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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|_| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998
|_| Transition report under 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 as specified in its charter)
New York 11-2621408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Underhill Boulevard, Syosset, New York 11791
(Address of principal executive offices) (Zip Code)
(516) 496-8822
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check 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 Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. |X| Yes No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
The Issuer's revenues for the fiscal year ended December 31, 1998 were
$7,560,418. As of March 26, 1999, the aggregate market value of the Issuer's
voting stock held by non-affiliates was approximately $1,063,619 based on the
average bid and asked price of the Issuer's Common Stock on March 26, 1999 as
reported on the Nasdaq Bulletin Board System.
As of March 26, 1999, there were 19,491,216 shares of the Issuer's Common Stock,
par value $.01 per share, issued and outstanding.
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Item 1. Description of Business
Overview
Medical Sterilization, Inc. (the "Company") provides off-site reprocessing
and sterilization of the Company's standard containerized reprocessable
sterilized surgical instrument sets ("Instrument Sets") as well as certain other
items requiring sterilization ("Sterilizable Items") for healthcare providers
such as hospitals, hospital networks and ambulatory surgi-centers. See
"Sterilization Services for Healthcare Providers". In furtherance of the
Company's decision in 1997 to divest its contract sterilization of disposable
medical products and radiation processing of industrial products businesses to
focus on its Instrument Set sterilization processing business, the Company
completed the sale of its electron beam accelerator ( the "Accelerator") to
Shamrock Technologies, Inc. ("Shamrock") during 1998.
The Company provides its off-site reprocessing and sterilization services
and pre-sterilized reprocessable Instrument Sets to hospitals, hospital networks
and ambulatory surgi-centers in New York, New Jersey, Pennsylvania and the New
England states, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire
and Maine (the "Northeast Corridor").
On November, 19, 1998, the Company entered into an Acquisition Agreement
("the Acquisition Agreement") with TFX Equities Incorporated ("TFX"), a wholly
owned subsidiary of Teleflex, Incorporated ("Teleflex"). Pursuant to the terms
of the Acquisition Agreement, the Company agreed to exchange 13,400,000 shares
of Common Stock and warrants to purchase an aggregate of 1,500,000 shares of
Common Stock for all of the issued and outstanding shares of Endoscopy
Specialists, Incorporated ("ESI"), a Florida-based surgical instrument
management services firm, and all of the issued and outstanding shares not
already held by the Company of SSI Surgical Services, Inc. ("SSI"), a Joint
Venture with TFX. The acquisition was completed on January 11, 1999. This
transaction will allow the Company to market the off-site reprocessing and
sterilization of surgical instruments and the management of on-site
sterilization services to hospitals and healthcare facilities in all of North
America.
The Company was founded in May 1982 as a New York corporation. Its
principal executive offices are located at 225 Underhill Boulevard, Syosset, New
York 11791, and its telephone number is (516) 496-8822.
Endoscopy Specialists Incorporated
ESI, headquartered in Orlando, Florida, was incorporated in 1993 to
provide endoscopic instrument sets to hospitals and other medical facilities on
a per procedure basis. In August 1995, ESI was acquired by TFX.
ESI provides customers specified endoscopic instruments and specialty
products required to perform designated endoscopic surgical procedures. In
addition, ESI assigns highly trained service technicians to each customer
hospital. The ESI service technician is responsible for assisting with the
operating room set-up prior to the start of the designated endoscopic case, and
remains on-site to serve as a technical expert available to respond to questions
from the surgical staff regarding the proper use of the products and video
systems supplied by ESI. At the
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completion of the case, the ESI technician decontaminates and reprocesses the
ESI instruments and performs quality assurance checks on the instruments to
validate their readiness for the next procedure. ESI manages all repairs,
refurbishing, reprocessing and replacement costs associated with the provided
products.
ESI offers services for general surgery, gynecology, urology, ENT,
orthopedics, plastic surgery, thoracic surgery and cardiovascular surgery. The
related ESI instrument sets can be basic, containing only instrumentation, or
increasingly complex, to include scopes, video equipment and other accessories.
By using high quality reusable instruments that are properly managed by trained
ESI technicians, ESI delivers higher quality products billed on a per procedure
basis, thus providing a basis for potentially reducing hospital costs.
ESI currently provides services to approximately 100 hospitals and surgery
centers throughout the United States. Maintaining its growth on a controlled
basis, ESI expects to continue to build its business through the strength of its
reputation.
SSI Surgical Services, Inc.
SSI, headquartered in Orlando, Florida, was formed in 1997 as a joint
venture between TFX and the Company. SSI was established to provide general and
specialty instrument sets, basins and surgical gowns and towels to hospitals and
other facilities. In August 1998, SSI acquired Sterilization Management Group
("SMG") which owned and managed five surgical instrument and linen reprocessing
facilities located in major metropolitan areas in the United States.
SSI offers a broad menu of services both on-site (at customer locations)
and off-site (at the five SSI facilities). These services include, facility
assessment, on-site department management and staffing, asset inventory
management systems, surgical instrument management, equipment and sterile
processing department redesign, sterile processing department
education/certification and off-site sterile reprocessing of surgical
instruments, gowns and towels.
SSI currently provides on-site services to six hospitals and surgery
centers and off-site sterilization services to more than 100 customers. SSI's
focus on education and management services, strategic alliances with suppliers
of sterilization equipment and asset management systems, on staff instrument
repair and refurbishment resources and its highly trained team of professionals
is expected to allow for continued growth and a competitive point of difference.
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Statements in this Form 10-KSB which are not historical facts, so-called
"forward-looking statements", are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed herein and in the Company's other filings with the Securities and
Exchange Commission. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Certain Factors That May Affect
Future Results".
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Sterilization Services for Healthcare Providers
MSI provides off-site cleaning, decontamination and sterilization
processing of the Company's standard containerized reprocessable sterilized
surgical Instrument Sets as well as Sterilizable Items for healthcare providers
such as hospitals and ambulatory surgi-centers within the Northeast Corridor. As
of March 26, 1999, MSI had 18 contracts with healthcare providers in its area of
operations to provide its instrument services for labor and delivery; 23
contracts to provide its instrument services for operating rooms; 2 contracts to
provide laparoscopic instruments; 9 contracts to provide basins; 8 contracts to
provide gowns and/or towels; 2 contracts to provide its instrument services for
open heart and vascular surgery; 6 contracts to provide instrument services for
ambulatory surgery; 7 contracts to provide Ethylene Oxide ("EtO") processing for
instruments which could not be sterilized in a steam sterilizer; and 1 contract
to provide management services in a hospital. The value of contracts to be
implemented through the year 2003 is approximately $16,730,000, as of March 26,
1999. The Company estimates that there are approximately 250 such healthcare
providers in the Northeast Corridor.
Sterilizable Items consist of Instrument Sets, utensils, basins, towels,
surgical gowns and wraps and other items used in healthcare facilities which
require sterilization. Instrument Sets are prepackaged, sterilized,
reprocessable instrument sets, each of which is a complete set of instruments
necessary for a given medical procedure. The Company has designed approximately
85 different Instrument Sets for operating room procedures and labor and
delivery, including gall bladder, tonsillectomy and adenoidectomy, open heart,
vascular, orthopedic, endoscopy, cesarean sections, newborn delivery,
hysterectomy and dilation and curettage. The Company packages its Instrument
Sets in rigid containers with filters and seals, thereby maintaining sterile
integrity without the risk of tearing and pinholes which occur in more
traditional wrappers. The Instrument Sets aid in the organization of the
instruments for ease of use and provide for better instrument accountability
once the procedure is completed. Once an Instrument Set has been utilized, it is
returned to the Company for cleaning, sterilization and repackaging.
The Company's services are designed to replace or supplement the existing
in-house sterilization facilities of healthcare providers. Many hospitals have
older, less efficient sterilization facilities, staff their facilities with
nurses whose skills could be more effectively used elsewhere and underutilize
their sterilization facilities by operating their equipment only once per day.
Because of the relatively low volume of sterilization activities undertaken at
many of these facilities, worker productivity may not be as high as in other
areas of the healthcare organization, causing concern for administrators. In
addition, as hospitals continue to evaluate ways in which to utilize their
available space better, many hospitals are seeking to replace their in-house
sterilization facilities with profit generating centers such as operating rooms.
Many hospitals are also looking for ways in which to improve operating room
efficiency by eliminating the sterilization processing delays and shortages
sometimes experienced with their in-house sterilization facilities.
By utilizing state of the art, industrial size equipment, modern
sterilization technology, less expensive labor, and handling larger volumes, the
Company believes that it offers a cost- effective, high quality alternative to
in-house sterilization facilities. The Company has installed modern, industrial
size sterilization equipment at its Syosset facility, including an ultrasonic
cleaning system, two tunnel washers, two 300 cubic foot steam sterilizers and
two 8 cubic foot EtO sterilizers.
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The Company believes that it offers better sterility assurance levels than
those maintained at many hospitals. In order to comply with the infection
control requirements of the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"), the Center for Disease Control ("CDC"), the Association
for Advancement of Medical Instrumentation ("AAMI"), the Association of
Operating Room Nurses ("AORN"), the policies and procedures of each respective
hospital as well as the requirements of federal, state and local government
agencies, the Company has established rigorous testing measures and procedures,
such as sterilization process monitors (including temperature and pressure
recording), chemical indicators and bacteriological spore and culture testing.
The Company is a registered contract sterilization facility with the U.S. Food
and Drug Administration ("FDA"), even though neither the Company's activities in
this area nor hospital sterilization facilities are required to be so
registered. See "Government Regulation."
Competition
The Company's principal competition with respect to its sterilization
services for healthcare providers comes from the in-house sterilization
facilities of hospitals and ambulatory surgi-centers. Most hospitals have
in-house sterilization capability and many have invested significant capital in
their sterilization facilities. Also, the in-house sterilization facility staff
may be committed to maintaining the facility and its current staffing levels. As
a result, healthcare providers may be reluctant to shift their sterilization
activities from in-house to an off-site contractor. Furthermore, some hospitals
have union agreements that preclude or mitigate a hospital's ability to
outsource. In today's managed care driven, consolidating environment, hospitals
and hospital networks are renegotiating these agreements with yet to be
determined success.
