Item 1. Business - ----------------
Introduction
Sabratek develops, produces and markets technologically-advanced, user-friendly and cost-effective therapeutic and diagnostic medical systems designed specifically to meet the unique needs of the alternate-site health care market. The Company's multi-therapy infusion and other devices and data management systems incorporate advanced communications technology which is designed to reduce provider operating costs while maintaining the integrity and quality of care. Sabratek's proprietary health care information system provides remote programming as well as real-time diagnostic and therapeutic data capture capabilities, allowing caregivers to monitor patient compliance more effectively and allowing providers to develop outcome analyses and optimal clinical protocols. The Company has designed its integrated hardware and software system to permit providers of infusion therapy to achieve cost-effective movement of patients along the continuum of alternate-site health care settings.
The Company intends to expand its product line beyond infusion therapy to become a leading developer and marketer of a variety of interactive therapeutic and diagnostic medical systems for the delivery of high-quality, cost-effective health care in alternate sites. The Company believes that its current and future products and related software will facilitate the ability of alternate-site providers to create a "virtual" hospital room, thereby affording the delivery of a wide range of care previously provided primarily in an acute-care setting. Substantially all of the Company's revenues have historically been derived from the sale of its multi-therapy infusion pumps and related disposable supplies. Since August, 1996, the Company has commercially introduced MediVIEW, PumpMaster, prepackaged injectable prescription products and pre-filled I.V. tubing flush syringes which further the Company's strategy of creating a virtual hospital room.
Changing Health Care Environment
The increase in health care costs at a rate significantly higher than that of overall inflation has caused managed care companies, indemnity insurers, employers, governmental agencies and other payors to employ a variety of strategies designed to contain health care expenditures. These cost-containment strategies aim to reduce the cost of health care services, as well as the amount of health care services utilized. In certain markets, payors are shifting away from traditional fee-for-service based payment plans and moving towards managed care plans in an effort to deliver quality health care services more cost-effectively. In particular, cost-containment measures, including increased utilization review and case management, have caused many health care providers to move patients from the higher-cost hospital setting to lower-cost alternate sites.
The alternate-site health care industry, which includes the delivery of skilled nursing services, intravenous infusion, respiratory therapy, physical therapy and pharmaceutical therapies in the home, long-term care facilities, physicians' offices and outpatient centers, has grown significantly during the past decade. According to a report entitled "National Health Expenditure Projections, 1994-2005" published in the summer of 1995 by Health Care Finance Administration of the United States Department of Health and Human Services ("HCFA"), total expenditures for home health care, which constitutes a significant component of alternate-site health care, increased from approximately $11.1 billion in 1990 to approximately $24.2 billion in 1994 and is projected to reach $45.9 billion in 2000. Since the early 1980s, the provision of acute and chronic care for serious illnesses outside the hospital has been recognized as a critical component of health care cost containment because the delivery of certain therapies in an alternate-site setting is more cost-effective than the delivery of these same therapies in an acute-care hospital setting. The Company believes that the alternate-site health care industry will continue to benefit from cost-containment measures which governmental and private payors have employed to reduce hospital admissions and length of stays in hospitals. The Company believes that such measures will continue the increase in the use of alternate-site health care due to its significantly lower cost when compared to similar care provided in traditional
acute health care settings. In addition to cost savings, the alternate-site health care industry should continue to benefit from advances in medical technology which have facilitated the provision of sophisticated care outside the hospital. Many disease states, including pulmonary diseases, neurological conditions, infectious diseases, digestive disorders, AIDS-related symptoms, various forms of cancer and related medical conditions such as pain and nausea, are now being treated in alternate-site settings, including the home. Growth in alternate-site health care has also been facilitated by the increased acceptance of such care by physicians, caregivers and patients. The American Medical Association Council on Scientific Affairs and the American Medical Association Council on Medical Education have recommended that training in the principles and practice of home health care be incorporated into the undergraduate, graduate and continuing education of physicians. Also contributing to the growth of the alternate-site health care industry is the increase in the over-65 population, which has a higher incidence of illness and disability.
A significant component of alternate-site health care is infusion therapy, which involves the administration of fluid intravenously at a regulated rate and volume. Alternate-site infusion therapy has historically been the fastest growing segment of the alternate-site health care market. According to POV, Incorporated, an industry tracking and consulting firm, the infusion therapy segment of this market is expected to grow in revenues from $3.2 billion in 1992 to $7.9 billion in 1997, representing an average annual compounded growth rate of approximately 20%. Infusion therapy is used in a wide range of applications such as nutrition therapy, pain management, delivery of antibiotics, pregnancy and obstetrical therapies, chemotherapy, cardiovascular therapy and immunosuppressive therapy. These therapies generally require the use of specialized infusion pumps to deliver precise dosages of fluids such as nutrients, parenteral solutions, anti-infectives, chemotherapeutic agents, narcotic analgesics and a variety of other drugs.
Due to the shift by managed care payors toward capitated payment arrangements, providers of infusion therapy are being forced to reduce costs without compromising the quality of care in order to maintain profitability. The costs associated with providing infusion therapy are composed of three general components: capital equipment, supplies and labor. Traditionally, providers of infusion therapy needed to purchase multiple types of infusion pumps and related back-up inventory because most pumps delivered only one type of therapy. This requirement to purchase several single therapy pumps also results in increased labor training costs because of the need to learn multiple programming protocols. The delivery of infusion therapy requires a substantial amount of non-clinical nursing time. The Company believes that reducing the labor costs of delivering infusion therapy is critical for alternate-site health care providers to achieve operating efficiencies. According to a 1992 study of the home infusion therapy industry published by The National Alliance for Infusion Therapy (the "NAIT Study"), nurses spent an average of 3.1 hours per home visit, of which approximately 64 minutes, or 35%, was spent traveling to and from the patient's home, 56 minutes, or 30%, was spent documenting clinical observations as well as coordinating care and the balance was spent on tasks performed during personal contact with the patient, including documentation. The NAIT Study also shows that training is required for patients not only at the start of therapy but also over time as the therapy of an individual patient changes. The NAIT Study indicates that during such home visits, a significant amount of nursing time is required to ensure that patients are complying with the prescribed therapy. Compliance is important since it can prevent patients from having to re-enter the costly hospital setting thereby generating unnecessary incremental expenses and health risks as a result of failure to adhere to their prescribed therapies, whether intentionally or unintentionally. The Company believes that products and technology which reduce the cost of providing infusion therapy, especially the labor component, will be attractive to health care payors and providers in general and providers of infusion therapy in particular.
Products
Sabratek's Seamless Delivery System. Sabratek's software-based infusion devices and related interactive information system and pump testing device are designed to provide both health care professionals and patients with ease of use and a smooth transition throughout the health care delivery spectrum. Sabratek's Seamless Delivery System product design is the Company's strategic response to the need to achieve cost-effective movement of patients from a hospital setting to an alternate-site setting, and among the various stages in alternate-site care, from sub-acute
to home care, with maximum ease of transition. The Seamless Delivery System maximizes the similarities between Sabratek's stationary and ambulatory infusion devices and is intended to allow both patients and health care providers to use both types of infusion devices interchangeably, as the specific setting or therapy dictates, and with greater ease. This ability reduces the amount of time health care professionals must spend training on multiple operating systems as well as administering and monitoring therapies. In addition, Sabratek's infusion devices have the flexibility to provide multiple therapies which allows providers to minimize their equipment inventories. Sabratek's infusion devices intravenously deliver therapeutic agents to address treatments for a wide variety of conditions, including, among others, antibiotic therapy for viral or bacterial infections, chemotherapy for cancer, pain management for chronic pain, clotting agents for hemophilia and various therapies for pregnancy and obstetrics.
The following table summarizes certain information with respect to the Company's products:
(1) Patent(s) issued in the United States.
(2) United States and/or foreign patents pending.
(3) Foreign patent issued.
(4) U.S. patent allowed.
Sabratek 3030 -- Stationary multi-therapy infusion pump. The Company's 3030 Stationary Pump is an electromechanical, volumetric infusion device that is able to deliver a wide variety of infusion therapies including, among others, chemotherapy, antibiotics, circadian rhythms and total parenteral nutrition under three standard and one custom delivery modes. The 3030 Stationary Pump incorporates multiple language capabilities, remote communications and pre-programming capabilities, a state-of-the-art ergonomic design and a relatively easy-to-learn programming format. The 3030 Stationary Pump operates with leading brands of disposable tubing as well as Sabratek's own line of non-proprietary disposable tubing. The 3030 Stationary Pump has the ability to work in conjunction with the MediVIEW software.
Sabratek 6060/HOMERUN -- Ambulatory multi-therapy infusion pump. The Company's 6060 Ambulatory Pump weighs approximately 13 ounces and can be worn discreetly by a patient. The 6060 Ambulatory Pump was designed as a complementary product to the 3030 Stationary Pump and, when combined with the use of the 3030 Stationary Pump, provides a seamless transition between the bed and an ambulatory state, or vice versa, with minimal additional training. The 6060 Ambulatory Pump has delivery capabilities and a programming format that are similar to the 3030 Stationary Pump, with the addition of a pre-programmed capability to deliver pain management infusion therapy. The 6060 Ambulatory Pump also has the ability to work in conjunction with the MediVIEW software and utilizes a proprietary disposable tubing set.
