<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1996
REGISTRATION NO. 333-03745
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO.1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STERILE RECOVERIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
FLORIDA 7213 59-3252632
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
28100 U.S. HIGHWAY 19 NORTH, SUITE 201
CLEARWATER, FLORIDA 34621
(813) 726-4421
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES T. BOOSALES
EXECUTIVE VICE PRESIDENT
STERILE RECOVERIES, INC.
28100 U.S. HIGHWAY 19 NORTH, SUITE 201
CLEARWATER, FLORIDA 34621
(813) 726-4421
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
DAVID S. FELMAN ROBERT J. GRAMMIG
GLENN RASMUSSEN & FOGARTY, P.A. HOLLAND & KNIGHT
100 SOUTH ASHLEY DRIVE, SUITE 1300 400 NORTH ASHLEY DRIVE, SUITE 2300
TAMPA, FLORIDA 33602 TAMPA, FLORIDA 33602
(813) 229-3333 (813) 227-8500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
STERILE RECOVERIES, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED IN FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Cover Page of the Registration Statement;
Cross-Reference Sheet; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges....... Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page of Prospectus;
Underwriting; Risk Factors
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal Shareholders
8. Plan of Distribution....................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered............................... Outside Front Cover Page of Prospectus;
Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information with Respect to the
Registrant............................... Cover Page of the Registration Statement;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend
Policy; Dilution; Capitalization;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal
Shareholders; Certain Transactions;
Description of Capital Stock; Shares
Eligible for Future Sale; Underwriting;
Legal Matters; Experts; Financial
Statements; Available Information
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
i
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
ANY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 25, 1996
PROSPECTUS
2,000,000 SHARES
STERILE RECOVERIES, INC.
COMMON STOCK
------------------------
All of the 2,000,000 shares of Common Stock are being offered by Sterile
Recoveries, Inc. Prior to the offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for information
relating to the determination of the initial public offering price. A
substantial portion of the offering proceeds will be used to repay indebtedness.
The Common Stock has been approved for listing on the Nasdaq Stock Market's
National Market under the symbol "STRC".
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION DISCUSSED
UNDER THE CAPTION "RISK FACTORS" AT PAGE 6. THESE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............................................ $ $ $
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Total(3)............................................. $ $ $
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</TABLE>
(1) The Company and certain shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses estimated at $850,000, all of which are
payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
150,000 additional shares of Common Stock and certain shareholders have
granted the Underwriters a 30-day option to purchase up to 150,000
additional shares of Common Stock on the same terms and conditions set
forth above to cover over-allotments, if any. The Company will not receive
any proceeds from the sale of any additional shares by these shareholders.
See "Principal Shareholders." If the Underwriters exercise this
over-allotment option in full with respect to all 300,000 shares, the total
Price to Public will be $ , the total Underwriting Discounts and
Commissions will be $ , the total Proceeds to Company will be
$ , and the total proceeds to these shareholders will be
$ . See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as, and if delivered to and accepted by the Underwriters
and subject to their right to reject orders in whole or in part. It is expected
that delivery of the certificates representing the shares of Common Stock will
be made on or about July , 1996, through the Depository Trust Company or at
the offices of Robert W. Baird & Co. Incorporated, Milwaukee, Wisconsin.
ROBERT W. BAIRD & CO. RAYMOND JAMES & ASSOCIATES, INC.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS JULY , 1996.
<PAGE> 4
[DIAGRAM SHOWING IN A CIRCLE THE FOUR
PRINCIPAL ELEMENTS OF THE COMPANY'S REPROCESSING OPERATION]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements (including the Notes thereto) appearing
elsewhere in this Prospectus.
THE COMPANY
Sterile Recoveries, Inc. ("SRI" or the "Company") provides hospitals and
surgery centers with a comprehensive surgical procedure-based delivery and
retrieval service for reusable gowns, towels, drapes, and basins and provides
other disposable products necessary for surgery. At seven 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 that 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
that is liquid and bacterial resistant. The Company believes that its reusable
surgical products made from these fabrics provide protection and comfort that
are superior to disposable alternatives.
The Company currently serves a growing customer base of approximately 200
hospitals and surgery centers located in 17 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). The Company's comprehensive delivery and retrieval
service enables its customers to outsource a costly and burdensome function to
SRI.
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 the costs associated with: (i) the disposal 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. The Company believes that a service
that provides daily delivery of substantially better quality surgical products
without any capital investment, thereby reducing employee and space needs,
should become an attractive managed care option for hospitals.
Several developments have created a market opportunity for the kind of cost
competitive reusable surgical product delivery and retrieval services SRI
offers. These factors include: increasing pressure on hospitals to contain costs
and increase productivity; heightened concern regarding the transmission of
infectious diseases; concern regarding the handling and disposal of biohazardous
waste; and increased outsourcing of hospital functions that do not involve
patient care.
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: (i) leverage infrastructure with
increased penetration in existing markets; (ii) become a preferred vendor
through competitive pricing and expanded service solutions; (iii) expand
national and regional agreements; (iv) add facilities in selected markets; (v)
decentralize operations to facilities; and (vi) utilize operational knowledge.
SRI purchased the assets of its business from AMSCO Sterile Recoveries,
Inc. ("AMSCO Sterile"), an indirect wholly-owned subsidiary of AMSCO
International, Inc. ("AMSCO") on July 31, 1994 (the "Acquisition"). From 1991 to
the Acquisition, AMSCO made significant capital investments to construct and
refine the "closed-loop" delivery and retrieval process currently used by SRI.
SRI believes that AMSCO invested approximately $100 million in the business
prior to the Acquisition, consisting of approximately $70 million in capital
expenditures to construct, equip, and stock nine facilities, and approximately
$30 million to fund operating losses. The Company believes that its
predecessor's expenditures of time, money, and effort to develop the
reprocessing system represent a significant barrier to future competition and
provide the foundation for the Company's further growth.
Since the Acquisition, SRI has reduced its variable cost by more
efficiently servicing increased sales levels with reduced labor hours. From
December 31, 1994 to March 31, 1996, the Company retained in excess of 85% of
its customers and increased its average daily revenue by approximately 32%.
3
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ------------- ------------------------------
1994(1) 1995(1) 1995 1996
------------ ------------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Reusable surgical products service.... $ 9,285 $24,753 $ 5,796 $ 6,896
Disposable surgical products.......... -- 567 21 434
------------ ------------- ------------ ---------------
Total revenues...................... 9,285 25,320 5,817 7,330
Cost of revenues...................... 6,550 17,659 4,181 5,024
------------ ------------- ------------ ---------------
Gross profit........................ 2,735 7,661 1,636 2,306
Distribution expenses................. 1,032 2,801 694 722
Selling and administrative expenses... 2,162 3,975 1,014 1,067
------------ ------------- ------------ ---------------
Income (loss) from operations....... (459) 885 (72) 517
Interest expense...................... 735 1,489 379 347
------------ ------------- ------------ ---------------
Net income (loss)................... $ (1,194) $ (604) $ (451) $ 170
============ ============ ============ ==============
Pro forma net income (loss)(2)........ $ (1,194) $ (604) $ (451) $ 170
============ ============ ============ ==============
Pro forma net income (loss) per common
share(2)(3)......................... $ (0.34) $ (0.17) $ (0.13) $ 0.05
============ ============ ============ ==============
Weighted average common shares
outstanding......................... 3,513 3,513 3,513 3,513
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
ACTUAL AS ADJUSTED(4)
------------ ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Reusable surgical products............ $ 5,413 $ 5,413
Total assets.......................... 15,635 24,587
Total indebtedness.................... 11,790 1,134
Shareholders' equity.................. 1,211 20,821
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1995 1996
--------- ------------ ------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF OPERATIONS DATA:
Reusable surgical products service.... $ 5,796 $6,025 $ 6,307 $6,625 $6,896
Disposable surgical products.......... 21 38 220 288 434
--------- ------------ ------------- ------------ -------
Total revenues...................... 5,817 6,063 6,527 6,913 7,330
Cost of revenues...................... 4,181 4,222 4,464 4,792 5,024
--------- ------------ ------------- ------------ -------
Gross profit........................ 1,636 1,841 2,063 2,121 2,306
Distribution expenses................. 694 691 690 726 722
Selling and administrative expenses... 1,014 1,011 962 988 1,067
--------- ------------ ------------- ------------ -------
Income (loss) from operations....... (72) 139 411 407 517
Interest expense...................... 379 374 371 365 347
--------- ------------ ------------- ------------ -------
Net income (loss)................... $ (451) $ (235) $ 40 $ 42 $ 170
--------- ------------ ------------- ------------ -------
Pro forma net income(loss)(2)......... $ (451) $ (235) $ 40 $ 42 $ 170
========= ============ ============ ============ ==============
Pro forma net income (loss) per common
share(2)(3)......................... $ (0.13) $(0.07) $ 0.01 $ 0.01 $ 0.05
========= ============ ============ ============ ==============
Weighted average common shares
outstanding......................... 3,513 3,513 3,513 3,513 3,513
OTHER DATA:
EBITDA(5)............................. $ 204 $ 423 $ 713 $ 729 $ 885
Average daily revenue(6).............. 91 95 104 110 115
</TABLE>
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,000,000 shares(7)
Common Stock to be outstanding after
the Offering............................... 5,367,089 shares(8)
Use of Proceeds.............................. For repayment of debt, capital expenditures,
working capital, and general corporate
purposes.
See "Use of Proceeds."
Nasdaq National Market symbol................ STRC
</TABLE>
- ---------------
(1) The Company operates on a 52-53 week fiscal year ending the Sunday nearest
December 31.
(2) As an S Corporation for federal income tax purposes, the Company has not
been subject to corporate income tax. On a pro forma basis, assuming the
Company had been subject to corporate income tax for all periods presented,
the Company would not have recognized any corporate income tax in the
relevant periods. See Notes B and K of Notes to Financial Statements.
(3) Supplemental pro forma net income per common share for the year ended
December 31, 1995 and the three months ended March 31, 1996, giving effect
to the payment of debt from a portion of the offering's proceeds and the
increased number of shares, is $0.18 and $0.11 per common share (assuming
4,508,000 and 4,412,000 weighted average common shares outstanding). See
"Use of Proceeds."
(4) Adjusted to reflect the sale of 2,000,000 shares of Common Stock being
offered by the Company hereby (assuming an initial public offering price of
$11.00) and the application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
(5) EBITDA has been calculated by adding the depreciation and amortization
amounts set forth in the Statements of Cash Flows to income from operations
as determined in the Statements of Operations for each period indicated.
EBITDA determines the amount available under the Company's credit facility
after January 1, 1997 and represents the cash generated by the business to
fund asset growth, particularly for the purchase of reusable surgical
products necessary to support and sustain revenue growth. EBITDA is a
non-GAAP measure. Any measurement of the Company's liquidity and ability to
meet cash needs should also focus on net income, income from operations,
and Statements of Cash Flows.
(6) Average daily revenue is calculated by dividing revenues for the period by
the number of days the facilities made deliveries to customers during the
period, which is generally 254 days per year and 63 or 64 days for a
quarter. The Company does not deliver on holidays or weekends.
(7) The Company has granted to the Underwriters a 30-day option to purchase up
to 150,000 additional shares of Common Stock and shareholders Richard T.
Isel, Wayne R. Peterson, and James T. Boosales have granted to the
Underwriters a 30-day option to purchase an aggregate of up to 150,000
additional shares of Common Stock. The Company will not receive any
proceeds from the sale of any additional shares by these shareholders.
(8) Excludes 180,000 shares of Common Stock issuable upon exercise of
outstanding stock options, 219,500 shares of Common Stock issuable on
exercise of options to be granted immediately on the completion of the
offering, and 128,205 shares of Common Stock issuable on partial conversion
of a Convertible Demand Promissory Note dated March 1, 1996, of the Company
(which is not redeemable).
Unless otherwise stated, the information in this Prospectus does not give
effect to the exercise of the Underwriters' over-allotment option. Except if the
context otherwise requires, the terms "SRI" and the "Company" as used in this
Prospectus refer to Sterile Recoveries, Inc., a Florida corporation. GORE(R) is
a registered trademark of W.L. Gore & Associates, Inc.
5
<PAGE> 8
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, as well as the other information set forth in this Prospectus.
LIMITED OPERATING HISTORY AND HISTORICAL LOSSES
The Company's predecessor, AMSCO Sterile Recoveries, Inc. ("Amsco
Sterile"), began operations in 1991 and was acquired by SRI on July 31, 1994.
Accordingly, the Company's business has only a short operating history. SRI's
predecessor funded operating losses of approximately $30 million (excluding
depreciation, amortization and interest) in starting and initially operating the
business. Additionally, for the five months ended December 31, 1994, and the
fiscal year ended December 31, 1995, the Company had net losses of approximately
$1.2 million and $600,000, respectively. There is no assurance that the Company
will operate profitably in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
SALES PROCESS AND MARKET ACCEPTANCE OF PRODUCTS AND SERVICES
The Company's future performance depends on its ability to sell its
products and services 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 sales
to 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 and direct delivery and retrieval
service. SRI's market is now dominated by disposable products, and the Company's
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 $275,000 per month in
the twelve months following the offering, although the amount will fluctuate
depending on the growth rate of SRI's business. The Company also expects to make
additional expenditures of approximately $300,000 in each of its five largest
facilities to increase the aggregate capacity of those facilities. 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 -- Overview" and "Liquidity and Capital Resources."
