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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO. 000-20997
STERILE RECOVERIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Florida 59-3252632
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(State of Incorporation) (IRS Employer Identification No.)
28100 U.S. HIGHWAY 19 NORTH, SUITE 201, CLEARWATER, FLORIDA 33761
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 726-4421
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 - 5,659,894
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on
March 16, 1998, as reported on the Nasdaq National Market, was approximately
$29,780,341. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The Registrant had outstanding 5,659,894 shares of Common Stock as of
March 16, 1998.
__________________________
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders
to be held on May 19, 1998 is incorporated by reference in Part III
of this report to the extent stated herein.
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STERILE RECOVERIES, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
Section Page
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PART I
Item 1: Business 1
Item 2: Properties 9
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
PART II
Item 5: Market for the Registrant's Common Equity and Related
Shareholder Matters 11
Item 6: Selected Financial Data 12
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8: Financial Statements and Supplementary Data 21
Item 9: Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 40
PART III
Item 10: Directors and Executive Officers of the Registrant 40
Item 11: Executive Compensation 40
Item 12: Security Ownership of Certain Beneficial Owners
and Management 40
Item 13: Certain Relationships and Related Transactions 40
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 40
SIGNATURES 44
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PART I
ITEM 1. BUSINESS
Sterile Recoveries, Inc. ("SRI" or the "Company") provides hospitals
and surgery centers with a comprehensive surgical procedure-based daily
delivery service. The foundations of this service are SRI's reusable surgical
products including gowns, towels, drapes and basins, and its daily delivery and
retrieval of these products for each customer. The Company complements its
reusable products with cost-effective disposable accessory packs to provide a
comprehensive offering for surgical procedures. SRI believes its superior
quality reusable products and its service solutions, including direct delivery
to its customers' departments, differentiate SRI from its competitors.
At eight regional facilities, SRI collects, sorts, cleans, inspects,
packages, sterilizes, and delivers its reusable products on a just-in-time
basis. SRI offers an integrated "closed-loop" reprocessing service which uses
two of the most technologically advanced reusable textiles: (i) a GORE(R)*
Surgical Barrier Fabric for gowns and drapes that is breathable yet liquidproof
and provides a viral/bacterial barrier and (ii) an advanced microfiber
polyester surgical fabric for gowns and drapes which is liquid and bacterial
resistant.
The Company currently serves a growing customer base of over 300
hospitals and surgery centers located in 20 states, including Duke University
Medical Center (Durham), Henry Ford Hospital (Detroit), Johns Hopkins Medical
Center (Baltimore), St. Luke's Episcopal Hospital (Houston), Jackson Memorial
Hospital (Miami), IHC Hospitals, Inc. (Salt Lake City), and Hospital of the
Good Samaritan (Los Angeles). None of the foregoing customers individually
accounts for a material portion of the Company's revenues. The Company
recently announced agreements to supply two group purchasing organizations.
Through an existing Purchase Agreement of Standard Textile Co., Inc. with VHA,
Inc., the Company now offers its reusable products service to VHA members. The
Company's agreement with Hospital Services Corporation of America now
designates the Company as an approved vendor of reusable surgical products to
HSCA's hospital and surgery center members.
The Company believes that its reusable surgical product delivery and
retrieval service is a superior and competitively priced alternative to
disposable surgical products or to operating an in-house reusable program for
surgical products. The Company's delivery service offers savings to hospitals
by reducing or eliminating costly steps associated with the disposable or
in-house alternatives: (i) disposing of biohazardous wastes, (ii) carrying an
inventory of disposable surgical products, and (iii) in-house processing of
reusable surgical products. In addition to these cost savings, the Company's
liquidproof and liquid resistant gowns offer surgeons and surgical staff
enhanced protection against transmission of blood-borne pathogens, including
the HIV and hepatitis viruses. Also, the Company's reusable gowns are made
with a breathable surgical fabric, which is designed for superior comfort
during long procedures.
SRI offers its customers disposable accessory packs containing smaller
surgical items which are not reusable, such as needles, syringes, and tubing.
SRI complements its reusable surgical product delivery and retrieval service
with disposable surgical products that are not available in reusable form. The
Company believes the flexibility it offers its customers by combining reusable
surgical gowns, towels, drapes, and basins with disposable products have
improved the Company's competitive position in the marketplace.
SRI purchased the assets of its business from Amsco Sterile
Recoveries, Inc. ("Amsco Sterile"), an indirect wholly-owned subsidiary of
Amsco International, Inc., on July 31, 1994 (the "Acquisition").
* GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
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THE MARKET
The United States health care system includes approximately 7,100 acute
care hospitals, over 2,400 freestanding surgery centers, and a variety of other
health care facilities. According to industry sources, approximately 31
million surgical procedures were performed at hospitals and surgery centers in
1996. The Company believes between $40-$50 of reusable surgical products
service revenues can be realized from a typical surgical procedure.
In the 1980's, hospitals began using custom procedure trays because
of their convenience, a trend which continued to grow until recently. A
custom procedure tray typically contains, in disposable form, most of the
sterile products used in a particular surgical or other medical procedure.
According to industry sources, total sales of custom procedure trays in the
United States were an estimated $1.5 billion in 1995. However, the Company
believes that custom procedure trays have several shortcomings relative to
reusable products, including costs associated with excessive product content,
storage, handling, and waste disposal, and the working capital requirements
required to carry product inventory.
Most hospitals which converted to custom procedure trays eliminated
the in-house personnel and equipment necessary to process reusable surgical
products. Furthermore, hospitals using in-house facilities are increasingly
unwilling to support those personnel and capital requirements. With the
growth of managed care, many hospitals and surgery centers are seeking
significant cost reduction solutions. The Company believes that a service
which provides daily delivery of substantially better quality surgical products
without any capital investment by the hospital, thereby reducing employee and
space needs, should become an attractive managed care option for hospitals.
The following developments have created a market opportunity for SRI's
reusable surgical product delivery and retrieval service:
Continued Pressure on Hospitals to Contain Cost and Raise
Productivity. With the growth of managed care, economic constraints continue
to require hospitals to become more efficient by limiting capital investments
and reducing staff and costs. Hospitals are continually seeking to decrease
their cost of operations including supplies and waste disposal. SRI offers a
service which eliminates the need for in-house inventory or processing
facilities or the process costs associated with stocking and discarding
disposable products.
Concern Regarding the Transmission of Infectious Diseases. The health
care industry confronts daily the risk of transmission of infectious diseases
through cross-infections. These concerns have increased the desirability of
surgical barrier fabrics that protect surgeons and surgical staff from patient
liquids. SRI's liquidproof gown prevents liquid and viral strike-through in
critical areas during surgical procedures involving higher risk. The Company's
standard gown is specially designed to resist liquid and bacterial
strike-through in most other surgical procedures.
Concern Regarding the Handling and Disposal of Biohazardous Waste.
The disposal of large volumes of infectious and hazardous waste generated by
the health care industry continues to attract increased public awareness. The
increased burdens on hospitals generating biohazardous waste due to
restrictions on incineration and access to dump sites give a competitive
advantage to reprocessing systems, such as SRI's, which replace disposable
surgical products with reusable surgical products. The SRI reprocessing system
substantially reduces biohazardous waste and its impact on the environment.
Increased Outsourcing of Hospital Functions That Do Not Involve
Patient Care. Hospitals with significant staff, capital and space dedicated to
in-house processing of reusable surgical products are increasingly outsourcing
this function to more efficient outside providers. This trend is consistent
with the overall industry focus on efficiency and improved patient care. SRI's
service allows hospitals to outsource to SRI the ownership and reprocessing of
surgical products, and inventory management of complementary disposable
products as well.
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STRATEGY
The Company's objective is to continue its growth and become a leading
provider of reusable surgical products and related delivery and retrieval
services to hospitals and surgery centers. The Company's principal strategies
for achieving this objective are as follows:
Leverage Infrastructure With Increased Penetration in Existing
Markets. The Company believes its existing facilities currently operate at
approximately 60% of their aggregate annual revenue capacity, allowing it to
add a substantial amount of sales without the need for significant additional
capital expenditures for equipment or new facilities. To obtain increased
operating leverage and expand profit margins, the Company intends to grow its
customer base within its existing markets and focus on expanding its
relationships with existing customers by servicing additional surgical
procedures.
Accelerate the Sales Process. The Company believes that its service
solutions address many of the requirements of hospitals to reduce total costs
of operations required by the managed care revenue reductions. Therefore, the
Company has increased its sales force from 15 to 22 people during 1997 to
increase prospective customer awareness of its value. More importantly, SRI's
presentation shows the total value of it's services in reducing product
expenditures, supply chain process costs, biohazardous waste, and instrument
costs when its programs are fully implemented.
Expand National and Regional Agreements. To date, the Company's
service agreements are primarily with individual hospitals. Management
believes that there is a trend toward group purchasing among hospitals. To
address this consolidation, management intends to offer its reusable products
delivery service through agreements with national and regional hospital groups.
SRI recently announced agreements to supply national group purchasing
organizations VHA, Inc. and Health Services Corporation of America, reflecting
significant progress in this effort (See "Business--Group Purchasing
Agreements").
Add Facilities in Selected Markets. SRI currently services customers
in 20 states through eight regional facilities. SRI serves several large
metropolitan areas through highway transport and satellite (depots) supported
by a regional facility. To expand geographically, the Company expects to build
additional facilities when needed in markets previously served by highway
transport. For example, the Company re-opened its Dallas facility in April
1997 to better serve its customers in Northern Texas and Southern Oklahoma that
were previously serviced from the Company's facility in Houston, Texas. From
each new facility, SRI will be able to serve new metropolitan areas which were
previously too far from an existing regional facility. The Company believes
this strategy of incremental geographic expansion will allow the Company to
operate these new facilities profitably by beginning operations with an
existing customer base.
Decentralize Operations to Facilities. The Company operates each of
its facilities on a stand alone basis, with the general manager of each
facility accountable to senior management for sales, service, operations, and
profitability within the facility's market area. The Company believes
individual general managers with operational experience in local markets are
best suited to respond to local business opportunities with overall direction
and support from the Company's corporate staff. The Company's incentive
compensation plan provides compensation awards for the general managers and
certain key production, customer service and sales employees based on
individual and facility performance, as well as overall Company performance.
Each general manager also participates in the Company's stock option plan.
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Utilize Operational Knowledge. The Company's management gained
substantial knowledge in operating Amsco Sterile's facilities. Amsco Sterile
invested approximately $100 million during the period from 1991 to 1994,
allowing management to implement innovative techniques and processes. As a
result, when the Company acquired these facilities, management had developed a
high degree of expertise in operations and was ready to capitalize upon Amsco
Sterile's development efforts. The Company continues to utilize this expertise
to provide superior products and services at a competitive cost.
DELIVERY, RETRIEVAL AND REPROCESSING SYSTEM
SRI's closed-loop reprocessing service picks up soiled reusable
surgical products from its customers and sorts, cleans, inspects, packages,
sterilizes, and redelivers the products. In one trip, SRI's trucks deliver
clean carts of sterilized surgical products to the hospital or surgical center
and retrieve carts containing soiled products and return them to its facility
for reprocessing. The specially designed aluminum carts hold sterile products,
lock to maintain security and sterilization, conveniently roll for delivery
within the hospital and convert into hampers to hold soiled products after the
procedure. The customer avoids the need to maintain secondary stock locations
and the costs of either reprocessing reusable products or stocking and
discarding disposable products.