Disposable infusion supplies. The Company sells non-proprietary disposable tubing sets for use with the 3030 Stationary Pump and proprietary disposable tubing sets for use exclusively with the 6060 Ambulatory Pump. Through the acquisition of Rocap, the Company offers I.V. Admixture and pre-filled syringe products.
MediVIEW -- Remote programming, monitoring and data capture and reporting software system. MediVIEW is a proprietary software system designed to allow providers to program and monitor Sabratek's infusion pumps and capture data for reporting and clinical purposes from remote locations over standard telephone lines. The Company has designed MediVIEW to enable alternate-site health care providers using the 3030 Stationary Pump and 6060 Ambulatory Pump combined with MediVIEW to: (i) remotely monitor and program the Company's pumps on a real-time basis, (ii) receive instantaneous notification of alarm activation and immediately respond from the provider's physical location, (iii) automatically record and "package" data regarding the outcomes of actual therapy courses for specific case management and clinical as well as administrative/reimbursement purposes, and (iv) develop a proprietary clinical protocol and outcomes database useful to managed care providers. In addition, patients who receive therapy on the Company's infusion products should derive greater comfort because their providers will be able to monitor their therapies on a real-time basis. The first release of MediVIEW became commercially available in the third quarter of 1996.
PumpMaster -- Portable, automatic diagnostic device for the testing of Sabratek infusion pumps. The PumpMaster is a portable device designed to enable providers to perform on-site diagnostic tests on Sabratek's
infusion devices. Pursuant to suggested standards adopted recently by the Joint Commission for the Accreditation of Healthcare Organizations ("JCAHO"), an industry group which promulgates standards relating to the provision of alternate-site health care, the performance of every infusion pump is required to be re-certified on the earlier of the date on which such pump is provided to a new patient for their use or the date which is 12 months from the date of the last certification. The Company believes that it is not cost-efficient for providers to maintain in-house bio-medical engineering resources on a branch level to perform pump re-certification. Instead, providers typically ship their pumps for remote-site testing and, as a result, are required to maintain costly back-up pump inventory. The PumpMaster is intended to obviate such incremental capital expenditure outlays as well as eliminate the cost of outside infusion pump testing. The PumpMaster is designed to conduct automatically, in approximately ten minutes, all tests typically performed as part of JCAHO re-certification. PumpMaster became commercially available in the fourth quarter of 1996.
Strategic Partnerships
Unitron. In July, 1997, the Company entered into a licensing agreement with Unitron Medical Communications, Inc. ("Unitron"), a privately held company which has developed MOON, a proprietary clinical patient information management network. Under the terms of this agreement, the Company will pay Unitron up to $7 million for a 15-year technology license for use of the continuous, real-time monitoring and reporting software which is a component of MOON. The Company also entered into an option agreement with the Unitron shareholders which gives the Company the right to purchase Unitron beginning in the fourth quarter of 1999. If additional funding is required by Unitron previous to the option exercise, the Company has the right of first refusal to provide such funding.
Unitron is in the process of deploying the MOON network on a national basis. MOON provides for continuous, real-time monitoring and reporting of clinical patient information from any site, including the patient's home.
Unlike in an acute care setting, patients in the alternate-site health care environment are often not in close physical proximity to their health care providers. As a result, patient information from the point of care is often communicated to the health care provider in a less timely and complete manner. In addition, physicians generally are less able to monitor the patient, including compliance with prescribed therapy and the management of care delivered by other providers. The goal of MOON is to enable health care providers to more effectively treat higher acuity patients in an alternate-site health care setting by maintaining the provider's ability to direct the patient's care, monitor compliance with prescribed therapies and have access to timely clinical information. MOON is designed to allow the provider to reduce the need for on-site visits without compromising the quality of patient care.
MOON allows caregivers to input patient information into a data repository which is immediately available to other providers, including physicians. The Company anticipates that its interactive medical devices will, in the future, transmit patient information directly to MOON without human interaction. The immediate availability of patient information is a significant improvement over the current paper-based reporting system which often lags two or more weeks behind the initial collection of such information. MOON allows providers immediate access to patient information. Additionally, the individual health care provider tracking information is useful to payors and the agencies/companies managing the provider. The Company intends to combine its proprietary MediVIEW medical device management and telemedicine software with Unitron's clinical patient information management network. The Company believes that this combination is likely to accelerate the realization of the data management aspects of the virtual hospital room.
GDS. In August, 1997, the Company entered into a supply and distribution agreement with GDS Technology, Inc. ("GDS"), a privately held medical device company. Under the terms of this agreement, the Company will pay GDS $4 million for the 10-year exclusive rights to certain diagnostic products, including the GDS Stat-Site point of care diagnostic testing device and related disposable tests for use in the alternate site health care market. The Company also entered into an option agreement with the GDS shareholders which gives the Company
the right to purchase GDS for a price of up to $25 million if exercised before GDS' fiscal 1998 operating results are finalized, and for a price based upon GDS' operating results, if exercised afterwards. Under certain circumstances the GDS shareholders have the right, exercisable no earlier than the second quarter of 1999, to require the Company to purchase their shares of GDS. GDS manufactures bulk and specific enzymes and reagents for the diagnostic testing industry, as well as Stat-Site, a unique test system for the point of care market. GDS has 510(k) approval for its Stat-Site device and a limited number of tests. The Stat-Site system provides immediate availability of certain critical information which can be used for diagnosis or monitoring the efficacy of a patient's drug therapy. For certain disease states, this information is important to determine the regimen of care.
The Company intends to integrate the GDS Stat-Site system and the data that it provides with its other medical devices as part of the virtual hospital room in order to enhance its capabilities to serve the alternate-site health care market.
Sales and Marketing
The Company sells its products to a diverse group of customers in the alternate-site health care industry such as sub-acute skilled nursing care facilities, pharmacy providers, home health care providers, physicians' offices, clinics, surgery centers and long-term care facilities. This group of customers ranges in size from national and regional chains to local independent operators. The Company's products are also sold to hospitals, particularly for pain management. Key decision makers include nursing, pharmacy, purchasing and bio-medical departments, as well as physicians.
As of December 31, 1997, the Company's domestic sales force consisted of 24 direct sales professionals, 9 clinical support staff members and 2 full-time sales consultants who work closely with a network of domestic distributors each of whom covers an exclusive geographic territory. In certain limited geographic areas, the distributors are directly involved in sales and implementation; in others, the distributors act as support to the new client implementation process. The Company's distributors have been selected for their experience in and focus on the infusion therapy market, coverage of specific geographical areas, product sales support and regional dominance. The Company's sales management team trains the sales personnel of each of the distributors and provides them with all product information and other relevant field literature. In addition, Sabratek's direct sales representatives sell and coordinate and manage national account activity. The Company's marketing and sales efforts are supported by advertising in trade journals, new product literature and attendance at trade shows. The Company believes that its existing sales force and distribution network provide the necessary infrastructure to market its current products and those under development.
The Company has also entered into distribution agreements with distributors in South America, Europe, the Middle East, Asia and Africa. For the years ended December 31, 1997, 1996 and 1995, international sales accounted for approximately 3%, 9% and 15%, respectively, of the Company's total sales. The Company perceives the international marketplace as a potential area for future growth. The Company has distribution agreements in Japan and Germany, which it believes are among the largest international markets for infusion systems. The Company has received regulatory approval in Japan and currently markets there. The Company will commence marketing its products in EEC countries upon receipt of regulatory approval. Currently, all of the Company's international sales are invoiced and paid in U.S. dollars.
The Company has enhanced its domestic sales effort through an affiliation with Americorp Financial, Inc. ("Americorp") to provide leasing services to the Company's domestic customers. Americorp has licensed the name "Sabratek Credit Corporation" from the Company and offers financing for the acquisition of Sabratek products under both capital and operating leases.
Research and Development
The Company is committed to continued product innovation and has invested approximately $1.8 million, $1.0 million and $2.2 million in research and development for the years ended December 31, 1997, 1996 and 1995, respectively. The Company's research and development effort is supported by a staff of ten electrical, mechanical and software engineers who have extensive experience in the design and development of electromechanical infusion therapy devices, other medical instrumentation and software. Sabratek's engineering team closely coordinates its design activities with the Company's sales and marketing team. This group solicits extensive pre-design focus group input from constituencies that use or are impacted by the use of Sabratek's products, but who may possess a host of different strategic, economic and other objectives.
Sabratek's research and development program is focused on both new product development and enhancements of existing products. The Company's product development efforts include advancements in infusion therapy, interactive software systems, vital signs monitoring, and device communications and integration. The Company's product development strategy is based on developing product platforms that have the flexibility to be configured to respond to a variety of customer requirements. The Company's product enhancement efforts are based on the input received from customers after the initial introduction of its products and focus on addressing customers' needs in a more cost-effective and comprehensive way.
Assembly and Manufacturing
Sabratek currently assembles all of its infusion devices at its facility in Niles, Illinois in an effort to ensure production quality and control its costs. The Company outsources the manufacture of certain sub-systems used in its infusion systems. In addition, disposable tubing sets sold by Sabratek are manufactured by contract manufacturers. Sabratek believes its mix of in-house assembly and contract manufacturing is the most cost-effective means of producing its products.
The Company's production process for its infusion devices consists of assembling major sub-systems as well as the assembly of both standard and custom components. The standard components can be obtained from a number of sources. The custom components are produced by both Sabratek as well as by sub-contractors and, in all cases, competitive back-up supply sources exist. The Company believes that, due to volume discounts, the unit cost of both standard and custom components will decrease as production volumes increase.
