (loss) income (229,738) 108,714
Preferred stock dividends 27,381 30,888
----------- -----------
Net (loss) income applicable to common
shareholders $ (257,119) $ 77,826
=========== ===========
Earnings per common shares - basic $ (.08) $ .02
=========== ===========
Earnings per common shares - diluted $ (.05) $ .01
=========== ===========
Weighted average common shares 3,170,496 3,170,496
=========== ===========
Weighted dilutive common shares 5,341,480 5,338,305
=========== ===========
See notes to financial statements
6
<PAGE>
MEDICAL STERILIZATION, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended June 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (229,340) $ 200,714
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 320,790 356,485
Changes in assets and liabilities:
Decrease (increase) in receivables 716,273 (92,786)
Decrease in inventory 17,535 25,598
(Increase) in prepaid expenses (163,819) (105,118)
(Increase) in other assets (3,909) (29,524)
Increase in deposits payable 0 150,000
Increase (decrease) in accounts payable
and accrued expenses 303,099 (304,925)
----------- -----------
Net cash provided by operating activities 960,629 200,444
----------- -----------
Cash flows from investing activities:
Net capital expenditures 345,774 (742,323)
----------- -----------
Net cash provided (used) in investing activities 345,774 (742,323)
----------- -----------
Cash flows from financing activities:
Registration costs 0 (18,000)
Net (repayments) proceeds from revolving (504,882) 1,249
line of credit
Borrowings (repayments) under
short-term notes payable 9,528 (8,189)
(Repayments) borrowings of long-term debt (851,836) 70,522
Net borrowings under capital lease
obligations 51,716 443,721
----------- -----------
Net cash (used) provided by financing activities (1,295,474) 489,303
----------- -----------
Net increase (decrease) in cash 10,929 (52,576)
Cash at beginning of period 32,446 75,703
----------- -----------
Cash at end of period $ 43,375 $ 23,127
=========== ===========
</TABLE>
See notes to financial statements
7
<PAGE>
MEDICAL STERILIZATION, INC.
Notes to Financial Statements
1. Unaudited Statements:
The accompanying unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements have been condensed or omitted pursuant to such
rules and regulations although management believes that the disclosures
are adequate to make the information presented not misleading. In the
opinion of management, the accompanying financial statements contain all
adjustments necessary to present a fair statement of the results for the
interim period presented. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report filed on Form 10-KSB for the year
ended December 31, 1997.
2. Earnings Per Share Calculation:
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), which establishes standards for computing and presenting
earnings per share. Basic earnings per share is computed by dividing net
income by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed in a similar manner
except that the weighted average number of common shares is increased for
dilutive securities. Potentially dilutive securities for the six months
ended June 30, 1998 computation of diluted earnings per share consist of
options for approximately 206,686 shares and Series C Convertible
Preferred Stock for approximately 1,945,625 shares. Potentially dilutive
securities for the three months ended June 30, 1998 computation of diluted
earnings per share consist of options for approximately 225,359 shares and
Series C Convertible Preferred Stock for approximately 1,945,625.
Potentially dilutive securities for the six months ended June 30, 1997
computation of diluted earnings per share consist of options for
approximately 263,844 shares and Series C Convertible Preferred Stock for
approximately 1,945,625. Potentially dilutive securities for the three
months ended June 30, 1997 computation of diluted earnings per share
consist of options for approximately 222,184 shares and Series C
Convertible Preferred Stock for approximately 1,945,625. Series B
Preferred Stock was excluded from the 1998 and 1997 calculation of diluted
earnings per share since the result would be anti-dilutive.
3. Subsequent Events:
On April 30, 1998, the Company successfully completed divestiture of its
electron beam accelerator and related equipment for the approximate sum of
$1,250,000. The proceeds of
8
<PAGE>
the sale were immediately used by the Company to repay the entire balance
of a bank note against the beam for approximately $402,000, and the
residual monies were applied against the Company's financing agreement
with its commercial lender.
The sale of the beam completes the decision by the Company's Board of
Directors to focus the Company on its core Instrument Set sterilization
processing business. Revenues from the business divested approximated
$4,100,000 and $3,800,000 for the years ended December 31, 1997 and 1996,
respectively.
On August 3, 1998, SSI Surgical Services, Inc. ("SSI"), a joint venture
company between TFX Equities, Incorporated, a wholly owned subsidiary of
Teleflex, Incorporated, and the Company formed in May, 1997, acquired all
the assets of Sterilization Management Group ("SMG"). SMG currently
operates 5 sterile processing facilities, principally involved in the
sterilization and reprocessing of reusable gowns and set-up packs, based
in McGraw Park, Illinois, Baltimore, Houston, Tampa and Detroit. Four of
these facilities have Instrument Set sterilization processing capabilities
and the company plans to upgrade the fifth to include Instrument Set
sterilization processing so that all of the facilities can focus on this
added business opportunity. Through these facilities, SMG currently
employs approximately 120 full-time employees, and provides sterile and
non-sterile operating room gowns, surgical towels and set-up packs to
approximately 130 hospitals in 11 states. SMG had approximately $11.0
million in revenues for the twelve months ending December 31, 1997.
