**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-QSB**
| ý | **QUARTERLY  REPORT UNDER SECTION 13 OR 15() OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|---------------------------------------------------------------------------------------|

**Forthe quarterly period ended March 31, 2002OR**
| o | **TRANSITION  REPORT UNDER SECTION 13 OR 15() OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|----------------------------------------------------------------------------------------|

**Forthe transition period from                 to                 **

**Commissionfile number 0-18785**

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**STERION INCORPORATED**

(Exact name of small business issuer as specified inits charter)

 

| **Minnesota**                                                         |   | **41-1391803**                     |
|-----------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |   | (IRS Employer  Identification No.) |
|                                                                  |   |                               |
| **13828 Lincoln Street N.E., Ham  Lake, Minnesota 55304**             |
| (Address of principal  executive offices)                             |
|                                                                  |
| **(763) 755-9516**                                                    |
| (Issuer’s telephone  number)                                     |

(Former name, former address and former fiscal year,if changed since last report)

 

         Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days: YES ý  NO o

         At May 14, 2002, 1,791,237 shares of the issuer’s Common Stock wereoutstanding.

 

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**STERIONINCORPORATED****INDEX TOFORM 10-QSB**
| PART I–FINANCIAL  INFORMATION: |
|-------------------------------------|
|                                | Item 1. | Consolidated  Financial Statements (unaudited) |
|                                | Consolidated Balance Sheets  at March 31, 2002 (unaudited) and September 30, 2001 (audited) |
|                                | Consolidated  Statements of Operations for the Three Months and Six Months Ended March  31, 2002 and 2001 (unaudited) |
|                                | Consolidated  Statements of Cash Flows for the Six Months Ended March 31, 2002 and 2001  (unaudited) |
|                                | Notes  to Consolidated Financial Statements (unaudited) |
|                                | Item  2. | Management’s  Discussion and Analysis or Plan of Operation |
| PART II–OTHER INFORMATION:     |
|                                | Item 6. | Exhibits  and Reports on Form 8-K |
| SIGNATURES                          |

                                                                                                                                                                                                                                

                                                                                                                                                                                                                                        

2

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**Part I - Financial Information.**

**Item 1 - Consolidated FinancialStatements.**

 