Disposable tubing sets are manufactured to Sabratek's specifications by third parties in a clean room environment under stringent quality control procedures covering assembly, storage and sterilization. Set production consists of the assembly of both standard and custom components. The plastic custom components are manufactured by a sub-contractor using molds supplied by the Company. The Company uses more than one manufacturer for the production of its disposable tubing sets.
Sabratek's Rocap division manufactures prepackaged injectable prescription pharmaceuticals and pre-filled I.V. tubing flush syringes at its facilities in Woburn, Massachusetts and Orlando, Florida. Competitive back-up sources exist for all of the components used in the production of Rocap's products.
Quality Assurance
The Company maintains a comprehensive quality assurance program. The quality assurance program begins with the components and other materials the Company purchases from vendors. Vendors are required to supply materials which meet stated specifications. The Company monitors vendors' compliance with the stated specifications through a program of on-site surveys, audits and product testing. The Company also employs quality assurance procedures during its on-site manufacturing and assembly process in an effort to ensure that finished products meet the standards set by the Company. All finished products are tested by the Company's separate quality assurance
department to ensure that the Company maintains its quality standards. Finally, the Company maintains a post-sale performance monitoring program.
Sabratek provides its customers a standard one-year warranty on the 3030 Stationary Pump, the 6060 Ambulatory Pump and the PumpMaster. To provide further product support, the Company has established an in-house capability for repair, maintenance and upgrade of its products. The repair and maintenance function utilizes full-time technical personnel as well as on-going support from temporary and production personnel as required to service infusion devices. The Company believes the service and maintenance of its infusion devices require minimal manpower due to the modularity of such devices' sub-systems, sound quality control procedures and the service capabilities of distributors.
As part of its quality program, Sabratek provides its customers with extensive in-service and training in the use of its products. This is provided by both Sabratek's sales force and its distributors.
Intellectual Property
One United States patent and one Australian patent have been issued for the 3030 Stationary Pump. In addition, two foreign patents are pending for the 3030 Stationary Pump. For the 6060 Ambulatory Pump, five United States patents have been issued, two United States patents have been allowed (are awaiting the issuance of patent numbers by the Patent and Trademark Office) and one United States patent is pending. One United States and one German patent have been issued and one Japanese patent has been allowed for the 6060 Infusion Set and United States and foreign patents are pending on this project. The Company also has United States and Foreign patents pending for PumpMaster. There is one United States patent pending with respect to the pre-filled syringe products. The Company also requires each of its employees, consultants and advisors to agree in writing to keep its proprietary information confidential and to assign all inventions relating to the Company's business to the Company. There can be no assurance that any unprotected information will not also be developed by others.
The Company has registered or applied to register the following trademarks: SABRATEK(R) and its logo, AutoRamp(R), HOMERUN(R), Seamless Delivery System(TM), PumpMaster(R), MediVIEW(R), TCS Total Compliance System(TM), VHR Virtual Hospital Room(TM) and Communicator(TM). The Company has also received a foreign trademark registration for the name SABRATEK(R) and its logo in Japan. Unitron Medical Communications, Inc. has filed a trademark application for the term MOON(TM) which appears herein. Stat-Site(R), which appears herein, is a registered trademark of GDS Technology, Inc.
Competition
The Company faces substantial competition. At the present time, the Company considers its primary competitors to be other marketers of infusion pumps. The Company believes there are several major competitors marketing infusion pump devices, including, but not limited to: Abbott Laboratories; Alaris Medical, Inc.; Baxter International Inc.; I-Flow Corp.; McGaw, Inc., an indirect subsidiary of B. Braun Melsungen AG; and SIMS Deltec, a unit of Smiths Industries Medical Systems.
Despite the greater size and market share of its competitors, Sabratek believes that its products compete favorably against the products offered by its competitors. Sabratek has designed its stationary and ambulatory pump products to offer cost efficient and convenient transferability of training/operational procedures and functions. Unlike manufacturers that offer only a stationary or an ambulatory pump, or offer both but whose products lack operational integration, Sabratek's Seamless Delivery System product design provides health care providers with product standardization which the Company believes to be critical in achieving optimum operating efficiencies. Sabratek believes that its products also compete favorably with the products of larger, more established companies on the basis of other advanced product features.
Reimbursement
The Company's current products are generally purchased by health care providers who are reimbursed by third-party payors, including indemnity insurance companies, managed care organizations and government agencies. Such health care providers recover the cost of purchasing the Company's products through reimbursement for services provided using the Company's products. A recent trend is for providers to contract for services on a capitated basis. Under those contracts, providers receive a fixed fee for providing service to patients. In those situations, the providers' profit or loss on the contract is dependent upon managing its costs.
HCFA coordinates a system of reimbursement for outpatient hospital procedures, physician office procedures and devices used in conjunction therewith. Under this system, HCFA determines coverage eligibility, issues coverage instructions and assigns billing codes called the HCFA Common Procedures Coding System ("HCPCS") for such procedures and devices under Medicare and Medicaid. HCFA has established HCPCS billing codes for infusion devices. Moreover, the HCPCS system is referenced by most third-party payors, including Medicare and Medicaid, insurance companies and health maintenance organizations, thereby standardizing coverage identification and billing identification across a broad spectrum of payor plans. When the use of FDA-approved infusion devices is prescribed by a physician and determined to be reasonable and necessary in the treatment of illness, such use is generally reimbursable under Medicare and Medicaid. Reimbursement by other third-party payors is dependent upon the coverage provided under the applicable plan.
Government Regulation
The medical devices and supplies manufactured and marketed by the Company are subject to regulation by the FDA and, in some instances, by state and foreign authorities. Pursuant to the FFDCA and the regulations promulgated thereunder, the FDA regulates the clinical testing, development, manufacture, packaging, labeling, distribution and promotion of medical devices and supplies.
Pursuant to the FFDCA, medical devices intended for human use are classified into three categories, Classes I, II and III, on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Class I devices are subject to general controls (for example, labeling, premarket notification and adherence to good manufacturing practice ("GMP") requirements) and Class II devices are subject to general and special controls (for example, performance standards, postmarket surveillance, patient registries, and FDA guidelines). Generally, Class III devices are those which must receive premarket approval ("PMA") from the FDA to ensure their safety and effectiveness (for example, life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices). Electronic infusion devices and disposable tubing sets are classified by the FDA as Class II medical devices.
If a new Class II medical device is substantially equivalent in terms of safety and effectiveness to a medical device already legally marketed in the United States, the FDA requirements may be satisfied through a procedure known as a "510(k) Submission," in which the applicant provides product information supporting its claim of substantial equivalency. "Substantial equivalence" means that a device has the same intended use and the same technological characteristics as the legally marketed device, or the same intended use and different technological characteristics, provided that it can be demonstrated that the device is as safe and effective as the legally marketed device, and does not raise different questions regarding safety and effectiveness. A "legally marketed device" to which a new device may be compared for a determination regarding substantial equivalence is a device that was legally marketed prior to May 28, 1976, when the Medical Device Amendments were added to the FFDCA, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) premarket notification process.
Commercial distribution of a device for which a 510(k) Submission is required can begin only after the FDA issues an order finding the device to be "substantially equivalent" to a legally marketed device. The FDA has recently been requiring a more rigorous demonstration of substantial equivalence than in the past. This may include a
requirement for clinical testing of the device. It generally takes from four to twelve months from submission to obtain a 510(k) clearance, but it may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, in which case a PMA may be required, or that additional information is needed before a substantial equivalence determination can be made, in which case data from safety and effectiveness tests, including clinical tests, may be required. The process for preparing and obtaining FDA approval of a PMA is much more elaborate, time-consuming and expensive than the process of preparing and obtaining FDA clearance of a 510(k) Submission and would require the Company, among other things, to conduct preclinical and clinical trials to demonstrate the safety and effectiveness of the proposed device. A "not substantially equivalent" determination or a request for additional information could significantly delay the market introduction of new products that fall into this category.
The Company received 510(k) clearance to begin marketing the 3030 Stationary Pump in the United States in May, 1992. The Company received 510(k) clearance for the disposable tubing sets for use with the 3030 Stationary Pump in March, 1995. In July, 1994, the FDA cleared the 510(k) Submission for the 6060 Ambulatory Pump and disposable tubing sets for use with the 6060 Ambulatory Pump. In June, 1996, the Company received 510(k) clearance for the MediVIEW software system for use with the 3030 Stationary Pump.
The Company believes that its 510(k) clearance for the 6060 Ambulatory Pump adequately described the MediVIEW software system and, accordingly, that the original 510(k) clearance for the 6060 Ambulatory Pump permits the Company to market the MediVIEW software with the 6060 Ambulatory Pump in the United States. However, there can be no assurance that the FDA would agree with the Company's determination. If in the future the FDA concluded that the MediVIEW software system for use with the 6060 Ambulatory Pump required a new 510(k) Submission, the FDA could prohibit the Company from marketing the MediVIEW software system for this use until the Company files a new 510(k) Submission and obtains clearance from the FDA. The FDA could also take regulatory action against the Company for any prior distribution of the MediVIEW software system with the 6060 Ambulatory Pump. Alternatively, the FDA could use its discretion not to take any regulatory steps with regard to this issue.