DEPENDENCE ON A SIGNIFICANT CUSTOMER AND MARKET CONSOLIDATION
During 1995 and the first quarter of 1996, Columbia/HCA Healthcare
Corporation ("Columbia") hospitals with which the Company currently does
business accounted for approximately 12% and 15% of SRI's sales, respectively.
Although each Columbia hospital currently makes its purchasing decisions on an
individual
6
<PAGE> 9
basis, and no single hospital accounted for more than 3% of the Company's sales,
the Company believes that 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 to group purchasing could have a material adverse
effect on the Company. See "Business -- Customers."
DEPENDENCE ON A KEY SUPPLIER
A significant percentage of the Company's business is dependent upon its
ability to obtain the GORE 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 17% of its revenues in fiscal year 1995. 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 product. Sustained loss of this supply relationship would have a
material adverse effect on the Company. See "Business -- Products."
DEPENDENCE ON KEY EXECUTIVES
The Company is largely dependent upon the management expertise and
experience of Richard T. Isel, Wayne R. Peterson, James T. Boosales, and Bertram
T. Martin, Jr., its principal officers. Mr. Isel underwent heart bypass surgery
in March 1996, and although he has returned to work on a full-time basis, there
is no assurance that his condition will permit him to provide the same level of
service to the Company that he provided before his surgery. The loss of the
services of one or more of these key employees could have a material adverse
effect on the Company. The Company has purchased $1.0 million key man life
insurance policies on the lives of each of Messrs. Isel, Peterson, and Boosales,
and a policy will be purchased on the life of Mr. Martin before the offering.
There is no assurance that this insurance will be maintained or available in the
future or that the amount of insurance would adequately compensate the Company
for the loss of services of any of these executives. See "Management."
COMPETITION
The Company's business is highly competitive. The Company's competitors
include a large 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 Baxter International Inc., 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."
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.
INCREASING REPLACEMENT AND AMORTIZATION COSTS
SRI acquired its equipment and surgical products at a cost that is
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
7
<PAGE> 10
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. Since the Acquisition, because the replacement
cost of reusable surgical products is substantially higher than the cost of the
surgical products acquired from Amsco Sterile, the amount of shrinkage may
increase, which could adversely affect the profitability of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and Note B of Notes to Financial Statements.
GOVERNMENT 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 process of obtaining and maintaining FDA and other
required regulatory approvals is lengthy, expensive, and uncertain, and
regulatory agencies can delay or prevent product introductions or license
renewals. The Company's products are subject to regulation by the FDA as medical
devices. Required notifications under Section 510(k) of regulations issued under
the Federal, Food, Drug and Cosmetics Act ("FDA Act") have been filed and
approved by the FDA, allowing the Company to market its existing products. In
addition, the Company's facilities are subject to FDA and state agency
inspections and its products must be manufactured in compliance with "Good
Manufacturing Practices" specified in regulations under the FDA Act and similar
state laws. Failure to comply with applicable regulatory requirements can result
in fines, civil and criminal penalties, stop sale orders, loss or denial of
approvals and recalls or seizures of products. Changes in existing regulations,
changes in interpretations of existing regulations, or the adoption of new
regulations could have a material adverse effect on the Company. See
"Business -- Regulation."
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 that 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 -- Regulation."
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 all of the above
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
8
<PAGE> 11
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.
VOTING CONTROL BY MANAGEMENT AND ANTI-TAKEOVER PROVISIONS
Upon the conclusion of the offering, directors and executive officers of
the Company, as a group, will beneficially own approximately 61.5% of the
Company's outstanding Common Stock (approximately 57.3% if the Underwriters'
over-allotment option is exercised in full). As a result, these shareholders
will have sufficient voting power to control the outcome of shareholder votes,
including votes concerning the election of directors, the adoption or amendment
of provisions in the Company's Articles of Incorporation or Bylaws, and the
approval of any sale or merger of the Company and other significant corporate
transactions. This could have the effect of delaying, deferring or preventing a
change of control of the Company, including transactions in which holders of the
Common Stock might otherwise receive a premium for their shares over
then-current market prices.
Purchasers in the offering will become minority shareholders of the Company
and will be unable to control the management or business policies of the
Company. Moreover, subject to general fiduciary obligations, the Company is not
prohibited from engaging in transactions with management and principal
shareholders, or with entities in which such persons are interested.
Florida law and the Company's Bylaws and Articles of Incorporation contain
provisions that might have the effect of inhibiting a non-negotiated merger or
other business combination, including a classified board of directors and
special voting requirements. These provisions are intended to encourage a person
interested in acquiring the Company to negotiate with, and obtain the approval
of, the Board of Directors in connection with the transaction. However, certain
of these provisions might discourage a future acquisition of the Company,
including an acquisition in which shareholders otherwise might receive a premium
for their shares. Further, certain provisions of the Company's employment
agreements and employee benefit plans might also render any such business
combination more costly and therefore less probable, by triggering provisions
for accelerated vesting of stock options and payment of severance compensation
following any involuntary or constructive employment termination. In addition,
the Board of Directors has the authority to issue shares of Preferred Stock and
fix its rights and preferences, which could have the effect of delaying or
preventing a change of control. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding
5,367,089 shares of Common Stock (5,517,089 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, 2,000,000 shares
sold in the offering (2,300,000 shares if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable by persons other than
affiliates of the Company, without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
3,367,089 shares of Common Stock (3,217,089 shares if the Underwriters'
over-allotment option is exercised in full) will be "restricted" securities
within the meaning of Rule 144 under the Securities Act, and cannot be sold
unless an exemption from registration is available, including the exemption
contained in Rule 144. Beginning 90 days after the date of this Prospectus,
approximately 3,100,000 shares will be eligible for public sale subject to the
volume and other limitations of Rule 144. However, the holders of all of those
shares have agreed not to sell or otherwise dispose of their shares for a period
ending 180 days after the date of this Prospectus without the prior written
consent of the Representatives of the Underwriters. The sale of a substantial
number of shares of Common Stock could adversely affect the market price of the
Common Stock. See "Management" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or continue after the offering, or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering
9
<PAGE> 12
price was determined by negotiation between the Company and the Underwriters
based on several factors and might not be indicative of the market price for the
Common Stock after the offering. See "Underwriting."
The Company believes that various factors, such as general economic
conditions and changes or volatility in financial markets, changing conditions
in the health care industry or health care reform, and quarterly or annual
variations in the Company's financial results, some of which are unrelated to
the Company's performance, could cause the market price of the Company's Common
Stock to fluctuate substantially.
DILUTION
Purchasers in the offering will incur immediate dilution in the tangible
book value of the Common Stock of $7.22 per share. Additional dilution is likely
to occur on the exercise of options and conversion of the Convertible Note. See
"Dilution" and "Certain Transactions."
10
<PAGE> 13
THE COMPANY
SRI provides hospitals and surgery centers with a comprehensive surgical
procedure-based delivery and retrieval service for reusable gowns, towels,
drapes, and basins and provides other disposable products necessary for surgery.
At seven 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 that uses two of the
most technologically advanced reusable textiles: (i) a GORE 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 that is liquid and bacterial resistant. The Company
believes that its reusable surgical products made from these fabrics provide
protection and comfort that are superior to disposable alternatives.
The Company currently serves a growing customer base of approximately 200
hospitals and surgery centers located in 17 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). The Company's comprehensive delivery and retrieval
service enables its customers to outsource a costly and burdensome function to
SRI and receive superior surgical products and service at a competitive cost.
ORIGIN OF THE BUSINESS -- AMSCO'S INVESTMENT
In 1991, Richard T. Isel, SRI's co-founder and Chief Executive Officer,
became aware of new surgical fabrics that led to the formation of Sterile
Recoveries, Inc. Mr. Isel, who previously founded Sterile Design, Inc. in 1979
to develop and market sterile disposable custom procedure trays, believed that
SRI could improve on custom procedure trays by responding to the needs of
hospitals and surgery centers to reduce costs, curtail biohazardous waste, and
improve the protection and comfort of surgeons and surgical staff during
surgery. To fund the significant capital requirements for fabric, equipment, and
infrastructure required for the new concept, Mr. Isel and Wayne R. Peterson
formed an alliance with AMSCO, a manufacturer and distributor of heavy
sterilizer equipment. In September 1991, the new company became AMSCO Sterile
Recoveries, Inc., a wholly-owned subsidiary of AMSCO's subsidiary, American
Sterilizer Company.
Amsco Sterile designed and built nine state-of-the-art processing
facilities in 1992 and 1993. During these two years, Amsco Sterile developed and
subsequently refined the washing and sterilizing system that serves as the
foundation for the Company's current closed-loop system. Amsco Sterile spent
considerable resources to create a reprocessing system that would meet the
significant logistical challenges of efficiently collecting, sorting, cleaning,
inspecting, packaging, sterilizing, and delivering an assortment of surgical
products to a dispersed customer base on a just-in-time basis. The primary
challenge was to effectively clean and sterilize soiled gowns and other sewn
goods while preserving the products' liquid resistance and breathability over
their maximum potential useful lives. SRI believes that Amsco Sterile invested
approximately $100 million in the business before the Acquisition, including
approximately $70 million in capital expenditures to construct, equip, and stock
nine facilities from 1991 through 1994, and approximately $30 million to fund
operating losses. SRI believes that its predecessor's expenditures of time,
money, and effort to develop the reprocessing system have allowed SRI's current
management to gain valuable experience and represent significant barriers for
potential competitors.
Amsco Sterile incurred substantial losses that resulted in the sale of its
assets to SRI on July 31, 1994. SRI believes that AMSCO made several operational
and strategic decisions that impaired the growth of Amsco Sterile and
contributed to the magnitude of these losses. The new facilities were built
without a sufficient customer base and Amsco Sterile experienced a delay in
obtaining FDA pre-market approval of the products after significant expenditures
had already been made. Additionally, AMSCO sought to integrate the business into
its own centralized operations rather than build the reprocessing service as a
separate self-sustaining business. Amsco Sterile also relied on AMSCO's existing
sales force, which was dedicated principally to selling AMSCO's institutional
sterilization equipment and emphasized volume over profitability.
11
<PAGE> 14
Finally, AMSCO limited the product offering to reusable products only, which
prevented Amsco Sterile from offering customers a full solution to their
surgical products needs.
Due to differences in management philosophy, AMSCO removed Mr. Isel as
President of Amsco Sterile in November 1993, and reassigned Mr. Peterson to a
planning role. Continued losses caused Amsco Sterile to close three facilities
in early 1994. In May 1994 AMSCO approached Mr. Isel about buying the business.
THE ACQUISITION
Mr. Isel and Mr. Peterson formed SRI and purchased substantially all the
assets of Amsco Sterile for $15.3 million, including $1.5 million of assets that
were sold to a third party. Concurrently, James T. Boosales invested in the
Company and joined the management team as an Executive Vice President and the
principal financial officer. The Acquisition was financed as follows: (i)
approximately $1.0 million of cash equity from Messrs. Isel, Peterson, and
Boosales, (ii) $1.0 million pursuant to a secured convertible note from Lee R.
Kemberling, currently a director of the Company, (iii) $1.5 million from the
concurrent sale of assets to a third party noted above, (iv) $9.9 million from
Acquisition debt financing provided by Amsco Sterile, which will be repaid from
the proceeds of the offering, and (v) the balance from an accounts receivable
loan facility. These funds were used to finance the following amounts: (i) the
cash portion of the purchase price of $5.0 million, (ii) the deferred portion of
the purchase price of $9.9 million, (iii) the direct acquisition costs of
$152,000, and (iv) payment of $265,000 of liabilities assumed in the
Acquisition. See Note C of Notes to Financial Statements.
The assets retained by SRI included eight of the nine facilities developed
by Amsco Sterile (one owned, seven leased) and all of its surgical products
inventory and operating equipment relating to the retained facilities. SRI's
processing facilities are currently underutilized and provide the capacity to
support significant growth for SRI's new and existing customers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Since acquiring the business from Amsco Sterile, SRI has changed its
business strategy and operations to overcome the operating problems experienced
by Amsco Sterile. Using the substantial management expertise developed before
the Acquisition, SRI management has designed and implemented standard operating
procedures at each facility, decentralized its management by promoting or
recruiting facility general managers who are accountable for both sales and
profitability, and imposed increased financial discipline. As a result, the
Company has improved its operating efficiency, reduced service costs, and
standardized its delivery and reprocessing service. Since the Acquisition, SRI
has reduced its variable cost by more efficiently servicing greater sales levels
with reduced labor hours. From December 31, 1994 to March 31, 1996, the Company
has retained in excess of 85% of its customers and increased its average daily
revenues by approximately 32%.
RECENT DEVELOPMENTS
On February 26, 1996, the Company acquired Surgipro, Inc., an Orlando-based
provider of disposable surgical products. This acquisition has enhanced SRI's
ability to offer flexible, tailored solutions to its customers' surgical supply
needs by supplementing its reusable surgical product delivery and retrieval
service with disposable accessory packs, which contain disposable items such as
needles, sutures, syringes, and tubing for surgical procedures.
To further strengthen the management team, Bertram T. Martin, Jr., a
director and a shareholder of the Company, will become Executive Vice President
and Chief Operating Officer on the consummation of the offering. Prior to
joining SRI, Mr. Martin assisted in formulating the initial business plan in
1991 and has served as a financial consultant to the Company.