The Company has no competitor operating in an off-site environment which
can replicate its sterilization services program though variations of the
Company's model potentially exist and/or have been announced in traditional
hospital purchasing news. Sterile Recoveries, Inc. and Angelica Corporation now
compete with the Company and specifically SMG in processing gowns, linens and
basins but their operating facilities are all outside the Northeast Corridor.
Substantial know-how and capital intensive barriers could limit competitive
interest.
Several small and large companies are specializing in on-site instrument
processing, consulting and management services, providing hospitals and hospital
networks a competitive choice between the Company's off-site instrument
processing and sterilization services. Following earlier strategic alliances and
the recent acquisition of ESI and SSI, the Company is now able to provide a
total instrument management solution for individual hospitals and hospital
networks throughout North America.
Customers
The Company sells its sterilization services to healthcare providers such
as hospitals and ambulatory surgi-centers in the Northeast Corridor. As of March
26, 1999, the Company provided Instrument Sets and sterilization services for
Sterilizable Items pursuant to 76 sterilization services contracts with 39
hospitals and ambulatory surgi-centers. No single customer accounted for 10% or
more of the Company's total revenues for the fiscal year ended December 31,
1998.
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Suppliers
The Company purchases from surgical instrument manufacturers the surgical
instruments included in Instrument Sets that are provided to hospitals and
ambulatory surgi-centers. The Company believes that such instruments are readily
available at market prices.
Sales and Marketing
MSI's sales and marketing strategy is to grow existing accounts by service
expansion: for example, if the Company is serving the labor and delivery
department of a hospital it will attempt to leverage its services into the
general operating room of the hospital after a period of successful product
performance in the labor and delivery area. The Company has expanded its
portfolio of reprocessing services to include new service offerings such as
consulting, on-site management services and EtO sterilization. The Company's
sales and marketing efforts are coordinated by sales professionals with
appropriate clinical and hospital expertise.
Intellectual Property
The Company does not rely on any patents for the conduct of its business.
The Company does rely upon the know-how of its employees and has executed
non-disclosure and non-competition agreements with its employees.
Government Regulation
The Company had obtained a permit from the New York State Department of
Environmental Conservation operating through the Nassau County Department of
Health to operate its radiation sterilization and processing facility. This
permit was in force through April 30, 1998, at which time the Company ceased
these operations. During that time, the Company believes it was in material
compliance with applicable laws and regulations with respect to its radiation
sterilization and processing facility. The Company believes that it was also in
material compliance with the regulations of the Nassau County Department of
Public Works with regard to the disposition of effluents.
The Company was registered with the Department of Health and Human
Services, Public Health Service of the FDA, and believes it was in material
compliance with the FDA compliance program. With regard to the reprocessing of
instrument sets for hospitals, the Company complies with the FDA's compliance
program.
The Company is also subject to the requirements of the Occupational Safety
and Health Administration ("OSHA") and believes that it is in material
compliance with such requirements. The Company believes that it is in material
compliance with all other applicable federal, state and local rules and
regulations relating to the conduct of its business.
Employees
As of December 31, 1998, the Company had 78 full-time and 22 part-time
employees. None of its employees are covered by any collective bargaining
agreement.
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Item 2. Description of Property
The Company's headquarters, including its executive offices and
sterilization facility, lease approximately 103,000 square feet of space in a
building located at 225 Underhill Boulevard, Syosset, New York. The Company
originally entered into its headquarters lease on March 1, 1984. On November 20,
1995, the Company executed a new lease for its headquarters which provides for a
term of March 1, 1996 through February 28, 2001 with an annual rent of $456,000
for the first three years and $504,000 for the next two years. The Company and
its Landlord are currently renegotiating the terms of the lease. On October 15,
1998, the Company signed a short-term sublease agreement through February 28,
1999, which provides for the sublease of 50,000 square feet of its premises for
approximately $100,000. This sublease was orally extended to March 31, 1999.
The Company believes that its facilities and equipment are in good
condition and are suitable for its operations as presently conducted and for its
foreseeable future operations. The Company currently believes that additional
facilities and equipment can be acquired if necessary, although there can be no
assurance that additional facilities and equipment will be available upon
reasonable or acceptable terms, if at all.
Item 3. Legal Proceedings
In management's opinion, there are no pending claims or litigation, the
adverse determination of which would have a material adverse effect on the
financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted for a vote of security-holders during the
Company's fiscal quarter ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock, $.01 par value per share, has been traded in
the over-the-counter market (under the symbol "MSTI") since September 26, 1983
and is now quoted on the Nasdaq Bulletin Board. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily represent actual transactions. The approximate number of record
holders of the Company's Common Stock as of March 26, 1999 was 261.
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The following table sets forth the high and low bid prices for a share of the
Company's Common Stock as reported on the Nasdaq Bulletin Board for each fiscal
quarter in the last two fiscal years and for the first fiscal quarter of 1999
(through March 26, 1999):
1999 High Bid Low Bid
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First Quarter (through March 26, 1999) $1.125 $0.563
1998
Fourth Quarter 1.063 0.500
Third Quarter 1.000 0.563
Second Quarter 1.875 0.750
First Quarter 1.313 0.875
1997
Fourth Quarter 1.375 0.875
Third Quarter 1.688 1.000
Second Quarter 1.688 1.000
First Quarter 2.625 1.188
The Company has never paid cash dividends with respect to its shares of
Common Stock. The Company currently intends to retain earnings, if any, for use
in its business and does not anticipate paying cash dividends on its shares of
Common Stock in the foreseeable future. The Company is required to pay dividends
at the rate of 8% per annum per share with respect to the outstanding shares of
Series B Convertible Preferred Stock. At the option of the Company, the
dividends may be paid in cash or accrued. If accrued, the dividends shall be
added to the face amount of the Series B Convertible Preferred at the time of
conversion. In addition, certain of the Company's financing agreements and the
terms of the Company's outstanding Series B Convertible Preferred Stock and the
Series C Convertible Preferred Stock prohibit the payment of dividends on the
shares of Common Stock. In connection with the January 1999 acquisition of ESI
and SSI, both the Series B and Series C Convertible Preferred Stock and accrued
dividends were converted to 2,920,720 shares of Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company reported a net loss of approximately $1,302,000 for the year
ended December 31, 1998 compared to net income of approximately $613,000 for the
year ended December 31, 1997. The decrease in net income was principally the
result of the loss in revenues associated with the divestiture of the contract
sterilization and radiation processing of industrial products services,
partially offset by an approximate 22 percent increase in revenues related to
the Company's hospital services division. The Company also incurred additional
unexpected one-time costs related to the disposal of the electron beam business
of approximately $230,000 and other nonrecurring expenditures including
severance and termination expenses of approximately $400,000 related to the
elimination of several senior management positions.
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The Company's earnings in 1998 were also severely impacted by its
inability to offset approximately $250,000 in unabsorbed plant rental, realty
taxes and other fixed overhead at its facility associated with the discontinued
electron beam business. On October 15, 1998, the Company signed a short-term
sublease agreement through February, 28, 1999, to sublease 50,000 square feet of
its premises at a rental plus other reimbursements of approximately $100,000.
For the fiscal year ended December 31, 1998, the Company's sterilization
services for healthcare providers, contract sterilization of disposable medical
products and radiation processing of industrial products businesses accounted
for approximately 94%, 6% and 0%, respectively, of the Company's revenues, as
compared with 59%, 10% and 31%, respectively, for the fiscal year ended December
31, 1997. These percentages are in line with the Board of Directors decision to
focus the Company on its core Instrument Set sterilization processing business.
During the second quarter of fiscal 1998, the Company successfully completed
divestiture of its electron beam accelerator and related equipment to Shamrock
Technologies, Inc. The proceeds of the sale were used by the Company to repay
the entire balance of a bank note secured by the electron beam accelerator, with
the residual monies applied against the Company's financing agreement with its
commercial lender.
In November, 1998, the Company entered into an agreement to acquire
Endoscopy Specialists, Incorporated ("ESI"), a Florida-based surgical instrument
management services firm, and the remaining 62.5% of the shares of SSI Surgical
Services, Inc. ("SSI"), a joint venture in which the Company had held a 37.5%
interest. Both businesses will be acquired from TFX, a wholly owned subsidiary
of Teleflex, a diversified publicly held company, in exchange for 13.4 million
common shares of the Company and warrants for an additional 1.5 million common
shares. TFX will convert the preferred shares of the Company it currently owns
into common shares of the Company. The Acquisition was completed on January, 11
1999, and has been accounted for as a purchase in the first quarter of fiscal
1999.
In December, 1998, the Company entered into a new loan agreement with TFX.
The funds obtained were used to settle interim and short-term advances from TFX
and various outstanding accounts payable balances, including amounts owed to
Pilling Weck, a subsidiary of Teleflex, as well as, to fund ongoing working
capital needs. The principal amount of the new loan totals $1,300,000 and bears
interest at the rate of 8 percent. The note is due and payable on January 3,
2000.
In December, 1998, the Company entered into a revolving loan account
agreement with Teleflex. Under the agreement, Teleflex has agreed to advance the
Company up to $750,000 for no more than two years. Interest is charged on the
unpaid principal balances at a fixed rate of 8 percent. $250,000 was drawn
against this facility as of December 31, 1998.
Results of Operations
1998 Compared with 1997
Revenues
Revenues for the year ended December 31, 1998 decreased approximately 24%
to $7,560,000 from approximately $9,890,000 for the year ended December 31,
1997. The decrease
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in revenues was attributable to an approximate $3,600,000 or 89% decrease in
revenues related to the Company's contract sterilization and radiation
processing of industrial products services in line with the Company's decision
to divest this business, partially offset by an approximate $1,276,000 or 22%
increase in revenues related to the Company's sterilization services to
healthcare providers. The increase in revenues related to the Company's
sterilization services to healthcare providers was attributable to market
penetration of new customers and expanded services to the Company's existing
customer base. During 1998, the Company also began to recognize, through
increased implementation of Instrument Sets, the full impact of revenues derived
from new multi-year contracts that were signed in 1997 with several major
healthcare providers in the region.
Other Income
During 1997, the Company received a nonrefundable deposit of $150,000
related to the sale of its contract sterilization services to E-BEAM.
Gross Profit
Gross profit (revenues minus operating expenses) decreased $1,286,000 or
approximately 33% from approximately $3,904,000 for the year ended December 31,
1997 to approximately $2,618,000 for the year ended December 31, 1998. Gross
profit as a percentage of revenues decreased approximately 4.9% from 39.5% for
the year ended December 31, 1997 to 34.6% for the year ended December 31, 1998.