The PumpMaster is a hardware and software system designed to perform diagnostic tests on the Company's infusion pumps. The Company has determined that the PumpMaster does not qualify as a medical device under the statutory definition and, therefore, did not file a 510(k) Submission with respect to such product. There can be no assurance that the FDA will agree with the Company's determination in this regard. If the FDA were to determine that the PumpMaster is a medical device, it could suspend its commercial distribution until such time as a 510(k) Submission covering such product has been filed and cleared. The FDA could also take regulatory action against the Company based on its prior distribution of the uncleared product. Alternatively, the FDA could use its discretion not to take any regulatory steps with respect to this issue.
The FFDCA requires the filing of a new 510(k) Submission when, among other things, there is a major change or modification in the intended use of the device or change or modification, including product enhancements, to a legally marketed device that could significantly affect its safety or effectiveness. A device manufacturer is responsible for making the initial determination as to whether a proposed change to a cleared device or to its intended use necessitates the filing of a new 510(k) Submission. The Company has made some enhancements to its currently marketed products without filing 510(k) Submissions. There can be no assurance that the FDA would agree with the Company's determinations that these enhancements do not require a 510(k) Submission. Likewise, if the Company determines that any modifications that it may make to its cleared devices in the future do not require a new 510(k) Submission, there can be no assurance that the FDA would agree with the Company's determinations and would not require a new 510(k) Submission for any past or future modifications made to a cleared device. If the FDA requires the Company to file a new 510(k) Submission for any modification to the device, the Company may be prohibited from marketing the device as modified until it obtains clearance from the FDA. There can be no assurance that the Company will obtain 510(k) clearance on a timely basis, if at all, for any device modification for which it files a future 510(k) Submission. If 510(k) clearance is granted, there can be no assurance that it will not contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use.
The Company's Rocap division is registered with the FDA as a drug manufacturer and repackager and as a device manufacturer, and its products are required to be manufactured according to current GMPs and Quality System Regulations ("QSRs") which impose certain process, procedure and documentation requirements upon the Company with respect to design, manufacturing and quality assurance activities. Some of the products manufactured by the Rocap division have been listed with the FDA in accordance with the Drug Listing Act of 1972. Some of the products manufactured by the Rocap division contain drugs that are purchased from other manufacturers, which have received FDA approvals. There can be no assurance that the suppliers of such drugs will be able to maintain such approvals.
The Company intends to develop new products for the future, including new applications for the MediVIEW software system. The Company's new products, including new applications for existing products, may qualify as devices that require FDA clearance or approval prior to marketing. For example, the FDA is currently in the process of revising the regulatory requirements and review criteria for software-related medical devices, which could adversely affect the Company's introduction of new software products, or devices that incorporate software, in the future. There can be no assurance that market clearance of future products or product applications will be forthcoming in a timely manner, if at all, or that the FDA's clearance or approval of future products or product applications will not contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use. If in the future the FDA concludes that current, modified or new products manufactured and distributed by the Company require that the products be relabeled, require 510(k) clearance, require new drug approval, or other regulatory approval, the FDA could prohibit the Company from manufacturing and/or distributing these products until the Company made the necessary submissions and obtained any required approvals. The FDA could also take regulatory action against the Company for the manufacture and/or distribution of products.
In October, 1996, the Company learned of a defect in a software feature of certain units of the 6060 Ambulatory Pump. The Company initiated a recall of these units to correct the problem with an upgrade of the software. Pursuant to FDA regulations, the Company notified the FDA of the recall and has updated the FDA of the progress of the recall, which is now approximately 97% complete. The FDA classified the Company's recall as a Class II recall, which is defined as a situation in which the use of a violative product may cause temporary or medically reversible adverse health consequences or where the probability of serious adverse health consequences is remote. FDA reported this recall in the January 15, 1997 issue of the FDA Enforcement Report. In April, 1997, the FDA notified the Company of changes to its classification of certain drugs and devices produced by the Company. In June, 1997, the FDA responded to the Company's reply by noting that the Company has addressed the regulatory issues raised in April. There can be no assurance, however, that the FDA will not again reclassify products manufactured by the Company. There can be no assurance that FDA will not take further action with respect to these matters.
Any products manufactured or distributed by the Company pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA. Device manufacturers are required to register their establishments and list their devices with the FDA, and are subject to periodic inspections by the FDA and certain state agencies. The FFDCA requires devices to be manufactured in accordance with QSRs. The Company believes that its manufacturing and quality control procedures substantially conform to the requirements of the QSRs. However, there can be no assurance that the FDA would concur with the Company's determination in this regard or that the Company will be able to maintain compliance with the QSRs.
In addition, the Medical Device Reporting ("MDR") regulation obligates the Company to inform the FDA whenever there is reasonable evidence to suggest that one of its devices may have caused or contributed to death or serious injury, or where one of its devices malfunctions and, if the malfunction were to recur, the device would be likely to cause or contribute to a death or serious injury. There can be no assurance that the FDA would agree with the Company's determinations as to whether particular incidents meet the threshold for MDR reporting.
Labeling and promotion activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved or uncleared uses.
If, as a result of FDA inspections, MDR reports or information derived from any other source, the FDA believes the Company is not in compliance with the law or regulations thereunder, the FDA can refuse to clear pending 510(k) Submissions; withdraw previously cleared 510(k) Submissions; require notification to users regarding newly found unreasonable risks; request repair, refund or replacement of faulty devices; require corrective advertisements, formal recalls or temporary marketing suspension; impose civil penalties; or institute legal proceedings to detain or seize products, enjoin future violations, or seek criminal penalties against the Company, its officers or employees. Civil penalties for FFDCA violations may be assessed by the FDA in lieu of or in addition to instituting legal action. Civil penalties may range up to $15,000 per violation for violations of the FFDCA, and a maximum of $1,000,000 per proceeding. Civil penalties may not be imposed for GMP violations, unless the violations involve a significant or knowing departure from the requirements of the FFDCA or a risk to public health. The FDA provides manufacturers with an opportunity to be heard prior to the assessment of civil penalties. If civil penalties are assessed, judicial review is available.
The Company exports, or intends to export, its products to Europe, Japan and other foreign countries. Exports of products that have market clearance from the FDA in the United States do not require FDA authorization for export. However, foreign countries often require, among other things, an FDA Certificate to Foreign Government verifying that the product complies with FFDCA requirements. To obtain a Certificate to Foreign Government, the device manufacturer must certify to the FDA that the product has been granted clearance or approval in the United States and that the manufacturer and the exported products are in compliance with the FFDCA and all applicable or pertinent regulations. The FDA may refuse to issue a Certificate to Foreign Government if significant outstanding GMP violations exist.
International sales of medical devices are subject to the regulatory requirements of each country. The regulatory review process varies from country to country. Many countries also impose product standards, packaging and labeling requirements, and import restrictions on devices. In addition, each country has its own tariff regulations, duties and tax requirements. The Company plans to use its distributors to assist in obtaining any necessary foreign governmental and regulatory approvals. The Company has received approval to market its products in Japan. Although the Company is in the process of having its products approved in the European community, with the exception of Japan, it does not currently have its products registered or approved in any countries requiring an extensive registration or approval process and has, therefore, not sold any products in such countries.
The Company has received Underwriters Laboratory, Inc. product recognition under UL 544, Standard for Medical and Dental Equipment and UL 2601, General Requirements for Safety for Mechanical Electrical Equipment as well as product recognition under Canadian National Standard C22.2 through cUL for both the 3030 Stationary Pump and the 6060 Ambulatory Pump. To maintain "UL" status, the Company is subject to quarterly inspections by Underwriters Laboratory, Inc.
The Company and its products are also subject to a variety of state and local laws and regulations in those states or localities where its products are or will be marketed.
Manufacturers are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations.
Product Liability Insurance
The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its products is alleged to have resulted in adverse effects. The Company maintains product liability insurance with coverage of $7.0 million per claim, with an annual aggregate policy limit of $7.0 million. There can be no assurance that liability claims will not exceed the coverage limits of such policies or that such insurance will continue to be available on commercially acceptable terms, if at all.
Employees
As of December 31, 1997, the Company employed approximately 272 persons full-time, including 195 in manufacturing and operations, 36 in sales, marketing and clinical support, 13 in research and development, 15 in administration, and 13 in regulatory affairs/quality assurance.
The Company has entered into employee non-disclosure and non-competition agreements with each of its full-time employees that (i) prohibit disclosure of confidential information to anyone outside of the Company both during and subsequent to employment, (ii) require disclosure to the Company of ideas, discoveries or inventions relating to or resulting from the employee's work for the Company and assignment to the Company of all proprietary rights to such ideas, discoveries or inventions, and (iii) limit competition with the Company's business by the employee for a maximum period of one year following termination of their employment.
Item 2.
Item 2. Properties - -------------------
The Company occupies approximately 38,000 square feet of development, production, warehouse and administrative space in Niles, Illinois. The facility lease runs through October 31, 1999. The current annual lease rate for this space is approximately $217,000 and is subject to annual increases. The Company may be required to lease additional space in the future and believes that such space will be readily available at reasonable rates.
The Company's Rocap division occupies approximately 7,900 square feet of production, warehouse and administrative space at two facilities in Woburn, Massachusetts. The lease terms end July 31, 2000 and August 1, 2000. The current annual lease rate in aggregate is approximately $64,000. The Rocap division also occupies approximately 14,400 square feet of production, warehouse and administrative space at one facility in Orlando, Florida. The lease expires in 2007. The current annual base lease rate is approximately $104,400. Sabratek intends to continue to operate the Rocap division's current business from its existing facilities but may need to lease additional space based upon the planned expansion of the Rocap division business.