As of April 1998, SSI had also entered into several multi-year contracts
to provide long-term on-site management and sterile processing services
totaling over $20.0 million.
Based on the Company's interest in a rapidly growing SSI, the Company now
has expanded from a regional sterilization processing facility to one with
a national footprint. It should be noted, however, that the Company's
accompanying unaudited financial statements do not reflect any
consolidation of SSI results at this time.
9
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Current Assets have decreased approximately $1,809,000 to $2,040,166 at
June 30, 1998 compared to $3,849,226 at December 31, 1997. The decrease was
primarily due to the decrease in assets held for sale of $1,250,000 related to
the successful completion of the divestiture of the electron beam accelerator
and related equipment and an approximate $716,273 decrease in accounts
receivable offset partially by an approximate $163,819 increase in prepaid
expenses. The Company had positive working capital of approximately $206,534 at
June 30, 1998 compared to approximately $1,529,850 at December 31, 1997. This
decrease of approximately $1,323,316 was primarily the result of the decrease in
assets held for sale of $1,250,000 related to the successful completion of the
divestiture of the electron beam accelerator and related equipment, the decrease
in accounts receivable of approximately $716,273 and the increase in accounts
payable and accrued expenses of $303,099, offset in part by the repayment of the
current portion of debt of approximately $851,836 and an increase in prepaid
expenses of approximately $163,819. There was a decrease in the working capital
ratio, to 1.11 to 1 at June 30, 1998 versus 1.66 to 1 at December 31, 1997. This
was directly the result of the sale of the beam and subsequent repayment of debt
described above.
The Company currently plans to expand its business by increasing its
portfolio of reprocessing services to include new service offerings such as
consulting, on-site management services and EtO sterilization. Management also
plans to purchase additional surgical instruments, as and if required to support
the Company's hospital sterilization growth objectives. The Company believes
that the anticipated future cash flow from operations, along with its cash on
hand and available funds under its working capital line of credit and the
completion of the sale of the electron beam accelerator in April, 1998, will be
sufficient to meet working capital requirements during 1998. There can be no
assurance, however, that the Company will not require additional working capital
and, if it does require such capital, that such capital will be available to the
Company on acceptable terms, if at all.
INFLATION
The Company does not anticipate that inflation will have any significant
effect on its business particularly since the United States, the only market in
which the Company currently intends to operate, is presently experiencing a
relatively low rate of inflation.
10
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
RESULTS OF OPERATIONS
REVENUES
Revenues for the six months ended June 30, 1998 decreased approximately
$837,000 or 17.7% to approximately $3,896,000 from revenues of approximately
$4,733,000 for the six months ended June 30, 1997. The decrease in revenues was
primarily attributable to an approximate $1,632,000 decrease in revenues or a
78.4% decrease in the Company's contract sterilization and radiation processing
of industrial products services in line with the Company's decision to divest
this business, offset by an approximate $795,000 or 30.0% increase in the
Company's revenue in its hospital services division. In addition, revenue in the
Company's hospital services division for the six months ended June 30, 1998 is
shown net of credits from prior periods of approximately $30,000 related to the
timing of volume adjustments to certain hospital contracts.
Revenues for the three months ended June 30, 1998 decreased approximately
$582,000 or 23.6% to approximately $1,885,000 from revenues of approximately
$2,467,000 for the three months ended June 30, 1997. The decrease in revenues
was primarily attributable to an approximate $976,000 decrease in revenues or a
93.8% decrease in the Company's contract sterilization and radiation processing
of industrial products services in line with the Company's decision to divest
this business, offset by an approximate $394,000 or 27.6% increase in the
Company's revenue in its hospital services division.
COSTS AND EXPENSES
Total expenses decreased approximately $406,000 or 9.0% to approximately
$4,125,692 for the six months ended June 30, 1998 compared to approximately
$4,532,180 for the six months ended June 30, 1997. Operating expenses have
decreased approximately $402,000 or 13.8% due to a reduction in salary, utility
and other costs related to the divestiture of the electron beam accelerator
partially offset by increases in salaries and supplies to support the increased
sales volume in the hospital services division. Distribution costs have
increased approximately $119,000 or 47.8% due to increased driver salaries and
other costs related to increased sales volume and expanded geographical coverage
in the hospital services division. Selling, general and administrative expenses
have decreased approximately $142,000 or 12.2% due primarily to reduced
administrative salary
11
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
expenditure attributed to the hospital services division. Interest expense
increased approximately $19,000 or 8.6% due to increased capital leases used to
purchase surgical instruments.