The decrease in the Company's gross profit was attributable to the decrease in
revenues associated with the Company's contract sterilization and radiation
processing of industrial products services in line with the Company's decision
to divest this business, partially offset by improved production efficiencies in
the Company's facility and the flow on benefits from increased hospital sales
volumes.
Distribution Costs
Distribution costs increased $212,000 or 39% from approximately $543,000
for the year ended December 31, 1997 to $755,000 for the year ended December 31,
1998. The increase is directly related to increased sales volume and expanded
geographical coverage in the hospital services division.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $250,000 from
approximately $2,341,000 for the year ended December 31, 1997 to $2,591,000 for
the year ended December 31, 1998. The increase is principally attributed to
additional unexpected one-time costs related to the disposal of the electron
beam business and other nonrecurring expenditures including severance and
termination expenses related to the elimination of several senior management
positions.
Bad Debt Expense
Bad debt expense increased by $85,000 from $61,000 for the year ended
December 31, 1997 to $146,000 for the year ended December 31, 1998. The increase
was due to the write-off of a receivable from a customer who filed for
bankruptcy during 1998. The Company has
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determined that its allowance for doubtful accounts is sufficient to cover the
receivables from its hospital operations.
Interest Expense
Interest expense decreased by $58,000 from $486,000 for the year ended
December 31, 1997 to $428,000 for the year ended December 31, 1998. The decrease
is directly attributed to the sale of the electron beam and the subsequent
repayment of debt, partially offset by continued capital spending on surgical
instruments to support the growth of the hospital business.
Net (Loss) Income
Net loss for the year ended December 31, 1998 was $1,302,000, a decrease
of $1,915,000 from net income of approximately $613,000 for the year ended
December 31, 1997.
Net (Loss) Income Applicable to Common Shareholders
Diluted earnings per share for the year ended December 31, 1998
represented a net loss per share of $0.46, compared to net income per share of
$0.09 for the year ended December 31, 1997. Basic earnings per share for the
year ended December 31, 1998 also represented a net loss per share of $0.46,
compared to net income per share of $0.16 for the year ended December 31, 1997.
Excluding the effect of preferred dividends, diluted earnings per share for the
year ended December 31, 1998 represented a net loss per share of $0.41, compared
to net income per share of $0.11 for the year ended December 31, 1997.
Results of Operations
1997 Compared with 1996
Revenues
Revenues for the year ended December 31, 1997 increased approximately 15%
to $9,890,000 from $8,626,000 for the year ended December 31, 1996. The increase
in revenues was attributable to an approximate $1,081,000 or 23% increase in
revenues related to the Company's sterilization services to healthcare
providers, an approximate $110,000 or 4% increase in revenues related to the
Company's radiation processing of industrial products services and an
approximate $73,000 or 8% increase in revenues related to the Company's contract
sterilization services. The increase in revenues related to the Company's
sterilization services to healthcare providers was attributable to market
penetration of new customers and expanded services to the Company's existing
customer base. During 1997, the Company signed several new multi-year contracts
with major healthcare providers in the region. The increase in radiation
revenues was primarily attributable to the acceleration of Teflon processing
related to the impending termination of these services. The increase in contract
revenues, in turn, was mainly attributed to renegotiated rates with certain key
customers to more accurately reflect the service provided by the Company.
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Other Income
In April 1997, the Company received $150,000 in connection with the sale
of its contract sterilization services to E-BEAM, which is nonrefundable. This
receipt has been reported as other income.
Gross Profit
Gross profit (revenues minus operating expenses) increased $1,017,000 or
approximately 35% from $2,887,000 for the year ended December 31, 1996 to
$3,904,000 for the year ended December 31, 1997. Gross profit as a percentage of
revenues increased approximately 6.0% from 33.5% for the year ended December 31,
1996 to 39.5% for the year ended December 31, 1997. The increase in the
Company's gross profit was attributable to improved production efficiencies in
the Company's facility and the flow on benefits from increased sales volumes.
The major components of these efficiencies were a reduction in labor as a
percentage of revenues and a reduction in supplies used in production offset by
other increases related to new volume.
Distribution Costs
Distribution costs increased $72,000 or approximately 15% from $471,000
for the year ended December 31, 1996 to $543,000 for the year ended December 31,
1997. As a percentage of revenues, distribution costs remained relatively the
same over the prior year at 5.5%. The increase is primarily the result of
increased sales volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $101,000 from
$2,442,000 for the year ended December 31, 1996 to $2,341,000 for the year ended
December 31, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 28.3% for the year ended December 31,
1996 to 23.7% for the year ended December 31, 1997. The decrease is attributed
to the Company's continued strategy to reduce discretionary costs, in addition
to certain national marketing expenses being borne by SSI whereas last year they
were borne by the Company, and reduced legal expenses.
Bad Debt Expense
Bad debt expense decreased by $499,000 from $560,000 for the year ended
December 31, 1996 to $61,000 for the year ended December 31, 1997. The decrease
is attributed to write-offs and adjustments made in 1996 related to a receivable
from a customer in bankruptcy and the settlement of amounts in dispute. The
Company has determined that its allowance for doubtful accounts is sufficient to
cover the receivables from its hospital operations.
Write Down of Assets
The decrease of approximately $103,000 is related to the charge taken in
1996 to reflect the reduction in the value of assets associated with the
proposed sale of the electron beam accelerator.
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Interest Expense
Interest expense increased by $179,000 from $307,000 for the year ended
December 31, 1996 to $486,000 for the year ended December 31, 1997. The increase
is directly attributed to the increased interest charges incurred in financing
the purchase of surgical instruments and other equipment and the additional
borrowing of $500,000 from TFX.
Net Income
Net income for the year ended December 31, 1997 was $613,000, compared to
a net loss of $995,000 for the year ended December 31, 1996.
Net Income (Loss) Applicable to Common Shareholders
Diluted earnings per share for the year ended December 31, 1997 was $0.09,
compared to a net loss per share of $0.37 for the year ended December 31, 1996.
Basic earnings per share for the year ended December 31, 1997 was $0.16,
compared to a net loss per share of $0.37 for the year ended December 31, 1996.
Excluding the effect of preferred dividends, diluted earnings per share for the
year ended December 31, 1997 was $0.11, compared to a net loss per share of
$0.33 for the year ended December 31, 1996.
Liquidity and Capital Resources
Current assets decreased $1,508,000 to $2,341,000 at December 31, 1998
from $3,849,000 at December 31, 1997. The decrease was primarily attributable to
the classification of $1,250,000 as current assets held for sale in connection
with the sale of the electron beam accelerator in 1997. During the second
quarter of 1998, the Company completed divestiture of its electron beam
accelerator and related equipment.
The Company had working capital of approximately $118,000 at December 31,
1998, compared to working capital of approximately $1,530,000 at December 31,
1997. The Company's current ratio at December 31, 1998, was 1.05 to 1 compared
to a current ratio of 1.66 to 1 at December 31, 1997. The decrease in the
Company's working capital and current ratio at December 31, 1998 compared to
December 31, 1997 was primarily the result of the classification of $1,250,000
as current assets held for sale in connection with the sale of the electron beam
accelerator in 1997.
With the recent acquisition in January, 1999, of ESI and SSI, the Company
plans to continue expansion of its business by increasing its portfolio of
reprocessing services to include new service offerings such as consulting,
on-site management services and EtO sterilization. The Company believes that the
anticipated future cash flow from operations, along with its cash on hand and
available funds under its available credit lines, including funding from its
major shareholder, and the completion of the sale of the electron beam
accelerator in April, 1998, will be sufficient to meet working capital
requirements during 1999. 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.
13
<PAGE>
Capital expenditures totaled $1,809,000 in 1998 as compared with
$2,239,000 in 1997. These purchases were principally surgical instruments made
to support the Company's supply obligations under new contracts entered into
during 1997 and 1998.
Management plans to purchase additional surgical instruments, as and if
required to support the Company's contract sterilization growth objectives. Cash
flows from operating activities will provide support for these expenditures,
however, additional external financing may also be required. 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.
Year 2000 Issue
The Company is dependent on computer systems and applications to conduct
its business. Some computer systems and applications include programming code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are commonly referred to as the "Millennium Bug" or "Year 2000
Problem."
The Company is currently executing a risk-based plan designed to make its
computer systems, applications and facilities Year 2000 ready. The plan covers
four stages including (i) identification, (ii) assessment, (iii) remediation,
and (iv) testing.
The Company has identified substantially all of the major computers,
software applications, and related equipment used in connection with its
internal operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption to its business. The Company has commenced
the assessment and remediation stages of modifying, upgrading, and replacing
major systems that have been identified as adversely affected.
In addition to computers and related systems, the operation of
sterilization equipment, other plant floor equipment and office equipment, such
as fax machines, photocopiers, security systems, and other common devices may be
affected by the Year 2000 Problem. The Company is currently assessing the
potential effects of, and cost of remediating, the Year 2000 Problem on this
type of equipment.
The Company has incurred costs to date of approximately $12,000 and
estimates the total cost of any required modifications, upgrades, or
replacements of its internal systems to be less than $100,000. While the
estimated cost of these efforts are not expected to be material to the Company's
financial position or any year's results of operations, there can be no
assurance to this effect. The estimated cost will be monitored and will be
revised as additional information becomes available.
The Company is initiating communications with its major customers and
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Problems. There can be
no assurance that these customers and suppliers will resolve any or all Year
2000 Problems with its systems before the occurrence
14
<PAGE>
of a material disruption to the business of the Company. Any failure of these
customers and suppliers to resolve Year 2000 Problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operation.
The Company is also developing contingency plans to be implemented as part
of its efforts to identify and correct Year 2000 Problems affecting its internal
systems. Depending on the systems affected, these plans could include
accelerated replacement of affected equipment or software, short to medium-term
use of backup equipment and software, increased work hours for Company personnel
or use of contract personnel to correct on an accelerated schedule any Year 2000
Problems that arise or to provide manual workarounds for information systems,
and similar approaches.