Item 3.
Item 3. Legal Proceedings - --------------------------
On February 5, 1997, SIMS Deltec filed a complaint in the United States District Court for the District of Minnesota alleging that Sabratek's manufacture, use and/or sale of the MediVIEW software in conjunction with its infusion pumps infringes on a patent entitled "Systems and Methods of Communicating with Ambulatory Medical Devices Such as Drug Delivery Devices" previously issued to SIMS Deltec. Subsequently, SIMS Deltec filed other pleadings that raised additional claims against Sabratek and three of its employees including trade secret misappropriation, unfair competition and interference with SIMS Deltec's customers. SIMS Deltec seeks injunctive relief, unspecified monetary damages and costs. In addition, SIMS Deltec filed for a preliminary injunction against Sabratek seeking to prevent on a preliminary basis Sabratek's manufacture and sale of the MediVIEW system. On August 4, 1997, the District Court denied the motion for preliminary injunction. The Company and the individual defendants intend to vigorously defend against the allegations made by SIMS Deltec. Protracted litigation or an adverse outcome in this matter could have a material adverse impact on the Company's business, financial condition and results of operations.
In addition, Sabratek has filed a complaint against SIMS Deltec in the United States District Court for the Northern District of Illinois alleging that SIMS Deltec employees have made misstatements about Sabratek's products. Sabratek has stated claims under the Federal Lanham Act to stop SIMS Deltec's improper disparagement and has requested preliminary and permanent injunctive relief, monetary damages and costs.
The Company is also a party to routine litigation in the ordinary course of business, none of which, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on the Company.
Item 4.
Item 4. Submissions of Matters to a Vote of Security Holders - -------------------------------------------------------------
Not Applicable.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------- Matters ------------------------------------------------------------------
The Company completed its initial public offering in June, 1996 at a price per share of $10.00. Since June 21, 1996, the Company's Common Stock has traded on the Nasdaq National Market under the symbol "SBTK". The following table sets forth, for the periods indicated, the high and low reported sale prices of shares of the Common Stock as reported on the Nasdaq National Market.
High Low ---- --- - ---- Second Quarter (from June 21, 1996) $12 $10 Third Quarter...................... $16-1/2 $7-3/4 Fourth Quarter..................... $16 3/4 $13
- ---- First Quarter 29-1/8 15-1/4 Second Quarter 31-3/8 17-3/4 Third Quarter 39-1/4 25 Fourth Quarter 38-11/16 23
- ---- First Quarter (through March 10, 1998) 36 28
As of February 28, 1998 there were 168 holders of record of the Company's Common Stock.
The Company has never paid a cash dividend and does not anticipate the payment of cash dividends in the foreseeable future as earnings are expected to be retained to finance the Company's growth. Declaration of dividends in the future will remain within the discretion of the Company's Board of Directors, which will review its dividend policy from time to time.
During December, 1997, the Company issued 99,798 shares of common stock upon the exercise of warrants not covered by a registration statement. The Company received proceeds of approximately $454,666 upon the exercise of such warrants. All such issuances of common stock were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The selected financial data with respect to the Company's statements of operations for each of the years in the five year period ended December 31, 1997 and the balance sheet data as of December 31, 1997, 1996, 1995, 1994 and 1993 are derived from the Company's audited financial statements. The financial data for the Company should be read in conjunction with the Company's Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere herein.
- ----------
(1) For the year ended December 31, 1996, a non-recurring charge in the amount of approximately $1.6 million was recorded to recognize obligations under certain stock appreciation rights in connection with the Company's June 1996 initial public offering. (2) See Note (2) to the Financial Statements for an explanation of the calculation of weighted average shares outstanding. (3) Includes capital lease obligations.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- RESULTS OF OPERATIONS -----------------------------------------------------------------
Overview
The Company's founding vision and strategic focus is the creation of a virtual hospital room for the alternate-site health care market. From its inception in 1989 through mid-1992, the Company was in its development stage and engaged primarily in research and development, product engineering and activities related to obtaining clearance from the FDA for its first product, the 3030 Stationary Pump. The Company has six years of operating history and, although profitable since the third quarter of 1996, experienced significant operating losses from its inception through mid-1996. Upon receiving FDA clearance for the 3030 Stationary Pump in mid-1992, the Company focused its efforts on creating a domestic and international sales and marketing network, as well as a manufacturing capability, to assist in the distribution of its first product to the alternate-site health care market. Concurrent with these sales and marketing activities, the Company continued to fund the research, development and regulatory clearance activities of other device and software products.
The Company commercially launched the 6060 Ambulatory Pump and related disposable supplies in late 1995 and both MediVIEW and the PumpMaster(R) in late 1996. Since then, the Company has continued its sales and marketing activities domestically and internationally for the distribution of its products and continued to fund the research and development of additional products. On February 25, 1997, the Company acquired substantially all the assets of Rocap which produces and markets pre-packaged injectable prescription pharmaceuticals and pre-filled flush syringes. In addition, the Company derives revenues from the servicing of products and sale of accessories and extended warranties.
The Company sells its products both directly to alternate-site and acute-care providers, as well as to third-party distributors. The Company's distributors and customers may purchase several months of inventory at any one time which may cause fluctuations in quarterly revenues. The Company also markets and sells its products internationally and, as a result, its revenues may be affected by fluctuations in exchange rates. Failure to obtain regulatory approval for the distribution of new products domestically or in international markets, or adverse regulatory changes, may also affect the revenues of the Company.
The Company has entered into strategic partnerships, including Unitron and GDS, which provide components of the virtual hospital room. Management intends to pursue additional acquisition and partnering opportunities in order to further accelerate the development of the virtual hospital room.
Results of Operations
Years Ended December 31, 1997 and 1996
Net Sales. Net sales increased $25.4 million to $43.1 million for the year ended December 31, 1997 as compared to $17.7 million for the year ended December 31, 1996, an increase of 143%. The increase is attributable to several factors; incremental unit sales volume of the 3030 Stationary Pump and 6060 Ambulatory Pump and their respective disposables into the alternate-site health care market including national homecare companies, an increase in the average per unit selling price due to a higher ratio of direct sales versus dealer sales, the addition of the Rocap product line of pre-filled flush syringes in February, 1997, the addition of the MediVIEW and PumpMaster products, and the addition of certain licensed products from GDS Technology, Inc.
Cost of Sales. Cost of sales increased $10.0 million to $18.7 million for the year ended December 31, 1997, as compared to $8.7 million for the year ended December 31, 1996, an increase of 114%. The increase is primarily attributable to direct product costs associated with incremental unit sales volume of the 3030 and 6060 infusion pumps and related disposables, the addition of the Rocap product line and an increase in costs relating to the expansion of production capacity.
Gross Margin. Gross margin increased $15.4 million to $24.3 million for the year ended December 31, 1997 as compared to $8.9 million for the year ended December 31, 1996, an increase of 172%. The increase is due primarily to the incremental unit sales volume and per unit contribution thereon, including the economies of scale realized by allocating fixed manufacturing costs over a greater number of units. Also contributing to the increase were higher average pricing levels, a more favorable product mix of the 6060 Ambulatory Pump units to 3030
Stationary Pump units, and the addition of the Rocap product line. Gross margin as a percent of sales increased to 57% for the year ended December 31, 1997 as compared to 51% for the year ended December 31, 1996.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $9.8 million to $18.3 million for the year ended December 31, 1997 as compared to $8.5 million for the year ended December 31, 1996, an increase of 115%. The increase is due primarily to the expansion of the Company's direct sales force and clinical support staff and the associated travel thereby, as well as, greater aggregate commissions paid in conjunction with higher net sales. Contributing also to the increase for the year ended December 31, 1997 was the assumption of expenses relating to the Rocap product line, the addition of administrative and management personnel, as well as the expansion of the Niles, Illinois facility. Expenses relating to SIMS Deltec, Inc. litigation were approximately $737,000 for the year ended December 31, 1997. Selling, general and administrative expenses as a percent of sales decreased to 42% for the year ended December 31, 1997 as compared to 48% for the year ended December 31, 1996.
Operating Income. Operating income increased to $6.1 million for the year ended December 31, 1997 as compared to $474,000 for the year ended December 31, 1996, an increase of 1,183%. Operating income as a percent of sales increased to 14% for the year ended December 31, 1997 as compared to 3% for the year ended December 31, 1996. The increase in operating income is due primarily to incremental gross margin generated by increased unit sales volume of new and existing products, as described above.
Interest Income. Interest income increased to $1.2 million for the year ended December 31, 1997 as compared to $617,000 for the year ended December 31, 1996, an increase of 101%. The increase is attributable to a higher average balance of cash available for investment as compared to that of the year ended December 31, 1996. The Company completed a secondary public offering in April, 1997 which resulted in net proceeds to the Company of approximately $21.6 million. In June, 1996, the Company completed an initial public offering which resulted in net proceeds to the Company of approximately $26.7 million.
Interest Expense. Interest expense decreased to $45,000 for the year ended December 31, 1997 as compared to $319,000 for the year ended December 31, 1996, a decrease of 86%. The decrease for the year ended December 31, 1997 is primarily attributable to the conversion and elimination of all convertible debt outstanding at the Company's initial public offering in June, 1996. Interest expense for the year ended December 31, 1997 applies to capital lease obligations and borrowings collateralized by a certain customer receivable.