The Company's executive offices are located at 28100 U.S. Highway 19 North,
Suite 201, Clearwater, Florida 34621, and its telephone number is (813)
726-4421.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds from the sale of 2,000,000 shares of Common Stock offered
by the Company (assuming an offering price of $11.00 per share), after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by the Company, are estimated to be $19.6 million ($21.1 million if the
Underwriters' over-allotment option is exercised in full).
The Company intends to use approximately $11.1 million of the net proceeds
to repay indebtedness, including approximately $8.4 million of debt owed to
Amsco Sterile and $2.7 million of debt owed to a lender, Metro Factors, Inc. The
Amsco Sterile debt was incurred to finance the Acquisition, matures in August
1997, and accrues interest at a variable rate equal to the prime rate plus 1.5%.
The remaining debt matures in January 1997 and accrues interest at a base
lending rate plus 2.0%. The balance of the net proceeds will be used for working
capital and general corporate purposes including the purchase of more reusable
surgical products and equipment to expand SRI's existing operations. During the
next 12 months, the Company estimates that it will require $275,000 per month
for new carts and reusable surgical products and expects that it will also make
expenditures of approximately $300,000 for additional equipment in each of its
five largest facilities to increase their capacity. In the longer term, the
Company expects that its needs for capital expenditures will be substantial and
will depend on its growth and opportunities. Although it does not have any
current plans, the Company might use part of the proceeds to acquire businesses,
technologies, or products complementary to the Company's business or to develop
additional facilities in new locations. Pending application, the proceeds will
be invested in short-term, investment grade securities or money market
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently expects that all of its earnings will be retained for
development and expansion of its business and does not anticipate paying
dividends on its Common Stock in the foreseeable future. Any payment of
dividends in the future will be at the sole discretion of the Company's Board of
Directors and will depend on, among other things, future earnings, contractual
restrictions, capital requirements, the general financial condition of the
Company, and general business conditions. 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."
13
<PAGE> 16
DILUTION
The net tangible book value of the Company as of March 31, 1996, was
$674,459, or $.20 per share of Common Stock. Net tangible book value per share
represents the amount of the Company's tangible net worth (total tangible assets
less total liabilities), divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of 2,000,000 shares of Common Stock
by the Company in the offering (assuming an initial public offering price of $11
per share) and the application of the net proceeds therefrom (after deduction of
estimated offering expenses to be paid by the Company), the pro forma net
tangible book value of the Company as of March 31, 1996, would have been
approximately $20.3 million or $3.78 per share of Common Stock. This represents
an immediate increase in pro forma net tangible book value of $3.58 per share to
current shareholders and an immediate dilution of $7.22 per share to purchasers
of shares in the offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $11.00
Net tangible book value per share before offering......................... $0.20
Increase per share attributable to new investors.......................... 3.58
-----
Pro forma net tangible book value per share after the offering.............. 3.78
------
Dilution to new investors................................................... $ 7.22
======
</TABLE>
The following table sets forth the number of shares purchased from the
Company, the total consideration paid, and the average price per share paid by
the Company's existing shareholders and to be paid by new investors in the
offering (assuming an initial public offering price of $11.00 per share) and
before deduction of estimated underwriting discounts and commissions:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. 3,367,089 62.7% $ 2,838,500 11.4% $ 0.84
New investors......................... 2,000,000 37.3 22,000,000 88.6 11.00
--------- ------- ----------- -------
Total....................... 5,367,089 100.0% $24,838,500 100.0%
======== ===== ========== =====
</TABLE>
- ---------------
(1) Excludes 180,000 shares of Common Stock issuable on the exercise of
outstanding stock options, an aggregate of 219,500 shares of Common Stock
issuable on the exercise of stock options to be granted upon the completion
of the offering, and 128,205 shares of Common Stock issuable on partial
conversion of the Convertible Note. See "Management -- Stock Option Plans;"
and "Certain Transactions." Exercise of outstanding stock options and
conversion of the Convertible Note will result in further dilution to
investors in the offering.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1996, and (ii) as adjusted to reflect the application of the net
proceeds from the issuance and sale by the Company of 2,000,000 shares of Common
Stock in the offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable -- working capital loan facility....................... $ 1,975 $ --
Notes payable -- related parties..................................... 1,134 1,134
Acquisition debt..................................................... 8,681 --
Shareholders' equity
Preferred Stock, $0.001 par value, 5,000,000 shares authorized; no
shares issued and outstanding................................... -- --
Common Stock, $0.001 par value, 30,000,000 shares authorized;
3,367,089 shares issued and outstanding; 5,367,089 shares as
adjusted(1)..................................................... 3 5
Additional paid-in capital......................................... 2,835 22,443
Accumulated deficit................................................ (1,627) (1,627)
------- -----------
Total shareholders' equity...................................... 1,211 20,821
------- -----------
Total capitalization.......................................... $13,001 $21,955
======= =========
</TABLE>
- ---------------
(1) Excludes 180,000 shares of Common Stock issuable upon the exercise of
outstanding stock options, an aggregate of 219,500 shares of Common Stock
issuable upon the exercise of stock options to be granted upon the
completion of the offering, and 128,205 shares of Common Stock issuable on
partial conversion of the Convertible Note.
15
<PAGE> 18
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 Prospectus. The selected financial data for the five months
ended December 31, 1994, and the fiscal year ended December 31, 1995, have been
derived from the Company's audited financial statements. The selected financial
data (statement of income data only) set forth below for the fiscal year ended
December 31, 1993, and the seven months ended July 31, 1994, have been derived
from audited financial statements of Amsco Sterile (the predecessor company).
The selected financial data set forth below for the three months ended March 31,
1995 and 1996 have been derived from the unaudited financial statements of the
Company, which include all adjustments that the Company considers necessary for
a fair presentation of the results of operation for the periods presented.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full year ended December
31, 1996. The selected financial data for the years ended December 31, 1991 and
1992 and Balance Sheet Data as of December 31, 1993 and July 31, 1994 have been
derived from the unaudited statements of operations and 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 periods 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 Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY(1) STERILE RECOVERIES, INC.(1)
------------------------------------------ -------------------------------------------------
FIVE MONTHS
SEVEN MONTHS ENDED THREE MONTHS
ENDED DECEMBER YEAR ENDED ENDED
YEARS ENDED DECEMBER 31, JULY 31, 31, DECEMBER 31, MARCH 31,
--------------------------- ------------ ----------- ------------ -------------------
1991 1992 1993 1994 1994 1995 1995 1996
------ ------- -------- ------------ ----------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Reusable surgical products
service...................... $ -- $ 1,132 $ 7,988 $ 12,069 $ 9,285 $ 24,752 $ 5,796 $ 6,896
Disposable surgical products... -- -- -- -- -- 568 21 434
------ ------- -------- ------------ ----------- ------------ ------- -------
Total revenues............... -- 1,132 7,988 12,069 9,285 25,320 5,817 7,330
Cost of revenues............... -- 684 15,090 14,091 6,550 17,659 4,181 5,024
------ ------- -------- ------------ ----------- ------------ ------- -------
Gross profit (loss).......... -- 448 (7,102) (2,022) 2,735 7,661 1,636 2,306
Distribution expenses.......... -- -- 981 1,309 1,032 2,801 694 722
Selling and administrative
expenses..................... 578 7,638 12,132 7,375 2,162 3,975 1,014 1,067
Restructuring expenses......... -- -- 1,550 -- -- -- -- --
------ ------- -------- ------------ ----------- ------------ ------- -------
Income (loss) from
operations................. -- (7,190) (21,765) (10,706) (459) 885 (72) 517
Interest expense............... -- 1,536 5,727 4,791 735 1,489 379 347
------ ------- -------- ------------ ----------- ------------ ------- -------
(578) (8,726) (27,492) (15,497) (1,194) (604) (451) 170
Income tax expense............. -- -- -- -- -- -- -- --
------ ------- -------- ------------ ----------- ------------ ------- -------
Net income (loss)............ $ (578) $(8,726) $(27,492) $(15,497) $(1,194) $ (604) $ (451) $ 170
====== ======= ======== =========== ========== ========== ======= =======
Pro forma net income
(loss)(2).................... $(1,194) $ (604) $ (451) $ 170
========== ========== ======= =======
Pro forma net income (loss)
per common share(2)(3)....... $ (0.34) $ (0.17) $ (0.13) $ 0.05
========== ========== ======= =======
Weighted average common shares
outstanding.................. 3,513 3,513 3,513 3,513
BALANCE SHEET DATA:
Reusable surgical products..... $ -- $18,344 $ 31,226 $ 32,836 $ 4,867 $ 4,924 $ 4,722 $ 5,413
Total assets................... 1,997 43,999 63,871 67,651 13,388 13,493 12,913 15,635
Total indebtedness............. 2,021 49,156 96,088 115,841 11,942 10,891 11,925 11,790
Shareholders' equity
(deficit).................... 1,422 (7,304) (34,796) (50,293) (182) 214 (634) 1,211
</TABLE>
- ---------------
(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 has not
been subject to income tax. 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 in the relevant periods. See Notes
B and K of Notes to Financial Statements.
(3) Supplemental pro forma net income per common share for the year ended
December 31, 1995 and the three months ended March 31, 1996, giving effect
to the payment of debt from a portion of the offering's proceeds and the
increased number of shares, is $0.18 and $0.11 per common share (assuming
4,508,000 and 4,412,000 weighted average common shares outstanding). See
"Use of Proceeds."
16
<PAGE> 19
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 Prospectus.
OVERVIEW
This discussion and analysis 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 for the periods before the Acquisition is not meaningful for
several reasons. Amsco Sterile incurred a significant amount of debt and costs
to start up and develop the business. SRI believes that Amsco Sterile expended
approximately $100 million in the business before the Acquisition, comprising
approximately $70 million to construct, equip, and stock nine facilities and
approximately $30 million to fund operating losses (excluding depreciation,
amortization and interest). SRI purchased eight of the nine facilities and all
of Amsco Sterile's depreciated equipment and surgical products inventory for
approximately 17% of their net book value. Consequently, SRI has one fewer
facility, less debt, and considerably lower depreciation and amortization
expense than Amsco Sterile. In addition, the Company has significantly changed
the business operations since the Acquisition. See "The Company" and Note C of
Notes to Financial Statements.
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 "closed-loop" delivery and retrieval service 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 that it services
for each customer, and the pricing by type of surgical pack.
A useful comparison of annual revenues requires combining the revenues of
Amsco Sterile for the seven months ended July 31, 1994, with the revenues of the
Company for the five months ended December 31, 1994. The Company's revenues
increased $3.9 million, or 18.6%, to $25.3 million in 1995 from $21.4 million in
1994. On a combined basis, 1994 revenues increased $13.4 million, or 167.3%, to
$21.4 million from $8.0 million in 1993. In late 1994 and early 1995, SRI's
revenue growth slowed because of marketplace concerns regarding SRI's financial
condition after the Acquisition and management's focus on retaining existing
customers and implementing operating efficiencies to generate operating profits
in 1995.
The Company believes that its facilities currently operate at approximately
50% of their estimated aggregate annual revenue capacity of approximately $60
million. 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. SRI believes that the
aggregate revenue capacity can be further increased to approximately $80 million
with additional equipment expenditures of approximately $300,000 in each of its
five largest facilities. A primary strategy of the Company is to increase its
operating leverage by expanding revenues within existing markets. See
"Business -- Strategy."
During 1996, the Company has substantially increased its expenditures for
reusable surgical products, primarily to support anticipated increases in
business. To adequately service a new customer, SRI 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. Until the beginning
of 1996, SRI minimized its new purchases of reusable surgical products by using
excess stocks of reusable surgical fabrics and products that were included in
the Acquisition at a relatively low cost. With excess stocks almost fully
utilized, SRI's capital expenditures for new carts and reusable surgical
products were $800,000 in the first quarter of 1996, compared to $800,000 for
all of fiscal year 1995. SRI estimates that its capital expenditures for new
carts and reusable surgical products will be approximately $275,000 per month
for the next 12 months, although the amount will fluctuate depending on the
growth rate of SRI's business. See "-- Liquidity and Capital Resources."
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 will increase future
17
<PAGE> 20
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 "Risk Factors -- Increasing Replacement and
Amortization Costs" and Note B of Notes to Financial Statements.
The Company has been an S Corporation for state and federal income tax
purposes since its inception and accordingly, has not been subject to corporate
income taxes. On completion of the offering, the Company's S Corporation status
will terminate and the Company will become subject to corporate income taxes.
See Notes B and K of Notes to Financial Statements.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual future results will depend on a variety of
factors and circumstances, including those discussed in "Risk Factors" at the
beginning of this Prospectus.