The discussion of the Company's efforts, and management's expectations,
related to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
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.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities
Exchange Commission (including this Form 10-KSB) may contain statements which
are not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. Forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995;
in particular, statements made above in "Item 2. Description of Property"
relating to the suitability of the Company's facilities and equipment for future
operations and the availability of additional facilities and equipment in the
future. Relating to the sufficiency of funds for the Company's working capital
requirements during 1999, the Company's expectation that future cash flow will
continue to be provided from operations and the Company's not presently
anticipating that inflation will have any significant impact on its business may
be forward-looking statements. The Company's actual future results may differ
significantly from those stated in any forward-looking statements. Factors that
may cause such differences include, but are not limited to, the factors
discussed below. Each of these factors, and others, are discussed from time to
time in the Company's filings with the Securities and Exchange Commission.
The Company's future results are subject to risks and uncertainties. The
Company has operated at a loss or a very small profit for its entire history and
there can be no assurance of its ever achieving consistent profitability. The
Company may require additional working capital in the future and there can be no
assurance that such working capital will be on acceptable terms, if
15
<PAGE>
at all. The failure of the Company to continue to compete effectively with
existing or new competitors could result in price erosion, decreased margins and
decreased revenues, any or all of which could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company's healthcare provider customers are currently concentrated in the
Northeast Corridor. Any factors affecting this market generally could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company is subject to government regulation in certain
aspects of its operations. Changes in such regulations could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Future results of the Company will depend significantly on its ability to
successfully integrate the acquired operations of ESI and SSI, as well as the
Company's ability to convince hospitals and other healthcare providers to
utilize the Company's off-site sterilization services as opposed to their own
on-site facilities. Hospitals may resist this change for a number of reasons,
including the preferences of hospital staffs which may wish to preserve their
existing staffing, labor unions which may resist any staffing reductions and the
ongoing consolidation of hospitals which may impact the willingness of hospital
administrators to make operational decisions on a timely basis and which may
affect a hospital's decision to utilize an off-site processor as opposed to
retaining one or more of the consolidated hospital group's central sterilization
facilities to provide services for the entire group.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect revenues and
profitability, including: competitive pressures on selling prices and margins;
the timing and cancellation of customer orders; the lengthy sales cycle of the
Company's sterilization services to healthcare organizations; the Company's
ability to maintain state-of-the-art sterilization facilities and the
corresponding timing and amount of capital expenditures, particularly if the
Company executes its plan for expansion; and the introduction of new services by
the Company's competitors. As a result of the foregoing and other factors, the
Company may experience material fluctuations in future operating results on a
quarterly or annual basis which could materially and adversely effect its
business, operating results and stock price.
Item 7. Financial Statements
For the following financial information required by this Item, see Index
on Page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
16
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors and Executive Officers
The following table sets forth certain information regarding the
individuals who are directors and executive officers of the Company as of March
26, 1999. All directors and executive officers are citizens of the United
States.
Name Age Position
---- --- --------
Scott A. Bartos 35 Director, President, Chief Executive
Officer
Larry C. Buckelew(1) 45 Director, Chairman of the Board
Steven K. Chance(2) 53 Director, Secretary
D. Michael Deignan(2) 55 Director
John J. Sickler(1) 57 Director
Forrest R. Whittaker(1)(2) 49 Director
Todd Riddell 39 Senior Vice President
Michael Spagnuolo 36 Vice President, On Site Operations
Michael Irwin 51 Vice President, Off Site Operations
Paul A. D'Alesio 41 Treasurer, Chief Financial Officer
(1) Member of Compensation Committee
(2) Member of Audit Committee
Directors
Scott A. Bartos was appointed Chief Operating Officer of the Company on
December 1, 1998 and elected a Director, President and Chief Executive Officer
on January 8, 1999. He was President of SSI since it was formed in March, 1997
as well as President of ESI, which position he held for more than five years.
Larry C. Buckelew was elected a Director on January 8, 1997 and Chairman
of the Board on January 8, 1999. In January, 1999 he was elected President of
TFX Medical, a division of Teleflex, which includes TFX Surgical Group, of which
he was President since December, 1996. Teleflex designs, manufactures and
distributes products and services for the automotive, marine, industrial,
medical and aerospace markets. Prior to December, 1996, he was President of LCB
Consultants, a consulting firm, since February, 1996 and President of Sunrise
Medical, Inc., a manufacturer of medical devices, from June, 1993.
Steven K. Chance was elected a Director on January 8, 1999. He is and has
been since 1993, Vice President and General Counsel of Teleflex.
17
<PAGE>
D. Michael Deignan was elected President, Chief Operating Officer and
Director of the Company on September 8, 1995 and Chief Executive Officer on
December 31, 1995. He remained as President and Chief Executive Officer until
January 8, 1999. For approximately two years prior to September 8, 1995 he was
President and Chief Executive Officer of Tonometrics, Inc., a developer of a
patented regional tissue oxygenation monitoring system.
John J. Sickler has been a Director since January 8, 1997. He is and has
been since 1990, the President of TFX, a subsidiary of Teleflex engaged in
corporate business development.
Forrest R. Whittaker has been a Director of the Company since January 17,
1996. He is and has been since January 1, 1996, the President and Chief
Executive Officer of Paidos Health Management Services, Inc., a company
providing health services. Prior thereto, he was President and Chief Executive
Officer of Paidos Healthcare, Inc. from May, 1993.
Executive Officers
Todd Riddell was elected Senior Vice President on March 2, 1999. For the
past five years he has been Vice President of ESI.
Michael Spagnuolo was elected Vice President-On Site Operations on March
2, 1999. For two years prior thereto he was Vice President/Sales for SSI. For
more than three years prior thereto he was a consultant for medical services.
Michael Irwin was elected Vice President-Off Site Operations on March 2,
1999. For two years prior thereto he was General Manager of SMG. From 1994 to
1997 he was a plant manager and division director of operations for the
Interwoven Division of Baxter Healthcare, Inc., a manufacturer and distributor
of medical supplies and equipment.
Paul D'Alesio was elected Treasurer and Chief Financial Officer on March
2, 1999. For five years prior thereto he was Controller of Meyer International,
Inc., a holding company for distributors of building materials and its
subsidiaries.
Item 10. Executive Compensation
Summary Compensation. The following table sets forth the compensation
earned by the Company's Chief Executive Officer who was the only Executive
Officer whose total salary exceeded $100,000 in 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Underlying All Other
Name and Principal Position Year Salary Bonus Securities Options Compensation
- --------------------------- ---- ------ ----- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
D. Michael Deignan 1998 $165,000 $ 42,600 -- -- $ 3,712(1)
President and Chief Executive 1997 $159,461 -- -- -- $ 3,857(1)
Officer 1996 $152,884 -- 41,170 -- $ 3,700(1)
</TABLE>
18
<PAGE>
(1) Includes $2,062 in 1998, $2,207 in 1997 and $2,250 in 1996 in contributions
by the Company to vested and unvested defined contribution plans for Mr.
Deignan's benefit. It also includes $1,650 in 1998, $1,650 in 1997 and
$1,450 in 1996 of term life insurance premiums paid by the Company for Mr.
Deignan's benefit.
Option Grants. No stock options were granted or exercised in 1998 to or by
the Named Executive Officer.
Unexercised Option Holdings. The following table sets forth certain
information concerning unexercised stock options held as of December 31, 1998 by
the Named Executive Officer.
<TABLE>
<CAPTION>
Year End Option Values
----------------------
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Year End Options at Year End(1)
------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
D. Michael Deignan 247,170 -- $43,255 --
</TABLE>
(1) Value is based on the difference between the option exercise price and the
fair market value of the Company's Common Stock on December 31, 1998,
multiplied by the number of shares underlying the options.
Employment Agreements and Severance Policy. The Company has a severance
agreement with Mr. Deignan calling for payment of his base annual salary of
$165,000 and benefits for a period of one year ending January 7, 2000. In
September of 1994, the Company entered into a transition agreement with Dr.
Kennard H. Morganstern, then its President and Chief Executive Officer. The
transition agreement provides, among other things, that Dr. Morganstern will
continue to serve as Chairman of the Board of Directors and, at the option of
the President, make available 50% of his time for consulting purposes, and that
he will receive $75,000, or 50% of his former compensation per year through
September, 1999 plus normal benefits provided to other officers of the Company
through September, 2001. Dr. Morganstern resigned as a Director on January 8,
1999.
Compensation of Directors
Messrs. Hoover and Whittaker, who were the only Directors in 1998 who were
not employees of the Company or TFX, each received a grant of Non-Qualified
Options to purchase 15,000 shares of common stock at a price of $1.00 per share
exercisable from December 31, 1998 to May 22, 2008 in consideration for their
services as Directors in 1998. All Directors are reimbursed for expenses in
connection with attending Board and committee meetings.
The Company has purchased directors' and officers' liability insurance
from National Union Fire Insurance Corporation of Pittsburgh, Pennsylvania
covering all of the Company's directors and officers. The aggregate premium for
this insurance policy in 1998 was $22,500.
19
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 26, 1999, the beneficial
ownership of the Company's voting securities by (i) each person who, to the
knowledge of the Company, beneficially owned more than 5% of the Company's
voting securities outstanding at such date, (ii) each current Director of the
Company, (iii) each executive officer of the Company and (iv) all current
Directors and executive officers as a group:
Number of Shares Percentage of Total
Name and Address(1) Beneficially Owned(2) Voting Securities(3)
- ---------------- ------------------ ------------------
John J. Sickler(4) 17,970,720 85.6%
c/o TFX Equities Incorporated
1787 Sentry Parkway West
Building 16, Suite 220
Blue Bell, PA 19422
D. Michael Deignan(5) 310,470 1.6%
Forrest R. Whittaker(6) 55,000 0.3%
Scott A. Bartos -- --
Larry C. Buckelew -- --
Steven K. Chance -- --
Todd Riddell -- --
Michael Spagnuolo 12,000 --
Michael Irwin 6,000 --
Paul A. D'Alesio 2,500 --
------
All Executive Officers and Directors
as a group(7)..................... 18,356,690 86.2%
- ----------
(1) Pursuant to the rules of the SEC, addresses are provided only for 5%
beneficial owners.
(2) Except as otherwise noted in the footnotes to this table, each person or
entity named in the table has sole voting and investment power with
respect to all shares shown as owned, based on information provided to the
Company by the persons and entities named in the table.
20
<PAGE>
(3) Total Voting Securities are 19,491,216 shares of Common Stock. Pursuant to
the rules of the SEC, all outstanding options and warrants which are
exercisable within 60 days of March 26, 1999 ("Presently Exercisable
Securities") held by the relevant person or entity are included as
outstanding Total Voting Securities for purposes of determining that
person's or entity's Percentage of Total Voting Securities, but are not
included for purposes of determining any other person's or entity's
Percentage of Total Voting Securities.