**STERION INCORPORATED**

**CONSOLIDATED BALANCE SHEETS******
|                                                  |   | **March 31,  2002 (unaudited)** |       | **September  30,2001 (audited)** |       |
|-------------------------------------------------------|--------|---------------------------------|------------|----------------------------------|------------|
|                                                  |   |                            |       |
| **ASSETS**                                            |   |                            |       |                             |       |
| Current Assets:                                       |   |                            |       |                             |       |
| Cash and cash  equivalents                            |   | $                               | 1,033,272  |                             | $          | 2,328,063 |   |
| Warrant proceeds  due from trustee                    |   | 0                               |       | 58,008                           |       |
| Accounts  receivables, net                            |   | 1,681,734                       |       | 1,315,070                        |       |
| Inventories, net                                      |   | 2,547,204                       |       | 1,824,353                        |       |
| Available-for-sale  securities                        |   | 0                               |       | 612,724                          |       |
| Income taxes  receivable                              |   | 11,747                          |       | 0                                |       |
| Deferred income  taxes                                |   | 189,000                         |       | 189,000                          |       |
| Other current  assets                                 |   | 401,368                         |       | 117,427                          |       |
|                                                  |   |                            |       |                             |       |
| Total current  assets                                 |   | 5,864,325                       |       | 6,444,645                        |       |
|                                                  |   |                            |       |                             |       |
| Property and  equipment, net                          |   | 2,189,973                       |       | 1,764,396                        |       |
|                                                  |   |                            |       |                             |       |
| Other assets:                                         |   |                            |       |                             |       |
| Goodwill                                              |   | 131,323                         |       | 0                                |       |
| Intangible  assets, net                               |   | 1,124,766                       |       | 1,185,946                        |       |
| Cash surrender  value of life insurance, net of loans |   | 39,598                          |       | 32,084                           |       |
| Total other  assets                                   |   | 1,295,687                       |       | 1,218,030                        |       |
|                                                  |   |                            |       |                             |       |
| Total assets                                          |   | $                               | 9,349,985  |                             | $          | 9,427,071 |   |
|                                                  |   |                            | ** ** |                             | ** ** |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**        |   |                            | ** ** |                             | ** ** |
| Current  liabilities:                                 |   |                            |       |                             |       |
| Current portion  of long-term debt                    |   | $                               | 339,305    |                             | $          | 323,951 |   |
| Accounts payable                                      |   | 670,401                         |       | 416,942                          |       |
| Accrued payroll  and related taxes                    |   | 216,513                         |       | 185,307                          |       |
| Accrued income  taxes                                 |   | 106,725                         |       | 28,250                           |       |
| Other accrued  expenses                               |   | 118,300                         |       | 129,566                          |       |
| Total current  liabilities                            |   | 1,451,244                       |       | 1,084,016                        |       |
|                                                  |   |                            |       |                             |       |
| Long-term debt,  net of current portion               |   | 1,486,675                       |       | 2,078,635                        |       |
| Deferred income  taxes                                |   | 24,000                          |       | 27,000                           |       |
| Total  liabilities                                    |   | 2,961,919                       |       | 3,189,651                        |       |
|                                                  |   |                            |       |                             |       |
| Stockholders’  equity:                           |   |                            |       |                             |       |
| Common stock,  $0.01 par value                        |   | 17,760                          |       | 17,769                           |       |
| Additional  paid-in capital                           |   | 3,363,946                       |       | 3,350,281                        |       |
| Deferred  compensation                                |   | (45,344                         | )          | 0                                |       |
| Retained  earnings                                    |   | 3,051,704                       |       | 2,812,716                        |       |
| Accumulated  other comprehensive income               |   | 0                               |       | 56,654                           |       |
| Total  stockholders’ equity                      |   | 6,388,066                       |       | 6,237,420                        |       |
|                                                  |   |                            |       |                             |       |
| Total  liabilities and stockholders’ equity      |   | $                               | 9,349,985  |                             | $          | 9,427,071 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**STERION INCORPORATED**

**CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME****(unaudited)**

 
|                                                               |   | **For the  Three Months Ended March 31,** |      | **For the  Six Months Ended March 31,** |   |
|--------------------------------------------------------------------|--------|-------------------------------------------|-----------|-----------------------------------------|--------|
|                                                               |   | **2002**                                  |      | **2001**                                |   | **2002** |   | **2001** |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Sales, net                                                         |   | $                                         | 2,539,648 |                                    | $      | 1,387,312 |   | $ | 4,771,886 |   | $ | 2,643,144 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Cost of goods  sold                                                |   | 1,205,483                                 |      | 552,143                                 |   | 2,202,439 |   | 1,042,035 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Gross profit                                                       |   | 1,334,165                                 |      | 835,169                                 |   | 2,569,447 |   | 1,601,109 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Selling, general  and administrative expenses                      |   | 1,149,936                                 |      | 686,212                                 |   | 2,210,071 |   | 1,301,222 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Income from  operations                                            |   | 184,229                                   |      | 148,957                                 |   | 359,376 |   | 299,887 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Other income  (expense)                                            |   |                                      |      |                                    |   |   |   |   |   |
| Interest expense                                                   |   | (32,311                                   | )         | (31,885                                 | )      | (69,866 | ) | (42,398 | ) |
| Investment  income                                                 |   | 4,450                                     |      | 35,565                                  |   | 16,027 |   | 66,057 |   |
| Gain on sale of  available-for-sale securities                     |   | 0                                         |      | 0                                       |   | 52,926 |   | 0 |   |
| Total other  income expense                                        |   | (27,861                                   | )         | 3,680                                   |   | (913 | ) | 23,659 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Income before  income taxes                                        |   | 156,368                                   |      | 152,637                                 |   | 358,463 |   | 323,546 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Provision for  income taxes                                        |   | (48,475                                   | )         | 0                                       |   | (119,475 | ) | 0 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Net income                                                         |   | 107,893                                   |      | 152,637                                 |   | 238,988 |   | 323,546 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Other  comprehensive income (loss)                                 |   | 0                                         |      | 293,340                                 |   | (56,654 | ) | 212,090 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Comprehensive  income                                              |   | $                                         | 107,893   |                                    | $      | 445,977 |   | $ | 182,334 |   | $ | 535,636 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Net income per  share:                                             |   |                                      |      |                                    |   |   |   |   |   |
| Basic                                                              |   | $                                         | 0.06      |                                    | $      | 0.09 |   | $ | 0.14 |   | $ | 0.18 |   |
| Diluted                                                            |   | 0.05                                      |      | 0.09                                    |   | 0.11 |   | 0.18 |   |
|                                                               |   |                                      |      |                                    |   |   |   |   |   |
| Weighted average  common and common equivalent shares outstanding: |   |                                      |      |                                    |   |   |   |   |   |
| Basic                                                              |   | 1,764,932                                 |      | 1,768,683                               |   | 1,766,217 |   | 1,766,900 |   |
| Diluted                                                            |   | 2,050,178                                 |      | 1,780,437                               |   | 2,093,268 |   | 1,841,834 |   |