Upon return to SRI's facility, the contents of the soiled carts are
sorted in a decontamination area. Soiled fabric products are routed through an
automated washing and drying process that delivers clean, dry, and
decontaminated products to a pack room where they are carefully inspected for
damage, repaired if necessary, folded and assembled into packs. The packs are
steam sterilized, sorted, and combined with complementary disposable products
for delivery to the customer. SRI separately cleans, dries, and decontaminates
its carts, stainless steel basins, and other hard reusable products through
special automatic tunnel washers before redelivery. Processing through the
facility occurs in three to five days.
Because the Company's ability to manage its amortization expense
depends on maintaining its sewn goods' useful lives, SRI closely monitors its
reprocessing to ensure longevity. SRI uses a bar coding system to track its
reusable surgical products' status, history, and number of uses. SRI continues
to refine the washing and sterilization processes, building on Amsco Sterile's
substantial investments of time and money to initially develop those
operations.
The growth of SRI's business reflects its products' appeal, its
service quality, and general customer resistance to change when the SRI system
is in place. SRI also believes its direct relationship with hospital staff has
been important in attracting and retaining customers. Many of SRI's
competitors use a distributor system which introduces an intermediary between
the competition and their customers which SRI believes adds costs.
The Company's sales process for new customers is typically six to
twelve months in duration from initial contact to a purchase commitment. The
extended sales process is typically due to the complicated approval process
within hospitals for purchases from new suppliers, the long duration of
existing supply contracts, and implementation delays pending termination of a
hospital's previous supply relationships. Conversely, the Company's high
service level, quality products, and customer resistance to change favors its
retention of existing customers.
SRI bills its customers weekly for the previous week's deliveries on a
per-use basis under service contracts or purchase orders. Consistent with
industry custom, these contracts generally are cancellable by either party with
90 days' notice, and customers may unilaterally reduce their use of the
Company's services under such contracts without penalty. The Company does not
have any order backlog because its products are generally delivered daily in
response to customer orders.
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PRODUCTS
SRI's principal reusable surgical products are its liquidproof and
liquid resistant surgical gowns, towels, drapes, and stainless steel basin
sets. SRI offers these products in a variety of packs configured to the
hospital's specific needs. Packs are comprised of various combinations of
gowns, absorbent towels, liquidproof backtable covers, mayo stand covers, and
stainless components.
The Company's liquidproof gown has GORE(R) Surgical Barrier Fabric in
critical areas to provide protection for procedures which present a higher risk
of liquid strike-through and provide more comfort. This protection is critical
to SRI's customers given current concerns of doctors, staff, and regulatory
authorities regarding transmission of blood-borne pathogens, including the HIV
and hepatitis viruses. The Company's liquid resistant gown is made of an
advanced microfiber polyester fabric designed to resist liquid and bacterial
strike-through in most surgical procedures. All of SRI's gowns and drapes
offer the wearer both comfort and breathability, combined with a high level of
protection from liquid penetration that SRI believes is superior to that
offered by disposable products.
SRI contracts with third-party vendors for the weaving of microfiber
fabric and the cutting and sewing of garments, wraps and drapes. The other
components of the Company's products are currently available at reasonable
costs from a variety of suppliers. To complement its reusable surgical
products, the Company offers disposable accessory packs containing smaller
surgical products, such as needles, syringes, and tubing. The Company develops
these packs with its customers' cooperation to assure a desirable and cost
effective product mix. SRI purchases the products from major manufacturers,
assembles the products in packs, arranges for ethylene oxide sterilization by a
third party, and delivers them to customers on its carts with its reusable
products.
EMPLOYEES
As of December 31, 1997, SRI employed approximately 774 people,
consisting of approximately 35 persons in management, administration and
finance at its corporate office and approximately 739 people in various
positions at the Company's facilities. The Company's employees are not covered
by a collective bargaining agreement, and the Company considers its employee
relations to be good.
GROUP PURCHASING AGREEMENTS
The Company recently announced separate agreements that will allow
members of VHA, Inc. and Health Services Corporation of America ("HSCA") to
choose SRI's reusable surgical products service.
The Company's relationship with VHA, Inc. through its agreement with
Standard Textile Co., Inc. ("Standard") allows the Company to offer its
reusable surgical product service to VHA's approximately 1,600 community-owned
health care organizations and their physicians. The initial term of agreement
is for two years from January 1, 1998 through December 31, 1999. After the
initial term, the agreement is terminable by either party on 90 days advance
notice. Standard sells a variety of medical products to VHA members under a
Purchasing Agreement with VHA, but has been limited in delivering a reusable
product service to VHA members by the geographical scope that its one
reprocessing facility covers. SRI's service to VHA's members will be offered
under Standard's existing Purchasing Agreement with VHA, but in the broad
geographical area covered by the Company's facilities. The agreement also
provides for Standard's sales staff to assist the Company in selling SRI's
services to VHA members and for the Company to purchase part of its reusable
products from Standard, the nation's largest manufacturer of reusable
healthcare textiles and apparel.
The Company's agreement with HSCA designates the Company as an
approved vendor of reusable surgical products to HSCA's hospital and surgery
center members. The agreement runs for five years from November 1, 1997
through October 31, 2002, and is terminable by either party on three months'
advance notice. HSCA is a national group purchasing organization for 1,000
hospitals and surgery centers.
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The agreements do not involve purchase commitments, but the Company
expects that its relationships with these purchasing organizations will
facilitate its sales efforts with member hospitals and surgery centers.
COMPETITION
SRI competes with sellers of both reusable and disposable gowns,
drapes, utensils, and other products for surgical procedures. The market is
dominated by disposables, especially custom procedure trays. SRI believes it
is the leading provider of high quality reusable surgical gowns and drapes, and
that with its complementary disposable products, SRI's surgical supply service
can effectively compete with suppliers of disposable custom procedure trays.
Unlike SRI, many of SRI's competitors can offer full national coverage
and have much greater resources than the Company. The Company's principal
competitors are the Convertors division of Allegiance Corporation, which has a
substantial market share, and Maxxim Medical Inc..
The Company competes based primarily on price, service, quality,
process improvement, and its ability to save its customers waste disposal
costs. The changing healthcare environment in recent years has led to
increasingly intense competition among health care suppliers based on price,
service, and product performance. Hospitals are seeking cost reductions in
response to pressure from governments, insurance companies, and health
maintenance organizations. The Company believes its high degree of expertise
in operations significantly assists it in offering a superior product at a
competitive cost. In addition, hospitals are increasingly seeking buying
leverage by purchasing in integrated networks. SRI believes that competitive
pressure in these areas will continue.
REGULATION
Substantially all of the Company's products and services are subject to
extensive government regulation in the United States by federal, state and local
governmental agencies, including the Food and Drug Administration (the "FDA"),
the Department of Transportation ("DOT"), and the Occupational Safety and Health
Administration ("OSHA"). The Company's products are subject to regulation by
the FDA as medical devices. The regulated devices include the Company's gowns,
towels, drapes, basins, boots, surgical wraps, surgical packs, and delivery
blankets. The FDA regulates the development, production, distribution, and
promotion of medical devices in the United States. Various states in which the
Company's products are being sold or may be sold in the future might impose
additional regulatory requirements. Pursuant to the Federal Food Drug and
Cosmetics Act (the "FDA Act"), a medical device is subject to general controls
regarding FDA inspections of facilities, "Current Good Manufacturing Practices
("CGMPs")," labeling, maintenance of records, and filings with the FDA. FDA
pre-market approval of these devices is obtained under Section 510(k) of
regulations issued under the FDA Act, which provides for FDA approval on an
expedited basis for products that can be shown to be substantially equivalent to
devices legally marketed before May 1976 (the month and year of enactment of the
FDA Act). Products must be produced in registered establishments and be
manufactured in accordance with CGMPs, as defined under the FDA Act. The CGMP
requirements have recently been substantially revised and incorporated into what
is now known as the "Quality System Regulation" (21 CFR Part 820). This action
was taken to add pre-production design controls to the regulations and to try
and achieve consistency with worldwide quality system requirements. The majority
of the changes to the regulations went into effect on June 1, 1997 with full
implementation scheduled for June 1, 1998. Since June 1, 1997, the focus of most
routine FDA inspections has largely been on compliance to the rule. As can be
expected with the introduction of any new regulations, there has been a
significant learning curve on both sides (manufacturer and FDA) as to the intent
and interpretation of several parts of the rule. As a result, it has not been
uncommon for the FDA to issue an "FDA Form 483" and "Warning Letter" following
an inspection dealing with issues associated with the new regulation. Since the
legislation went into effect June 1, 1997, SRI has been inspected five times,
all of which resulted in the issuance of an FDA Form 483. Two inspections
resulted in the issuance of a Warning Letter. Both Warning Letters dealt mainly
with issues associated with the new regulations. To date, the corrections made
by SRI have been reviewed and deemed satisfactory for all inspections except for
one response which remains open pending a final response from the FDA. In
addition, all medical devices must be periodically listed with the FDA.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. If the Company fails to
comply with the applicable provisions of the FDA Act, the FDA can institute
proceedings to detain or seize products, enjoin future violations, impose
product labeling restrictions or enforce product recalls or withdrawals from the
market. The Medical Device Reporting ("MDR") regulation obligates the Company
to provide information to the FDA on injuries alleged to have been associated
with the use of a product or in connection with certain product failures which
could cause serious injury or death.
SRI and its hospital customers also must comply with regulations of
OSHA, including the blood-borne pathogen rule requiring that "universal
precautions" be observed to minimize exposure to blood and other bodily fluids.
To comply with these requirements, SRI's employees wear protective gear in
handling soiled linens in the facility's decontamination area. Properly used,
SRI's products allow its hospital customers to protect their employees in
compliance with these regulations. The Company must comply with local
regulations governing the discharge of water used in its operations. SRI uses
local licensed contractors to dispose of any biohazardous waste generated by the
hospital and received by SRI and therefore does not need to obtain permits for
biohazardous waste disposal. The Company must comply with DOT and OSHA
regulations governing the transportation of hazardous materials. These
regulations concern, among other things, labeling, marketing, placarding, using
proper containers, and reporting discharges. The Company complies with these
regulations by putting soiled products in marked liquidproof bags and locked,
marked transfer carts. Sterilization of the Company's disposable accessory
packs is provided under
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contract by a third-party. The use of ethylene oxide by that third-party in the
sterilization of the Company's disposable accessory packs is subject to
regulation by OSHA and the Environmental Protection Agency. In addition to the
foregoing, numerous other federal, state and local regulatory authorities,
including those enforcing laws which relate to the environment, fire hazard
control, and working conditions, have jurisdiction to take actions which could
have a material adverse effect on the Company. SRI makes expenditures from time
to time to comply with environmental regulations, but does not expect any
material capital expenditures for environmental compliance in the current or
next fiscal year.