(4) Consists of 16,470,720 shares of Common Stock and 1,500,000 Presently
Exercisable Securities held by TFX. Mr. Sickler is President of TFX and
has voting and investment power over the shares held by TFX. Mr. Sickler
disclaims beneficial ownership of the shares held by TFX, except to the
extent of his pecuniary interest therein.
(5) Consists of 63,300 shares of Common Stock owned and 247,170 Presently
Exercisable Securities.
(6) Consists of 55,000 Presently Exercisable Securities.
(7) Consists of 16,554,520 shares of Common Stock and 1,802,170 presently
Exercisable Securities. See notes 4, 5 and 6.
Item 12. Certain Relationships and Related Transactions
In 1997 and 1998, the Company made payments to Dr. Morganstern of $116,638
on a note held by Dr. Morganstern, then Chairman of the Company's Board of
Directors. The balance of principal on the note at December 31, 1998 was
$49,741. The note bears interest at the rate of 1% per annum over the prime
rate. Dr. Morganstern resigned as a Director in January 8, 1999.
On January 8, 1997, TFX, a wholly owned subsidiary of Teleflex, acquired
687,500 shares of Series B Convertible Preferred Stock and 1,945,625 shares of
Series C Convertible Preferred Stock from several of the Oxford Funds and from
the Dr. William Cartinhour, Jr. Trust. After the closing of this transaction,
Kenneth W. Rind, William R. Lonergan and Harvey Cohen resigned as Directors and
Messrs. John J. Sickler, Larry C. Buckelew and Harold L. Zuber, Jr. were elected
as Directors. All three of the new Directors were officers of Teleflex or
affiliated companies. Mr. Zuber resigned January 12, 1999.
Prior to this transaction the Company was indebted in the sum of $517,961
to Pilling Weck, part of TFX Surgical Group, a company with which it had a Joint
Marketing Agreement. Mr. Buckelew was then President of TFX Surgical Group. On
January 30, 1997, $300,000 of the debt was converted into 150,000 shares of the
Company's Common Stock at $2.00 per share which were issued to TFX. After such
conversion, TFX held 2,783,125 shares of voting stock, or 47.95% of the
outstanding voting stock. Mr. Sickler is President of TFX.
In December, 1998, the Company entered into a new loan agreement with TFX.
The funds obtained were used to settle interim and short term advances from TFX
and various outstanding accounts payable balances, including amounts owed to
Pilling Weck, a subsidiary of Teleflex, as well as to fund ongoing working
capital needs. The principal amount of the new loan totals $1,300,000 and bears
interest at the rate of 8 percent. The note is due and payable on January 3,
2000.
21
<PAGE>
In December, 1998, the Company entered into a revolving loan account
agreement with Teleflex. Under the agreement, Teleflex has agreed to advance the
Company up to $750,000 for no more than two years. Interest is charged on the
unpaid principal balances at a fixed rate of 8 percent. $250,000 was drawn
against this facility as of December 31, 1998.
On November 19, 1998, the Company entered into an Acquisition Agreement
("the Acquisition Agreement") with TFX. Pursuant to the terms of the Acquisition
Agreement, the Company agreed to exchange 13,400,000 shares of Common Stock and
warrants to purchase an aggregate of 1,500,000 shares of Common Stock for all of
the issued and outstanding shares of ESI, a Florida-based surgical instrument
management services firm, and all of the issued and outstanding shares of Common
Stock and Preferred Stock not already held by the Company, of SSI, a Joint
Venture with TFX. The transaction was consummated on January 11, 1999.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits:
(3)(1) Restated Certificate of Incorporation filed May 24, 1989 -
filed as Exhibit (3)(1) to Company's Annual Report for the fiscal year ended
December 31, 1995 on Form 10-KSB and incorporated herein by reference.
(3)(2) Certificate of Amendment of Certificate of Incorporation
filed January 4, 1990 - filed as Exhibit (3)(2) to Company's Annual Report for
the fiscal year ended December 31, 1995 on Form 10-KSB and incorporated herein
by reference.
(3)(3) Certificate of Amendment of Certificate of Incorporation
filed November 25, 1994 - filed as Exhibit (3)(3) to Annual Report for the year
ended December 31, 1995 on Form 10-KSB and incorporated herein by reference.
(3)(4) Certificate of Amendment of Certificate of Incorporation
filed June 17, 1996 - filed as Exhibit (3)(4) to Annual Report for the year
ended December 31, 1996 on Form 10-KSB and incorporated herein by reference.
(3)(5) Certificate of Amendment of Certificate of Incorporation
filed January 6, 1997 - filed as Exhibit (3)(5) to Annual Report for the year
ended December 31, 1996 on Form 10-KSB and incorporated herein by reference.
(3)(6) Certificate of Correction of Certificate of Amendment of
Certificate of Incorporation filed January 10, 1997 - filed as Exhibit (3)(6) to
Annual Report for the year ended December 31, 1996 on Form 10-KSB and
incorporated herein by reference.
(3)(7) Certificate of Amendment of Certificate of Incorporation
filed January 8, 1999.
(3)(8) Amended and Restated By-Laws dated June 2, 1987 - filed as
Exhibit (3)(4) to Annual Report for the year ended December 31, 1995 on Form
10-KSB and incorporated herein by reference.
22
<PAGE>
(10)(1) 1994 Stock Option Plan - filed as Exhibit (10)(a)(1) to
Annual Report for the year ended December 31, 1993 on Form 10-K and incorporated
herein by reference.
(10)(2) 1996 Stock Option Plan - filed as Exhibit (10)(2) to the
Annual Report for the year ended December 31, 1995 on Form 10-KSB and
incorporated herein by reference.
(10)(3) Lease dated November 20, 1995 with Barlich Realty, Inc. -
filed as Exhibit (10)(4) to Annual Report for the year ended December 31, 1995
on Form 10-KSB and incorporated herein by reference.
(10)(4) Financing Agreement between the Company and Rosenthal &
Rosenthal, Inc., dated October 17, 1994 - filed as Exhibit (19)(o) to Annual
Report for the year ended December 31, 1993 on Form 10-K and incorporated herein
by reference.
(10)(5) Extension of Financing Agreement with Rosenthal & Rosenthal,
Inc., dated December 22, 1995 - filed as Exhibit (19)(o)(1) to Amendment No. 4
to Registration Statement on Form SB-2 (File No. 33-96330) and incorporated
herein by reference.
(10)(6) Extension of Financing Agreement with Rosenthal & Rosenthal,
Inc., dated April 29, 1996 - filed as Exhibit (10)(21) to Annual Report for the
year ended December 31, 1996 on Form 10-KSB and incorporated herein by
reference.
(10)(7) Extension and Modification of Financing Agreement with
Rosenthal & Rosenthal dated August 15, 1997 - filed as Exhibit (10)(10) to
Annual Report for the year ended December 31, 1997 on Form 10-KSB and
incorporated herein by reference.
(10)(8) Acquisition Agreement dated November 19, 1998 between the
Company and TFX Equities Incorporated - filed as Exhibit (1) to Form 8-K dated
January 26, 1999 and incorporated herein by reference.
(10)(9) Promissory Note dated December 9, 1998 between the Company
and TFX Equities Incorporated.
(10)(10) Revolving Loan Agreement dated December 17, 1998 between
the Company and Teleflex Incorporated.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K dated January 26, 1999 were filed by the Company
relating to the Company's acquisition of ESI and SSI.
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
March 26, 1999 MEDICAL STERILIZATION, INC.
By:
-----------------------------------------
Name: Scott A. Bartos
Title: President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report was
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name and Signature Title(s) Date
- ------------------ -------- ----
President, Chief Executive March 26, 1999
- -------------------------- Officer
Scott A. Bartos (principal executive)
Principal Accounting March 26, 1999
- -------------------------- Officer
Ivan M. Zubin
Director March 26, 1999
- --------------------------
Larry C. Buckelew
Director March 26, 1999
- --------------------------
Steven K. Chance
Director March 26, 1999
- --------------------------
D. Michael Deignan
Director March 26, 1999
- --------------------------
John J. Sickler
Director March 26, 1999
- --------------------------
Forrest R. Whittaker
24
<PAGE>
SUPPLEMENTAL INFORMATION TO BE
FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE EXCHANGE
ACT BY NON-REPORTING ISSUERS
No annual report or proxy material has been sent to the Issuer's security
holders with respect to the year ended December 31, 1998. If such report or
proxy material is furnished to security holders subsequent to the filing of the
annual report on this Form, the registrant shall furnish copies of such material
to the Commission when it is sent to the security holders.
25
<PAGE>
MEDICAL STERILIZATION, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Balance Sheet as at December 31, 1998 F-3
Statements of Operations for the years ended December 31, 1998 F-4
and 1997
Statements of Shareholders' Equity for the years ended F-5
December 31, 1998 and 1997
Statements of Cash Flows for the years ended December 31, 1998 F-6
and 1997
Notes to Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Medical Sterilization, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity and cash flows listed in the index on page F-1
of this Form 10-KSB present fairly, in all material respects, the financial
position of Medical Sterilization, Inc. at December 31, 1998 and the results of
its operations and its cash flows for the years ended December 31, 1998 and
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 22, 1999.
F-2
<PAGE>
MEDICAL STERILIZATION, INC.