 

See accompanying notes to consolidated financialstatements.

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**STERIONINCORPORATED**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

 
|                                                                          |   | **For the  Six Months Ended March 31,** |       |
|-------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                          |   | **2002**                                | ** ** | **2001** | ** ** |
|                                                                          |   |                                    |       |   |   |
| **Cash flows from operation  activities**:                                    |   |                                    |       |   |   |
| Net income                                                                    |   | $                                       | 238,988    |   | $ | 323,546 |   |
| Adjustments to  reconcile net income to cash flows from operating activities: |   |                                    |       |   |   |
| Depreciation and  amortization                                                |   | 254,650                                 |       | 83,969 |   |
| Gain on sale of  available-for-sale securities                                |   | (52,926                                 | )          | (16,130 | ) |
| Compensation  related to non-employee stock options                           |   | 2,255                                   |       | 0 |   |
| Compensation  related to stock options issued below fair market value         |   | 1,467                                   |       | 0 |   |
| Changes in  operating assets and liabilities:                                 |   |                                    |       |   |   |
| Accounts  receivables, net                                               |   | (331,306                                | )          | (107,558 | ) |
| Inventories, net                                                              |   | (453,532                                | )          | (24,221 | ) |
| Income taxes  receivable                                                      |   | (11,747                                 | )          | (9,300 | ) |
| Other current  assets                                                         |   | (283,941                                | )          | (58,925 | ) |
| Accounts payable                                                              |   | 178,460                                 |       | 91,862 |   |
| Accrued payroll  and related taxes                                            |   | 31,206                                  |       | (19,013 | ) |
| Accrued income  taxes                                                         |   | 102,475                                 |       | 0 |   |
| Other accrued  expenses                                                       |   | (11,266                                 | )          | (20,973 | ) |
| Cash flows from  operating activities                                         |   | (335,217                                | )          | 243,257 |   |
|                                                                          |   |                                    |       |   |   |
| **Cash flows from investing  activities:**                                    |   |                                    |       |   |   |
| Purchases of  property and equipment                                          |   | (430,047                                | )          | (40,268 | ) |
| Purchase of  Surgidyne                                                        |   | (200,000                                | )          | 0 |   |
| Purchase of  Bellingham                                                       |   | (350,000                                | )          | 0 |   |
| Proceeds from  sale of available-for-sale securities                          |   | 581,996                                 |       | 83,687 |   |
| Change in other  assets                                                       |   | (7,514                                  | )          | 103,129 |   |
| Cash flows from  investing activities                                         |   | (405,565                                | )          | 146,548 |   |
|                                                                          |   |                                    |       |   |   |
| **Cash flows from financing  activities:**                                    |   |                                    |       |   |   |
| Proceeds from  long-term debt                                                 |   | 0                                       |       | 975,000 |   |
| Payments on  long-term debt                                                   |   | (576,606                                | )          | (385,082 | ) |
| Proceeds from  rights and warrants exercised and stock options exercised      |   | 90,136                                  |       | 1,101,853 |   |
| Repurchase of  common shares                                                  |   | (67,539                                 | )          | 0 |   |
| Cash flows from  financing activities                                         |   | (554,009                                | )          | 1,691,771 |   |
| Increase  (decrease)  in cash and cash  equivalents                      |   | (1,294,791                              | )          | 2,081,576 |   |
|                                                                          |   |                                    |       |   |   |
| Cash and cash  equivalents, beginning of period                               |   | 2,328,063                               |       | 461,108 |   |
|                                                                          |   |                                    |       |   |   |
| Cash and cash  equivalents, end of period                                     |   | $                                       | 1,033,272  |   | $ | 2,542,684 |   |
|                                                                          |   |                                    |       |   |   |
| **Non cash financing activities:**                                            |   |                                    |       |   |   |
| Stock options  issued below fair market value                                 |   | $                                       | 22,000     |   | $ | 0 |   |
| Deferred  consulting services related to stock options issued to non-employee |   | $                                       | 27,066     |   | $ | 0 |   |