CERTAIN CONSIDERATIONS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance,
business prospects, new products, and similar matters. These
statements are based on current expectations and actual results might
differ materially. Among the factors which could cause actual results
and experience to differ are the following:
Sales Process and Market Acceptance of Products and Services. The
Company's future performance depends on its ability to increase revenues to new
and existing customers. The Company's sales process for new customers is
typically between six and twelve months in duration from initial contact to
purchase commitment. The extended sales process is typically due to the
complicated approval process within hospitals for purchases from new suppliers,
the long duration of existing supply contracts, and implementation delays
pending termination of a hospital's previous supply relationships. The long
sales process inhibits the ability of the Company to quickly increase revenues
from new and existing customers or enter new markets. SRI's future performance
will also depend on market acceptance of its combination of reusable surgical
products, disposable accessory packs, and direct delivery and retrieval
service. SRI's market is now dominated by disposable products, and the
Company's primary strategic emphasis on reusable surgical products and
reprocessing services requires its customers to change their customary
purchasing patterns. There is no assurance that a significant portion of the
market will shift from disposable products to the Company's reusable surgical
products and reprocessing services. The Company's inability to gain wider
market acceptance of its reusable products and reprocessing services would have
a material adverse effect on the Company's operating and expansion plans. See
"Business--The Market."
Need for Capital. The Company's business is capital intensive and
will require substantial capital expenditures for additional surgical products
and equipment during the next several years to achieve its operating and
expansion plans. To adequately service a new customer, SRI makes an investment
in new reusable surgical products and carts equal to approximately 50% of the
projected first year revenue from the customer. SRI estimates that its capital
expenditures for new carts and reusable surgical products will be approximately
$750,000 per month in the next twelve months, although the amount will
fluctuate depending on the growth rate of SRI's business. The Company also
expects to make additional expenditures of approximately $2.0 million in 1998
for equipment upgrades and maintenance as required to increase the aggregate
capacity of its facilities. This includes approximately $1.0 million for new
technology software and related computer hardware. Depending on its growth, the
Company expects to add a facility at the end of 1998 or beginning of 1999 at an
estimated cost of between $2.5 and $5.0 million depending on size and location.
In the longer term, the Company expects that its needs for capital expenditures
will be substantial and will depend on its growth and opportunities. The
Company's inability to obtain adequate capital could have a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Dependence on a Significant Customer and Market Consolidation. During
1997, Columbia/HCA Healthcare Corporation ("Columbia") hospitals, with which
the Company currently does business, accounted for approximately 11% of SRI's
sales, compared to 15% in 1996. Although each Columbia hospital currently
makes its purchasing decisions on an individual basis, and no single hospital
accounted for more than 4% of the Company's sales, the Company believes the
executive management of Columbia has the ability to influence the selection of
particular vendors. The loss of a substantial portion of the Columbia
hospitals' business would have a material adverse effect on the Company.
Additionally, hospitals are increasingly buying products and services in groups
to improve efficiency and lower costs. Although SRI is increasingly targeting
these groups for its sales efforts, a change of its customers' purchasing
patterns could have a material adverse effect on the Company.
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Dependence on a Key Supplier. A significant percentage of the
Company's business is dependent upon its ability to obtain the GORE(R)Surgical
Barrier Fabric from W. L. Gore & Associates, Inc. This material is a key
component of SRI's liquidproof surgical gowns, which accounted for approximately
20% of gowns leased by SRI. The Company does not have a long-term commitment
from W. L. Gore & Associates, Inc. for the supply of this fabric and is
currently unaware of any equivalent substitute for the GORE(R) product.
However, we are continuing to evaluate several alternative products. Sustained
loss of this supply relationship would have a material adverse effect on the
Company. See "Business--Reusable Products."
Competition. The Company's business is highly competitive. The
Company's competitors include a number of distributors and manufacturers, as
well as the in-house reprocessing operations of hospitals. Certain of the
Company's existing and potential competitors possess substantially greater
resources than the Company, and the Company's market is dominated by their
disposable products. Some of the Company's competitors, including the
Convertors division of Allegiance Corporation, serve as the sole supplier of a
wide assortment of products to a significant number of hospitals. The Company
does not provide an array of products as complete as those provided by some of
its competitors, which in some instances is a competitive disadvantage. There
is no assurance that the Company will be able to compete effectively with
existing or potential competitors. See "Business--Competition."
Dependence on Key Executives. The Company is largely dependent upon
the management expertise and experience of Richard T. Isel, Bertram T. Martin,
Jr., Wayne R. Peterson, and James T. Boosales, its principal officers. The
loss of the services of one or more of these key executives could have a
material adverse effect on the Company. In December 1997, the Company appointed
Mr. Isel as its Chairman of the Board and Mr. Martin as its President. These
changes recognize Mr. Isel's shift from responsibility for day-to-day
operations to focus on longer-term business opportunities, including additional
products and services, strategic relationships, and joint venture or
acquisition opportunities.
Protection of Operating Knowledge. The Company's success will depend
in part on its ability to protect the operating knowledge associated with
operation of its closed-loop system. The Company relies on a combination of
trade secret law, proprietary know-how, non-disclosure and other contractual
provisions to protect its knowledge associated with operation of the
closed-loop system. The Company does not hold any patents. Failure to
adequately protect its operating knowledge could have a material adverse effect
on the Company.
Increased Replacement and Amortization Costs. SRI acquired its
equipment and surgical products at a cost substantially below both their
original cost and current replacement cost, which has resulted in lower
depreciation, amortization, and shrinkage expense for those assets since the
Acquisition, as compared to the expenses incurred by Amsco Sterile. Since the
Acquisition, SRI has purchased equipment and surgical products at current
replacement cost, resulting in increased depreciation, amortization, and
shrinkage expense. SRI amortizes its reusable surgical products on a per use
basis. [If the products' actual number of uses proves to be shorter than SRI's
current estimates, SRI's annual product amortization expense would increase,
which would adversely affect its profitability.] The amount of shrinkage (loss
and scrap of reusable surgical products) experienced by the Company is
influenced by a variety of factors including the customers' surgical product
rotation and operating room control procedures, the Company's internal tracking
of reusable surgical products through bar coding and the Company's increased
use of standardized surgical packs (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and Note B of Notes
to Financial Statements).
Health Care Reform. Numerous proposals have been debated in Congress
and in several state legislatures regarding health care legislation intended to
control the cost and availability of health care services. It is not possible
to determine what health care reform legislation will be adopted by Congress or
any state legislature, or if and when any such legislation will be adopted and
implemented by regulations. In that event, there can be no assurance the
Company will be able to adjust effectively to any regulatory changes made by
future health care reform legislation and remain profitable. The Company is
unable to predict accurately the nature and effect, if any, that the adoption
of health care legislation or regulations or changing interpretations at the
federal or state level would have upon the Company. See "Business--The
Market."
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11
Product Liability and Insurance Coverage. The use of the Company's
products entails a risk of liability from injuries suffered by patients,
hospital staff, and the Company's employees. The Company's products are used
in connection with surgery, which exposes these persons to risks of
transmission of blood-borne pathogens, including the HIV and hepatitis viruses.
Although no claims have been asserted to date, product liability or other
claims might be asserted against the Company by persons who allege that the use
of the Company's products resulted in injury or other adverse effects, and the
claims might involve large amounts of alleged damages and significant defense
costs. Although the Company currently maintains product liability and workers
compensation insurance, the liability limits or the scope of the Company's
insurance policies might be inadequate to protect against potential claims. In
addition, the Company's insurance policies must be renewed annually. The
Company has been able to obtain product liability insurance in the past,
however this insurance varies in cost, might be difficult to obtain, and might
not be available on commercially reasonable terms in the future. A successful
claim against the Company in excess of its available insurance coverage could
have a material adverse effect on the Company. In addition, the Company's
business reputation could be adversely affected by product liability claims,
regardless of their merit or eventual outcome.
ITEM 2: PROPERTIES
SRI operates eight processing facilities of approximately 23,000 to
32,000 square feet each in Baltimore, Dallas, Detroit, Houston, Los Angeles,
Raleigh, Salt Lake City, and Tampa. Each facility contains a uniform set of
computerized and fully automated heavy washers, dryers, and sterilizers to
achieve consistent cleaning and sterilization cycles for reusable surgical
products. The Company uses standard operating procedures at each facility, and
regularly implements at all facilities efficiencies which are developed and
tested at one location.
The Company's properties and the major markets which they serve are
summarized below. All the properties are leased, with the exception of the
Houston processing facility. SRI believes its existing facilities adequately
serve its current requirements.
SQUARE FEET
FACILITY AND LOCATION (APPROX.) LEASE EXPIRATION(1) SELECTED MARKETS SERVED
- --------------------- --------- ------------------- ------------------------
Processing facilities:
Baltimore, Maryland 32,000 July 31, 2002 Baltimore, Philadelphia,
Pittsburgh, Washington, D.C.
Dallas, Texas 31,000 March 31, 2002 Dallas, Oklahoma City, Tulsa
Detroit, Michigan 23,000 September 30, 2002 Chicago, Detroit, Louisville,
Milwaukee, Toledo
Houston, Texas 30,000 Owned Houston, San Antonio, Austin
Los Angeles, California 30,000 November 30, 2002 San Diego, Sacramento, Los Angeles,
San Francisco
Raleigh, North Carolina 31,500 April 30, 2002 Richmond, Atlanta, South Carolina, North
Carolina
Salt Lake City, Utah 24,000 November 30, 2003 Utah, Idaho
Tampa, Florida 29,000 January 24, 2002 Tampa, Miami, Orlando, Jacksonville
Depots:
Atlanta, GA 2,500 June 30, 2000 --
Chicago, Illinois 3,000 September 30, 1998 --
Louisville, Kentucky 3,000 December 31, 1998 --
Miami, Florida 4,000 January 31, 2000 --
San Francisco, California 6,000 May 31, 1999 --
San Marcos, Texas 3,600 September 30, 2000 --
Warehouse:
Salt Lake City, Utah 5,500 Month to Month --
Disposable products facility:
Orlando, Florida 18,500 February 28, 1999 --
Corporate office:
Clearwater, Florida 10,000 October 31, 2001 --
(1) Excludes renewal options in the leases which range from one to 10
years.
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ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any
litigation or other legal proceeding expected to have a material effect on the
Company or its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
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13
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades publicly on The Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol "STRC." The table
below sets forth the high and low bid quotations for the Company's Common Stock
from July 18, 1996 (the date on which trading commenced on the Nasdaq National
Market) through December 31, 1997. These bid prices represent prices between
dealers without adjustment for retail mark-ups, mark-downs, or commissions and
may not necessarily represent actual transactions.
COMMON STOCK PRICE RANGE
1996 HIGH LOW
---- ---- ---
Third Quarter (from July 18, 1996) $14.750 $10.875
Fourth Quarter $15.250 $14.125
1997
----
First Quarter $19.125 $15.125
Second Quarter $19.000 $16.625
Third Quarter $19.500 $14.375
Fourth Quarter $17.125 $13.875
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently expects that its earnings will be retained for
development and expansion, and does not anticipate paying dividends on its
Common Stock in the foreseeable future. Additionally, financial covenants in
the Company's credit facility prohibit the payment of cash dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Notes to Financial
Statements." On February 26, 1998, there were approximately 70 holders of
record of the Common Stock.