QUARTERLY RESULTS
The following table presents unaudited quarterly operating results for the
Company for 1995 and the first quarter of 1996. The data have been derived by
the Company from the Financial Statements included elsewhere in this Prospectus,
and include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary for a fair presentation thereof. These operating
results are not necessarily indicative of the Company's future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Reusable surgical products
service.......................... $ 5,796 $6,025 $ 6,307 $6,625 $ 6,896
Disposable surgical products....... 21 38 220 288 434
--------- -------- ------------- ------------ ---------
Total revenues................... 5,817 6,063 6,527 6,913 7,330
Cost of revenues................... 4,181 4,222 4,464 4,792 5,024
--------- -------- ------------- ------------ ---------
Gross profit..................... 1,636 1,841 2,063 2,121 2,306
Distribution expenses.............. 694 691 690 726 722
Selling and administrative
expenses......................... 1,014 1,011 962 988 1,067
--------- -------- ------------- ------------ ---------
Income (loss) from
operations.................. (72) 139 411 407 517
Interest expense................... 379 374 371 365 347
--------- -------- ------------- ------------ ---------
Pro forma and historical net income
(loss)........................... $ (451) $ (235) $ 40 $ 42 $ 170
======= ====== ========== ========== =======
Pro forma net income (loss) per
share............................ $ (0.13) $(0.07) $ 0.01 $ 0.01 $ 0.05
======= ====== ========== ========== =======
</TABLE>
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 and Amsco Sterile.
<TABLE>
<CAPTION>
STERILE RECOVERIES, INC.
PREDECESSOR COMPANY --------------------------------------------
--------------------------- THREE MONTHS
SEVEN MONTHS FIVE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED MARCH 31,
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31, --------------
1993 1994 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Reusable surgical products
service........................ 100.0% 100.0% 100.0% 97.8% 99.6% 94.1%
Disposable surgical products..... -- -- -- 2.2 0.4 5.9
------------ ------------ ------------ ------------ ------ -----
Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues................. 188.9 116.7 70.5 69.7 71.9 68.5
------------ ------------ ------------ ------------ ------ -----
Gross profit................ (88.9) (16.7) 29.5 30.3 28.1 31.5
Distribution expenses............ 12.3 10.9 11.1 11.1 11.9 9.9
Selling and administrative
expenses....................... 151.9 61.1 23.3 15.7 17.4 14.6
Restructuring expense............ 19.4 -- -- -- -- --
------------ ------------ ------------ ------------ ------ -----
Income (loss) from
operations................ (272.5) (88.7) (4.9) 3.5 (1.2) 7.0
Interest expense................. 71.7 39.7 7.9 5.9 6.5 4.7
------------ ------------ ------------ ------------ ------ -----
Pro forma and historical net
income (loss).................. (344.2) (128.4) (12.8) (2.4) (7.7) 2.3
</TABLE>
18
<PAGE> 21
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Revenues. The Company's revenues increased $1.5 million, or 26.0%, to $7.3
million in the first quarter of 1996 from $5.8 million in the first quarter of
1995, primarily as a result of new customers and the addition of disposable
surgical products to supplement the Company's reusable surgical products service
in March 1995. New customers and the addition of disposable surgical products
accounted for $1.1 million and $413,000, respectively, of the revenue increase.
The Company's reusable surgical products delivery and retrieval service provided
94.1% of revenues in the first quarter of 1996 and 99.6% of revenues in the
first quarter of 1995. Substantially all the revenues from the sale of
disposable products in both periods was attributable to disposable products
purchased from a third party vendor and distributed to SRI customers under a
joint marketing agreement.
The Company measures average daily revenue to track its growth. Average
daily revenue increased to $115,000 per day in the first quarter of 1996 from
$91,000 per day in the first quarter of 1995. Average daily revenue is
calculated by dividing revenues for the period by the number of days the
facilities made deliveries to customers during the period. The Company does not
deliver to customers on weekends or holidays. Therefore, a year generally has
254 days, a fiscal quarter has 63 or 64 days, a five-week fiscal month has 24 or
25 days, and a four-week fiscal month has 19 or 20 days.
Gross Profit. Gross profit increased $671,000, or 41.0%, to $2.3 million
in the first quarter of 1996 from $1.6 million in the first quarter of 1995.
Gross margin increased to 31.5% in the first quarter of 1996 from 28.1% in the
first quarter of 1995. The improvement in gross margin is largely attributable
to labor efficiencies in the pack room and the economies of scale associated
with spreading fixed costs over more revenues. These favorable developments were
partially offset by increased costs for amortization of reusable surgical
products and the Company's relatively lower gross margin on its distribution of
the third party vendor's disposable products. The Company expects the gross
margin on disposable surgical products to increase if Surgipro revenues
increase. However, the sale of disposable products will reduce the Company's
overall gross margin when combined with the higher gross margin on reusable
surgical product services.
Distribution Expenses. Distribution expenses increased $29,000, or 4.1%,
to $722,000 in the first quarter of 1996 from $694,000 in the first quarter of
1995. As a percentage of revenues, distribution expenses decreased to 9.9% in
the first quarter of 1996 from 11.9% in the first quarter of 1995. The Company
incurs distribution expenses both in transporting its reusable surgical products
locally and between the facility and outlying metropolitan areas. The
improvement in distribution expenses as a percentage of revenues resulted
primarily from efficiencies derived from delivering more volume over existing
routes and the reopening of the Raleigh facility.
Selling and Administrative Expenses. Selling and administrative expenses
increased $53,000, or 5.2%, to $1.1 million in the first quarter of 1996 from
$1.0 million in the first quarter of 1995. As a percentage of revenues, selling
and administrative expenses decreased to 14.6% in the first quarter of 1996 from
17.4% in the first quarter of 1995 due to the leveraging of fixed administrative
expenses over additional revenues. Administrative expenses will increase after
the offering with the addition of another executive officer and the expense
associated with being a public company.
Interest Expense. Interest expense decreased by $32,000, or 8.5%, to
$347,000 for the first quarter of 1996 from $379,000 in the first quarter of
1995, primarily as the result of a lower variable interest rate on its working
capital loan, conversion of a $1.0 million convertible note into Common Stock in
September 1995, and a $1.2 million reduction in the principal balance of the
Amsco Sterile note. As a percentage of revenues, interest expense decreased to
4.7% in the first quarter of 1996 from 6.5% in the first quarter of 1995.
Net Income. As a result of the foregoing, SRI's net income increased to
$170,000 for the first quarter of 1996, from a net loss of $451,000 in the first
quarter of 1995. As a percentage of revenues, net income in the first quarter of
1996 was 2.3% of revenues compared to a net loss of 7.7% of revenues in the
first quarter of 1995.
19
<PAGE> 22
YEAR ENDED DECEMBER 31, 1995 COMPARED TO FIVE MONTHS ENDED DECEMBER 31, 1994
Revenues. Average daily revenue increased to $111,000 per day in December
1995 from $82,000 per day in August 1994. Average daily revenue increased to
$100,000 per day in fiscal year 1995 from $87,000 per day in the last five
months of 1994, primarily as a result of additional customers, an increase in
sales to existing customers and the addition of disposable surgical products to
supplement the Company's reusable surgical products service.
Gross Profit. As a percentage of revenues, gross profit increased to 30.3%
in 1995 from 29.5% in the last five months of 1994. The increase was due
primarily to leveraging of the facility infrastructure as average daily revenue
increased by 14.9% during this time period.
Distribution Expenses. As a percentage of revenues, distribution expenses
remained constant at 11.1% in 1995 and in the last five months of 1994.
Selling and Administrative Expenses. As a percentage of revenues, selling
and administrative expenses decreased to 15.7% in fiscal year 1995 from 23.3% in
the last five months of 1994 due to the leveraging of fixed administrative
expenses over additional revenues, a reduction in computer expenses incurred in
the transition following the Acquisition, and a reduction in corporate staff.
Interest Expense. As a percentage of revenues, interest expense decreased
to 5.9% in 1995 from 7.9% in the last five months of 1994. The decrease resulted
from a $400,000 reduction in the average outstanding balance of the Company's
working capital loan from the last five months of 1994 to fiscal year 1995, the
conversions of a $1.0 million convertible note into Common Stock in September
1995, and the increase in revenues. See Notes E and F of Notes to Financial
Statements.
Net Loss. As a result of the foregoing, the Company's net loss decreased
to 2.4% of revenues in fiscal year 1995 from 12.8% in the last five months of
1994.
SEVEN MONTHS ENDED JULY 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The following discussion and analysis pertains to operations before the
Acquisition on July 31, 1994 and the inception of the Company's operations. See
"-- Overview" and "The Company."
Revenues. Average daily revenue increased to $82,000 per day in the seven
months ended July 31, 1994, from $31,000 per day in 1993, primarily as a result
of continuing marketing efforts of Amsco Sterile.
Gross Profit (Deficit). As a percentage of revenues, Amsco Sterile's gross
profit (deficit) decreased to a deficit of 16.7% in the seven months ended July
31, 1994, from a deficit of 88.9% in fiscal year 1993. Gross profit (deficit) in
fiscal year 1993 was adversely affected by facility start-ups and process
refinement, both of which contributed to extraordinarily high variable costs due
to inefficiencies, training costs, and inexperienced personnel. In early 1994,
Amsco Sterile consolidated the facility operations of Chicago into Detroit,
Raleigh into Baltimore, and Dallas into Houston to increase production volume in
Detroit, Houston, and Baltimore and reduced facility overhead by converting the
Chicago, Raleigh and Dallas facilities to depot operations.
Distribution Expenses. As a percentage of revenues, Amsco Sterile's
distribution expenses decreased to 10.9% in the seven months ended July 31,
1994, from 12.3% in fiscal year 1993. Increases in distribution expenses
($82,000 per month in 1993 compared to $187,000 per month in the seven months
ended July 31, 1994) associated with the conversion of three operating
facilities to depots were offset by economies of scale derived from a
substantial increase in revenues.
Selling and Administrative Expenses. As a percentage of revenues, Amsco
Sterile's selling and administrative expenses decreased to 61.1% of revenues for
the seven months ended July 31, 1994, from 151.9% for fiscal year 1993. Selling
and administrative expenses for both periods were just over $1.0 million per
month and as a percentage of revenues, decreased in the seven months ended July
31, 1994 from fiscal year 1993 because of increases in revenues.
Interest Expense. As a percentage of revenues, Amsco Sterile's interest
expense decreased to 39.7% in the seven months ended July 31, 1994 from 71.7% in
fiscal year 1993. Average interest expense increased to
20
<PAGE> 23
$684,000 per month for the seven months ended July 31, 1994, from $477,000 per
month in fiscal year 1993, as AMSCO's continuing investments in Amsco Sterile
were reflected in intercompany debt. However, revenues increased during the
first seven months of 1994 at a higher rate than interest expense, causing
interest expense to decrease as a percentage of revenues.
Restructuring Expense. Amsco Sterile incurred a $1.6 million restructuring
expense in fiscal year 1993 in connection with its decision to close three of
the reprocessing facilities. See Note D of Notes to Amsco Sterile's Financial
Statements.
Net Loss. As a result of the foregoing, Amsco Sterile's net loss decreased
to 128.4% of revenues in the seven months ended July 31, 1994, from 344.2% of
revenues in fiscal year 1993.
LIQUIDITY AND CAPITAL RESOURCES
Since the Acquisition, the Company's primary sources of capital have been
cash flows from operations, private sales of debt and equity securities,
operating leases for facilities and distribution vehicles, and available
borrowings under its working capital loan facility. In March 1996, the Company
raised $1.3 million through the sale of Common Stock and the Convertible Note.
See "Certain Transactions."
The Company had positive cash flow from operating activities of $38,000 for
the first quarter of 1996, compared to $22,000 for the same period in 1995. The
Company's positive cash flow from operating activities was $1.1 million for
1995, as compared to $774,000 in the last five months of 1994. The Company
benefited in 1994 and the first quarter of 1995 from collection of Amsco
Sterile's trade accounts receivable of $551,000 for 1994 and $367,000 for the
first quarter of 1995. This one-time impact of trade accounts receivable
collection favorably impacted the net cash provided from operations by $367,000
for the first quarter of 1995, thereby understating the improvement of cash flow
from the first quarter of 1995 to the first quarter of 1996. As an investing
activity, the Company expended $805,000 for purchases of reusable surgical
products in the first quarter of 1996 as compared to $28,000 in the first
quarter of 1995.
Inventories at March 31, 1996, were $679,000, compared to $305,000 and
$217,000 at the end of 1995 and 1994, respectively. The increases in inventories
reflects the introduction of disposable surgical products to supplement the
Company's delivery and retrieval service for reusable products. As a result of
the acquisition of Surgipro on February 26, 1996, inventories are expected to
continue to increase with revenues as the Company fully implements the offering
of disposable products.
At March 31, 1996, the Company had $11.8 million of notes payable and
acquisition debt outstanding. Approximately $11.1 million of the net proceeds of
the offering will be used to repay most of this outstanding indebtedness. Before
and after the Acquisition, the business of the Company has been financed
primarily with interest-bearing borrowings that have negatively impacted its
earnings. The Company's interest expense in 1995 was $1.5 million. The use of a
portion of the offering proceeds to retire most of the Company's outstanding
borrowings will on an annualized basis eliminate interest expense of
approximately $1.4 million and principal payments to Amsco Sterile of
approximately $1.2 million. See "Use of Proceeds."
The Company has a commitment from First Union National Bank of Florida for
a $15.0 million unsecured revolving credit facility that will be effective upon
completion of the offering and expire in July 1999. 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 imposes certain financial covenants, including a
covenant concerning the maintenance of minimum tangible net worth. Pursuant to
the terms of the credit facility, SRI may elect to convert up to $5.0 million of
the available facility into term loans for capital expenditures that are ratably
payable over five years. All borrowings accrue interest at the London Interbank
Offered Rate (LIBOR) plus 200 basis points (7.5% as of May 1, 1996). The
Company's revolving credit agreement with the bank restricts the declaration of
dividends and prohibits the Company from encumbering its assets.