See accompanying notes to consolidated financialstatements.

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**STERION INCORPORATED (F/K/A OXBOROMEDICAL, INC.)**

###### **NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH31, 2002 AND 2001**

 

**Note 1—Basis of FinancialStatement Presentation**

 

                The accompanying unaudited consolidated financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been consolidated oromitted pursuant to such rules and regulations, although management believesthat the disclosures are adequate to make the information presented notmisleading.

 

                In the opinion of management, the unauditedconsolidated financial statements contain all adjustments (consisting of onlynormal recurring adjustments) necessary to present fairly the financialposition and results of operations. Results of operations for the interim periods are not necessarilyindicative of the results to be expected for the full year or of the resultsfor any future periods.

 

                In preparation of the Company’s consolidatedfinancial statements, management is required to make estimates and assumptionsthat affect reported amounts of assets and liabilities and related revenues andexpenses.  Actual results could differfrom the estimates used by management.

 

**Note 2 –Significant Accounting Policies**

 

**Principles of consolidation –**The consolidated financial statements include theaccounts of Sterion Incorporated and its wholly-owned subsidiaries, Oxboro,Inc. (formerly known as Oxboro Medical, Inc.) and Sterion, Inc.  All significant intercompany transactionsand balances have been eliminated in consolidation.

 

**Amortization –** Patents and trademarks are being amortized over theirestimated useful lives using the straight-line method.

 

**Income taxes –** The Company has adopted Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes,” under whichdeferred income tax assets and liabilities are recognized for the temporarydifferences between the financial statement and income tax reporting bases ofassets and liabilities based on currently enacted rates and laws.  These temporary differences includedepreciation and related party accruals.

 

**Research and development –** The Company expenses all costs related to productresearch and development as incurred. Research and development expense was $28,074 and $34,341 for the threemonths ended March 31, 2002 and 2001, respectively, and $44,950 and $44,975 forthe six months ended March 31, 2002 and 2001.