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ITEM 6: SELECTED FINANCIAL DATA
The following table contains certain selected financial data and is
qualified by the more detailed Financial Statements and Notes thereto included
elsewhere in this report. The selected financial data for the years ended
December 31, 1997, December 31, 1996, December 31, 1995 and the five-months
ended December 31, 1994, have been derived from the Company's audited financial
statements. The selected financial data (statement of income data only) set
forth below for the seven months ended July 31, 1994 and the year ended
December 31, 1993, have been derived from audited financial statements of Amsco
Sterile (the predecessor company). The Balance Sheet data as of July 31, 1994
and December 31, 1993 have been derived from the unaudited balance sheets of
Amsco Sterile exclusive of notes thereto, which include all adjustments that
Amsco Sterile considers necessary for a fair presentation of its results of
operation and financial position for the period presented. The following
information should be read in conjunction with the Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.
Sterile Recoveries, Inc. Predecessor Company (1)
------------------------------------------------------------------ --------------------------
Years Ended Five Months Seven Months
-------------------------------------------------- Ended Ended Year Ended
December 31, December 31, December 31, December 31, July 31, December 31,
1997 1996 1995 1994 1994 1993
------------ ----------- ------------ ------------ ---------- -----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 39,854 $ 32,168 $ 25,320 $ 9,285 $ 12,069 $ 7,988
Cost of revenues 26,286 21,764 17,659 6,550 14,091 15,090
---------- --------- ------------ ----------- --------- ---------
Gross profit (loss) 13,568 10,404 7,661 2,735 (2,022) (7,102)
Distribution expenses 3,150 3,000 2,801 1,032 1,309 981
Selling and administrative
expenses 5,924 4,734 3,975 2,162 7,375 12,132
Restructuring expenses -- -- -- -- -- 1,550
---------- --------- ------------ ----------- --------- ---------
Income (loss) from
operations 4,494 2,670 885 (459) (10,706) (21,765)
Interest expense (income), net (142) 648 1,489 735 4,791 5,727
---------- --------- ------------ ----------- --------- ---------
Income (loss) before
income taxes 4,636 2,022 (604) (1,194) (15,497) (27,492)
Income tax expense (2) 1,835 190 -- -- -- --
---------- --------- ------------ ----------- --------- ---------
Net income (loss) $ 2,801 $ 1,832 $ (604) $ (1,194) $ (15,497) $ (27,492)
========== ========= ============ =========== ========= =========
UNAUDITED PRO FORMA INFORMATION (2):
Historical net income (loss) $ 2,022 $ (604) $ (1,194)
Pro forma income tax expense 778 -- --
--------- ------------ -----------
Pro forma net income (loss) $ 1,244 $ (604) $ (1,194)
========= ============ ===========
Historical (1997 only)
and pro forma net
income per common
share, basic $ 0.50 $ 0.29 $ (0.20) $ (0.40)
========== ========= ============ ===========
Historical (1997 only)
and pro forma net
income per common
share, diluted $ 0.48 $ 0.28 $ (0.20) $ (0.40)
========== ========= ============ ===========
Weighted average
common shares
outstanding, basic 5,637 4,300 3,094 3,000
========== ========= ============ ===========
Weighted average
common shares
outstanding, diluted 5,862 4,491 3,094 3,000
========== ========= ============ ===========
BALANCE SHEET DATA:
Reusable surgical
products, net $ 10,034 $ 6,915 $ 4,924 $ 4,867 $ 32,836 $ 31,226
Total assets 27,546 25,006 13,493 13,388 67,651 63,871
Total indebtedness -- 1,000 10,891 11,942 115,841 96,088
Shareholders' equity (deficit) 24,348 20,756 214 (182) (50,293) (34,796)
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STERILE RECOVERIES, INC.
SELECTED FINANCIAL DATA - (CONTINUED)
(1) The table covers periods before and after the Company acquired its
business from Amsco Sterile on July 31, 1994. A comparison of the
Company's operating results for the periods after the Acquisition to
the operating results before the Acquisition is not meaningful. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
(2) As an S Corporation for federal income tax purposes, the Company had
not been subject to income tax until the date of the Offering at which
time the Company became a C Corporation. On a pro forma basis,
assuming the Company had been subject to income tax for all periods
presented, the Company would not have recognized any corporate income
tax expense prior to 1996. See Notes B and J of Notes to Financial
Statements.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and the Notes thereto included
elsewhere in this report. This discussion and analysis contains trend analysis
and might contain forward-looking statements. These statements are based on
current expectations and actual results might differ materially. Among the
factors that could cause actual results to vary are those described in this
"Overview" section and in "Business - Certain Considerations."
OVERVIEW
The Company's revenues are derived from providing hospitals and
surgery centers with reusable gowns, towels, drapes, and basins for use in
surgical procedures through a daily comprehensive surgical procedure-based
delivery and retrieval system, and also from the sale of disposable surgical
products that supplement its reusable surgical product service. The Company's
revenue growth is primarily affected by the number of customers, the number and
type of surgical procedures it services for each customer, and the pricing by
type of surgical pack.
As of December 31, 1997, the Company believes its facilities operated
at approximately 60% of their estimated aggregate annual revenue capacity of
approximately $80 million at current prices. Estimated annual revenue capacity
is based on the Company's estimate of revenues that would be derived from the
full utilization of the facilities at current prices and without addition of
equipment. Variations in maximum revenue potential by facility result from
differences in product mix and pricing for each facility. The Company's
ability to use this excess revenue capacity will depend on its success in
substantially increasing its volume of business. A primary strategy of the
Company is to increase its operating leverage by expanding revenues within
existing markets.
The Company amortizes its reusable surgical products on a per-use
basis, based on estimates of the products' useful lives. SRI's purchase of
used reusable surgical products in the Acquisition at approximately 17% of
Amsco Sterile's net book value has resulted in lower amortization expense since
the Acquisition. The Company's purchases of new reusable surgical products at
current replacement cost increased amortization expense in 1997 and will
increase future amortization expense. However, the Company's current
replacement cost is substantially less than Amsco Sterile's original cost due
to significantly improved sourcing of fabrics. See "Business--Certain
Considerations - Increasing Replacement and Amortization Costs" and Note B of
Notes to Financial Statements.
The Company completed its initial public offering (the "Offering") of
2,150,000 shares of its Common Stock (including shares sold in the
overallotment) in July and August 1996. The net proceeds of the Offering
received by the Company after payment of expenses were $17.9 million, of which
approximately $11 million was used to retire its acquisition debt and working
capital facility.
Before the Offering, the Company was an S Corporation for state and
federal income tax purposes and not subject to corporate income taxes. Upon
completion of the Offering, the Company's S Corporation status terminated and
the Company became subject to corporate income taxes. See Notes B and K of
Notes to Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the statements of operations
of the Company.
YEARS ENDED
DECEMBER 31,
-------------------------------------------------
1997 1996 1995
------------- ------------ -----------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 66.0 67.7 69.7
----- ----- -----
Gross profit 34.0 32.3 30.3
Distribution expenses 7.8 9.3 11.1
Selling and administrative expenses 14.9 14.7 15.7
----- ----- -----
Income from operations 11.3 8.3 3.5
Interest expense (income), net (0.3) 2.0 5.9
----- ----- -----
Income (loss) before income taxes 11.6 6.3 (2.4)
Income tax expense 4.6 0.6 --
----- ----- -----
Net income (loss) 7.0% 5.7% (2.4)%
===== ===== =====
Pro forma information:
Historical income (loss) before income taxes 6.3% (2.4)%
Pro forma income tax expense 2.4 --
----- -----
Pro forma net income (loss) 3.9% (2.4)%
===== =====
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18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Revenues increased $7.7 million, or 23.9%, to $39.9 million in 1997
from $32.2 million in 1996. The revenue increases for the period were
attributable to the activities of the Company's sales force, which was
increased by 45% during 1997. The revenue increases were achieved equally from
new customers and increased revenue from current customers.
Gross Profit
Gross profit increased $3.2 million, or 30.4%, to $13.6 million in
1997 from $10.4 million in 1996. As a percentage of revenues, gross profit
increased to 34.0% in 1997 from 32.3% in 1996. The improvement in gross profit
is largely attributable to increased revenues, labor efficiencies, and the
economies of scale associated with spreading fixed costs over increased
revenues. These favorable factors were partially offset by higher amortization
expense of reusable surgical products as the Company supplements the products
purchased in the Acquisition with products purchased at current higher
replacement cost. Increased revenues from relatively lower margin disposable
surgical products also offset some of the efficiency gains.
Distribution Expenses
Distribution expenses increased $150,000, or 5.0%, to $3.15 million in
1997 from $3.0 million in 1996. As a percentage of revenues, distribution
expenses decreased to 7.8% in 1997 from 9.3% in 1996. The improvement in
distribution expenses as a percentage of revenues resulted primarily from
efficiencies derived from delivering more volume over existing routes, from
adding additional routes and equipment at a slower pace than revenue growth,
and from a renegotiated truck leasing contract.
Selling and Administrative Expenses
Selling and administrative expenses increased $1.2 million, or 25.1%,
to $5.9 million in 1997 from $4.7 million in 1996. As a percentage of
revenues, selling and administrative expenses increased to 14.9% in 1997 from
14.7% in 1996. This increase was largely attributable to the Company
increasing its sales force by 45% and hiring staff to manage anticipated
revenue growth.
Interest Expense (Income), Net
Interest expense (income) changed from interest expense of $648,000 in
1996 to interest income of $142,000 in 1997, primarily due to the elimination
of the acquisition debt to Amsco Sterile repaid from the Offering proceeds and
the interest and other income earned from investing excess cash.
Income Before Income Tax Expense
As a result of the foregoing, the Company's income before taxes
increased to $4.6 million in 1997, from $2.0 million in 1996. As a percentage
of revenues, income before taxes in 1997 was 11.6% of revenues compared to 6.3%
in 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Historical Income Tax Expense
Income tax expense increased $1.6 million to $1.8 million in 1997 from
$200,000 in 1996. The Company's effective tax rate increased to 39.6% in 1997
from 9.4% in 1996. During 1996, the Company changed from an S Corporation to
a C Corporation for Federal income tax purposes. The lower effective tax rate
in 1996 reflects the recording of a deferred tax asset and the benefit from the
allocation of the year's earnings between the C Corporation and the S
Corporation (see Note J of the financial statements).
Pro Forma Income Tax Expense
Pro forma income tax expense for 1996 reflects the statutory rate of
38.5% as if the Company had been treated as a C Corporation for the entire
year.
Net Income Per Share
The Company recorded a historical net income per share of $0.48 on a
diluted basis, and $0.50 on a basic per share basis for 1997, compared with
$0.28 for diluted and $0.29 for basic pro forma per share net income in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Revenues increased $6.9 million, or 27.0%, to $32.2 million in 1996
from $25.3 million in 1995. The revenue increases for the period were equally
attributable to new customers and increased revenues from current customers.
Gross Profit
Gross profit increased $2.7 million, or 35.8%, to $10.4 million in
1996 from $7.7 million in 1995. The improvement in gross profit is largely
attributable to labor efficiencies and the economies of scale associated with
spreading fixed costs over increased revenues. These favorable factors were
partially offset by higher amortization of reusable surgical products as the
Company supplements the products purchased in the Acquisition with products
purchased at current higher replacement cost. Increased revenues from
relatively lower margin disposable surgical products also offset some of the
efficiency gains.