Stock Appreciation Rights Expense. No stock appreciation rights expense is recorded for the year ended December 31, 1997 as compared to $1.6 million for the year ended December 31, 1996. The stock appreciation rights expense for the year ended December 31, 1996 was non-recurring.
Provision for Income Taxes. Due to net operating loss carryforwards sufficient enough to offset pretax income, the Company did not incur any federal or state income tax liability for the year ended December 31, 1997. Due to net losses for the year ended December 31, 1996, the Company did not incur any federal or state income tax liability for the period. Utilization of remaining net operating loss carryforwards depends on future earnings and will be subject to annual limitations as a result of changes that have occurred in the Company's ownership.
Net Income. Net income was $7.2 million for the year ended December 31, 1997 as compared to a net loss of $858,000 for the year ended December 31, 1996. Net income for the year ended December 31, 1997 was achieved primarily as a result of incremental gross margin generated by increased unit sales volume of new and existing products, as discussed above. Also contributing to net income for the year ended December 31, 1997 was the increase in interest income due to the investment of excess cash. Additionally, the year ended December 31, 1996 included the non-recurring charge for stock appreciation rights of $1.6 million.
Years Ended December 31, 1996 and 1995
Net Sales. Net sales increased to $17.7 million for the year ended December 31, 1996 from $4.0 million for the year ended December 31, 1995, an increase of $13.7 million or 343%. The increase is primarily attributable to an increase in sales volume of the 3030 Stationary Pump, the 6060 Ambulatory Pump and their respective disposables, to the alternate-site health care market. Also contributing to the increase was the introduction of the MediVIEW and PumpMaster products.
Cost of Sales. Cost of sales increased to $8.7 million for the year ended December 31, 1996 from $2.9 million for the year ended December 31, 1995, an increase of $5.8 million, or 200%. Approximately $5.3 million of the increase represents the direct manufacturing cost attributable to the increase in sales volume and the balance of the increase is attributable to the investment in fixed manufacturing costs and overhead necessary to increase production capacity.
Gross Margin. Gross margin increased to $8.9 million for the year ended December 31, 1996 from $1.1 million for the year ended December 31, 1995, an increase of $7.8 million, or 709%. The increase is due primarily to the increase in sales volume and the resulting economies of scale associated with the increase. Gross margin as a percentage of sales increased to 51% for the year ended December 31, 1996, from 28% for the year ended December 31, 1995. The increase is due to the absorption of fixed manufacturing costs and overhead over a greater unit volume, higher average pricing levels for the 3030 Stationary Pump, and the higher margins inherent to the 6060 Ambulatory Pump introduced in the fourth quarter of 1995.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $8.5 million for the year ended December 31, 1996 from $6.9 million for the year ended December 31, 1995, an increase of $1.6 million, or 23%. Expansion of the Company's sales and clinical support staff increased selling, general and administrative expenses by approximately $1.8 million while reductions and elimination of financial, marketing and product development consulting fees represent the offsetting amount. Selling, general and administrative expenses as a percent of sales decreased to 48% for the year ended December 31, 1996 from 173% for the year ended December 31, 1995. The decrease is due to the allocation of overhead expenses over a greater volume of sales.
Operating Income (Loss). The Company reported operating income of $474,000 for the year ended December 31, 1996 as compared to an operating loss of $5.7 million for the year ended December 31, 1995. The primary contributors to operating profitability, as discussed above, are the incremental sales volume of the 3030 Stationary Pump and the 6060 Ambulatory Pump and related products.
Interest Expense. Interest expense increased to $319,000 for the year ended December 31, 1996 from $222,000 for the year ended December 31, 1995, an increase of $97,000, or 44%. The increase is attributable to the incremental amount of debt issued by the Company and outstanding during the comparative periods. Approximately $1.8 million, in aggregate, of debt was issued between July and December, 1995 and was outstanding through the end of June, 1996.
Interest Income. Interest income increased to $617,000 for the year ended December 31, 1996 from $13,000 for the year ended December 31, 1995. The increase of $604,000 is due to interest earned on proceeds from the Company's initial public offering in June, 1996.
Income Tax Provision. Due to net losses for the years ended December 31, 1996 and 1995, the Company did not incur any federal or state income tax liability for such periods. The Company currently has a net operating loss carryforward in excess of $14.0 million; however, utilization of such carryforward depends on future earnings and will be subject to annual limitations as a result of changes that have occurred in the Company's ownership.
Net Loss. Net loss decreased to $858,000 for the year ended December 31, 1996 from $6.0 million for the year ended December 31, 1995, a decrease of $5.1 million. The loss was reduced primarily as a result of increased sales volume of new and existing products, as discussed above, and the allocation of fixed manufacturing cost and overhead over a greater unit volume. The year ended December 31, 1996 includes a non-recurring charge for stock appreciation rights of approximately $1.6 million in connection with the Company's June, 1996 initial public offering, without which the Company would have reported net income of $770,000.
Liquidity and Capital Resources
In April, 1997, the Company completed a public offering resulting in net proceeds of $21.6 million. As of December 31, 1997, cash balances were invested in commercial paper, certificates of deposit, money market accounts and U.S. Treasury Notes.
As of December 31, 1997, the Company had approximately $24.6 million in cash, cash equivalents, and short-term investments in marketable securities, and had net working capital of approximately $48.2 million. In March 1997, the Company entered into a bank credit agreement which matures in April 1999, and provides for up
to $9.5 million of available borrowing at the bank's prime rate. As of December 31, 1997, no funds have been borrowed under the agreement.
The Company used cash in its operations of approximately $5.2 million for the year ended December 31, 1997. Cash used in operations for the period was due, primarily, to the growth in trade accounts receivable and inventories as a result of actual and anticipated growth in sales volume.
During the third quarter of 1997, the Company entered into strategic partnerships with Unitron and GDS. The agreements with Unitron and GDS could require the Company to pay up to a total of $11.0 million in cash license fees, in aggregate. In addition, should the Company decide to exercise its right to acquire either Unitron or GDS, such acquisitions may require additional outlays of cash.
In September, 1997, the Company initiated a hedging program through the use of forward contracts to minimize foreign currency fluctuation exposure. As of December 31, 1997, the remaining aggregate U.S. dollar amount of the forward contracts was $2,603,412, and such contracts mature at various dates through September, 1998.
Future liquidity and capital resources could be adversely influenced by certain factors including the Company's dependence on a relatively new customer base, regulatory or legislative changes pertaining to health care, product liability exposure regarding the delivery of medication, dependence on future product development, and others. There can be no assurance that the Company will not require additional financing and may, in the future, seek additional funds through bank facilities, debt or equity offerings and to the extent such additional financing is not available, the Company could suffer material adverse effects to its financial condition and the results of its operations.
Recent Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The Company is required to adopt the new standard for periods ending after fiscal 1997. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The standard requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with the other financial statements. The standard is not expected to have a material impact on the Company's current presentation of income.
In June, 1997, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is required to adopt this new standard for periods ending after fiscal 1997. This statement establishes standards for the way companies are to report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating the impact of this standard on its financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------
Not Applicable.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors Sabratek Corporation:
We have audited the accompanying balance sheets of Sabratek Corporation as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1997. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sabratek Corporation at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP KPMG Peat Marwick LLP
Chicago, Illinois March 17, 1998
SABRATEK CORPORATION
BALANCE SHEETS
See accompanying notes to financial statements.
SABRATEK CORPORATION
STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
See accompanying notes to financial statements
SABRATEK CORPORATION
STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
SABRATEK CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) Description of Business
Sabratek Corporation (the "Company") designs, manufactures and markets programmable electronic intravenous infusion pumps, disposable intravenous administration sets, integrated software, and related accessories, as well as pre-filled flush syringes, and IV Admixture out-sourcing services. Sales of the products are made through distributors as well as the Company's own representatives.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and cash equivalents represent funds in demand deposit accounts, money market accounts, commercial paper, certificates of deposit, and short-term bond mutual funds. Also included are U.S. Treasury Bills and U.S. Treasury Notes to the extent they mature within 90 days.
(b) Investments in Marketable Securities
Investments in marketable securities are classified as available-for-sale and are reported at fair market value. Unrealized gains on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized.
(c) Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out ("FIFO") method.
(d) Long-lived Assets
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization is provided on a straight-line basis over the estimated useful lives. The estimated useful lives of the machinery and equipment range from 3 to 5 years. The estimated useful lives of office furniture, fixtures and equipment is 7 years. Leasehold improvements are amortized over the life of the lease.
Intangible assets consist of licenses and marketing rights and are being amortized over the life of the respective agreements using the straight-line method.
Goodwill represents the excess of purchase price over the estimated fair value of net tangible assets acquired and is being amortized over 15 years using the straight-line method.
Patent costs in progress are amortized over 16 years. The Company has assessed that no permanent impairment of the value of the asset has occurred. Such assessment includes consideration of possible obsolescence, demand, new technology, competition, and other pertinent economic factors and trends that may have an impact on the value or remaining lives of the asset.
Long-lived assets are reviewed for impairment in value based upon undiscounted future cash flows, and appropriate losses are recognized whenever the carrying amount of an asset may not be recovered.
(e) Warranty
Accruals for estimated warranty costs are recorded at the time of sale and periodically adjusted to reflect actual experience.