BALANCE SHEET
December 31, 1998
ASSETS:
Current assets:
Cash $ 56,951
Trade accounts receivable (net of allowance for
doubtful accounts of $294,909) 1,966,412
Inventory 55,017
Prepaid expenses 262,301
-----------
Total current assets 2,340,681
Fixed assets, net 6,281,372
Other assets 129,058
-----------
Total assets $ 8,751,111
===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 1,611,770
Current maturities of long-term debt 49,741
Obligation under capital leases 561,653
-----------
Total current liabilities 2,223,164
Long-term debt less current maturities 2,732,051
Obligation under capital leases 1,570,671
-----------
Total liabilities 6,525,886
-----------
Commitments and contingencies (Note 12)
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 1,945,499
-----------
Shareholders' equity:
Convertible preferred stock, par value $.01
per share: 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 7,564,989
Accumulated deficit (9,262,592)
-----------
Total shareholders' equity 279,726
-----------
Total liabilities and shareholders' equity $ 8,751,111
===========
See notes to financial statements
F-3
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------
1998 1997
---- ----
Revenues:
Revenue $ 7,560,418 $ 9,890,277
Other Income 0 150,000
------------ ------------
7,560,418 10,040,277
------------ ------------
Costs and expenses:
Operating 4,942,040 5,986,638
Distribution 754,820 542,653
Selling, general and administrative 2,590,933 2,340,524
Bad debt expense 146,000 61,012
Interest 428,494 486,076
------------ ------------
8,862,287 9,416,903
------------ ------------
(Loss) income before income taxes (1,301,869) 623,374
Income taxes 0 10,000
------------ ------------
Net (loss) income (1,301,869) 613,374
Preferred stock dividends (167,995) (109,552)
------------ ------------
Net (loss) income applicable to
common shareholders $ (1,469,864) $ 503,822
============ ============
Earnings per common share - basic $ (0.46) $ 0.16
============ ============
Earnings per common share - diluted $ (0.46) $ 0.09
============ ============
Weighted average common shares 3,170,496 3,157,996
============ ============
Weighted dilutive common shares 3,170,496 5,571,683
============ ============
See notes to financial statements
F-4
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common stock Preferred stock Additional
------------ --------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 3,020,496 $ 30,204 1,945,625 $ 1,945,625 $ 7,544,036 ($8,574,097) $ 945,768
Accrual of preferred stock
dividends (109,552) (109,552)
Issuance of stock 150,000 1,500 298,500 300,000
Net income for year 613,374 613,374
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1997 3,170,496 $ 31,704 1,945,625 $ 1,945,625 $ 7,732,984 ($7,960,723) $ 1,749,590
Accrual of preferred stock
dividends (167,995) (167,995)
Net loss for year (1,301,869) (1,301,869)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1998 3,170,496 $ 31,704 1,945,625 $ 1,945,625 $ 7,564,989 ($9,262,592) $ 279,726
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net (loss) income $(1,301,869) $ 613,374
Adjustments to reconcile net
(loss) income to net
cash provided by
operating activities:
Depreciation and
amortization 704,559 681,741
Bad Debt Expense 146,000 61,012
Loss on asset sales 71,461 0
Changes in assets and
liabilities:
Decrease (Increase) in receivables 278,721 (43,090)
Decrease in inventory 15,586 50,472
(Increase) in prepaid expenses (157,257) (67,664)
Decrease in other assets 10,638 20,723
Increase (decrease) in accounts payable
and accrued expenses 680,597 (590,326)
----------- -----------
Net cash provided by
operating activities 448,436 726,242
----------- -----------
Cash flows from investing activities:
Proceeds from asset sales 1,181,167 0
Net capital expenditures (1,809,224) (2,238,987)
----------- -----------
Net cash used in
investing activities (628,057) (2,238,987)
----------- -----------
See notes to financial statements
F-6
<PAGE>
MEDICAL STERILIZATION, INC.
STATEMENTS OF CASH FLOW
Years ended December 31,
----------------------------
1998 1997
---- ----
(Continued)
Cash flows from financing activities:
Net repayments from revolving
line of credit $ (218,217) $ (100,976)
Repayments of long-term debt (901,836) (413,146)
Proceeds from issuance of debt 1,550,000 500,000
Net (repayments) borrowings under
capital lease obligations (225,821) 1,483,610
----------- -----------
Net cash provided by
financing activities 204,126 1,469,488
----------- -----------
Net increase (decrease) in cash 24,505 (43,257)
Cash at beginning of year 32,446 75,703
----------- -----------
Cash at end of year $ 56,951 $ 32,446
=========== ===========
Supplemental disclosures:
Interest payments during the years ended December 31, 1998 and 1997 were
$428,494 and $486,076, respectively
Taxes paid during the years ended December 31, 1998 and 1997 were $16,926
and $1,304, respectively.
During 1998 and 1997, the Company accrued dividends of $167,995 and
$109,552, respectively, on Series B Preferred Stock, in accordance
with the Series B Preferred Stock agreement.
During 1998 and 1997, the Company recorded capital lease obligations of
$301,494 and $1,882,886, respectively.
See notes to financial statements
F-7
<PAGE>
MEDICAL STERILIZATION, INC.
NOTES TO FINANCIAL STATEMENTS
1. Formation and Business:
The Company was incorporated in New York State on May 27, 1982. The
Company provides off-site sterilization services to health care providers and
through 1997 provided sterilization services to manufacturers of disposable
medical products and various industrial products, principally in the New York
metropolitan area. The Company also used its radiation facility at Syosset, New
York, through 1997, to irradiate PTFE, which was ground into very small
particles for use primarily as an additive to printing inks and as a lubricant.
The electron accelerator beam used in this process was removed from the facility
in May of 1998. The Company leases its facility in which it currently has
installed steam and EtO sterilization equipment.
For the fiscal year ended December 31, 1998, the Company's sterilization
services for healthcare providers, contract sterilization of disposable medical
products and radiation processing of industrial products businesses accounted
for approximately 94%, 6% and 0%, respectively, of the Company's revenues, as
compared with 59%, 10% and 31%, respectively, for the fiscal year ended December
31, 1997.
2. Summary of Significant Accounting Policies:
Inventory:
Inventory is stated at the lower of first-in, first-out cost or market.
Fixed Assets:
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the related assets (ranging from 5 to 15
years) and, for leasehold improvements, over the shorter of the useful life of
the improvement or the term of the lease. Shrinkage-loss of surgical instruments
and containers is provided based upon incurred losses.
Maintenance and repairs are charged to expense in the year incurred.
Expenditures which significantly improve or extend the life of the assets are
capitalized. Upon disposal, the cost and related accumulated depreciation are
removed from the respective accounts and any resulting gain or loss is included
in income.
F-8
<PAGE>
Accounting for Long-Lived Assets:
On a periodic basis or whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset.
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. SFAS No. 128 requires presentation of both basic and diluted
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 have been excluded from the 1998 computation of
diluted earnings per share since the result would be anti-dilutive. Potentially
dilutive securities for the 1997 computation of diluted earnings per share
consist of options for 468,062 shares and Series C Convertible Preferred Stock
for 1,945,625 shares. Series B Preferred Stock was excluded from the 1997
calculation of diluted earnings per share since the result would be
anti-dilutive.
Revenue Recognition:
The Company records revenue for hospital services monthly, in accordance
with contractual terms. Revenues for other sterilization and radiation services
are recorded upon the completion of processing and/or shipment.
Concentration of Credit Risk:
Trade receivables arise from long-term and short-term contracts with
healthcare providers in its area of operations. The Company provided instrument
sterilization services pursuant to approximately 76 sterilization services
contracts with hospitals and ambulatory surgi-centers during 1998 as compared to
approximately 71 during 1997. To reduce credit risk, the Company performs credit
evaluations of its customers but does not generally require collateral. Credit
risk is affected by conditions within the economy and the healthcare industry.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
At December 31, 1998, seven customers represented approximately 50% of the
accounts receivable balance. The loss of any one customer could have a
significant impact on the Company's financial position or results of operations.
F-9
<PAGE>
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes",
which requires that deferred income taxes be recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based on enacted tax laws
and statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain items in the 1997 financial statements have been reclassified to
conform with the 1998 presentation of the financial statements.
3. Fixed Assets:
At December 31, 1998, fixed assets consists of:
Machinery and equipment $2,338,795
Leasehold improvements 598,035
Furniture and fixtures 286,915
----------
3,223,745
Less accumulated depreciation and amortization 1,703,715 1,520,030
----------
Surgical instruments 7,484,297
Containers 1,393,857
----------
8,878,154
Less accumulated depreciation and amortization 4,116,812 4,761,342
---------- ----------
$6,281,372
==========
Included in fixed assets at December 31, 1998 are assets recorded under
capital leases comprised of:
Machinery and equipment $ 685,101
Containers 335,225
Surgical instruments 2,173,925
----------
3,194,251
Less accumulated amortization 486,758
----------
$2,707,493
==========
F-10
<PAGE>
4. Employee Benefit Plans:
The Company maintains a 401(k) defined contribution plan which allows
participants to make contributions based on a percentage of their earnings. The
Company's contribution for the fiscal years ended December 31, 1998 and 1997 was
approximately $25,700 and $34,700, respectively.
5. Income Taxes:
The components of the provision for income taxes for the years ended
December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Current tax expense:
Federal $ 0 $ 7,000
State 0 3,000
------- -------
$ 0 $10,000
======= =======
Reconciliation of the federal statutory tax rate to the effective tax rate
is as follows:
1998 1997
---- ----
Expected federal statutory tax rate (benefit) (34%) 34%
State and local taxes, net (6%) 6%
Limitation (utilization) of net operating losses 40% (38%)
--- ---
Effective tax rate 0% 2%
=== ===
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1998 are as
follows:
Deferred tax liability:
Depreciation $ (322,740)
-----------
Total deferred tax liability (322,740)
Deferred tax assets:
Net operating loss carryforwards 4,048,849
Other 347,733
Total deferred tax assets 4,396,582
Less valuation allowance (4,073,842)
-----------
Net deferred tax assets $ 0
===========
The Company has established a valuation allowance equal to the net
deferred tax asset amount as it is more likely than not that the deferred tax
asset will not be realized.
At December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $10,122,000, which expire in varying amounts from
1999 through 2013.
F-11
<PAGE>
6. Long-Term Debt:
At December 31, 1998, long-term debt consists of:
Notepayable to officer and shareholder, payable
in annual installments of $50,000 with interest
payable monthly at the prime rate (8.50% at
December 31, 1998) plus 1%(a) $ 49,741
Notepayable to commercial lender, due January 31, 2000
with interest payable monthly at the rate of 2%
per annum over the prime rate(b) 1,182,051
Note payable to TFX, due January 3, 2000 with interest
payable monthly at the rate of 8% per annum(c) 1,300,000
Note payable to Teleflex, due December 17, 2000 with
interest payable monthly at the rate of 8% per
annum(d) 250,000
----------
2,781,792
Less, current maturities (all due
to related parties) 49,741
----------
Long-term debt $2,732,051
==========
(a) Repayment terms are restricted at a rate not to exceed 10% of the
profits in any quarter and to be limited further by the Company's cash
availability.