 

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**Note 3 –Inventories**

 
|                     |   | **March 31,  2002** |      | **September  30, 2001** |   |
|--------------------------|--------|---------------------|-----------|-------------------------|--------|
|                     |   |                |      |                    |   |
| Inventories  consist of: |   |                |      |                    |   |
| Raw  materials           |   | $                   | 1,329,670 |                    | $      | 830,468 |   |
| Work  in process         |   | 774,728             |      | 641,977                 |   |
| Finished  Goods          |   | 536,613             |      | 603,805                 |   |
| Total                    |   | 2,641,011           |      | 2,076,250               |   |
| Less:  valuation reserve |   | (93,807             | )         | (251,897                | )      |
| Inventories,  net        |   | $                   | 2,547,204 |                    | $      | 1,824,353 |   |
|                     |   |                |      |                    |   |

 

**Note 4 –Available for Sale Securities**

 

The Company classified all equity securities, whichare not cash equivalents, as available-for-sale securities.  Available-for-sale securities were reportedat fair value with all unrealized gains or losses included in othercomprehensive income.  The fair value ofthe securities was determined by quoted market prices of the underlyingsecurity.  These securities were soldduring the three months ended December 31, 2001.

 

**Note  5 – Net Income Per Share**

 

                The Company’sbasic net income per share amounts have been computed by dividing net income bythe weighted average number of outstanding common shares.  The Company’s diluted net income per shareis computed by dividing net income by the weighted average number ofoutstanding common shares and common share equivalents relating to stockoptions and warrants, when dilutive. For the three months ended March 31, 2002 and 2001, 312,859 and 11,754shares of common stock equivalents (based on the treasury stock method) wereincluded in the computation of diluted net income per share, respectively.  For the six months ended March 31, 2002 and2001, 340,823 and 74,934 shares of common stock equivalents (based on thetreasury stock method) were included in the computation of diluted net incomeper share, respectively.

 

                Options topurchase 38,900 shares of common stock with a weighted average exercise priceof $5.44 were outstanding at March 31, 2001, but were excluded from thecomputation of common share equivalents because their exercise prices weregreater than the average market price of the common shares for the period.  All options were dilutive for the three andsix months ended March 31, 2002.

 

**Note 6 –Income Taxes**

 

The Company recorded a provision for income taxes of$119,475 for the six months ended March 31, 2002.  The Company utilized net operating loss carryforwards to offsetincome tax expense during the six months ended March 31, 2001.  The Company recognized as a 

7

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deferred tax asset the net operating loss carryforwardat September 30, 2001.  There are no netoperating loss carryforwards available to offset income as of March 31, 2002.

 

**Note 7 –Long-term debt**

 

                As of March 31, 2002, the Company had $675,000available at prime under a line of credit agreement which expires May 31,2002.  No amounts were outstanding onthis line of credit at March 31, 2002 or September 30, 2001.

 

**Note 8 — Commitments andcontingencies**

 

**Treasury stock purchase program –**On September 14, 2001, the Board ofDirectors authorized a stock repurchase program under which the Company isauthorized to repurchase up to 175,000 shares of its common stock in the openmarket.  Through March 31, 2002, theCompany repurchased 15,200 common shares for an aggregate price of $111,961,excluding commissions or other expenses associated with the repurchase.

 

**Note 9 — Acquisitions**

 

On January 22, 2002, the Company acquired substantially all the assetsand assumed certain liabilities of Surgidyne, Inc. (Surgidyne).  The total purchase price for the assetsacquired and liabilities assumed was $200,000. Statement of Financial Accounting Standards (SFAS) No. 141 “BusinessCombinations” requires that all business combinations after June 30, 2001 beaccounted for under the purchase method of accounting.  Therefore, the acquisition of assets andassumed liabilities of Surgidyne was accounted for under the purchase method ofaccounting and, accordingly, the purchase price was allocated to assetsacquired and liabilities assumed based on the estimated fair value as of theacquisition date.  (See the table belowfor a condensed balance sheet summarizing the amounts assigned to assetsacquired and liabilities assumed at the date of acquisition.)

 

On February 10, 2002, the Company acquired substantially all the assetsand assumed certain liabilities of Bellingham Medical, Inc. (Bellingham).  The total purchase price for the assetsacquired and liabilities assumed was $350,000. Statement of Financial Accounting Standards (SFAS) No. 141 “BusinessCombinations” requires that all business combinations after June 30, 2001 beaccounted for under the purchase method of accounting.  Therefore, the acquisition of assets andassumed liabilities of Bellingham was accounted for under the purchase methodof accounting and, accordingly, the purchase price was allocated to assetsacquired and liabilities assumed based on the estimated fair value as of theacquisition date.  (See the table belowfor a condensed balance sheet summarizing the amounts assigned to assetsacquired and liabilities assumed at the date of acquisition.)