The decrease in total expenses for the six months ended June 30, 1998, was
limited by several factors attributed to the divestiture of the electron beam
business, as well as, other nonrecurring expenditures. The Company is currently
evaluating long-term sublease offers on its facility to offset approximately
$143,000 in unabsorbed plant rental and realty taxes associated with the
discontinued electron beam business that are currently included in operating
expenses for the six months ended June 30, 1998. Operating expenses also include
approximately $50,000 related to nonrecurring items involving benefit policy
changes and one-time supply costs. In addition to these items, the Company is
effecting further reductions in selling, general and administrative expenses.
Total expenses decreased approximately $243,000 or 10.3% to approximately
$2,114,988 for the three months ended June 30, 1998 compared to approximately
$2,358,165 for the three months ended June 30, 1997. Operating expenses have
decreased approximately $199,000 or 13.6% due to a reduction in salary, utility
and other costs related to the divestiture of the electron beam accelerator
partially offset by increases in salaries and supplies to support the increased
sales volume in the hospital services division. Distribution costs have
increased $53,000 or 38.3% due to increased driver salaries and other costs
related to increased sales volume and expanded geographical coverage in the
hospital services division. Selling, general and administrative expenses have
decreased approximately $103,000 or 15.9% due primarily to reduced
administrative salary expenditure attributed to the hospital services division
and a decrease in provision for bad debt. Interest expense increased
approximately $6,000 or 5.3% due to increased capital leases used to purchase
surgical instruments.
The decrease in total expenses for the three months ended June 30, 1998,
was limited by approximately $86,000 in unabsorbed plant rental and realty taxes
associated with the discontinued electron beam business that are currently
included in operating expenses for the three months ended June 30, 1998.
12
<PAGE>
MEDICAL STERILIZATION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS, continued
NET INCOME (LOSS)
APPLICABLE TO COMMON SHAREHOLDERS
Net loss applicable to common shareholders was approximately ($284,000) or
($.05) per share on a diluted basis for the six months ended June 30, 1998
compared to net income applicable to common shareholders of approximately
$139,000 or $.03 per share for the six months ended June 30, 1997 on a diluted
basis. Basic earnings per share for the six months ended June 30, 1998
represented a net loss per share of approximately ($.09) compared to net income
per share of approximately $.04 for the six months ended June 30, 1997.
Net loss applicable to common shareholders was approximately ($257,000) or
($.05) per share on a diluted basis for the three months ended June 30, 1998
compared to net income applicable to common shareholders of approximately
$78,000 or $.01 per share for the three months ended June 30, 1997 on a diluted
basis. Basic earnings per share for the three months ended June 30, 1998
represented a net loss per share of approximately ($.08) compared to net income
per share of approximately $.02 for the three months ended June 30, 1997.
13
<PAGE>
MEDICAL STERILIZATION, INC.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-KSB
(b) There were no reports on Form 8-KSB filed by the registrant during
the three months ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
This Form 10-QSB contains statements concerning certain trends and other
forward-looking information affecting or relating to the Company and its
industry that are intended to qualify for the protections afforded
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. There are many important factors that could cause actual results to
differ materially from those in the forward-looking statements. Many of these
important factors are outside MEDICAL STERILIZATION, INC.'s control. Changes in
market conditions, including competitive factors and changes in government
regulations, could cause actual results to differ materially from the Company's
expectations. No assurance can be provided as to any future financial results.
Date August 14, 1998 MEDICAL STERILIZATION, INC.
---------------
/s/ D. Michael Deignan
----------------------------------------
D. Michael Deignan, President/C.E.O. and
Principal Financial Officer
/s/ Ivan Zubin
----------------------------------------
Ivan Zubin, Director of Finance and
Principal Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 43,375
<SECURITIES> 0
<RECEIVABLES> 1,842,685
<ALLOWANCES> (167,825)
<INVENTORY> 53,068
<CURRENT-ASSETS> 2,040,166
<PP&E> 11,199,528
<DEPRECIATION> (5,436,757)
<TOTAL-ASSETS> 7,946,542
<CURRENT-LIABILITIES> 1,833,632
<BONDS> 0
0
1,832,266
<COMMON> 31,704
<OTHER-SE> 1,433,783
<TOTAL-LIABILITY-AND-EQUITY> 7,946,542
<SALES> 3,896,352
<TOTAL-REVENUES> 3,896,352
<CGS> 2,503,925
<TOTAL-COSTS> 3,890,475
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235,217
<INCOME-PRETAX> (229,340)
<INCOME-TAX> 0
<INCOME-CONTINUING> (229,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (284,102)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.05)
</TABLE>