Distribution Expenses
Distribution expenses increased $200,000, or 7.1%, to $3.0 million in
1996 from $2.8 million in 1995. As a percentage of revenues, distribution
expenses decreased to 9.3% in 1996 from 11.1% in 1995. The improvement in
distribution expenses as a percentage of revenues resulted primarily from
efficiencies derived from delivering more volume over existing routes.
Selling and Administrative Expenses
Selling and administrative expenses increased approximately $700,000,
or 19.1%, to $4.7 million in 1996 from $4.0 million in 1995. This increase
was largely attributable to additional sales personnel, the addition of an
executive officer after the Offering, and the expense associated with being a
public company. As a percentage of revenues, selling and administrative
expenses decreased to 14.7% in 1996 from 15.7% in 1995, primarily due to
leveraging of fixed administrative expenses over additional revenues.
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20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Interest Expense, Net
Interest expense decreased by approximately $850,000, or 56.5%, to
$648,000 in 1996 from $1.5 million in 1995, primarily due to the elimination of
the acquisition debt to Amsco Sterile repaid from the Offering proceeds, and
the interest and other income earned in the amount of $181,000 since the
Offering.
Income Before Income Tax Expense
As a result of the foregoing, the Company's income before taxes
increased to $2.0 million in 1996, from a loss before taxes of $604,000 in
1995. As a percentage of revenues, income before taxes in 1996 was 6.3% of
revenues compared to a loss before taxes of 2.4% in 1995.
Historical Income Tax Expense
During 1996, the Company changed from an S Corporation to a C
Corporation for federal income tax purposes. This change resulted in an
effective tax rate for the Company of 9.4% compared to the statutory income tax
rate of 38.5%. The lower effective tax rate reflects the recording of a
deferred tax asset and the benefit from the allocation of the year's earnings
between the C Corporation and the S Corporation (see Note J of the Financial
Statements).
Pro Forma Income Tax Expense
In conjunction with the completion of the Offering, the Company
terminated its S Corporation status. For pro forma income tax purposes only,
the S Corporation's cumulative net operating losses as of December 31, 1995, of
approximately $1.6 million were not treated as C Corporation losses.
Accordingly, the 1996 pro forma income tax expense reflects the 38.5% statutory
rate (See Note J of the Financial Statements.)
Net Income Per Share
The Company recorded a pro forma net income per share of $0.29 on a
basic per share basis, and $0.28 on a diluted per share basis for 1996,
compared with ($0.20) for both basic and diluted pro forma per share net (loss)
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from
operations, sales of its debt and equity securities including the Offering,
operating leases for facilities and distribution vehicles, and borrowings under
its working capital loan facility.
The Company's positive cash flow from operating activities was $3.9
million in 1997, compared to $1.7 million in 1996. The increase in cash from
operating activities from 1996 to 1997 resulted primarily from increased net
income before amortization and depreciation expense, and improved accounts
receivable collections. This increase was partially offset by cash used for
increased prepaid expenses and a decrease in accrued expenses. Inventories at
December 31, 1997 were $1,979,000 compared to $1,240,000 at December 31, 1996.
The increase in inventory reflects the continued growth of disposable surgical
products to supplement the Company's reusable products.
The Company used approximately $3.6 million more net cash in investing
activities in 1997 than in 1996. To support sales growth, the Company made
capital expenditures in 1997 for equipment of $2.8 million and for reusable
surgical products and carts of $6.0 million compared to $1.3 million for
equipment and $4.0 million for reusable surgical products and carts in 1996.
These expenditures were funded from proceeds of the Offering and cash provided
by operating activities. The Company has not raised any cash in financing
activities since the Offering.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
The Company continues to increase its expenditures for reusable
surgical products, primarily to support anticipated increases in business. The
Company's business is capital intensive and will require substantial capital
expenditures for additional surgical products and equipment during the next
several years to achieve its operating and expansion plans. To adequately
service a new customer, the Company estimates that it makes an investment in
new reusable surgical products and carts equal to approximately 50% of the
projected first year revenue from the customer. The Company estimates capital
expenditures for new carts and reusable surgical products will be approximately
$750,000 per month for the next 12 months, although the amount will fluctuate
with the growth of its business. The Company also expects to make additional
expenditures of approximately $1.0 million in 1998 for equipment upgrades and
maintenance to increase the aggregate capacity of its facilities and $1.0
million for new technology software and related computer hardware. Depending
on its growth, the Company expects to add a facility at the end of 1998 or
beginning of 1999, at an estimated cost of between $2.5 and $5.0 million
depending on size and location.
The Company expects to incur internal staff costs, consulting and
other expenses for infrastructure and facilities' enhancements to prepare its
computer systems and applications for the year 2000. The Company will make its
computer systems year 2000 compliant as part of its $1 million of expenditures
for new technology software and related computer hardware. There can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that another company's failure to convert
will not adversely affect the Company's operations.
The Company has established with First Union National Bank a $15.0
million unsecured revolving credit facility scheduled to mature in August
1999. The facility imposes certain financial covenants. Beginning January 1,
1997, total outstanding borrowings under the facility are limited to three
times the Company's earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the previous four quarters (declining to two and
one-half times by the last year). The Company must maintain a minimum tangible
net worth of $18,750,000 during 1997, increasing to $20,745,000 for 1998 and
$23,745,000 for the balance of the loan term. The Company may elect to convert
up to $5.0 million of the available facility into term loans for capital
expenditures that are repayable ratably over five years and secured by
equipment acquired with the loan proceeds. All borrowings accrue interest at
the London Interbank Offering Rate (LIBOR) plus 190 basis points (7.50% as of
December 31, 1997). The facility restricts the declaration of dividends and
prohibits the Company from encumbering its assets. Through December 31, 1997,
there are no borrowings under this credit facility.
As of December 31, 1997, the Company had cash of approximately
$380,000. The Company believes that this cash balance, its cash flow from
operating activities, and funds available under its credit facility will be
sufficient to fund its growth and anticipated capital requirements for the next
twelve months. In the longer term, the Company expects its capital
requirements will be substantial and will depend on its growth and
opportunities. The Company expects to fund additional capital expenditures
from a combination of internal cash flow, its credit facility, and other
capital sources. See "Business - Certain Considerations--Need for Capital."
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22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Sterile Recoveries, Inc.
We have audited the accompanying balance sheets of Sterile Recoveries,
Inc. as of December 31, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the 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 Sterile Recoveries,
Inc., as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
February 16, 1998
-20-
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STERILE RECOVERIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
------------- ------------ -------------
Revenues $ 39,854 $ 32,168 $ 25,320
Cost of revenues 26,286 21,764 17,659
------------- ------------ --------------
Gross profit 13,568 10,404 7,661
Distribution expenses 3,150 3,000 2,801
Selling and administrative expenses 5,924 4,734 3,975
------------- ------------ --------------
Income from operations 4,494 2,670 885
Interest expense (income), net (142) 648 1,489
------------- ------------ --------------
Income (loss) before income taxes 4,636 2,022 (604)
Income tax expense 1,835 190 --
------------- ------------ --------------
Net income (loss) $ 2,801 $ 1,832 $ (604)
============= ============ ==============
Historical net income (loss) per
common share - basic $ 0.50 $ 0.43 $ (0.20)
============= ============ ==============
Historical net income (loss) per
common share - diluted $ 0.48 $ 0.41 $ (0.20)
============= ============ ==============
Unaudited pro forma information
Historical income (loss) before income taxes $ 2,022 $ (604)
Pro forma income tax expense 778 --
------------ --------------
Pro forma net income (loss) $ 1,244 $ (604)
============ ==============
Pro forma net income per common share - basic $ 0.29 $ (0.20)
============ ==============
Pro forma net income per common share - diluted $ 0.28 $ (0.20)
============ ==============
The accompanying notes are an integral part of these financial statements.
-21-
24
STERILE RECOVERIES, INC.
BALANCE SHEETS
(in thousands, except share data)
December 31,
-------------------------------------------
1997 1996
------------------- -----------------
ASSETS
Cash $ 380 $ 5,199
Accounts receivable, net 6,016 5,253
Inventories 1,979 1,240
Prepaid expenses and other assets 1,203 530
Reusable surgical products 10,034 6,915
Property, plant and equipment, net 7,253 5,102
Goodwill, net 521 550
Deferred income taxes 160 217
---------- ----------
Total assets $ 27,546 $ 25,006
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable--related parties $ - $ 1,000
Accounts payable 1,603 1,360
Employee related accrued expenses 926 901
Other accrued expenses 669 989
---------- ----------
Total liabilities 3,198 4,250
Commitments and contingencies - -
Shareholders' equity
Preferred stock--authorized 5,000,000 shares of $.001
par value; no shares issued and outstanding - -
Common stock--authorized 30,000,000 shares of $.001
par value; issued and outstanding 5,659,894 and
5,521,189 shares, respectively 6 6
Additional paid-in capital 20,167 19,376
Retained earnings 4,175 1,374
---------- ----------
Total shareholders' equity 24,348 20,756
---------- ----------
Total liabilities and shareholders' equity $ 27,546 $ 25,006
========== ==========
The accompanying notes are an integral part of these financial statements.
-22-
25
STERILE RECOVERIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except for share data)
COMMON STOCK ADDITIONAL RETAINED
------------------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- --------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 1994 3,000,000 $ 3 $ 1,009 $ (1,194) $ (182)
Conversion of note payable 225,807 -- 1,000 -- 1,000
Net loss -- -- -- (604) (604)
--------- --------- ----------- -------- ---------
BALANCE AT DECEMBER 31, 1995 3,225,807 3 2,009 (1,798) 214
Issuance of common stock for cash 51,282 -- 300 -- 300
Acquisition of Surgipro 90,000 1 526 -- 527
Initial Public Offering, net 2,150,000 2 17,926 -- 17,928
S Corp Shareholder Distribution -- -- (52) -- (52)
Recapitalization of Company for
change from S Corporation to
C Corporation -- -- (1,340) 1,340 --
Exercise of stock options 4,100 -- 7 -- 7
Net income -- -- -- 1,832 1,832
--------- --------- ----------- -------- ---------
BALANCE AT DECEMBER 31, 1996 5,521,189 6 19,376 1,374 20,756
Conversion of note payable 128,205 -- 750 -- 750
Exercise of stock options 10,500 -- 41 -- 41
Net income -- -- -- 2,801 2,801
--------- --------- ----------- -------- ---------
BALANCE AT DECEMBER 31, 1997 5,659,894 $ 6 $ 20,167 $ 4,175 $ 24,348
========= ========= =========== ======== =========
The accompanying notes are an integral part of this financial statement.
-23-
26
STERILE RECOVERIES, INC.