After the offering, the Company's primary capital requirements will be for
additional stocks of reusable surgical products, primarily to support
anticipated growth in revenues. The Company anticipates that such
21
<PAGE> 24
expenditures will be approximately $275,000 per month for the next 12 months,
subject to fluctuations in the growth of SRI's business. The Company also
expects to make additional equipment expenditures of approximately $300,000 in
each of its five largest facilities to increase the aggregate capacity of those
facilities. The Company will also require additional working capital to support
its inventory of disposable surgical products following the Surgipro
acquisition. Management believes that the proceeds of the offering, combined
with 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 at least the next 12 months. In the longer term, the Company
expects that its needs for capital expenditures will be substantial and will
depend on its growth and opportunities. See "Risk Factors -- Need for Capital."
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. Management has determined not
to adopt SFAS No. 123's accounting recognition provisions related to stock
options granted to employees and accordingly, will continue following APB No.
25's accounting provisions. See Note B of Notes to Financial Statements.
22
<PAGE> 25
BUSINESS
SRI provides hospitals and surgery centers with a comprehensive surgical
procedure-based delivery and retrieval service for reusable gowns, towels,
drapes, and basins and provides other disposable products necessary for surgery.
At seven 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 that uses two of the
most technologically advanced reusable textiles: (i) a GORE 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 that is liquid and bacterial resistant. The Company
believes that its reusable surgical products made from these fabrics provide
protection and comfort that are superior to disposable alternatives.
The Company currently serves a growing customer base of approximately 200
hospitals and surgery centers located in 17 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). The Company's comprehensive delivery and retrieval
service enables its customers to outsource a costly and burdensome function to
SRI.
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 the costs associated with: (i) the disposal 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 that is designed for superior comfort
during long procedures.
Through the Company's acquisition of Surgipro on February 26, 1996, SRI
offers its customers disposable accessory packs containing smaller surgical
items that are not reusable, such as needles, sutures, syringes, and tubing. The
Company's Surgipro acquisition enables SRI to complement its reusable surgical
product delivery and retrieval service with disposable surgical products that
are not available in reusable form. The Company believes that the flexibility it
offers its customers by combining reusable surgical gowns, towels, drapes, and
basins with disposable products will improve the Company's competitive position
in the marketplace.
THE MARKET
The United States health care system includes approximately 6,500 acute
care hospitals, over 2,300 freestanding surgery centers, and a variety of other
health care facilities. According to industry sources, approximately 31 million
procedures will be performed at hospitals and surgery centers in 1996. The
Company believes that 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 that 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.
With the growth of managed care, many hospitals and surgery centers are
seeking alternatives to custom procedure trays. 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 possessing in-house facilities are
increasingly unwilling to support those personnel and capital requirements. The
Company believes that a service that provides daily
23
<PAGE> 26
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.
Several developments have created a market opportunity for the kind of
cost-competitive, reusable surgical product delivery and retrieval service SRI
offers, including:
Increasing Pressure on Hospitals to Contain Cost and Increase
Productivity. With the growth of managed care, economic constraints continue to
require hospitals to become more efficient by limiting capital investments,
reducing staff, and reducing costs. Hospitals are increasingly seeking to
decrease their cost of supplies and the associated cost of waste disposal. SRI
offers a cost-competitive service that eliminates the need for in-house
inventory or processing facilities or the costs associated with stocking and
discarding disposable products.
Heightened Concern Regarding the Transmission of Infectious Diseases. The
health care industry has experienced a substantial increase in the transmission
of infectious disease 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 solid and liquid waste
generated by the health care industry has attracted 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, that replace disposable
surgical products with reusable surgical products. The SRI reprocessing cycle
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.
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 that its existing facilities currently operate at
approximately 50% 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.
Become a Preferred Vendor Through Competitive Pricing and Expanded Service
Solutions. As hospitals seek to contain costs and outsource functions that do
not involve patient care or revenue producing activities, the Company believes
that hospitals will seek relationships with vendors that offer a broad range of
products or services at competitive prices. The Company intends to establish
preferred vendor relationships with its customers by providing high-quality
reusable surgical products, related delivery and retrieval services, and
disposable accessory packs containing disposable surgical items. Through its
disposable products division, SRI has expanded its range of surgical products to
include those products typically offered by its competitors through disposable
custom procedure trays, while giving its customers the added flexibility of
using the Company's reusable surgical products.
24
<PAGE> 27
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.
Add Facilities in Selected Markets. SRI currently services customers in 17
states through seven regional facilities. SRI serves several large metropolitan
areas through highway transport and satellite distribution facilities (depots)
that are supported from 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 reopened its Raleigh,
North Carolina facility during the second quarter of 1995 to serve customers in
North Carolina and South Carolina that were previously serviced from the
Company's facility in Baltimore, Maryland. From each new facility, SRI will be
able to serve new metropolitan areas that were previously too far from an
existing regional facility. The Company believes that 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, operations, and profitability within
the facility's market area. The Company believes that 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 implemented an incentive compensation
plan in 1995 that provides compensation awards for the general managers and
certain key production and sales employees based on individual and facility
performance, as well as overall Company performance. Each general manager
participates in the Company's stock option plan.
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 intends 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 return carts
containing soiled products to its facility for reprocessing, always dividing
clean carts from "soiled" carts. 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 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, and then wrapped in a barrier wrap.
The wrapped pack is steam sterilized before being packaged, sorted, and
redelivered 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. The processing through the
facility occurs in three to five days.
Because the Company's ability to price competitively with disposable
products depends on maintaining its sewn goods' useful lives, SRI closely
monitors their reprocessing to ensure longevity. SRI uses a bar coding system to
track its reusable surgical products' status, history, and number of uses. SRI
continually refines the washing and sterilization processes, building on Amsco
Sterile's substantial investments of time and money to initially develop those
operations.
25
<PAGE> 28
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 that are configured to the
hospital's specific needs. Packs are comprised of various combinations of gowns,
absorbent towels, liquidproof backtable covers, mayo stand covers, and possibly
some stainless components. SRI also offers disposable accessory packs with
disposable products such as needles, syringes, sutures, tubing, and other
products that are not available in reusable form.
SRI's liquidproof gown has GORE Surgical Barrier Fabric in critical areas
to provide protection for procedures that present a higher risk of liquid
strike-through. The GORE fabric is breathable yet liquidproof and prevents both
viral and liquid strike-through. 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 Company's
business is substantially dependent on its ability to obtain from GORE the
Surgical Barrier Fabric, a key component of its liquidproof surgical products.
The Company does not have a long-term commitment from GORE for the supply of
that product, but enjoys a good relationship with that company. The other
components of the Company's products are currently available at reasonable costs
from a variety of suppliers. See "Risk Factors -- Dependence on a Key Supplier."
FACILITIES AND SERVICE AREAS
SRI operates seven processing facilities of approximately 23,000 to 32,000
square feet each in Baltimore, 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, regularly implementing at all
facilities efficiencies that are developed and tested at one location.
The Company believes that its existing facilities currently operate at
approximately 50% of their aggregate annual revenue capacity. The Company
believes that it can significantly increase its revenues without significant
additional capital expenditures for equipment or new facilities. SRI intends to
eventually add another washer and sterilizer to each facility, which will
further increase its capacity in its existing facilities. Furthermore, the
Dallas facility is fully equipped to operate as a processing facility but is
currently only used as a depot. Should the North Texas and Oklahoma market
warrant a processing facility, SRI could begin full processing operations with
minimal capital expenditures. SRI believes it has an opportunity to
significantly improve its operating results by servicing added sales through
increased use of its existing facilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
26
<PAGE> 29
The Company's properties and the major markets that they serve are
summarized below. All the properties are leased, except for the Houston
processing facility. SRI believes that its existing facilities are adequate to
meet its current requirements.
<TABLE>
<CAPTION>
SQUARE FEET
FACILITY AND LOCATION (APPROX.) LEASE EXPIRATION(1) SELECTED MARKETS SERVED
- ---------------------------------- ----------- ------------------- -------------------------
<S> <C> <C> <C>
Processing facilities:
Baltimore, Maryland............. 32,000 February 1, 2003 Baltimore, Philadelphia,
Pittsburgh, Washington,
D.C.
Detroit, Michigan............... 23,000 September 30, 2002 Chicago, Detroit,
Louisville, Milwaukee,
Toledo
Houston, Texas(2)............... 30,000 Owned Dallas, Houston, San
Antonio, Oklahoma City
Los Angeles, California......... 30,000 December 31, 2002 San Diego, Sacramento,
Los Angeles, San
Francisco
Raleigh, North Carolina......... 26,000 April 30, 2002 Richmond, Atlanta, South
Carolina, North Carolina
Salt Lake City, Utah............ 24,000 November 31, 2003 Utah
Tampa, Florida.................. 29,000 January 24, 2002 Tampa, Miami, Orlando,
Jacksonville
Depots:
Chicago, Illinois............... 3,000 September 30, 1996 --
Dallas, Texas................... 20,000 March 31, 2002 --
Louisville, Kentucky............ 3,000 December 31, 1996 --
Miami, Florida.................. 4,000 January 31, 1997 --
San Francisco, California....... 6,000 May 31, 1997 --
Warehouse:
Houston, Texas.................. 5,000 September 30, 1996 --
Disposable products facility:
Orlando, Florida................ 18,500 February 28, 1999 --
Corporate office:
Clearwater, Florida............. 9,000 October 31, 1996 --
</TABLE>
- ---------------
(1) Excludes renewal options in the leases that range from one to 10 years.
(2) The Houston property is owned by the Company subject to a first mortgage
securing a Convertible Note in the principal amount of $1.0 million. See
"Certain Transactions."
EMPLOYEES
As of March 31, 1996, SRI employed approximately 650 people, consisting of
approximately 30 persons in management, administration, and finance at its
corporate office and approximately 620 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.
27
<PAGE> 30
CUSTOMERS
The Company currently services approximately 200 hospitals and surgery
centers in 17 states throughout the United States. The following is a partial
list of these customers and their locations:
<TABLE>
<S> <C>
Allegheny General Hospital............... Pittsburgh, Pennsylvania
Audubon Regional Hospital................ Louisville, Kentucky
Duke University Medical Center........... Durham, North Carolina
Henry Ford Hospital...................... Detroit, Michigan
Hermann Hospital......................... Houston, Texas
Hospital of the Good Samaritan........... Los Angeles, California
Jackson Memorial Hospital................ Miami, Florida
Johns Hopkins Medical Center............. Baltimore, Maryland
IHC Hospitals, Inc,...................... Salt Lake City, Utah
Medical City Dallas...................... Dallas, Texas
St. Luke's Episcopal Hospital............ Houston, Texas
Southwest Texas Methodist Hospital....... San Antonio, Texas
</TABLE>
From December 31, 1994 through March 31, 1996, the Company has retained in
excess of 85% of its customers. SRI believes that this low attrition rate among
its customers reflects its products' appeal, its service quality, and general
customer resistance to change when the SRI system is in place. SRI also believes
that its direct relationship with hospital staff has been important in retaining
and attracting customers. Many of SRI's competitors use a distributor system
that SRI believes adds cost and introduces an intermediary between the
competition and their customers.
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. The Company believes that there is a tendency to
maintain the status quo in many hospitals and that this favors its retention of
existing customers. See "Risk Factors -- Sales Process and Market Acceptance of
Products and Services."
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.
COMPETITION
SRI competes principally 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
that it is the leading provider of high quality reusable surgical gowns and
drapes. With the acquisition of Surgipro, SRI can compete directly 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 competitor
is the Convertors division of Baxter International Inc., which has a substantial
market share. See "Risk Factors -- Competition."
The Company competes primarily based on price, service, quality, 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
that 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
28
<PAGE> 31
buying leverage by purchasing in integrated networks. SRI believes that
competitive pressure in these areas will continue.
REGULATION
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, "Good Manufacturing Practices," 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 "Good Manufacturing
Practices," as defined under the FDA Act. 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, labelling, 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 and by
separating sterile and soiled products on its trucks. Sterilization of the
Company's disposable accessory packs is provided under 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 under OSHA and by
the Environmental Protection Agency. In addition to the foregoing, numerous
other federal, state and local regulatory authorities, including those enforcing
laws that relate to the environment, fire hazard control, and working
conditions, have jurisdiction to take actions that 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.
LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any litigation or
other legal proceeding that is expected to have a material effect on the Company
or its business.
29
<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is divided into three classes, with the
members of each class serving three-year terms expiring at the third annual
meeting of shareholders after their election. The following table sets forth
information, as of the date of this Prospectus, regarding the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- --------------------------------------- --- --------------------------------------- --------
<S> <C> <C> <C>
Richard T. Isel........................ 52 President, Chief Executive Officer, and 1999
Director
Wayne R. Peterson...................... 44 Executive Vice President - Operations 1998
and Director
James T. Boosales...................... 53 Executive Vice President, Chief 1997
Financial Officer, Secretary and
Director
Bertram T. Martin, Jr.*................ 46 Executive Vice President, Chief 1998
Operating Officer, and Director
Lee R. Kemberling...................... 70 Director 1997
James M. Emanuel....................... 47 Director 1999
</TABLE>
- ---------------
* Mr. Martin will become an executive officer of the Company at the completion
of the offering.