 

The Company acquired Surgidyne and Bellingham to enhance and expandcurrent product lines. These product lines would enable the Company to grow inareas related to its present markets. The acquisitions were seen as strategicfits to position the Company for market penetration.

 

Following are condensed balance sheet summarizing the amounts assignedto the assets acquired and liabilities assumed at the various dates ofacquisition:

 

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|                    |   | **Surgidyne** |    | **Bellingham** |   |
|-------------------------|--------|---------------|---------|----------------|--------|
| Accounts receivable     |   | $             | 35,358  |           | $      | 0 |   |
| Inventories             |   | 117,363       |    | 151,956        |   |
| Property  and equipment |   | 20,000        |    | 65,000         |   |
| Intangibles             |   | 4,000         |    | 100,000        |   |
| Goodwill                |   | 83,279        |    | 48,044         |   |
| Liabilities  assumed    |   | (60,000       | )       | (15,000        | )      |
| Net  purchase price     |   | $             | 200,000 |           | $      | 350,000 |   |

 

The accompanying unaudited pro forma condensed results of operationsfor the six months ended March 31, 2002 and 2001 and the three months endedMarch 31, 2002 and 2002, give effect to the acquisitions of Surgidyne andBellingham as if such transactions had occurred on October 1, 2001.

 

The unaudited pro forma information does not purport to represent whatthe Company’s results of operations would actually have been if suchtransactions in fact had occurred at such date or to project the Company’sresults of future operations:

 
|                    |   | **For the  Three Months Ended March 31,** |      | **For the  Six Months Ended**

**March 31,** |   |
|-------------------------|--------|-------------------------------------------|-----------|----------------------------------------------|--------|
|                    |   | **2002**                                  |      | **2001**                                     |   | **2002** |   | **2001** |   |
|                    |   |                                      |      |                                         |   |   |   |   |   |
| Sales, net              |   | $                                         | 2,579,368 |                                         | $      | 1,644,228 |   | $ | 5,108,556 |   | $ | 3,168,529 |   |
|                    |   |                                      |      |                                         |   |   |   |   |   |
| Income from  operations |   | 184,998                                   |      | 109,785                                      |   | 290,526 |   | 235,632 |   |
|                    |   |                                      |      |                                         |   |   |   |   |   |
| Net income              |   | 108,662                                   |      | 105,219                                      |   | 160,899 |   | 237,408 |   |
|                    |   |                                      |      |                                         |   |   |   |   |   |
| Net income per  share:  |   |                                      |      |                                         |   |   |   |   |   |
| Basic                   |   | $                                         | .06       |                                         | $      | .06 |   | $ | .09 |   | $ | .13 |   |
| Diluted                 |   | $                                         | .05       |                                         | $      | .06 |   | $ | .08 |   | $ | .13 |   |
|                         |        |                                           |           |                                              |        |  |  |  |  |  |  |  |  |  |

 

9

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**Item2. Management’s Discussion and Analysis or Plan of Operation**

 

 

**Overview**

 

                Sterion Incorporated, formerly known as OxboroMedical, Inc. (“Sterion”), with its wholly-owned subsidiary Sterion, Inc.(collectively, the “Company”), develop, manufacture , and market medical andsurgical devices.  Principal medicalproducts produced and sold by the Company include silicone loops, silicone andfabric clamp covers, instrument guards, suture aid booties, identificationsheet and roll tape, and various holders and organizers for instruments used inthe operating room under the name “Sterion®”. On January 22, 2002 the Company completed the purchase of a line ofsurgical drainage and fluid containment systems from Surgidyne, Inc.  On February 10, 2002, the Company completedthe purchase of a line of wound closure strips and related products fromBellingham Medical, Inc.