STATEMENTS OF CASH FLOW
(In thousands)
YEARS ENDED
DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ----------- ----------
1995
---------
Increase (decrease) in cash
Cash flows from operating activities
Net income (loss) $ 2,801 $ 1,832 $ (604)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 689 512 421
Amortization of reusable surgical products 2,015 1,293 764
Provision for reusable surgical products shrinkage 606 422 --
Deferred income taxes 57 (217) --
Change in assets and liabilities (net of business combination)
Accounts receivable (763) (1,800) (94)
Inventories (739) (728) (88)
Prepaid expenses and other assets (673) (94) (45)
Accounts payable 243 71 487
Accrued expenses (295) 439 272
----------- --------- -----------
Net cash provided by operating activities 3,941 1,730 1,113
----------- --------- -----------
Cash flows from investing activities
Purchases of property, plant, and equipment (2,811) (1,261) (278)
Purchases of reusable surgical products (5,740) (3,705) (820)
Payment for acquisition of business, net of cash acquired 0 6 --
----------- --------- -----------
Net cash used in investing activities (8,551) (4,960) (1,098)
----------- --------- ----------
Cash flows from financing activities
Proceeds from convertible demand notes 0 1,000 --
Payments on related party debt (250) (167) --
Payments on acquisition debt 0 (9,081) (800)
Net proceeds from working capital facility 0 (1,810) 749
Net proceeds from issuance of common stock 41 18,235 --
----------- --------- ----------
Net cash provided by (used in) financing activities (209) 8,177 (51)
----------- --------- ----------
Increase (decrease) in cash (4,819) 4,947 (36)
Cash and cash equivalents at beginning of period 5,199 252 288
----------- --------- ------------
Cash and cash equivalents at end of period $ 380 $ 5,199 $ 252
=========== ========= ============
Supplemental cash flow information
Cash paid for interest $ 67 $ 697 $ 1,419
=========== ========= ============
Cash paid for income taxes $ 1,870 $ 96 $ --
=========== ========= ============
Supplemental schedule of non-cash investing activities
Purchase of Surgipro (1996)
Fair value of assets acquired $ -- $ 986 $ --
Cash received -- 6 --
Common stock issued -- (526) --
----------- --------- ------------
Liabilities incurred or assumed $ -- $ 466 $ --
=========== ========= ============
Conversion of Convertible Demand Note into 128,205
shares of common stock $ 750 $ -- $ 1,000,000
=========== ========= ============
The accompanying notes are an integral part of these financial statements.
-24-
27
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF ORGANIZATION AND BUSINESS
Sterile Recoveries, Inc. ("SRI" or the "Company") was incorporated in
June 1994 in Florida to acquire all of the assets of its predecessor, AMSCO
Sterile Recoveries, Inc. on July 31, 1994 (the "Acquisition"). The Company's
corporate office is located in Clearwater, Florida.
SRI provides hospitals and surgery centers with a comprehensive
surgical procedure-based delivery and retrieval service for reusable gowns,
towels, drapes and basins, and, additionally provides disposable products
necessary for surgery. At eight regional facilities located in various states,
SRI collects, sorts, cleans, inspects, packages, sterilizes, and delivers its
reusable products on a just-in-time basis. On February 26, 1996, the Company
acquired Surgipro, Inc. ("Surgipro"), which became its disposable products
division, in order to expand its revenues from disposable accessory packs
containing small surgical items such as needles and sutures. While its
emphasis is providing a reusable surgical product delivery and retrieval
service, the Company also earns revenues from the sale of disposable surgical
products, representing 9% or less of total revenues for all periods presented
herein.
SRI contracts with third-party vendors for the weaving of microfiber
fabric and the cutting and sewing of gowns, wraps and drapes. A significant
percentage of the Company's business is dependent on its ability to obtain a
key component of its liquid-proof surgical products from one principal vendor.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement presentation
The Company operates on a 52-53 week fiscal year ending the Sunday
nearest December 31. The financial statements reflect the Company's year-end
as December 31 for presentation purposes.
Use of estimates in financial statements
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company has no
cash equivalents for any of the periods presented.
Collectibility of accounts receivable
The Company grants credit to customers who meet pre-established credit
requirements. The Company does not require collateral when trade credit is
granted to customers. Credit losses have been less than $35,000 for each
period presented herein. The allowance for doubtful accounts at December 31,
1997 and 1996 is $39,000 and $35,000, respectively
Inventories
Inventories consist principally of consumables, supplies, and
disposable surgical products since the acquisition of Surgipro and are stated
at the lower of cost or market - cost being determined on the first-in,
first-out method.
-25-
28
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reusable surgical products
Reusable surgical products are stated at historical cost, net of
amortization. The products are amortized on a basis similar to the units of
production method. Estimated useful lives are based on the estimated total
number of available uses for each product. The expected total available usage
for its products using the three principal fabrics (accounting for 85% of its
products) are 75, 100, and 125 uses based on several factors including studies
performed by management. Based on current reusable product turnover, the
expected total available usage equates to a time period of approximately three
to seven years. The estimates, however, are subject to revision if actual
experience differs from the estimated available uses. Accumulated amortization
at December 31, 1997 and 1996 approximates $4,325,000 and $2,388,000,
respectively.
The Company has experienced minor amounts of shrinkage, with actual
shrinkage currently ranging 1% - 1.5% of revenues. As of December 31, 1997 and
1996, the Company has established a reserve for shrinkage of $195,000 and
$135,000 respectively, to account for the estimated amount of product at
customer locations which will not be returned to the Company. The Company will
continue to evaluate, at least quarterly, the actual shrinkage experience and
trends, and will review the shrinkage provision if deemed necessary.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, or the term
of the related leases for leasehold improvements, if less than the useful
lives. For 1997, accelerated methods are used for tax purposes.
Goodwill
Goodwill, which resulted from the acquisition of Surgipro, is stated
at cost less accumulated amortization which is provided using the straight-line
method over 20 years.
Impairment of long-lived and intangible assets
On a quarterly basis, the Company evaluates the projected undiscounted
cash flows of each business unit (reusable and disposable) to determine, when
indicators of impairment are present, whether or not there has been permanent
impairment of its long-lived assets, and accrues expenses for the amount, if
any, determined to be permanently impaired. No impairment exists as of
December 31, 1997.
Revenues
Revenues are recognized as the agreed upon services are delivered,
generally daily. The Company's revenues are principally generated from service
agreements with varying terms of one to three years, which are cancellable by
either party, generally with a 90-day notice. All reusable surgical products
provided to a customer under these agreements are used by the customer, but
remain the Company's property.
Income taxes
At the time of the completion of the offering in July 1996 (see Note
H), the Company terminated its S Corporation status and became subject to
corporate income taxes. Accordingly, income taxes are presented on a
historical basis for 1997 and 1996. Pro forma taxes are presented for 1996 and
1995 using an effective rate of 38.5%.
.
-26-
29
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of financial instruments
The carrying amounts of cash, receivables, payables, accrued expenses
and notes payable approximate fair value because of the short-term nature of
the items.
Earnings per common share
The Company has adopted Standard of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings Per Share" as this standard became effective
for financial statements issued after December 15, 1997. SFAS No. 128
eliminates primary and fully dilutive net income per common share and replaces
them with basic and diluted net income per common share. Accordingly, all
income per common share for the previous periods have been restated to conform
to the new standard.
Accounting for Stock-Based Compensation
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as it
relates to employment awards. It applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock.
New Accounting Pronouncements
SFAS No. 130, Reporting Comprehensive Income, is effective for fiscal
years beginning after December 15, 1997. This Statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The new rule requires that
the Company (a) classify items of other comprehensive income by their nature in
a financial statement, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The Company plans to adopt
SFAS No. 130 in 1998 and expects no material impact to the Company's financial
statement presentation.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, is effective for fiscal years beginning after December 15, 1997.
This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of All
Majority-Owned Subsidiaries. This Statement requires annual financial
statements to disclose information about products and services, geographic
areas and major customers based on a management approach, along with interim
reports. The management approach requires disclosing financial and descriptive
information about an enterprises's reportable operating segments based on
reporting information the way management organizes the segments for making
business decisions and assessing performance. It also eliminates the
requirement to disclose additional information about subsidiaries that were not
consolidated. The Company plans to adopt SFAS No. 131 in 1998 with impact only
to the Company's disclosure information and not its results of operations.
-27-
30
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C--BUSINESS COMBINATIONS
In February 1996, the Company purchased the operations of Surgipro.
The Company paid consideration of approximately $600,000, consisting of 90,000
shares of the Company's Common Stock valued at $526,500 and a note payable of
approximately $109,000, which was paid at the completion of the offering, for
approximately $500,000 of assets and the assumption of approximately $400,000
of liabilities. This acquisition was accounted for as a purchase transaction
and, accordingly, the purchase price was allocated to the assets and
liabilities based upon their estimated fair values at the time of the
acquisition, with the excess of approximately $574,000 being allocated to
goodwill. The results of operations are included in the accompanying Statement
of Operations from the acquisition date.
The following unaudited pro forma financial information assumes the
purchase had occurred at the beginning of the respective periods after the
effect of certain pro forma adjustments including, among others, adjustments to
reflect amortization of goodwill. The pro forma information is presented for
informational purposes only and may not be indicative of actual results had the
purchase occurred at the beginning of the respective periods.
Years Ended
December 31, December 31,
-------------------------------------------
1996 1995
---------------- -----------------
(Unaudited)
Revenues $ 32,281,858 $ 26,315,051
Net income (loss) $ 1,875,019 $ (683,968)
Pro forma net income (loss) per common share - basic $ 0.44 $ (0.22)
Pro forma net income (loss) per common share - diluted $ 0.42 $ (0.22)
NOTE D--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
Useful Lives ---------------------------------------------
in Years 1997 1996
-------------- ------------- -------------
Land and buildings 38 $ 375,120 $ 324,474
Leasehold improvements & signs 2-18 1,530,812 1,323,655
Machinery and equipment 3-12 6,042,063 4,035,436
Office furniture, equipment & computers 3-10 1,044,154 497,593
------------- ------------
8,992,149 6,181,158
Less: Accumulated depreciation and amortization 1,739,644 1,078,890
------------- ------------
$ 7,252,505 $ 5,102,268
============= ============
During 1997, 1996 and 1995, depreciation expense totaled approximately
$660,000, $488,000 and $421,000, respectively.
-28-
31
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E--LINE OF CREDIT
The Company has established with First Union National Bank a $15
million unsecured revolving credit facility that is scheduled to mature in
August 1999. The facility imposes certain financial covenants. Beginning
January 1, 1997, total outstanding borrowings under the facility are limited to
three times the Company's earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the previous four quarters (declining to two and
one-half times by the third year). The facility also imposes a covenant
concerning the maintenance during the 1997 year of minimum tangible net worth
of $19,245,000. The minimum net worth requirement increases to $20,745,000 for
1998. Thereafter, the minimum net worth requirement will be $23,745,000.
Pursuant to the terms of the credit facility, the Company may elect to convert
up to $5 million of the available facility into term loans for capital
expenditures that are ratably payable over five years, and are secured by the
equipment acquired with these loans. All borrowings accrue interest at the
London Interbank Offering Rate (LIBOR) plus 190 basis points through October
15, 1998 (7.50% as of December 31, 1997), and 175 basis points thereafter until
maturity. The facility restricts the declaration of dividends and prohibits
the Company from encumbering its assets. Through December 31, 1997, there are
no borrowings under this credit facility.
NOTE F--NOTES PAYABLE
In conjunction with the Acquisition, the Company borrowed $1,000,000
from a director of the Company pursuant to a secured Convertible Demand
Promissory Note which accrued interest at 12% per annum. In September, 1995,
the note was converted into 225,807 shares of Common Stock at an effective
conversion price of $4.43 per share.