Richard T. Isel has been the Company's President and a director since the
Company's inception in 1994. Mr. Isel co-founded Amsco Sterile in 1991 and
served as its President and a director until November 1993. From November 1993
until the Acquisition, Mr. Isel engaged in private investment activities and
arranged the Acquisition. Before starting Amsco Sterile, Mr. Isel was a founder
and the chief executive officer of Sterile Design, Inc., a manufacturer of
sterile custom procedure trays. Sterile Design, Inc. was acquired by Johnson &
Johnson in 1986 and operated as a wholly owned subsidiary until it was sold to
Maxxim Medical, Inc. in 1993. Following his sale of Sterile Design, Inc., Mr.
Isel was subject to a five-year non-compete agreement and engaged in consulting
and private investment activities. Before founding Sterile Design, Inc., Mr.
Isel served as an area vice president with American Hospital Supply Corporation.
Wayne R. Peterson has been the Company's Executive Vice President
responsible for operations and a director since the Company's inception. Mr.
Peterson co-founded Amsco Sterile and served as a Vice President until the
Acquisition. Before joining Amsco Sterile, Mr. Peterson was President of Agora
Development, Inc., a real estate development company that from 1987 to 1991
developed projects totaling 2,000,000 square feet in four Western States
(California, Nevada, Arizona, and Illinois) for a total combined value of $278
million. Mr. Peterson is Mr. Isel's brother-in-law.
James T. Boosales has been the Company's Executive Vice President and
principal financial officer and a director since the Company's inception. He
served as President, International, of Fisher-Price, Inc., a $200 million
division of this toy and juvenile products company, from 1990 through 1993.
Before joining Fisher-Price, Inc., Mr. Boosales served in several senior
executive capacities with General Mills, Inc., including President,
International, for Kenner Parker Toys, Inc./Tonka Corp. from 1985 to 1989,
during and after its spinoff as a public company, and President of Foot-Joy,
Inc. from 1982 to 1985.
Bertram T. Martin, Jr. was elected a director of the Company on May 2,
1996, and will become Executive Vice President and Chief Operating Officer of
the Company on the consummation of the offering. Since July 1995, Mr. Martin has
provided consulting services to the Company (from October 1995) and other
30
<PAGE> 33
businesses through Corporate Strategic Directions, Inc. From 1993 until 1995, he
was President and Chief Operating Officer of Pharmacy Management Services, Inc.,
a nationwide provider of medical cost containment and managed care services and
a Nasdaq-listed company, until its acquisition by Beverly Enterprises, Inc. in
June 1995. He served as a director during the five years Pharmacy Management was
a public company. Before joining Pharmacy Management, Mr. Martin was a Vice
President, director, and shareholder of Tunstall Consulting, Inc., a corporate
financial consulting business, from 1985 to 1993.
Lee R. Kemberling, an initial investor in the Company, has been a director
of the Company since its inception. Mr. Kemberling is the founder, and since
1969 has been sole shareholder and President of, Kemco Systems, Inc., a
developer and manufacturer of commercial and industrial waste water heat
recovery systems, including systems used in SRI's operations.
James M. Emanuel has been a director of the Company since May 2, 1996.
Since January 1984, he has served as the Chief Financial Officer of Lincare
Inc., a national provider of respiratory therapy services for patients with
pulmonary disorders, and has been the Chief Financial Officer of Lincare
Holdings since November 1990. Mr. Emanuel has also served as a director of
Lincare Inc. and Lincare Holdings since November 1990. Mr. Emanuel served in
numerous financial capacities at Union Carbide Corporation between 1973 and
1984, and acted as Business Controller of Union Carbide's Cryogenic Equipment
Business immediately prior to joining Lincare.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid to or earned by the Company's President and Chief Executive Officer and
each of the Company's other most highly compensated executive officers for the
year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITIONS SALARY COMPENSATION
- ---------------------------------------------------------------------- -------- ------------
<S> <C> <C>
Richard T. Isel, President and Chief Executive Officer................ $220,000 --
Wayne R. Peterson, Executive Vice President - Operations.............. $200,000 --
James T. Boosales, Executive Vice President and Chief Financial
Officer............................................................. $200,000 --
</TABLE>
None of the foregoing officers received any bonus compensation in 1995 or has
ever received any stock option grants.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with all of the executive officers
listed in the Summary Compensation Table and with Bertram T. Martin, Jr. that
provide for annual salary as follows for fiscal year 1996:
<TABLE>
<CAPTION>
NAME SALARY
-------------------------------------------------------------------------- --------
<S> <C>
Richard T. Isel........................................................... $220,000
Wayne R. Peterson......................................................... $200,000
James T. Boosales......................................................... $200,000
Bertram T. Martin, Jr..................................................... $200,000*
</TABLE>
- ---------------
* Mr. Martin will become an executive officer of the Company at the completion
of the offering.
The agreements can be terminated by either party without cause at any time,
subject to certain notice requirements. Each officer is prohibited from
competing with the Company during the three year period following termination of
the officer's employment. The Company also has severance agreements with each of
its executive officers that provide for a severance compensation benefit equal
to 2.99 times the executive officer's annual cash compensation (payable in a
lump sum) for an involuntary or constructive termination of employment following
a "change of control."
31
<PAGE> 34
STOCK OPTION PLANS
The Company maintains two stock option plans (collectively, the "Stock
Option Plans") to attract, motivate, and retain key employees and members of the
Board of Directors who are not employees of the Company. The Company's 1995
Stock Option Plan (the "Employee Plan") and the 1996 Non-Employee Director Stock
Option Plan (the "Non-Employee Plan") have been adopted by the Board of
Directors and were approved by the shareholders of the Company on December 21,
1995 and May 2, 1996, respectively. An amendment to the Employee Plan was
approved by the Board of Directors and shareholders of the Company on May 2,
1996.
1995 Stock Option Plan. The Employee Plan provides for the grant to
employees of incentive or nonqualified options to purchase up to 500,000 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. None of the options vest until
completion of the offering, and then vest ratably over the four-year period
following the completion of the offering. All of the options vest on a change in
control of the Company. Options granted under the Employee Plan expire not later
than ten years after the date granted or sooner in the event of death,
disability, retirement, or termination of employment. Upon the completion of the
offering, Bertram T. Martin, Jr. will be granted options to purchase a total of
70,000 shares of Common Stock at the initial offering price per share. All
participants in the option plan as a group (including Mr. Martin) will be
granted options to purchase a total of 219,500 shares of Common Stock at the
initial offering price per share. Each of these options vests ratably over the
five-year period following the completion of the offering.
1996 Non-Employee Director Stock Option Plan. The Non-Employee Plan
provides for the grant of nonqualified 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. As of the date of this Prospectus, such members held
no options under the Non-Employee Plan. Upon the completion of the offering,
each outside director will be 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 outside 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. Each outside director 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.
DIRECTOR COMPENSATION
Directors who are executive officers of the Company receive no compensation
as such for service as members of either the Board of Directors or committees
thereof. Directors who are not employees of the Company receive $1,000 per Board
and committee meeting attended. The outside directors are also eligible to
receive options to purchase Common Stock under the Non-Employee Plan. See
"Management -- Stock Option Plans -- 1996 Non-Employee Director Stock Option
Plan." In addition, upon becoming a director of the Company, James M. Emanuel
was granted options to purchase 7,500 shares of Common Stock at an exercise
price equal to $8.00 per share, which vest one-third on the closing of the
offering, one-third at the 1997 annual meeting of shareholders, and one-third at
the 1998 annual meeting of shareholders.
COMMITTEES OF THE BOARD
The Board of Directors has established committees whose responsibilities
are summarized as follows:
Audit Committee. The Audit Committee is comprised of Messrs. Kemberling
and Emanuel and is responsible for reviewing the independence, qualifications,
and activities of the Company's independent certified accountants and the
Company's financial policies, control procedures, and accounting staff. The
Audit Committee recommends to the Board the appointment of the independent
certified public accountants and reviews and approves the Company's financial
statements. The Audit Committee also is responsible for the review of
transactions between the Company and any Company officer, director, or entity in
which a Company officer or director, has a material interest.
32
<PAGE> 35
Compensation Committee. The Compensation Committee is comprised of Messrs.
Kemberling and Emanuel and is responsible for establishing the compensation of
the Company's directors, officers, and other managerial personnel, including
salaries, bonuses, termination arrangements, and other executive officer
benefits. In addition, the Committee is responsible for the administration of
the Company's Employee Plan, including the recipient, amount, and terms of stock
option grants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee on May 2, 1996.
Members of the Compensation Committee are Messrs. Kemberling and Emanuel.
Certain members of the Company's Board of Directors are parties to transactions
with the Company. See "Certain Transactions."
CERTAIN TRANSACTIONS
In September 1995, Lee R. Kemberling, a director of the Company, converted
a Convertible Demand Promissory Note in the original principal amount of
$1,000,000 into 225,807 shares of the Common Stock at an effective conversion
price of $4.43 per share. The indebtedness to Mr. Kemberling was incurred to
partially finance the Acquisition. In March 1996, the Company borrowed another
$1,000,000 from Mr. Kemberling for working capital pursuant to a secured
Convertible Demand Promissory Note (the "Convertible Note") that is not
redeemable before March 1, 1997. The Convertible Note bears interest at an
annual rate of 8.5%, and the entire principal amount of the Convertible Note is
payable on demand on or after March 1, 1997. At any time before that date, up to
$750,000 of the principal amount of the Convertible Note is convertible into
Common Stock at $5.85 per share. The Convertible Note is secured by a first lien
on the Company's Houston facility and the equipment located there.
Mr. Kemberling is also the director, president, and sole stockholder of
Kemco, Inc., a developer and manufacturer of commercial and industrial waste
water heat recovery systems that originally furnished Amsco Sterile with the
water and heat reclamation equipment installed at each of its facilities. The
Company expects to pay Kemco in 1996 between $75,000 and $100,000 to design and
supply the components for water reclamation systems for five of the Company's
facilities. The Company believes that the terms of its transactions with Kemco
approximate those that would be available from an independent third party.
Since October 1995, Bertram T. Martin, Jr. and his company, Corporate
Strategic Directions, Inc., have performed consulting services for the Company,
including advising the Company in connection with the offering, its interim
financing, and its strategic plan, for which he received options to purchase
66,000 shares of Common Stock at $4.43 per share and will receive consulting
fees of $254,320 on the completion of the offering. The options were awarded in
October 1995.
The Audit Committee of the Board of Directors is responsible for reviewing
all future transactions between the Company and any officer or director of the
Company or any entity in which an officer or director has a material interest.
Any such transactions must be on terms no less favorable than those that could
be obtained on an arms-length basis from independent third parties.
33
<PAGE> 36
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of June 6, 1996, and as adjusted to reflect the
sale of Common Stock offered hereby, with respect to: (i) each of the Company's
directors and the executive officers named in the Summary Compensation Table;
(ii) all directors and officers of the Company as a group; (iii) shareholders
potentially selling pursuant to the Underwriters' over-allotment option, and
(iv) each person known by the Company to own beneficially more than 5% of the
Common Stock. Each of the shareholders listed below has sole voting and
investment power over the shares beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
---------------------------------------------------
AFTER EXERCISE OF
SHARES SHARES SUBJECT TO OVER- BEFORE AFTER OVER-ALLOTMENT
BENEFICIAL OWNER(1) BENEFICIALLY OWNED ALLOTMENT OPTION THE OFFERING THE OFFERING(2) OPTION
- ------------------- ------------------ ------------------------ ------------ --------------- ------------------
<S> <C> <C> <C> <C> <C>
Richard T. Isel.... 1,042,329 54,000 31.0% 19.4% 17.9%
James T.
Boosales......... 900,000 46,500 26.7 16.8 15.5
Wayne R.
Peterson......... 960,000 49,500 28.5 17.9 16.5
Bertram T. Martin,
Jr.(3)........... 165,126 -- 4.8 3.0 3.0
Lee R.
Kemberling(4).... 354,012 -- 10.1 6.4 6.4
James M.
Emanuel(5)....... 2,500 -- * * *
All directors and
officers as a
group (6
persons)(6)...... 3,423,967 -- 96.0% 61.5% 57.3%
</TABLE>
- ---------------
* Indicates less than 1%.
(1) The business address for Richard T. Isel, James T. Boosales, Wayne R.
Peterson, and Bertram T. Martin, Jr. is 28100 U.S. Highway 19 North, Suite
201, Clearwater, Florida 34621. The business address for Lee R. Kemberling
is 11500 47th Street North, Clearwater, Florida 34622.
(2) Assumes the Underwriters' over-allotment option is not exercised.
(3) Includes 66,000 shares of Common Stock issuable on the exercise of
outstanding stock options that will become exercisable on completion of the
offering. Excludes 70,000 shares of Common Stock issuable on the exercise
of stock options that are not exercisable within 60 days.
(4) Includes 128,205 shares of Common Stock issuable on conversion of the
Convertible Note. Excludes 4,000 shares of Common Stock issuable on
exercise of stock options that are not exercisable within 60 days.
(5) Represents shares of Common Stock issuable pursuant to the exercise of
outstanding stock options that will become exercisable on completion of the
offering. Excludes 17,000 shares of Common Stock issuable on exercise of
stock options that are not exercisable within 60 days.
(6) Includes 128,205 shares of Common Stock issuable on conversion of the
Convertible Note held by Lee R. Kemberling, 66,000 shares of Common Stock
issuable upon the exercise of outstanding stock options held by Bertram T.