 

**Results of Operations**

 

                    Net sales for the six-month period ended March 31, 2002 were $4,771,886 as compared to $2,643,144 for the corresponding period in fiscal 2001.  This represents an increase of approximately 80.5%.  Net sales for the three-month period ended March 31, 2002 were $2,539,648 as compared to $1,387,312 for the corresponding period in the previous fiscal year.  This represents an increase of approximately 83.1%.  Second quarter sales includes $1,076,610 for the Company’s subsidiary, Sterion, Inc., which is primarily engaged in the manufacture of sterile containers under the Sterion® name.  The Sterion® product line was acquired from Johnson & Johnson Medical division of Ethicon, Inc. in May 2001.  Excluding the effect of Sterion, Inc. sales, Sterion’s net sales for the second quarter rose 5.5 percent over the same period last year.  Net sales for the three-month and six-month periods ended March 31, 2002 includes $63,981 for Surgidyne and $52,858 for Bellingham.

 

                Continued competition and pricing pressure haveconstrained revenue growth in the Company’s existing product lines.  However several new products have recentlybeen added through the acquisition of the surgical drainage and fluidcontainment systems from Surgidyne, Inc. and the wound closure strips andrelated products from Bellingham Medical, Inc. The Company expects these new products, together with newly developed oracquired products to contribute to sales growth in the future.

 

                Gross profit as apercent of net sales for the first six months of fiscal 2002 and 2001 was 53.8%and 60.5%, respectively.  Gross profitas a percent of net sales for the first three months of fiscal 2002 and 2001was 52.5% and 60.2%, respectively.  Thegross profit percentage decrease is attributable to sales of the Sterion®product, which typically have a lower gross profit margin percentage.  Gross profit dollars increased for the sixmonths ended March 31, 2002 compared to the corresponding period in the prioryear by $968,338.  The principal reasonfor the increase in gross profit for the period is the acquisition of theSterion® line which contributed $1,049,591 to total gross profit for the sixmonths ended March 31, 2002 compared to the corresponding period in fiscal2001.

 

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Net income for the first six months of fiscal year 2002 was $238,988 ascompared to income of $323,546 in the same period of fiscal 2001.  Net income for the three months ended March31, 2002 was $107,893 as compared to income of $152,637 in the same period offiscal 2001.  Net income was somewhatlower in the six months ended March 31, 2002 principally due to the income taxprovision recorded for the six months ended March 31, 2002 in the amount of$119,475 compared to $0 for the prior comparable period, and increased generaland administrative expenses attributable to staffing for future new productsupport.

 

**Liquidity and Capital Resources**

 

                The Company has typically financed its operationsthrough internal working capital and a bank line of credit.  Financing of its building has been throughlong-term bank financing.  The Companybelieves it has adequate capital to meet its cash requirements for the nexttwelve months.  As of March 31, 2002,the Company had working capital of $4,413,081 as compared to $5,360,629 atSeptember 30, 2001, and long-term debt of $1,825,980 compared to$2,402,586 at September 30, 2001.  Thedecrease in working capital and the increase in long-term debt principallyrelates to the sale of available-for-sale securities and utilization of cashreserves for improvements and additions to the Company’s facilities and fixedassets.   As of March 31, 2002, theCompany had $1,033,272 in cash and cash equivalents as compared to $2,328,063at September 30, 2001.  Thedecrease in cash and cash equivalents of approximately $1,300,000 fromSeptember 30, 2001 to March 31, 2002 principally relates to an increase ininventories of new products (approximately $450,000), paydown of long-term bankdebt (approximately $575,000), purchases of new equipment (approximately$430,000) and the acquisitions of Surgidyne and Bellingham (approximately$550,000) offset by the sale of available for sale securities (approximately$582,000).

