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Tuesday, August 31, 1999

Sabratek Corp.
(Nasdaq: SBTKE)*
Phone: 847-647-2760
Website: www.sabratek.com
Price (8/30/99): $4

*Note -- The company came public in 1996 and traded on the Nasdaq under the symbol "SBTK." The firm became delinquent in filing its quarterly earnings this past month, so the symbol has temporarily changed to "SBTKE" to indicate its delinquent status.


One of the more notable sagas of the summer of 1999 has to be Sabratek. A fairly volatile stock to begin with, the first days of June saw the shares eclipse the $30 level. As recently as the first week of July Sabratek was trading for $28, but it's been practically straight down even since. In a drop that is uncommon in both its speed and intensity, the shares have lost more than 90% of their value over the past seven weeks.

The recent problems all began in early June as Milberg Weiss, one of the more infamous class action law firms, filed suit against Sabratek accusing the company of numerous accounting improprieties, including "stuffing" its sales channel and booking phony sales. These were fairly serious accusations, even coming from Milberg Weiss.

Another problem that cropped up was when Sabratek announced, largely out of the blue, that it had finished its acquisition of the consulting firm Strategic Reimbursement Services. What appeared on the surface to be a minuscule acquisition actually found Sabratek giving away a significant chunk of its equity for the newly acquired firm. The lack of information given about Strategic Reimbursement Services, as well as the timing of the deal (completed on the last day of the quarter), gave some pause for thought.

As if one questionable deal at the end of the quarter wasn't enough, Sabratek then announced, way down in the part of an SEC filing that few read, that it had reached a research and development agreement worth $1 million with a company called Systle. The information vacuum about Systle and the timing of the deal yet again raised some eyebrows, as did the fact that Systle was only incorporated a few days before the deal was made and is apparently associated with Charles Stewart, a major shareholder in Sabratek.

Then came the announcement on August 2 that the company's second quarter earnings would be below expectations, largely cementing worries of shareholders (and the hopes of the short sellers) that perhaps something was seriously awry at the company. That day, Sabratek also announced a significant restructuring and new corporate focus on becoming a "clinical connectivity" company.

Then, on August 13 the company announced that it was delaying the release of its second quarter results pending the completion of a review by its auditors. August 20 came and went without Sabratek announcing its quarterly results (which still haven't been released), which puts the company in default on some of its debt covenants, prevents the company from selling shares as it had hoped, and has thrown a wrench into the gears of many of the firm's acquisitions. It was also announced on August 23 that Sabratek's CEO, K. Shan Padda, had resigned among the flurry of controversies. Moreover, the company said that it had retained a restructuring firm to help with the company's current liquidity problems.

In addition to the CEO leaving, it was announced on August 25 that two members of the company's board of directors were also resigning to concentrate on their other businesses.

Needless to say, the company's short sellers are awash in profits, and this is one strange story that just keeps getting stranger -- almost by the day.


Based in Skokie, Illinois, Sabratek is one of the leading developers and sellers of "remote healthcare" equipment. The company makes a variety of infusion pumps and related equipment that can be used in both hospital and home healthcare situations. Sabratek also makes software that can be used with the pumps, allowing real-time access to information by healthcare professionals at remote sites.


Income Statement
12-month sales: $65.3 million
12-month income: $3.6 million
Profit Margin: 5.5%
EPS: $0.34
Market Cap: $40.6 million

Balance Sheet (as of 3/31/99)
Cash and Investments: $26.3 million
Current Assets: $78.1 million
Total Assets: $151.9 million
Current Liabilities: $7.9 million
Long-term Debt: $85.3 million
Total Liabilities: $93.2 million

Price-to-earnings: 11.8
Price-to-sales: 0.6


One of the earlier warning signs with Sabratek was the fact that company missed its first-quarter earnings estimates. While $0.10 a share in profits was expected from the firm, it reported only $0.07. It's rarely a good thing for a company to send confusing signals to analysts, leaving Wall Street thinking the business is healthier than it really is.

Another warning sign was the company's swelling receivables and inventories in the most recently reported quarter. Even though sales had ticked down sequentially and also against the previous year, both receivables and inventories actually ticked up fairly substantially. Watching these two balance sheet items in the context of sales is an excellent way to sniff trouble before it actually hits. If these two items increase relative to sales, it means the company is having a harder time collecting its bills and may be outproducing the demand for its products.

Then, of course, there were the lawsuits and controversies detailed above that might have put a doubt in the minds of many investors.

Finally, one can't look back on the Sabratek story and not give TheStreet.com's (Nasdaq: TSCM) Herb Greenberg kudos. While Greenberg has a reputation of being fairly harsh with many of the companies he writes about, he nailed the Sabratek story right on the head long before it started to plunge. His columns covered Sabratek like a blanket as the ugliness unfolded, and going back and reading what he wrote really gives an excellent insight into the controversies involved with the company.


While lopping off more than 90% of the company's market capitalization in less than two months may seem like harsh punishment from Wall Street, much of the selling appears to be warranted given the recent controversy. With the company trading at a single-digit P/E ratio and below book value, some investors may be tempted to bottom fish with the stock. But those investors should beware since the validity of the reported earnings is in doubt and the company is in serious trouble on many fronts. Between the liquidity problems, the class action lawsuits, the audits, and the securities regulators keeping a close eye, there are more than a few potholes and coming expenses.

Even though the company's core business of selling "telemedicine" equipment is fairly intriguing, any further fundamental analysis can be thrown out the window until investors are able to get a handle on the company's real finances. This won't happen until at least after the second-quarter numbers are released. The company has said that it does not anticipate restating earnings for the previous quarters, but today Sabratek is a firm whose announcements need to be carefully scrutinized.

Right now, there are more questions than answers concerning Sabratek. What are the real earnings, both past and current? Is there any validity to the class action lawsuits? What's the real deal with Systle? How will the recent acquisitions affect the company's finances? Why did the CEO step down? Will the company have to repay early its convertible debt that is in default? Are there any breakup fees for the pending acquisitions that may be scrapped due to these problems? When did the company develop a liquidity problem that needs to be fixed? These are just a sampling of the questions that are yet to be answered.

Even if one has zero interest in holding Sabratek's stock, the story is compelling, and there are more than a few lessons to be learned here. As we like to say, stay tuned.

-- Paul Larson

Related Articles:
-- Fool Plate Special: Sabratek Saga Cliff Notes (8/26/99)

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