(b) The agreement provides for a revolving collateralized line of credit
up to $2,000,000. The line of credit is collateralized by substantially all
assets of the Company. In October, 1997, the agreement was modified and extended
to January 31, 2000, and the advance rate on the Company's eligible Accounts
Receivable was increased to 85% from the existing 75%. The interest rate on the
facility was also changed to prime rate plus 2% (previously prime rate plus
3.5%). The agreement prohibits the payment of dividends on the shares of Common
Stock.
Average monthly borrowings under the revolving line of credit
described above for the year ended December 31, 1998 amounted to $1,376,481 and
the related weighted average interest rate was 10.6%. Maximum borrowings at any
month end were $1,798,479 in 1998.
(c) In December, 1998, the Company entered into a new loan agreement with
TFX, a wholly owned subsidiary of Teleflex. The principal amount of the new loan
totals $1,300,000 and bears interest at the rate of 8 percent. The note is due
and payable on January 3, 2000.
F-12
<PAGE>
(d) In December, 1998, the Company entered into a revolving loan account
agreement with Teleflex. Under the agreement, Teleflex has agreed to advance the
Company up to $750,000 for no more than two years. Interest is charged on the
unpaid principal balances at a fixed rate of 8 percent. $250,000 was drawn
against this facility as of December 31, 1998.
Aggregate principal payment requirements for long-term debt are as
follows: 1999 - $49,741; 2000 - $2,732,051.
Fair value of long-term debt approximates recorded amounts as similar
borrowings have been offered to the Company at comparable rates and maturities.
7. Capital Leases:
Future minimum payments as of December 31, 1998 under capital leases for
fixed assets, including surgical instruments, are as follows:
1999 $ 736,172
2000 717,403
2001 559,046
2002 446,794
2003 39,884
----------
Total minimum lease payments $2,499,299
Less, amount representing interest 366,975
----------
Present value of minimum lease payments $2,132,324
==========
8. Common and Preferred Stock:
On January 8, 1997, TFX, a wholly owned subsidiary of Teleflex, a
diversified publicly held company, purchased the Series B and Series C
Convertible Preferred Stock from the previous owners of such stock. In
connection with this transaction and after the resignation of three of the
incumbent Directors, three nominees of TFX, were elected to the Company's Board
of Directors.
The Series B Convertible Preferred Stock is convertible at $2.00 per share
into 687,500 shares of Common Stock. This Series B Convertible Preferred Stock
is convertible at the option of the holder into Common Stock or cash, at $2.00
per share maturing December 31, 1999. Dividends accrue on the Series B
Convertible Preferred Stock at the rate of 8% per year. These dividends may be
paid in cash or accrued at the option of the Company. If not paid, accrued
dividends are added to the face amount of the Series B Convertible Preferred
Stock at the time of conversion. In the event prior to October 31, 1999, the
market price of the Company's Common Stock as quoted on Nasdaq attains a price
of $6.00 per share and maintains such price for at least 90 days, the Series B
Convertible Preferred Stock will be automatically converted into Common Stock.
F-13
<PAGE>
The Series C Convertible Preferred Stock is automatically convertible at
$1.00 per share into 1,945,625 shares of Common Stock on December 30, 2004, or
earlier at the option of the holder. There are no dividends payable nor accrued
on the Series C Convertible Preferred Stock. In the event prior to October 31,
1999, the market price of the Company's Common Stock as quoted on Nasdaq attains
a price of $3.00 per share and maintains such price for at least 90 days, the
Series C Convertible Preferred Stock will be automatically converted into Common
Stock.
In February 1997, the Company issued an additional 150,000 shares of its
common stock to TFX for $2.00 per share. The shares were used to reduce amounts
payable to another subsidiary of Teleflex, incurred for surgical instrument
purchases.
9. Common Stock Warrants:
From time to time, the Company has issued Common Stock warrants to
directors, lending institutions and other third parties. At December 31, 1998,
the Company had aggregate warrants outstanding to purchase 255,000 shares of
Common Stock at a price of $2.00 per share with expiration dates through January
2001.
10. Stock Option Plan:
On September 29, 1994, the Board of Directors approved the 1994 Stock
Option Plan and authorized the issuance of up to 1,000,000 shares of Common
Stock of the Company upon the exercise of Incentive and Non-Qualified Stock
Options which may be granted pursuant to the Plan. The Plan was approved by the
shareholders at a meeting held on July 20, 1995. In 1996, the Board of Directors
authorized another 500,000 shares of Common Stock to be issued under the 1996
Plan which was approved by shareholders on May 25, 1996.
Incentive Stock Options may be granted only to key employees, including
officers or directors who are employees of the Company, and are exercisable
immediately or in installments following a period of two (2) years after grant
but within ten (10) years from the date of grant (five (5) years in the case of
options granted to holders of more than 10% of the Company's voting stock). The
exercise price must be at least equal to the fair market value of the Company's
Common Stock on the date granted (110% in the case of 10% shareholders). At
December 31, 1998, Incentive Stock Options for an aggregate of 435,670 shares of
Common Stock at exercise prices ranging from $.74 to $1.28 were outstanding.
Non-Qualified Stock Options may be granted under the Plans or otherwise to
officers, directors, consultants and key employees. The exercise price is not
limited and may be below the fair market value of the Company's Common Stock on
the date of grant. At December 31, 1998, Non-Qualified Stock Options for an
aggregate of 720,000 shares of Common Stock at exercise prices ranging from $.74
to $1.50, were outstanding.
F-14
<PAGE>
The Company applies the disclosure-only provisions of SFAS 123 "Accounting
for Stock-Based Compensation," continuing to measure compensation cost in
accordance with APB 25 " Accounting for Stock Issued to Employees." Had
compensation cost been determined based on the fair value at the grant date
consistent with the provisions of SFAS 123, the Company's proforma net income
(loss) and earnings per share for the years ended December 31, 1998 and 1997
would have been:
1998 1997
---- ----
Net (loss) income attributable to common
shareholders as reported $(1,469,864) $ 503,822
=========== =========
Pro forma (loss) income (1,491,464) 368,242
=========== =========
Earnings per Common share as reported - Diluted (.46) .09
=========== =========
Pro forma Earnings per share - Diluted (.47) .07
=========== =========
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in 1998 and 1997, respectively; no
dividend yield; expected volatility of 90%; risk-free interest rate of 5.65% to
6.61%: and expected lives ranging from approximately 4.5 to 5 years. Weighted
averages are used because of varying assumed exercise dates.
A summary of the status of the Company's stock option plans as of December 31,
1998 and 1997, and changes during the years ended on those dates is presented
below.
December 31, 1998 December 31, 1997
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
--------- -------- --------- --------
Outstanding at beginning of year 1,229,420 .88 1,080,920 .84
Granted 30,000 1.00 148,500 1.32
Exercised 0 0 0 0
Canceled (103,750) 1.02 0 0
---------- ----------
Outstanding at end of year 1,155,670 .87 1,229,420 .88
========== ==========
Options exercisable at year end 1,075,753 1,079,335
========== ==========
Weighted average fair value of
options granted during the year $ .72 $ .91
========== ==========
F-15
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
$ .74 to $ .75 817,500 5 $ .74 817,500 $ .74
$1.00 30,000 10 1.00 30,000 1.00
$1.06 109,670 2 1.06 82,253 1.06
$1.19 50,000 1 1.19 50,000 1.19
$1.28 118,500 9 1.28 66,000 1.28
$1.50 30,000 9 1.50 30,000 1.50
--------- --------- -------- --------- -------
$ .74 to $1.50 1,155,670 5 $ .87 1,075,753 $ .85
11. Related Party Transactions:
As of December 31, 1998 and 1997, members of the law firm currently
serving as general counsel for the Company owned 48,057 shares of common stock.
Fees for legal services rendered by the law firm approximated $73,700 and
$79,000 for the years ended December 31, 1998 and 1997, respectively.
The Company purchases from surgical instrument manufacturers the surgical
instruments included in instrument sets that are utilized in providing the
Company's services. Pilling Weck, a national surgical instrument manufacturer
and a subsidiary of Teleflex, has agreed to supply surgical instruments to the
Company. Purchases from Pilling Weck are made on commercial terms. Instrument
purchases from Pilling Weck, including instruments financed under capital lease
obligations, for the years ended December 31, 1998 and 1997 were approximately
$556,000 and $701,000, respectively.
The Company also incurred interest expense to Teleflex of approximately
$29,000 and $44,000 for the years ended December 31, 1998 and 1997,
respectively.
See Notes 6, 8 and 9 for other related party transactions.
12. Commitments and Contingencies:
The Company leases its operating facility and certain equipment under
operating leases. The lease for the facility in Syosset, New York, was renewed
in November 1995, with the following terms: (a) term of the lease is five (5)
years until March 2001, (b) annual rental to be $456,000 for the first three (3)
years and $504,000 for the remaining two (2) years. The Company and its Landlord
are currently renegotiating the terms of the lease.
F-16
<PAGE>
Minimum annual rental commitments for non-cancelable operating leases at
December 31, 1998, are as follows:
Year ending
December 31, Amount
------------ ------
1999 $ 638,000
2000 578,000
2001 137,000
2002 26,000
2003 20,000
-----------
$ 1,399,000
===========
Rent expense net of sublease income of approximately $86,000 and $0, was
approximately $389,000 and $475,000 for the years ended December 31, 1998 and
1997, respectively.
13. Acquisitions and Divestitures:
In March 1997, the Company entered into a purchase and sale agreement with
Shamrock to sell the Company's electron beam accelerator. Under the agreement
the Company received approximately $1,181,000 for the beam and related equipment
at the closing on April 30, 1998, at which time title to the beam transferred to
Shamrock. Revenues from the divested business approximated $4,100,000 in 1997.
On November, 19, 1998, the Company entered into an Acquisition Agreement
with TFX Equities Incorporated ("TFX"), a wholly owned subsidiary of Teleflex,
Incorporated ("Teleflex"). Pursuant to the terms of the Acquisition Agreement,
the Company agreed to exchange 13,400,000 shares of Common Stock and warrants to
purchase an aggregate of 1,500,000 shares of Common Stock for all of the issued
and outstanding Common Stock of Endoscopy Specialists, Incorporated ("ESI"), a
Florida-based surgical instrument management services firm, and all of the
issued and outstanding shares of SSI Surgical Services, Inc. not already held by
the Company. The transaction was completed on January 11, 1999.