Martin, Jr. and 2,500 shares of Common Stock issuable upon the exercise of
outstanding stock options held by James M. Emanuel that will become
exercisable on completion of the offering.
34
<PAGE> 37
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.001 par value per share, and 5,000,000 shares of preferred
stock, $.001 par value per share (the "Preferred Stock"). The following
description of the capital stock of the Company is qualified in its entirety by
reference to the Company's Articles of Incorporation and Bylaws.
COMMON STOCK
As of May 6, 1996, the Company had outstanding 3,367,089 shares of Common
Stock and had eight holders of record of the Common Stock. This total excludes
shares issuable on the exercise of outstanding options and conversion of the
Convertible Note. Each shareholder of record is entitled to one vote per share
on all matters to be voted upon by the shareholders. The Company's Articles of
Incorporation do not provide for cumulative voting.
Subject to preferences that might be applicable to any then 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 therefor. See "Dividend Policy." 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. All outstanding shares of Common
Stock in the offering are, and the shares offered hereby on issuance and sale
will be, duly authorized, validly issued, fully paid, and non-assessable.
PREFERRED STOCK
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. The Company has no present
intention to issue shares of Preferred Stock, although it may determine to do so
in the future.
Depending on the rights of the Preferred Stock, the issuance of Preferred
Stock could have an adverse effect on holders of Common Stock by delaying or
preventing a change in control of the Company, making removal of the present
management of the Company more difficult, or resulting in restrictions in the
payment of dividends and other distributions to the holders of Common Stock.
REGISTRATION RIGHTS
The holders of 444,933 shares of Common Stock (collectively, the "Holders")
each have certain registration rights with respect to the registration of those
shares under the Securities Act. Each of such shareholders has "piggyback"
registration rights to request that the Company register any of such shares to
the extent that the Company proposes to register any of its Common Stock under
the Securities Act (other than in exchange for assets or securities of another
corporation, Common Stock to be issued pursuant to a transaction registered on
Form S-4 or a comparable registration statement, or a stock option plan or other
employee plan or securities issued or issuable pursuant to such a plan).
However, if such piggyback rights are exercised in connection with an
underwritten public offering of the Company's Common Stock, the managing
underwriter of such an offering has the right to reduce the number of such
shares to be included in the offering.
35
<PAGE> 38
CERTAIN STATUTORY AND OTHER PROVISIONS
Statutory Provisions. The Company is subject to several anti-takeover
provisions under Florida law that apply to a public corporation organized under
Florida law unless the corporation has elected to opt out of those provisions in
its articles of incorporation or (depending on the provision in question)
bylaws. The Company has not elected to opt out of those provisions. The Florida
Business Corporation Act (the "Florida Act") prohibits the voting of shares in a
publicly-held Florida corporation that are acquired in a "control share
acquisition" unless the Board of Directors approves the control share
acquisition or the holders of a majority of the corporation's voting shares
(exclusive of shares held by officers of the corporation, inside directors, or
the acquiring party) approve the granting of voting rights as to the shares
acquired in the control share acquisition. A "control share acquisition" is
defined as an acquisition that immediately thereafter entitles the acquiring
party to vote in the election of directions within each of the following ranges
of voting power: (i) one-fifth or more but less than one-third of such voting
power, (ii) one-third or more but less than a majority of such voting power, and
(iii) a majority or more of such voting power. This statutory voting restriction
is not applicable in certain circumstances set forth in the Florida Act.
The Florida Act also contains an "affiliated transaction" provision that
prohibits a publicly-held Florida corporation from engaging in a broad range of
business combinations or other extraordinary corporate transactions with an
"interested shareholder" unless (i) the transaction is approved by a majority of
disinterested directors before the person becomes an interested shareholder,
(ii) the interested shareholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years, or (iii) the transaction is
approved by the holders of two-thirds of the corporation's voting shares other
than those owned by the interested shareholder. An interested shareholder is
defined as a person who together with affiliates and associates, beneficially
owns (as defined in Section 607.0901(1)(e) of the Florida Act) more than 10% of
the corporation's outstanding voting shares.
Classified Board of Directors. The Company's Articles of Incorporation and
Bylaws provide that the Board of Directors of the Company will be divided into
three classes, with staggered terms of three years for each class. The term of
one class expires every year. The Company's Articles of Incorporation provide
that any vacancies on the Board of Directors shall be filled only by the
affirmative vote of a majority of the directors then in office, even if less
than a quorum. The Articles of Incorporation of the Company also provide that
any director may be removed from office, but only for cause and only upon the
affirmative vote of the holders of at least two-thirds of the Common Stock.
Special Voting Requirements. The Company's Articles of Incorporation
provide that all actions taken by the shareholders must be taken at an annual or
special meeting of the shareholders or by unanimous written consent. The
Articles of Incorporation provide that special meetings of the shareholders may
be called only by the President, the Chairman of the Board, a majority of the
members of the board of directors, or the holders of not less than 35% of the
Company's outstanding voting shares. Under the Company's Bylaws, shareholders
will be required to comply with advance notice provisions with respect to any
proposal submitted for shareholder vote, including nominations for elections to
the Board of Directors. The Articles of Incorporation and Bylaws of the Company
contain provisions requiring the affirmative vote of the holders of at least
two-thirds of the Common Stock to amend certain provisions thereof.
Indemnification and Limitation of Liability. The Florida Act authorizes
Florida corporations to indemnify any person who was or is a party to any
proceeding (other than an action by, or in the right of, the corporation), by
reason of the fact that he or she is or was a director, officer, employee, or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation or other
entity, against liability incurred in connection with such proceeding, including
any appeal thereof, if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or on behalf of a corporation, indemnification may not be made if the
person seeking indemnification is adjudged liable, unless the court in which
such action was brought determines such person is fairly and reasonably entitled
to indemnification. The indemnification provisions of the Florida Act require
indemnification if a director or
36
<PAGE> 39
officer has been successful on the merits or otherwise in defense of any action,
suit, or proceeding to which he or she was a party by reason of the fact that he
or she is or was a director or officer of the corporation. The indemnification
authorized under Florida law is not exclusive and is in addition to any other
rights granted to officers and directors under the Articles of Incorporation or
Bylaws of the corporation or any agreement between officers and directors and
the corporation. A corporation may purchase and maintain insurance or furnish
similar protection on behalf of any officer or director against any liability
asserted against the officer or director and incurred by the officer or director
in such capacity, or arising out of the status, as an officer or director,
whether or not the corporation would have the power to indemnify him or her
against such liability under the Florida Act.
The Company's Articles of Incorporation provide for the indemnification of
directors and executive officers of the Company to the maximum extent permitted
by Florida law and for the advancement of expenses incurred in connection with
the defense of any action, suit, or proceeding that the director or executive
officer was a party to by reason of the fact that he or she is or was a director
or executive officer of the Company upon the receipt of an undertaking to repay
such amount, unless it is ultimately determined that such person is not entitled
to indemnification.
Under the Florida Act, a director is not personally liable for monetary
damages to the Company or any other person for acts or omissions in his or her
capacity as a director except in certain limited circumstances such as certain
violations of criminal law and transactions in which the director derived an
improper person benefit. As a result, shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although injunctive or other equitable relief may be available.
The Company also has entered into agreements with each of its current
directors and executive officers pursuant to which it is obligated to indemnify
those persons to the fullest extent authorized by law and to advance payments to
cover defense costs against an unsecured obligation to repay such advances if it
is ultimately determined that the recipient of the advance is not entitled to
indemnification. The Company is not required to indemnify a director or officer
if the indemnified loss results from any of the following: (a) a violation of
Section 16(a) of the Securities and Exchange Act of 1934, as amended; (b) a
violation of criminal law; (c) a transaction from which the officer or director
received an improper personal benefit; (d) willful misconduct or a conscious
disregard for the Company's best interests; or (e) a transaction for which the
director is liable pursuant to Section 607.0834 of the Florida Act for certain
distributions from the corporation to its shareholders.
The foregoing provisions of the Florida Act and the Company's Articles of
Incorporation and Bylaws could have the effect of preventing or delaying a
person from acquiring or seeking to acquire a substantial equity interest in, or
control of, the Company.
REGISTRAR AND TRANSFER AGENT
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina, Charlotte, North Carolina.
37
<PAGE> 40
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the offering, the Company will have 5,367,089 shares
of Common Stock outstanding (5,517,089 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,000,000
shares of Common Stock sold in the offering (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable by persons other than affiliates of the Company, without restriction
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 3,367,089 shares of Common Stock (3,217,089 shares if the
Underwriters' over-allotment option is exercised in full) will be "restricted"
securities within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemptions contained in
Rule 144. Of this amount, approximately 3.1 million shares will be beneficially
owned by persons who are affiliates of the Company and, commencing 90 days after
the date of this Prospectus, would be eligible for public sale pursuant to Rule
144, subject to the volume restrictions discussed below. However, the directors,
executive officers, and principal shareholders of the Company have agreed not to
sell, contract to sell, or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Representatives.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the company, who has
beneficially owned his or her shares for at least two years (including the prior
holding period of any prior owner other than an affiliate) is entitled to sell
within any three-month period that number of shares which does not exceed the
greater of 1% of the outstanding shares of the Common Stock, or the average
weekly trading volume during the four calendar weeks preceding each such sale.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements, and the availability of current public information about
the Company. A person (or persons whose shares are aggregated) who is not or has
not been deemed an "affiliate" of the Company for at least three months, and who
has beneficially owned shares for at least three years (including the holding
period of any prior owner other than an affiliate) would be entitled to sell
such shares under Rule 144 without regard to the limitations discussed above.
A public market for the Common Stock has not existed before the offering.
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
38
<PAGE> 41
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters listed
below, and the Underwriters, for whom Robert W. Baird & Co. Incorporated and
Raymond James & Associates, Inc. are acting as representatives (the
"Representatives"), have severally agreed to purchase, the respective number of
shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Robert W. Baird & Co. Incorporated........................................
Raymond James & Associates, Inc...........................................
---------
Total........................................................... 2,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The Underwriters are obligated to
purchase all the shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, if any are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price, less a concession not in excess of $ per share, and that
the Underwriters and such dealers may reallow a concession not in excess of
$ per share to other dealers. The public offering price and concessions
and reallowances to dealers may be changed by the Representatives after the
initial public offering.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of the initial public offering, to purchase up to an
additional 150,000 shares of Common Stock to cover over-allotments, at the same
price per share to be paid by the Underwriters for the other shares offered
hereby. In addition, shareholders Richard T. Isel, Wayne R. Peterson, and James
T. Boosales, have granted the Underwriters a 30-day option to purchase an
aggregate of up to 150,000 additional shares of Common Stock to cover
over-allotments if any. If the Underwriters purchase any such additional shares
pursuant to this option, each of the Underwriters will be committed to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover over-
allotments, if any, in connection with the offering.
The Company and the Underwriters have agreed to indemnify, or to contribute
to payments made by, each other against certain civil liabilities, including
certain civil liabilities under the Securities Act.
The Company has a written agreement with Corporate Strategic Directions,
Inc., a financial consulting firm that is controlled by Bertram T. Martin, Jr.
and which has no affiliation with the Underwriters or the Company, to pay up to
$250,000, plus costs, for consulting services relating to the offering.
Before the offering, there has been no public market for the Common Stock.
The initial public offering price was determined by negotiation among the
Company, the Selling Shareholders and the Representatives. The factors
considered in determining the initial public offering price include the history
of and prospects for the business in which the Company operates, past and
present operations, revenues, and earnings of the Company and the trend of such
earnings, the prospects for such earnings, the general condition of the
securities markets at the time of the offering, and the demand for similar
securities of reasonably comparable companies.
39
<PAGE> 42
The Representatives have informed the Company and the Selling Shareholders
that the Underwriters do not intend to make sales to any accounts over which
they exercise discretionary authority.
The Company and its directors and executive officers, and the Selling
Shareholders have agreed not to sell, contract to sell, or otherwise dispose of
any shares of Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of the Representatives. See "Shares
Eligible for Future Sale."
LEGAL MATTERS
The validity of the issuance of the Common Stock offered pursuant to this
Prospectus will be passed upon for the Company by Glenn Rasmussen & Fogarty,
P.A., Tampa, Florida. Certain legal matters in connection with the sale of the
Common Stock offered hereby will be passed upon for the Underwriters by Holland
& Knight, Tampa, Florida. A shareholder of Glenn Rasmussen & Fogarty, P.A.
beneficially owns 19,827 shares of Common Stock of the Company.
EXPERTS
The financial statements and financial statement schedule for SRI as of
December 31, 1995 and December 31, 1994, and for the five months ended December
31, 1994, and the year ended December 31, 1995, and the financial statements and
financial statement schedule for AMSCO Sterile Recoveries, Inc. for the year
ended December 31, 1993, and the seven months ended July 31, 1994, included in
this Prospectus and in the Registration Statement, have been audited by Grant
Thornton LLP, independent certified public accountants, as stated in their
reports included herein, and in the Registration Statement, and are included
herein in reliance upon the reports given upon the authority of that firm as
experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part)
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and its exhibits and schedules, certain portions of which are omitted
as permitted by the rules and regulations of the Commission. Statements made in
this Prospectus regarding the contents of any plan, contract, document, or
agreement are not necessarily complete, and, in each instance, reference is made
to the copy of the plan, contract, document, or agreement filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference and the exhibits and schedules thereto. For further
information concerning the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits and
schedules filed with that statement, which may be obtained from the Commission
at the public reference facilities maintained by the Commission at 450 Fifth
Street N.W., Washington, D.C. 20549, at prescribed rates.