(f) Revenue Recognition
Revenues are recognized when products are shipped with allowances for discounts, estimated warranty costs and estimated returns recorded at the time of sale. Contract revenue from research agreements is recorded when earned and as the related costs are incurred. Payments received which are related to future performance are deferred and recognized as revenue when earned over future performance periods.
(g) Research and Development
Research and development costs are expensed as incurred. Research and development costs amounted to $1,812,576, $969,059 and $2,193,508 in 1997, 1996 and 1995, respectively.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(i) 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 and 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.
(j) Computation of Net Income Per Share and Net Loss Per Share
In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share (FASB 128). FASB 128 simplifies the standards for computing earnings per share and replaces the presentation of primary earnings per share with basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the consolidated statement of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted EPS computation. The reconciliation between basic and diluted income (loss) per share for the years ended December 31, 1997, 1996 and 1995 are as follows:
Certain options and warrants outstanding were not included in the computation of diluted income (loss)per share because they were antidilutive. These options and warrants may have a dilutive effect in future years.
(k) Financial Instruments
The Company enters into forward currency exchange contracts ("Forwards") in the regular course of business to minimize its exposure against raw material purchases denominated in a foreign currency. Forward exchange contracts related to raw material and fixed asset purchases are recognized as adjustments to the bases of the underlying assets. The Forwards are not used by the Company for trading or speculative purposes. At December 31, 1997 the Company had Forwards outstanding to purchase foreign currency at a contracted amount of $2,603,412. The spot rate at December 31, 1997, would require the Company to exchange $2,528,046 for such currency. The Company had no outstanding Forwards as of December 31, 1996.
At December 31, 1997 and 1996 fair value of the Company's financial instruments approximated their carrying value.
(l) Reclassifications
Certain prior year's amounts were reclassified to conform to the current year presentation.
(3) Investments in Marketable Securities
The following table summarizes short-term and long-term investments in marketable securities as of December 31:
U.S. Treasury securities 1997 1996 ---- ----
Maturing in less than one year $ 5,004,390 $ 4,351,726 Maturing in one to two years - 2,011,560 --------------- ---------- Total $ 5,004,390 $ 6,363,286 =============== ===========
Investments in marketable securities are comprised of U. S. Treasury Notes. These securities are classified as available-for-sale and are reported at fair market value. At December 31, 1997 and 1996, unrealized gains of $43,521 and $4,140, respectively, were recorded in stockholders' equity.
(4) Inventories
Inventories at December 31 is as follows:
1997 1996 ---- ----
Raw materials $ 7,391,756 $ 3,284,436 Work-in-process 2,497,298 1,151,668 Finished goods 3,829,405 612,897 ----------- ---------- $ 13,718,459 $ 5,049,001 ============= ============
(5) Property, Plant and Equipment
Property, plant and equipment at December 31 is as follows:
1997 1996 ---- ----
Machinery and equipment $ 2,787,279 $ 1,817,063 Furniture and fixtures 1,341,200 411,187 Leasehold improvements 591,886 181,769 -------------- ------------- 4,720,365 2,410,019 Less accumulated depreciation 1,174,079 635,407 ------------- ------------- $ 3,546,286 $ 1,774,612 ============ ============
Depreciation expense for years ended December 31, 1997, 1996 and 1995 amounted to $538,672, $402,337 and $184,383 respectively.
(6) Notes Receivable
As of December 31, 1997, the Company was owed $233,334 for rights to certain products granted under a 2-year license agreement. Amounts due under the license agreement must be satisfied in cash or execution of a promissory note bearing interest at the prime lending rate no later than June 30, 2000.
In December, 1996, the Company loaned $200,000 to GDS Technology, Inc. ("GDS"), in exchange for a Non-Negotiable Promissory Note due upon demand after February 18, 1999. The note carries an interest rate of 5.5% per annum, payable upon maturity or prepayment of the note. The note and all accrued interest was converted into
a prepaid license and marketing right in August 1997, pursuant to the supply and distribution agreement entered into with GDS.
(7) Goodwill
On February 25, 1997, the Company purchased substantially all of the assets of Rocap, Inc., a Massachusetts corporation, which produces pre-packaged injectable prescription pharmaceuticals and pre-filled flush syringes. The Company issued 131,593 shares of common stock, cash and assumed liabilities for a total purchase price of $5,452,939. The acquisition was accounted for as a purchase and resulted in $4,589,762 of goodwill. Accumulated amortization was $248,160 at December 31, 1997.
(8) Intangibles
In August 1997, the Company entered into a supply and distribution agreement with GDS. Under the terms of the agreement, the Company will pay up to $4,000,000 for the 10-year exclusive rights to certain products. The Company also entered into an option agreement with GDS's stockholders which gives the Company the right to purchase the outstanding common stock of GDS in the future. Under certain circumstances, GDS's stockholders have the right, no earlier than the second quarter of 1999, to induce the stock purchase option.
In July 1997, the Company entered into a license agreement with Unitron Medical Communications, Inc., a Florida corporation, doing business as MOON Communications ("MOON"). Under the terms of the agreement, the Company will pay up to $7,000,000 for a 15-year technology license. The Company also entered into an agreement with MOONs' stockholders which gives the Company the right to purchase MOON beginning in the fourth quarter of 1999.
The following table summarizes intangibles at December 31,
1997 1996 ---- ----
Prepaid licenses and marketing rights $ 8,633,951 $ - Patent costs 55,284 41,587 ------------- ------
Less accumulated amortization 387,354 - ------------- -------- $ 8,301,881 $ 41,587 ============== ========
(9) Capital Stock Transactions
In April, 1997, the Company completed an underwritten public offering of 1,291,486 primary shares of common stock and 176,574 shares of common stock by and for the account of existing stockholders at a price to the public of $18.00 per share. Net proceeds to the company were $21,580,257.
In June, 1996, the Company completed an underwritten initial public offering of 2,785,000 shares of common stock, par value $0.01, at a price of $10.00 per share, with proceeds to the Company of $26,737,500 after underwriters' discounts and commissions.
In March, 1996, the Company issued 167,245 shares of common stock at a per share price of approximately $9.80, resulting in gross proceeds to the Company of $1,639,761.
In April, 1996, the Company executed a 1-for-3.173 reverse stock split of its Common Stock and Series A convertible preferred stock. All references in the financial statements to share and per share data retroactively reflect the reverse stock split. Also in April, the Company filed a Restated Certificate of Incorporation authorizing an increase in the number of authorized shares of common stock to 25,000,000, $0.01 par value, and preferred stock
to 12,500,000, $0.01 par value. In October, 1996, the Company filed a Certificate of Elimination to rescind its Preferred Stock Certificate of Designation.
The following table of warrants gives effect to the anti-dilution adjustment on the conversion of preferred stock warrants to common stock warrants. The anti-dilution adjustment resulted in 19,849 additional shares of common stock issuable upon the exercise of certain warrants and changed the exercise price from $4.76 to $4.55.
(10) Stock Option Plan
The Company adopted the Amended and Restated 1993 Stock Option Plan (the Stock Option Plan) which provided for the granting of stock options to certain employees, nonemployee consultants, and directors of the Company. Options vest over various periods as defined in the agreements and expire as determined by the Board on an individual basis, but not to exceed 10 years. At December 31, 1997 3,800,000 shares of common stock were reserved for issuance on the exercise of stock options.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its Stock Option Plan. Accordingly, no compensation cost has been recorded. Had compensation cost for the Company's Stock Option Plan been determined consistent with FASB Statement No. 123, the Company's net income (loss) and income (loss) per share would have been as follows:
Pro forma net income (loss) and income (loss) per share reflect only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period of up to 4 years and compensation cost for options granted prior to January 1, 1995 is not considered.
The compensation cost of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995.
1997 1996 1995 ---- ---- ----
Dividend yield 0% 0% 0% Volatility 63% 67% 67% Risk-free interest rate 6% 7% 7% Expected term in years 5.7 4.2 4.2
A summary of the status of the Company's Stock Option Plan as of December 31, 1997, 1996 and 1995 and changes during the years then ended is presented below:
Weighted Average Exercise Shares Price ------ -----
Outstanding at December 31, 1994 158,604 $ 4.95 Granted 613,773 4.76 Exercised (9,621) 3.51 Expired (30,120) 5.51 --------- Outstanding at December 31, 1995 732,636 4.78 Granted 581,590 7.10 Exercised (55,978) 4.90 Expired (2,994) 5.29 ---------- Outstanding at December 31, 1996 1,255,254 5.85 Granted 1,752,404 22.73 Exercised (498,574) 6.08 Expired (6,853) 11.01 ---------- Outstanding at December 31, 1997 2,502,231 17.60 =========
The per share weighted average fair value of options granted was $14.00, $4.11 and $3.08 in 1997, 1996, and 1995, respectively.
The following table summarizes information about stock options outstanding as of December 31, 1997:
(11) Retirement Plan
The Company implemented a defined contribution plan during 1995 pursuant to section 401(k) of the Internal Revenue Code, whereby participants may contribute up to 15 percent of compensation, but not in excess of the maximum allowed under the Code. The Plan includes a discretionary employer matching contribution program as determined by the Board of Directors. In 1997, 1996 and 1995, no matching contributions were made to Plan participants' accounts.
The Company adopted the Sabratek Corporation Employee Stock Purchase Plan during 1997 whereby employees, after 90 days of service, can contribute up to 10% of compensation to the purchase of Sabratek stock. The stock is purchased quarterly at a price equal to 85% of the lower of, the closing price on either the first or the last trading day of the quarter. There have been 150,000 shares designated for this plan and 1,331 shares have been issued as of December 31, 1997.