 

                During the six months ended March 31, 2002, theCompany used $335,217 in net cash from operating activities primarily topurchase inventory for two new product lines, and accompanying increases inaccounts receivable from new sales.  TheCompany used $405,565 in investing activities during the six months ended March31, 2002, primarily due to the purchase of assets of Surgidyne and Bellingham,new equipment, offset by sale of available-for-sale securities. The Companyused $576,606 in cash to pay down long-term bank debt.  Repurchase of common stock totaled$67,539.  Additionally, the Companyreceived $90,136 from the exercise of warrants issued in the Company’s stockrights offering completed on November 30, 1999.

 

**Critical Accounting Policies andEstimates**

 

                Our significantaccounting policies are described in Note 1 to the consolidated financialstatements included in our annual report for the year ended September 30, 2001.The accounting policies used in preparing our interim 2002 consolidatedfinancial statements are the same as those described in our annual report.

 

Our critical accounting policies and estimates arethose both having the most impact to the reporting of our financial conditionand results, and requiring significant judgments and 

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estimates.  Our criticalaccounting policies include those related to (a) revenue recognition (b)long-lived assets, and (c) inventories.

 

The Company records sales revenue at the timemerchandise is shipped.  Managementensures that the transaction complies with the seven conditions and the sixconsiderations contained in Accounting and Auditing Enforcement Release No. 108of the Securities and Exchange Commission (SEC).

 

The evaluation of long-lived assets for impairmentinvolves management judgement in estimating future cash flows related to andfair values of such assets.  Managementreviews its long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of theassets to future net cash flows expected to be generated by the assets.  If the assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets.

 

Management values inventories at the lower of cost orthe current estimated market value of the inventory.  Management, on a quarterly basis, at a minimum, reviews inventoryquantities on hand and records a provision for excess and obsolete inventory.

 

**Forward-Looking Statements**

 

                This report contains forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934.In addition, forward-looking statements may be made orally in the future by oron behalf of the Company.  When used inthis report, the words “believe,” “expect,” “will,” “can,” “estimate,”“anticipate” and similar expressions are intended to identify suchforward-looking statements.  The Companywishes to caution readers not to place undue reliance on any forward-lookingstatements and to recognize that the statements are not predictions of actualfuture results.  Actual results coulddiffer materially from those anticipated in the forward-looking statements dueto the risks and uncertainties set forth in our 2001 Annual Report onForm 10-KSB under the caption “Risks Related to Our Business,” as well asothers not now anticipated.  These risksand uncertainties include, without limitation: our ability to successfullyintegrate newly acquired products and introduce new products, pricingstrategies of competitors, the success of competitive products, generalconditions in the industries served by our products, including consolidation ofcustomers and the potential loss of those customers or their ability to demanddiscounted pricing on our products, changes in management of the Company,maintenance of operating capital and bank financing, the effect of governmentregulation of our products, continuing relationships with our third partysuppliers, and overall economic conditions, including inflation and consumerbuying patterns.

 

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**PART II**

**OTHER INFORMATION**

 

 

 

**Item 6. Exhibits and Reports on Form 8-K:**

 

                                                (a)           Exhibits:

 

                                                None.

 

                                                (b)           Reportson Form 8-K:

 

                The Company fileda Current Report on Form 8-K dated January 22, 2002 to report an Item 5 eventrelating to the consummation of the acquisition of certain assets of Surgidyne,Inc.

 

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**SIGNATURES**

 

                In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|               | STERION  INCORPORATED                                                                 |                 |
|--------------------|---------------------------------------------------------------------------------------|----------------------|
|               |                                                                                  |                 |
| Date: May 14, 2002 | By:                                                                                   | /s/ J. David Berkley |   |
|               |  J. David Berkley, President (Principal  Executive Officer)                      |                 |
|               |                                                                                  |                 |
| Date: May 14, 2002 | By:                                                                                   | /s/ Ramon L. Burton  |   |
|               | Ramon L Burton, Chief  Financial Officer (Principal Financial and Accounting Officer) |
|                    |                                                                                       |                      |  |  |  |  |

 

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