In connection with the acquisition on January 8, 1999, the Company
increased the number of authorized shares of Common Stock, par value $.01 per
share, of the Company in order to permit consummation of the transactions
contemplated by the acquisition
For financial reporting purposes the acquisition of ESI and SSI will be
accounted for as a purchase. An excess purchase price of approximately
$5,300,000 is expected to arise from the acquisition, based upon the fair value
of assets acquired, liabilities assumed and consideration paid (shares and
warrants of the Company issued in connection with the acquisition).
F-17
<PAGE>
The following represents the unaudited pro forma results of operations as
if the above noted acquisition had occurred at the beginning of the years
presented:
(Unaudited) 1998 1997
----------- ---- ----
Revenues $28,969,000 $ 26,646,000
Net (loss) income $ (253,000) $ 170,000
Earnings Per Common $ (0.01) $ 0.01
Share - Diluted
F-18
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF
MEDICAL STERILIZATION, INC.
Under Section 805 of the Business Corporation Law
WE, THE UNDERSIGNED, D. Michael Deignan and Harvey Cohen, being
respectively the President and the Secretary of Medical Sterilization, Inc. (the
"Corporation") hereby certify:
1. The name of the Corporation is Medical Sterilization, Inc. The original
name under which the Corporation was formed was General Sterilization Services,
Inc.
2. The Certificate of Incorporation of the Corporation was filed by the
Department of State on May 27, 1982. Restated Certificates of Incorporation and
Certificates of Amendment were filed on May 12, 1983, August 5, 1983, May 24,
1989, January 4, 1990, November 28, 1994, May 13, 1996 and January 6, 1997, as
corrected on January 10, 1997.
3. (a) The Certificate of Incorporation is amended to increase the number
of authorized shares constituting the Common Stock of the Corporation from
10,000,000 to 30,000,000.
(b) To effect the foregoing, the first sentence of Paragraph Fourth
relating to the number of authorized shares constituting the Common Stock of the
Corporation is amended to read as follows:
"The aggregate number of shares which the Corporation shall have
authority to issue is Thirty-Three Million (33,000,000) shares to
consist of Thirty Million (30,000,000) shares of Common Stock, with
a par
1
<PAGE>
value of $.01 per share, and Three Million (3,000,000) shares of
Preferred Stock, with a par value of $.01 per share."
4. The foregoing Amendment to the Certificate of Incorporation was
authorized by the unanimous written consent of the Board of Directors of the
Corporation, followed by the vote of majority of all the outstanding shares
entitled to vote on said Amendment.
IN WITNESS WHEREOF, we have signed this certificate on the day of January,
1999.
/s/ D. Michael Deignan
-----------------------------
D. Michael Deignan, President
/s/ Harvey Cohen
-----------------------------
Harvey Cohen, Secretary
2
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NASSAU )
HARVEY COHEN, being duly sworn deposes and says, that he is the Secretary
of Medical Sterilization, Inc., the corporation named in and described in the
foregoing certificate, and is one of the persons described in and who executed
the foregoing certificate, that he has read the foregoing Certificate of
Amendment of the Certificate of Incorporation and knows the contents thereof,
and that the statements contained therein are true.
/s/ Harvey Cohen
-----------------------------------------
Harvey Cohen
Sworn to before me this
8th day of January, 1999
/s/ [ILLEGIBLE]
- -------------------------------
Notary Public
[NOTARY STAMP - ILLEGIBLE]
3
PROMISSORY NOTE
$1,300,000 December 9, 1998
FOR VALUED RECEIVED, Medical Sterilization, Inc. ("Maker"), a New York
corporation, with offices at 225 Underhill Boulevard, Syosset, New York 11791,
promises to pay to the order of TFX Equities, Inc. ("Payee"), the sum of
$1,300,000 together with interest on the unpaid balance as set forth below. All
sums are payable by mail to the Payee at 155 South Limerick Road, Limerick,
Pennsylvania 19468, Attention: Treasury. The issuance of this instrument shall
be construed as a discharge of all rights, claims, or demands that Payee may
have against Maker under those certain Promissory Notes issued by Maker to Payee
dated August 12, 1998, September 30, 1998, October 26, 1998 and November 18,
1998, with the exception of accrued interest thereon.
Interest
1. The unpaid principal balance shall bear interest at the rate of 8%.
Interest is calculated on the basis of actual days elapsed divided by 360 days
per year.
Payment of Principal and Interest
2. The outstanding principal of this Note and interest then due shall be
due and payable on January 3, 2000. This Note may be prepaid in whole or in part
at any time, provided interest accrued on the amount prepaid is paid at the same
time.
3. Interest shall be payable monthly on the last day of each month, first
payment being due December 31, 1998.
Default
4. On default of any payments of interest or principal due or other
default under this Note and the failure of Maker to cure that default within
five (5) days after receipt by Maker at its address, above, of a written notice
of such default addressed to its Chief Financial Officer, the Payee, at its
election, may accelerate the due date of the entire principal, in which event
the remaining unpaid balance of principal, and interest accrued to that date,
shall become immediately due and payable. The dissolution, termination of
existence, insolvency, business failure, appointment of receiver for any part of
the property of, assignment for the benefit of creditors by, or commencement of
any proceedings in bankruptcy or insolvency by or against Maker and which is not
dismissed within thirty (30) days shall be a default under this Note. The
default by the Maker under any other agreement or instrument for borrowed money
shall be a default hereunder.
<PAGE>
Waiver
5. Except as otherwise provided in this Note, Maker, sureties, and
endorsers of this Note severally waive demand, notice of dishonor, diligence in
collecting, grace, and notice of protest. Any failure by Payee to exercise any
right hereunder shall not be construed as a waiver of the right to exercise the
same or any other right at any time, or from time to time thereafter.
Attorneys' Fees
6. If this Note is not paid at maturity and is placed in the hands of an
attorney for collection, or if it is collected through a bankruptcy court, a
probate court, or any other court after maturity, then the Payee shall be
entitled to reasonable attorneys' fees.
Compliance With Usury Laws
7. All agreements between the Maker and the Payee are hereby expressly
limited so that in no contingency or event shall the amount paid or agreed to be
paid to the Payee for the use, forbearance, or detention of the money to be
loaned under this Note exceed the maximum amount permissible under the laws of
Pennsylvania. If, at the time of any interest payment, the payment amount due
under this Note exceeds the legal limit, the obligation shall be reduced to the
legal limit. If the Payee should ever receive as interest an amount that exceeds
the highest lawful rate, the amount that would be excessive as interest shall be
applied to the reduction of the principal amount owing under this Note, and not
to the payment of interest.
Choice of Laws
8. This Note and the rights and duties of the parties hereto shall be
construed and enforced in accordance with the laws of the Commonwealth of
Pennsylvania.
9. Maker represents and warrants that this Note has been duly authorized
by all proper corporate authority of Maker and is the valid, legal and binding
obligation of Maker enforceable against Maker in accordance with its terms.
IN WITNESS WHEREOF, the Maker has caused this Note to be signed by its
President and Chief Financial Officer and its corporate seal to be affixed
hereto this 8th day of December, 1993.
ATTEST: MEDICAL STERILIZATION, INC.
/s/ [ILLEGIBLE] By: /s/ D. Michael Deignan
- ------------------------ ------------------------------------
Name: D. Michael Deignan
Title: CEO
REVOLVING LOAN ACCOUNT AGREEMENT
This agreement is made and entered into on the 17th day of December 1998,
between Teleflex Inc. (Lender) and Medical Sterilization, Inc., a New York
corporation (Borrower).
Establishment of Account
Under the terms and conditions set forth in this Agreement, the Lender and
Borrower agree to the establishment of a revolving loan account (Account) under
which the Lender, at its option, will permit the Borrower to obtain advances
from time to time. The advances and the appropriate charges will be debited to
the Borrower's Account. The outstanding unpaid principal balances of the Account
will be paid by the Borrower on demand. The Borrower agrees that all advances
made under this Agreement will be made on the terms and conditions set forth in
this Agreement and in any documents that evidence the advances made under this
Agreement and that are incorporated by references into this Agreement.
Maximum Amount and Term
The advances to the Borrower may not aggregate more than the maximum
amount of $750,000 of principal indebtedness or exceed the maximum contract term
of two years. The Lender's willingness to make the advances under this Agreement
up to the maximum amount is subject to the conditions that since the execution
of this Agreement, there has been no substantial or material change in the
Borrower's business, financial condition, general credit standing, or equity
position in security.
Method of Making Advances
Advances shall be made by wire transfer of funds. At the end of each
billing cycle in which an advance is obtained or payment made, the Lender shall
provide the Borrower with a written statement disclosing the current status of
the Account.
Calculation of Charges
Interest will be charged monthly on the unpaid principal balances at a
fixed rate of 8 percent per year. Interest on the unpaid balance of this Note
shall be due and payable on demand.
<PAGE>
Prepayment
The Borrower may pay any scheduled installment, wholly or partially, prior
to the due date. If the Account is wholly prepaid at any time, the Borrower will
be refunded a portion of the interest.
Cancellation
This Agreement may be canceled at any time by either party giving written
notice of cancellation to the other. Notice of cancellation shall not affect the
Borrower's obligation to repay any outstanding indebtedness to lender or the
Lender's right to collect the indebtedness.
MEDICAL STERILIZATION, INC.
By: /s/ D. Michael Deignan
-------------------------------------
Name: D. Michael Deignan
Title: President & CEO
(12/19/98)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 56,951
<SECURITIES> 0
<RECEIVABLES> 2,261,321
<ALLOWANCES> (294,909)
<INVENTORY> 55,017
<CURRENT-ASSETS> 2,340,681
<PP&E> 12,101,899
<DEPRECIATION> (5,820,527)
<TOTAL-ASSETS> 8,751,111
<CURRENT-LIABILITIES> 2,223,164
<BONDS> 0
0
1,945,499
<COMMON> 31,704
<OTHER-SE> 248,022
<TOTAL-LIABILITY-AND-EQUITY> 8,751,111
<SALES> 7,560,418
<TOTAL-REVENUES> 7,560,418
<CGS> 4,942,040
<TOTAL-COSTS> 5,696,860
<OTHER-EXPENSES> 2,590,933
<LOSS-PROVISION> 146,000
<INTEREST-EXPENSE> 428,494
<INCOME-PRETAX> (1,301,869)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,301,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,469,864)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