In March 1996, the Company borrowed $1,000,000 from a director
pursuant to an 8.5% Convertible Demand Promissory Note. Seven hundred fifty
thousand dollars of the Convertible Note was convertible to Common Stock at
$5.85 per share and was converted on February 24, 1997 into 128,205 shares of
common stock. The $250,000 non-convertible balance was paid on the same date.
The Company incurred interest expense related to the demand notes of
approximately $13,310, $71,000 and $70,000, respectively, for the years ended
December 31, 1997, 1996 and 1995.
Total interest expense and related fees for 1997, 1996 and 1995 was
approximately $67,000, $829,000 and $1,489,000, respectively.
-29-
32
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases offices, facilities, office equipment, and
distribution vehicles under non-cancelable operating leases with terms ranging
from one year to nine years. The office and processing facility leases contain
various renewal options and escalating payments. At present, the Company
intends to exercise certain aspects of these renewal options when the initial
term expires. The vehicle leases contain contingent rentals based on mileage.
Future minimum lease payments as of December 31, 1997 under leases in
excess of one year are as follows:
Year ending
1998 $1,523,311
1999 1,404,293
2000 1,323,739
2001 1,250,714
2002 772,573
Thereafter 208,676
----------
Total $6,483,306
==========
Rental expense for years ended December 31, 1997, 1996 and 1995
totaled $1,570,960, $1,960,346, and $1,866,246 (including contingent rentals
of approximately $211,000, $228,000, and $230,000), respectively.
Legal Proceedings
Neither the Company nor any of its property is subject to any
litigation or other legal proceedings expected to have a material effect on the
Company or its business.
Management Incentive Plan
The Company has a Management Incentive Plan, the incentives of which
are based on various performance factors and are adjusted to reflect the
Company's overall performance as determined by the Board of Directors. Payment
of the cash incentives is made at the end of the second month after the end of
the incentive year. The participant must still be an employee of the Company
at that time. Approximately $295,000, $375,000 and $195,000 of estimated
incentives were recognized during the years ended December 31, 1997, 1996 and
1995, respectively.
Management Employment Agreements
The Company has approved employment agreements with four executives
and one other employee in which each person would receive severance pay equal
to two years of base salary in the event that the executive or employee is
terminated following a change in control of the Company.
-30-
33
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY
Common Stock
Subject to preferences which might be applicable to any outstanding
Preferred Stock, the holders of the Common Stock are entitled to receive
dividends when, as, and if declared from time to time by the Board of Directors
out of funds legally available. In the event of liquidation, dissolution, or
winding-up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities subject to prior
distribution rights of any Preferred Stock then outstanding. The Common Stock
has no preemptive or conversion rights and is not subject to call or assessment
by the Company. There are no redemption or sinking fund provisions applicable
to the Common Stock.
On July 24, 1996, the Company completed the Offering of 2,000,000
shares of its Common Stock priced at $9.50 per share. The net proceeds of the
Offering, after deducting commissions of approximately $1,330,000 and
approximately $1,100,000 in expenses, were approximately $16,570,000. In
addition, the underwriters on August 9, 1996 exercised their overallotment
option to purchase 150,000 additional shares of the Company's Common Stock.
Proceeds to the Company of the underwriters' purchase of shares pursuant to
their exercise of the overallotment option were $1,325,250 after commissions.
The Company used approximately $11,000,000 of the proceeds to retire debt.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred
Stock, $.001 par value per share. The Board of Directors has the authority,
without any further vote or action by the Company's shareholders, to issue
Preferred Stock in one or more series and to fix the number of shares,
designations, relative rights (including voting rights), preferences, and
limitations of those series to the full extent now or hereafter permitted by
Florida law. The Company believes that this power to issue Preferred Stock
will provide flexibility in connection with possible corporate transactions.
The issuance of Preferred Stock, however, could adversely affect the voting
power of holders of Common Stock and restrict their rights to receive payments
upon liquidation and could have the effect of delaying, deferring, or
preventing a change in control of the Company. The Company has no present
intention to issue shares of Preferred Stock, although it may determine to do
so in the future.
NOTE I--STOCK OPTIONS
The Company maintains two stock option plans, the 1995 Stock Option
Plan (the "Employee Plan") and the Company's 1996 Non-Employee Director Plan
(the "Non-Employee Plan").
The Employee Plan
The Employee Plan provides employees with incentive or non-qualified
options to purchase up to 700,000 shares of Common Stock. On December 21,
1995, the Company granted non-qualified stock options covering a total of
94,000 shares of Common Stock to various employees at an exercise price of
$5.85 per share. The exercise price represented the estimated fair value of
the Company's Common Stock at the time of the grant, as approved by the Board
of Directors based upon various factors including an independent third-party
firm's valuation. None of the options vested until completion of the
Offering, and are then vested ratably over the four-year period following the
completed Offering. Since the Offering, the Company has granted 455,000
options under this Plan. The options vest ratably over five years from the
date of the grant. All outstanding options vest upon a change in control of
the company. Options granted under the Employee Plan expire no later than ten
years after the date granted or sooner in the event of death, disability,
retirement or termination of employment. Included in these options are options
to purchase 140,000 shares issued to an employee who is also a director and an
officer of the Company.
-31-
34
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Non-Employee Plan
The Non-Employee Plan provides for the grant of non-qualified stock
options to purchase up to 100,000 shares of Common Stock to members of the
Board of Directors who are not employees of the Company. At the completion of
the Offering, each non-employee director was granted options to purchase 4,000
shares of Common Stock for each full remaining year of the director's term.
Thereafter, on the date on which a new non-employee director is first elected
or appointed, he will automatically be granted options to purchase 4,000 shares
of Common Stock for each year of his initial term, and will be granted options
to purchase 4,000 shares of Common Stock for each year of any subsequent term
to which he is elected. All options become exercisable ratably over the
director's term and have an exercise price equal to the fair market value of
the Common Stock on the date of grant. As of December 31, 1997, options to
purchase 28,000 shares have been granted under this Plan.
Other Stock Options
In October 1995, in conjunction with a financial consulting
arrangement with an individual who has become a director and an officer of the
Company, the Company granted the individual a non-qualified stock option for
66,000 shares of its Common Stock at an exercise price of $4.43 a share which
were exercisable as follows: (1) 22,000 shares upon the completion of an
interim financing (completed in March 1996); and (2) 44,000 at the completion
of an initial public offering. The exercise price was determined by the
Board of Directors to approximate the estimated fair value of the Company's
Common Stock at the date of grant based on various factors, including the
Company's history of operating losses.
On May 2, 1996, the Company issued to a recently appointed director,
an option to purchase 7,500 shares of the Company's Common Stock for $8.00 per
share, which vests one-third on completion of the offering, one-third at the
1997 annual meeting of shareholders, and one-third at the 1998 annual meeting
of shareholders.
On November 21, 1997, the Company issued to an officer and director an
option to purchase 20,000 shares of the Company's Common Stock for $15.06 per
share, which vests ratably over five years.
If the Company had elected to recognize compensation expense based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed by SFAS 123, the Company's net income (loss)
and earnings (loss) per share would be reduced to the pro forma amounts
indicated below:
1997 1996 1995
------ ------- -------
Net income (loss) As reported $2,801 $ 1,244 $ (604)
Pro forma (unaudited) $2,390 $ 1,069 $ (608)
Basic earnings (loss) per share As reported $ 0.50 $ 0.29 $ (0.20)
Pro forma (unaudited) $ 0.43 $ 0.25 $ (0.20)
Diluted earnings (loss) per share As reported $ 0.48 $ 0.28 $ (0.20)
Pro forma (unaudited) $ 0.41 $ 0.24 $ (0.20)
-32-
35
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using the
Binomial options-pricing model with the following weighted-average assumptions
used for grants in 1997, 1996 and 1995, respectively, no dividend yield for all
years, expected volatility of 47, 32 and 38 percent; risk-free interest rates
of 6.5, 5.6 and 6.5 percent, and expected lives of 4.1, 3.8 and 3.7 years.
A summary of the status of the Company's fixed stock option plan as of December
31, 1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding as of December 31, 1994 -- --
Granted 172,500 $ 4.96
Exercised -- --
Forfeited -- --
-------
Outstanding as of December 31, 1995 172,500 $ 4.96
Granted 258,000 $ 9.64
Exercised (4,100) $ 1.71
Forfeited (2,400) $ 5.85
-------
Outstanding as of December 31, 1996 424,000 $ 7.83
Granted 252,500 $ 16.45
Exercised (10,500) $ 3.94
Forfeited (34,800) $ 10.96
-------
Outstanding as of December 31, 1997 631,200 $ 11.17
=======
The following table summarizes information concerning currently
outstanding and exercisable stock options:
OUTSTANDING SHARES
Weighted Average
Remaining
Range of Number Contractual Life Weighted Average
Exercise Prices Outstanding (years) Exercise Price
- ----------------- ----------- ------------------ ----------------
$1.00 - 4.42 3,500 7.2 $ 1.00
$4.43 - 5.85 145,800 7.9 $ 5.21
$5.86 - 9.50 224,400 8.4 $ 9.45
$9.51 - 17.50 257,500 9.5 $ 16.20
EXERCISABLE SHARES
$ 1.00 - 4.42 3,500 $ 1.00
$ 4.43 - 5.85 97,200 $ 4.89
$ 5.86 - 9.50 52,700 $ 9.36
$ 9.51 - 17.50 3,000 $ 12.69
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36
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J--INCOME TAX
Historical Income Taxes
In accordance with the provisions of the Internal Revenue Code, upon
the completion of the Offering and the conversion to a C Corporation in 1996, a
portion of the income earned after the conversion was allocated to the S
Corporation. As a result of this allocation, the effective rate for
calculating income taxes is lower than the statutory rates. In addition, the
accounting rules require the establishment of deferred taxes for all existing
temporary differences in the Company's assets' and liabilities' basis for
income and financial reporting purposes at the date of conversion to a C
Corporation. The Company recorded deferred tax assets of approximately
$200,000 at the date of conversion.
The provision for income taxes for the years ended December 31 is as
follows:
1997 1996
-------------- ------------
Income taxes currently payable $ 1,778,000 $ 407,000
Deferred income tax expense (benefit) 57,000 (217,000)
----------- ----------
Income tax expense $ 1,835,000 $ 190,000
=========== ==========
Reconciliation of the federal statutory income tax rate of 34.0% to
the effective income tax rate for the years ended December 31 is as follows:
1997 1996
---------- ---------
Federal statutory income tax rate 34.0% 34.0%
State income taxes, net of federal 4.5 4.5
Net earnings allocated to the S Corporation period - (21.3)
Deferred tax asset previously not recognized - (10.7)
Other, net 1.1 2.9
------- -----
39.6% 9.4%
======= =====
Deferred tax asset and liability components resulting from the
differences between accounting for financial statement purposes and purposes
pursuant to SFAS No. 109 are as follows as of December 31:
1997 1996
-------- --------
Deferred tax assets:
Inventory shrinkage reserve $ 93,000 $ 52,000
Health insurance reserve 55,000 64,000
Vacation pay accrual 58,000 56,000
Other 33,000 45,000
-------- --------
239,000 217,000
Deferred tax liabilities - accumulated depreciation (79,000) -
-------- --------
Net deferred income taxes $160,000 $217,000
======== ========
No valuation allowance has been established as management considers the
utilization of the deferred tax asset probable.