(12) Stock Appreciation Rights
In July, 1996, the Company paid, in full, stock appreciation rights totaling $1,628,463 in aggregate, which were issued pursuant to three separate agreements during 1995. The agreements provided for a maximum appreciation of $4.76 per share and required payment at the time of certain qualifying events, or upon demand of the holder. The obligation created with respect to the agreements resulted in a non-recurring charge to other income (expenses) in the Statement of Operations for 1996.
(13) Income Taxes
There is no current or deferred tax expense for the years ended December 31, 1997, 1996 and 1995. The Company utilized net operating loss carryforwards in 1997 and was in a loss position in 1996 and 1995. The deferred tax consequences of temporary differences in reporting items for financial statement and income tax purposes are recognized, if appropriate. Realization of the future tax benefits is dependent on many factors, including the Company's ability to generate taxable income within the allowable net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purposes. The income tax effect of temporary differences comprising the deferred tax assets and deferred tax liabilities at December 31, is as follows:
A deferred tax asset stemming from the Company's net operating loss carryforward, research and development credit carryforward, and other accruals has been reduced by a valuation account to zero due to uncertainties regarding the utilization of the deferred assets. The deferred tax asset and the corresponding valuation allowance were approximately $6,557,000 and $5,851,000 at December 31, 1997 and 1996, respectively. The valuation allowance was increased by $706,000 in 1997 and $649,458 in 1996.
A reconciliation between the statutory federal income tax rate and the effective tax expense for each of the three years ended December 31 follows:
Previous sales of the Company's common stock have resulted in an ownership change for the Company, as defined for tax purposes. As a result, an annual limitation exists on the utilization of the net operating loss carryforwards and credit carryforwards. This limitation may cause a portion of the existing net operating loss and credit carryforwards to expire prior to utilization.
The net operating loss and research and development credit carryforwards will expire as follows:
Net Research Operating and Loss Development ---- -----------
2005 $42,000 $ -- 2006 128,000 -- 2007 794,000 2,000 2008 2,500,000 47,000 2009 3,341,000 53,000 2010 5,880,000 63,000 2011 1,365,000 23,000 2012 1,016,000 42,000 ----------- -------- Total $15,066,000 $230,000 =========== ========
(14) Supplemental Disclosures of Cash Flow Information
1997 1996 1995 ---- ---- ----
Cash paid during the year for interest $44,891 $133,103 $87,473
In conjunction with the Rocap asset purchase in February 1997, the Company issued 131,593 shares of common stock with a market value of $2,899,981 and assumed liabilities of $1,120,396.
In August 1997, the Company utilized an outstanding note receivable from GDS for $200,000 as part of its consideration paid for prepaid license fees.
In 1996, 124,488 shares of common stock were issued in satisfaction of accrued obligations in the amount of $592,500 for services rendered in 1995.
In 1996, 1,331,451 shares of common stock were issued in exchange for the retirement of $3,597,793 in long-term debt principal and $364,210 in accrued interest on long-term debt. The number of shares issued included the conversion premium originally provided for in the debt instruments.
Capital lease obligations of $11,547, $0, and $178,239 were incurred in 1997, 1996, and 1995, respectively when the Company entered into leases primarily for machinery, equipment, furniture and fixtures.
(15) Related Parties
The Company is affiliated through common ownership with Dak-Tech Ltd., an Israeli company. Dak-Tech Ltd. provides the Company with manufacturing goods and, in 1995, research and development activities. Two officers of Sabratek own in aggregate 67% of the Dak-Tech Ltd. stock. The amount included as research and development expense was $44,585 for the year ended December 31, 1995. Amounts included as cost of sales were $521,248, $384,800 and $493,959 for the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, the Company was indebted to Dak-Tech Ltd. for receipts of various inventory components in the amount of $26,701 and $139,991, respectively.
During 1996, the Company forgave the repayment of a loan, interest on the loan and certain advances to a stockholder who is an officer of the Company totaling $336,939, in aggregate.
(16) Business and Credit Concentrations
As of December 31, 1997 and 1996, individual customers representing at least 10% of total receivables accounted for $4,272,876 or 28% (two customers) and $3,458,882 or 41% (three customers) of total accounts receivable, respectively. Aggregate sales to individual customers representing at least 10% of total sales amounts to $20,018,557 (two customers), $0 and $1,367,227 (three customers), for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's customers are based throughout the world with 3%, 9% and 15% of sales to international markets for the years ended December 31, 1997, 1996 and 1995, respectively. Customers are not concentrated in any specific geographic location. The customer base is very specific, however, to the health care industry as the Company's products are used primarily by hospitals and alternate-site healthcare settings such as nursing homes, home health care companies, long-term care facilities and clinics.
(17) Commitments and Contingencies
In March 1997, the Company entered into a bank credit agreement which matures in April, 1999, and provides for up to $9,500,000 of available borrowing at the bank's prime rate. As of December 31, 1997, no funds have been borrowed under the agreement.
The Company leases its facilities under noncancelable operating lease arrangements. Rent expense charged to operations for the years ended December 31, 1997, 1996 and 1995 amounted to $404,703, $221,035 and $221,361, respectively.
At December 31, 1997 minimum lease commitments together with the present value of obligations under operating leases that have initial or remaining noncancelable terms in excess of one year were as follows:
Years ending December 31,
1998 $ 387,030 1999 352,349 2000 124,462 2001 86,400 2002 86,400 -------------- Total minimum lease payments $ 1,036,641 ==============
On February 5, 1997 SIMS Deltec filed a complaint in the United States District Court for the District of Minnesota alleging that the Company's manufacture, use and/or sale of the MediVIEW software in conjunction with its infusion pumps infringes on a patent entitled "Systems and Methods of Communication with Ambulatory Medical Devices Such as Drug Delivery Devices" previously issued to SIMS Deltec. Subsequently, SIMS Deltec filed other pleadings that raised additional claims against the Company and three of its employees including trade secret misappropriation, unfair competition and interference with SIMS Deltec's customers. SIMS Deltec seeks injunctive relief, unspecified monetary damages and costs. In addition, SIMS Deltc filed for a preliminary injunction against the Company seeking to prevent, on a preliminary basis, the Company's manufacture and sale of the MediVIEW system. On August 4, 1997 the District Court denied the motion for preliminary injunction. The Company and the individual defendants intend to vigorously defend against the allegations made by SIMS Deltec. Protracted litigation or an adverse outcome in this matter could have a material adverse impact on the Company's financial position and results of operations. In the opinion of management, ultimate resolution of this matter is not expected to have a material adverse impact on the financial position or results of operations of the Company.
Item 9.
Item 9. Changes in and Disagreements with Accountants on - -------- Accounting and Financial Disclosure -------------------------------------------------
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The section of the Company's 1997 Proxy Statement entitled "Election of Directors" is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation - --------------------------------
The section of the 1997 Proxy Statement entitled "Executive Compensation" is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and - ------- Management -----------------------------------------------------
The section of the 1997 Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The section of the 1997 Proxy Statement entitled "Certain Relationships and Related Transactions" is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------
(a) Exhibits
(a)(1)and (2). The Company's audited financial statements are included herewith as Item 8 beginning on page 21.
(a)(3) and (c). The Company filed a Current Report on Form 8-K with the Commission on March 12, 1997.
Exhibits (numbered in accordance with Item 601 of Regulation S-K).
+ Incorporated by reference to the Company's Registration Statement on Form S-1, declared effective by the Commission on June 21, 1996 (File No. 333-3866).
++ Incorporated by reference to the Company's Current Report on Form 8-K filed with the Commission on March 11, 1997.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed with the Commission on March 31, 1997.
++++ Incorporated by reference to the Company's Registration Statement on Form S-1, declared effective by the Commission on April 4, 1997 (File No. 333-23437).
+++++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 filed with the Commission on May 15, 1997.
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SABRATEK CORPORATION
By: /s/ K. Shan Padda Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 26, 1997.
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitute and appoint K. Shan Padda and Stephen L. Holden their true and lawful attorneys-in-fact and agents, each acting alone, with full powers of substitution and resubstitution, for them and in their name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title - --------- -----
/s/ K. Shan Padda - ----------------- K. Shan Padda Chairman of the Board and Chief Executive Officer
/s/ Anil K. Rastogi - ------------------- Anil K. Rastogi President and Chief Operating Officer
/s/ Doron C. Levitas - -------------------- Doron C. Levitas Vice Chairman of the Board, Vice President-- International Operations, Secretary and Director
/s/ Stephen L. Holden - --------------------- Stephen L. Holden Senior Vice President, Chief Financial Officer and Treasurer, Principal Financial Officer
/s/ Scott Skooglund - ------------------- Scott Skooglund Vice President--Finance and Assistant Secretary, Principal Accounting Officer
/s/ William D. Lautman - ---------------------- William D. Lautman Director
/s/ L. Peter Smith - ------------------ L. Peter Smith Director
/s/ Francis V. Cook, M.D. - ------------------------- Francis V. Cook, M.D. Director
/s/ Edson W. Spencer, Jr. - ------------------------- Edson W. Spencer, Jr. Director
/s/ Marvin Samson - ----------------- Marvin Samson Director
/s/ William H. Lomicka - ---------------------- William H. Lomicka Director
/s/ Mark Lampert - ---------------- Mark Lampert Director