Pro forma income taxes
In conjunction with the completion of the Offering in 1996, the
Company terminated its S Corporation status. For pro forma income tax
purposes, the S Corporation's cumulative net operating losses as of December
31, 1995 of approximately $1.6 million have not been used to reduce pro forma
income tax expense in 1996. For 1996, the Company chose to recognize income
tax expense using an effective rate of 38.5% of historical income before income
taxes.
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37
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of the income tax expense (benefit) calculated using
the federal statutory income tax rate of 34% to the income tax expense recorded
is as follows:
Years Ended
December 31,
------------------------------------------
1996 1995
------------- -------------
Federal income taxes (benefit) at statutory rate $ 687,000 $(205,000)
State income taxes, net of federal benefit 91,000 (27,000)
Net operating losses not currently utilizable - 232,000
---------- ---------
Income tax expense $ 778,000 $ --
========== =========
NOTE K--WEIGHTED AVERAGE COMMON SHARES
Historical and pro forma net income (loss) per common share is
computed by dividing pro forma net income (loss) by the basic and diluted
weighted average number of shares of common stock outstanding. For 1996 and
1995, pro forma net income (loss) includes a pro forma provision for income
taxes assuming the Company had been subject to income taxes during the period
it was an S Corporation for income tax purposes. For diluted weighted
average shares outstanding, the Company used the treasury stock method to
calculate the Common Stock equivalents that the stock options would represent.
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38
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------- -------------
BASIC
- -----
Actual weighted average shares outstanding;
weighted average shares used in income per
calculation - basic 5,636,607 4,300,125 3,094,086
DILUTED
- -------
Actual weighted average shares outstanding 5,636,607 4,300,125 3,094,086
Additional shares 225,013 190,827 418,729
--------- -------- ---------
The following table sets forth the computation of historical basic and
diluted earnings (loss) per share:
1997 1996 1995
------------ ------------- -------------
Numerator:
Net income (loss) $2,801,000 $1,832,000 $ (604,000)
========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding 5,636,607 4,300,125 3,094,086
Effect of dilutive securities:
Employee stock options 211,847 141,097 -
Convertible notes 13,366 49,736 -
---------- ----------- ----------
225,213 190,827 -
Denominator for diluted earnings per share 5,861,820 4,490,952 3,094,086
========= ========== ==========
Net income (loss) per common share - basic $ 0.50 $ 0.43 $ (0.20)
========== ========== ==========
Net income (loss) per common share - diluted $ 0.48 $ 0.41 $ (0.20)
========== ========== ==========
The effect of all dilutive securities (see Notes F and I) for 1995
were not included in the calculation of diluted net loss per common
share as the effect would have been anti-dilutive.
Options to purchase 186,500 shares of common stock were not included
for all or a portion of the 1997 computation of diluted net income per
common share as the options' exercise price were greater than the
average market price of the common shares and therefore the effect
would be anti-dilutive.
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39
NOTE L--RELATED PARTY TRANSACTIONS
SRI paid $76,000, $56,000 and $8,000 in 1997, 1996 and 1995 to a
company to design and supply the components for water reclamation systems for
six SRI facilities. The company providing these services to SRI is owned by a
director and shareholder of SRI.
During 1997, 1996 and 1995, the Company paid approximately $20,000,
$257,000, and $22,000 respectively, to the Company's corporate law firm, a
member of which is a shareholder of the Company.
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40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL SCHEDULE
Board of Directors
Sterile Recoveries, Inc.
In connection with our audit of the financial statements of Sterile
Recoveries, Inc., referred to in our report dated February 16, 1998, which is
included in this annual report on SEC Form 10-K for the year ended December 31,
1997, we have also audited Schedule II for the years ended December 31, 1995,
1996 and 1997. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
GRANT THORNTON LLP
Tampa, Florida
February 16, 1998
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41
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
STERILE RECOVERIES, INC.
Column A Column B Column C Column D Column E
- ------------------------------------ -------- -------- -------- ---------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) OF PERIOD
----------- --------- --------- ----------- ----------
Year ended December 31, 1995:
Allowance for doubtful accounts $ 6,000 $ 25,000 $(10,000) (1) $ 21,000
Year ended December 31, 1996:
Allowance for doubtful accounts $ 21,000 $ 34,000 $(20,000) (1) $ 35,000
Year ended December 31, 1997:
Allowance for doubtful accounts $ 35,000 $ 36,000 $(32,000) (1) $ 39,000
- -------------------------
(1) Write-offs of uncollectible accounts
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42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
executive officers and directors is incorporated by reference to the
information set forth under the captions "Proposal No. 1: Election of
Directors" and "Other Information" in the Company's Proxy Statement for the
1998 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information set forth under the caption "Executive Officer Compensation" in
the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information set forth under the caption "Other Information" in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information set forth under the caption "Certain Relationships" in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The Company did not file a Report on Form 8-K during the last quarter
of 1997.
Exhibits
The following exhibits are filed as part of this report:
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43
EXHIBITS INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
2.1(1) Asset Purchase Agreement dated July 31, 1994, between the Company and
Amsco Sterile Recoveries, Inc.
2.2(1) Agreement and Plan of Merger dated as of February 26, 1996, between Surgipro,
Inc. and the Company.
2.3(1) Articles of Merger dated as of February 26, 1996, between Surgipro, Inc. and
the Company.
3.1(1) Restated Articles of Incorporation of the Company.
3.2(1) Bylaws of the Company.
4.3(1) Specimen certificate for Common Stock.
10.1(1) 1995 Stock Option Plan, as amended.
10.2(1) Form of Stock Option Agreement between the Company and participants under
the 1995 Stock Option Plan.
10.3(1) Form of Indemnity Agreement between the Company and each of its executive
officers.
10.4(1) Stock Option Agreement dated March 20, 1995, between the Company and
Robert Normyle.
10.5(1) Form of Registration Rights Agreement executed in connection with the private
placement of Common Stock.
10.6(3) Employment Agreement between the Company and each of Messrs. Isel,
Peterson, Boosales and Martin:
(a) Isel
(b) Peterson
(c) Boosales
(d) Martin
10.7(1) Employment Agreement dated as of February 26, 1996, between Clayton W. Page
and the Company.
10.8(1) Lease Agreement dated August 16, 1991, between Coastal 2920 Corporation and
Amsco Sterile Recoveries, Inc., as amended and assigned to the Company.
10.9(1) Lease dated August 28, 1992, among Winchester Homes, Inc. and Weyerhaeuser
Real Estate Company and Amsco Sterile Recoveries, Inc., as assigned to the Company.
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44
EXHIBITS INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.10(1) Texas Industrial Net Lease dated March 19, 1992, between the Trustees of the
Estate of James Campbell, Deceased, and Amsco Sterile Recoveries, Inc., as assigned
to the Company.
10.11(1) Lease dated March 30, 1992, between Walter D'Aloisio and Amsco Sterile
Recoveries, Inc., as assigned to the Company.
10.12(1) Standard Industrial Lease -- Multi-Tenant (American Industrial Real Estate
Association) dated February 24, 1992, between Borstein Enterprises and Amsco
Sterile Recoveries, Inc., as assigned to the Company.
10.13(1) Carolina Central Industrial Center Lease dated April 22, 1992, between Industrial
Development Associates and Amsco Sterile Recoveries, Inc., as assigned to the
Company.
10.14(1) Lease Agreement dated September 2, 1993, between Price Pioneer Company, Ltd.,
and Amsco Sterile Recoveries, Inc., as assigned to the Company.
10.15(1) Service Center Lease dated December 4, 1991, between QP One Corporation
and Amsco Sterile Recoveries, Inc., as assigned to the Company.
10.16(1) Lease Agreement dated January 31, 1996, between Florida Conference
Association of Seventh-Day Adventists and Surgipro, Inc., as assigned to the
Company.
10.17(1) License Agreement dated July 31, 1994, between the Company and Amsco
Sterile Recoveries, Inc.
10.18(1) Stock Option Agreement dated as of October 18, 1996, between Bertram T.
Martin, Jr. and the Company.
10.19(3) Stock Option Agreement dated as of May 2, 1996, between James M. Emanuel
and the Company.
10.20(1) 1996 Non-Employee Director Stock Option Plan.
10.21(3) Retention Agreements between the Company and each of Messrs. Isel,
Peterson, Boosales and Martin:
(a) Isel
(b) Peterson
(c) Boosales
(d) Martin
10.21(4) Loan Agreement dated October 15, 1996, between First Union National Bank of
Florida and the Company.
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45
EXHIBITS INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
10.22(4) Revolving Line of Credit Promissory Note dated October 15, 1996, executed by
the Company in favor of First Union National Bank of Florida.
10.23(4) Security Agreement dated October 15, 1996, executed by the Company in favor
of First Union National Bank of Florida.
10.24(5) Amendments No. 2 and 3 to the 1995 Stock Option Plan.
10.25 Stock Option Agreement dated November 21, 1997, between Bertram T. Martin,
Jr. and the Company.
10.26 Corporate Service Agreement dated October 21, 1997, between Standard Textile
Company, Inc. and the Company.
10.27 Corporate Service Agreement dated October 31, 1997, between Health Services
Corporation of America and the Company.
10.28 1998 Stock Option Plan
23.1 Consent of Grant Thornton, LLP
27.1 Financial Data Schedule for year ended December 31, 1997 (for
SEC use only).
27.2 Restated Financial Data Schedule for year ended December 31,
1996 (for SEC use only).
27.3 Restated Financial Data Schedule for year ended December 31,
1995 (for SEC use only).
____________
(1) Incorporated by reference to the Registration Statement on Form S-1 filed
by the Registrant on May 15, 1996.
(2) Incorporated by reference to Amendment No. 2 to the Registration Statement
on Form S-1 filed by the Registrant on July 15, 1996.
(3) Incorporated by reference to Amendment No. 3 to the Registration Statement
on Form S-1 filed by the Registrant on July 18, 1996.
(4) Incorporated by reference to the Quarterly Report on Form 10-Q filed by the
Registrant on November 12, 1996.
(5) Incorporated by reference to the Annual Report on Form 10-K filed by the
Registrant on March 24, 1997.
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46
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
STERILE RECOVERIES, INC.
BY: /s/ RICHARD T. ISEL
-----------------------------------
Richard T. Isel
Chairman of the Board
Dated: March 24, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD T. ISEL Chairman, Chief Executive Officer March 24, 1998
- --------------------------- and Director
Richard T. Isel
/s/ BERTRAM T. MARTIN, JR. President, Chief Operating Officer March 24, 1998
- --------------------------- and Director
Bertram T. Martin, Jr.
/s/ WAYNE R. PETERSON Executive Vice President and March 24, 1998
- --------------------------- Director
Wayne R. Peterson
/s/ JAMES T. BOOSALES Executive Vice President, March 24, 1998
- --------------------------- Chief Financial Officer and
James T. Boosales Director
/s/ JAMES M. EMANUEL Director March 24, 1998
- ---------------------------
James M. Emanuel
/s/ LEE R. KEMBERLING Director March 24, 1998
- ---------------------------
Lee R. Kemberling
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