The Company intends to furnish its shareholders annual reports containing
financial statements certified by an independent public accounting firm and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
40
<PAGE> 43
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF STERILE RECOVERIES, INC.
Report of Independent Certified Public Accountants.................................. F-2
Balance Sheets as of December 31, 1994 and 1995, and March 31, 1996 (unaudited)..... F-3
Statements of Operations for the five months and year ended December 31, 1994 and
1995, and the three months ended March 31, 1995 and 1996 (unaudited)............. F-4
Statement of Shareholders' Equity (Deficit) for the five months and year ended
December 31, 1994 and 1995, and the three months ended March 31, 1996
(unaudited)...................................................................... F-5
Statements of Cash Flows for the five months and year ended December 31, 1994 and
1995, and the three months ended March 31, 1995 and 1996 (unaudited)............. F-6
Notes to Financial Statements....................................................... F-7
FINANCIAL STATEMENTS OF AMSCO STERILE RECOVERIES, INC.
Report of Independent Certified Public Accountants.................................. F-19
Statements of Operations for the year ended December 31, 1993 and the seven months
ended July 31, 1994.............................................................. F-20
Statements of Cash Flows for the year ended December 31, 1993 and the seven months
ended July 31, 1994.............................................................. F-21
Notes to Financial Statements....................................................... F-22
</TABLE>
F-1
<PAGE> 44
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, 1994 and 1995, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the five months ended December
31, 1994 and year ended December 31, 1995. 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, 1994 and 1995, and the results of operations and cash flows for
the five months ended December 31, 1994 and year ended December 31, 1995, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
May 10, 1996
F-2
<PAGE> 45
STERILE RECOVERIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash................................................ $ 287,881 $ 251,444 $ 365,260
Accounts receivable, net............................ 3,295,518 3,389,243 3,842,895
Inventories......................................... 217,335 305,450 678,722
Prepaid expenses and other assets................... 258,009 303,309 390,098
Reusable surgical products, net of accumulated
amortization of $374,130, $1,137,603, and
$1,392,277, respectively.......................... 4,867,447 4,924,271 5,412,737
Property, plant and equipment, net.................. 4,462,305 4,318,840 4,409,110
Goodwill, net....................................... -- -- 536,229
-------- -------- --------
Total assets.............................. $13,388,495 $13,492,557 $15,635,051
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable -- working capital loan facility...... $ 1,061,341 $ 1,810,119 $ 1,975,386
Notes payable -- related parties.................... 1,000,000 -- 1,133,977
Accounts payable.................................... 679,814 1,166,657 1,527,382
Employee related accrued expenses................... 439,712 652,990 634,185
Other accrued expenses.............................. 509,197 568,084 472,601
Acquisition debt.................................... 9,880,832 9,080,832 8,680,832
-------- -------- --------
Total liabilities......................... 13,570,896 13,278,682 14,424,363
Commitments......................................... -- -- --
Shareholders' equity (deficit)
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
3,000,000, 3,225,807 and 3,367,089 shares,
respectively................................... 3,000 3,226 3,367
Additional paid-in capital........................ 1,009,000 2,008,774 2,835,133
Accumulated deficit............................... (1,194,401) (1,798,125) (1,627,812)
-------- -------- --------
Total shareholders' equity (deficit)........... (182,401) 213,875 1,210,688
-------- -------- --------
Total liabilities and shareholders'
equity.................................. $13,388,495 $13,492,557 $15,635,051
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 46
STERILE RECOVERIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ------------ -------------------------
1994 1995 1995 1996
------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Reusable surgical products service.... $ 9,284,792 $ 24,752,403 $5,795,882 $6,896,334
Disposable surgical products.......... -- 567,421 20,648 433,843
----------- ----------- ---------- ----------
Total revenues..................... 9,284,792 25,319,824 5,816,530 7,330,177
Cost of revenues........................ 6,549,809 17,658,762 4,180,857 5,023,536
----------- ----------- ---------- ----------
Gross profit....................... 2,734,983 7,661,062 1,635,673 2,306,641
Distribution expenses................... 1,031,954 2,801,419 693,678 722,213
Selling and administrative expenses..... 2,162,012 3,974,849 1,014,001 1,067,109
----------- ----------- ---------- ----------
Income (loss) from operations...... (458,983) 884,794 (72,006) 517,319
Interest expense........................ 735,418 1,488,518 379,153 347,006
----------- ----------- ---------- ----------
Net income (loss).................. $ (1,194,401) $ (603,724) $ (451,159) $ 170,313
=========== =========== ========== ==========
Unaudited pro forma information
Historical net income (loss).......... $ (1,194,401) $ (603,724) $ (451,159) $ 170,313
Income tax expense.................... -- -- -- --
----------- ----------- ---------- ----------
Pro forma net income (loss)........... $ (1,194,401) $ (603,724) $ (451,159) $ 170,313
=========== =========== ========== ==========
Pro forma net income (loss) per common
share.............................. $ (0.34) $ (0.17) $ (0.13) $ 0.05
=========== =========== ========== ==========
Weighted average common shares
outstanding........................ 3,512,815 3,512,815 3,512,815 3,512,815
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 47
STERILE RECOVERIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Initial cash capitalization
of the Company............ 3,000,000 $3,000 $1,009,000 $ -- $ 1,012,000
Net loss..................... -- -- -- (1,194,401) (1,194,401)
--------- ------ ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1994... 3,000,000 3,000 1,009,000 (1,194,401) (182,401)
Conversion of note payable... 225,807 226 999,774 -- 1,000,000
Net loss..................... -- -- -- (603,724) (603,724)
--------- ------ ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1995... 3,225,807 3,226 2,008,774 (1,798,125) 213,875
Issuance of Common Stock for
cash (unaudited).......... 51,282 51 299,949 -- 300,000
Acquisition of Surgipro
(unaudited)............... 90,000 90 526,410 -- 526,500
Net income (unaudited)....... -- -- -- 170,313 170,313
--------- ------ ---------- ----------- -----------
BALANCE AT MARCH 31, 1996
(UNAUDITED).................. 3,367,089 $3,367 $2,835,133 $(1,627,812) $ 1,210,688
========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 48
STERILE RECOVERIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------------
1994 1995 1995 1996
------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net income (loss)................................................ $(1,194,401) $ (603,724) $(451,159) $ 170,313
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization.................................. 169,778 421,243 102,687 112,741
Amortization of reusable surgical products..................... 274,130 763,473 173,261 254,674
Provision for reusable surgical products shrinkage............. 100,000 -- -- 61,458
Change in assets and liabilities:
Accounts receivable.......................................... 551,175 (93,725) 366,845 (389,850)
Inventories.................................................. (90,119) (88,115) (128,001) (167,028)
Prepaid expenses and other assets............................ (258,009) (45,300) (47,795) 46,698
Accounts payable............................................. 401,025 486,843 (112,912) 239,226
Accrued expenses............................................. 820,364 272,164 119,475 (289,754)
----------- ----------- --------- ---------
Net cash provided by operating activities................. 773,943 1,112,859 22,401 38,478
----------- ----------- --------- ---------
Cash flows from investing activities
Proceeds from sale of assets from acquired company............... 1,529,540 -- -- --
Purchases of property, plant, and equipment...................... (62,112) (277,778) (37,722) (190,973)
Purchases of reusable surgical products.......................... (14,831) (820,297) (27,932) (804,598)
Payment for acquisition of business, net of cash acquired........ (5,012,000) -- -- 5,634
----------- ----------- --------- ---------
Net cash used in investing activities.......................... (3,559,403) (1,098,075) (65,654) (989,937)
----------- ----------- --------- ---------
Cash flows from financing activities
Proceeds from initial capitalization of the Company.............. 1,012,000 -- -- --
Proceeds from convertible demand notes........................... 1,000,000 -- -- 1,000,000
Payments on acquisition debt..................................... -- (800,000) -- (400,000)
Net proceeds from working capital loan facility.................. 1,061,341 748,779 (16,856) 165,275
Proceeds from issuance of common stock........................... -- -- -- 300,000
----------- ----------- --------- ---------
Net cash provided by (used in) financing activities............ 3,073,341 (51,221) (16,856) 1,065,275
----------- ----------- --------- ---------
Increase (decrease) in cash........................................ 287,881 (36,437) (60,109) 113,816
Cash at beginning of period........................................ -- 287,881 287,881 251,444
----------- ----------- --------- ---------
Cash at end of period.............................................. $ 287,881 $ 251,444 $ 227,772 $ 365,260
=========== =========== ========= =========
Supplemental cash flow information
Cash paid for interest........................................... $ 686,085 $ 1,418,623 $ 263,760 $ 418,857
=========== =========== ========= =========
Supplemental schedule of non-cash investing and financing
activities:
Purchase of Amsco Sterile (1994) and Surgipro (1996)
Fair value of assets acquired.................................. $15,300,000 $ -- $ -- $ 952,000
Cash (paid) received........................................... (5,012,000) -- -- 6,000
Common stock issued............................................ -- -- -- (526,000)
----------- ----------- --------- ---------
Liabilities incurred or assumed................................ $10,288,000 $ -- $ -- $ 432,000
=========== =========== ========= =========
Conversion of convertible demand note into 225,807 shares of
common stock................................................... $ -- $ 1,000,000 $ -- $ --
=========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 49
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF ORGANIZATION AND BUSINESS
Sterile Recoveries, Inc. ("SRI" or the "Company") was incorporated on June
13, 1994 in Florida to acquire substantially all of the assets of its
predecessor, AMSCO Sterile Recoveries, Inc. ("Amsco Sterile") on July 31, 1994
(see Note C) (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 provides other disposable products necessary for surgery.
At seven regional facilities located in various states, SRI collects, sorts,
cleans, inspects, packages, sterilizes, and delivers its reusable products on a
just-in-time basis. 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. 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.
SRI's customers, hospitals and surgery centers are currently located in
seventeen states. During 1995 and the first quarter of 1996, Columbia/HCA
Healthcare Corporation ("Columbia") hospitals, with which the Company currently
does business, accounted for approximately 12% and 15% of SRI's sales,
respectively. Although each Columbia hospital currently makes its purchasing
decisions on an individual basis, and none of the individual hospitals accounted
for more than 3% of the Company's sales, the Company believes that the executive
management of Columbia has the ability to influence the hospitals' use 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 negotiating leverage. Although SRI is increasingly targeting
these groups for its sales efforts, a change of its customers' purchasing
patterns to group purchasing might have a material adverse effect on the Company
because the Company has historically sold its products to hospitals on an
individual basis.
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 had no assets or operations from June 13, 1994 until the
Acquisition, except for the Company's initial cash capitalization of $1,012,000
by its three shareholders on July 21, 1994. The statements of operations, cash
flows and shareholders' equity present the Company's initial period as the five
month period August 1, 1994 through December 31, 1994.
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.
F-7
<PAGE> 50
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
Inventories
Inventories consist principally of consumables, supplies, and disposable
surgical products since the acquisition of Surgipro (see Note C) and are stated
at the lower of cost or market; cost being determined on the first-in, first-out
method.
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
generally ranges from 75 to 125 uses, which correlates to a three to seven year
time period and is based on several factors including studies performed by
management. The estimates, however, are subject to revision if actual experience
differs from the estimated available uses.
The Company has experienced minor amounts of shrinkage since August 1,
1994, with actual shrinkage currently ranging 1% - 1.5% of revenues. At December
31, 1994, the Company established a reserve for shrinkage of $100,000 to account
for the estimated amount of product at customer locations that will not be
returned to the Company. An additional provision was not deemed necessary during
1995, in part because of the favorable effect of returned products previously
written off. 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.
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.
On a quarterly basis, the Company will evaluate the projected undiscounted
cash flows of each business unit (reusable and disposable) to determine whether
or not there is permanent impairment of its long-lived assets, including
goodwill, and will expense the amount, if any, determined to be permanently
impaired.
Revenues
Revenues are recognized as the agreed upon services, as described in Note A
of Notes to Financial Statements, are delivered, which is generally daily. The
Company's revenues are principally generated from service agreements with
varying terms of one to three years, which are cancelable by either party with
generally 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.
F-8
<PAGE> 51
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes
The Company is taxed as an S Corporation under the provisions of the
Internal Revenue Code. As such, the Company's taxable income is includable in
the individual income tax returns of its shareholders for federal and state
income tax purposes. Accordingly, no provisions for federal and state income
taxes have been recorded in the accompanying historical financial statements.
On completion of the offering, the Company will terminate its S Corporation
status, become subject to corporate income taxes, and record deferred income
taxes to account for the temporary differences between the tax and reported
bases of the Company's assets and liabilities, which will be included in the
Company's statement of operations (see Note K).
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 $25,000 for each period
presented herein. The allowance for doubtful accounts at December 31, 1994 and
1995 and March 31, 1996 is $6,000, $21,000 and $27,000, respectively.
Fair value of financial instruments
The carrying amounts of cash, receivables, accounts payables, accrued
expenses and notes payable approximate fair value because of the short-term
nature of the items. The carrying value of the acquisition debt approximates its
fair value based on current interest rates, coupled with the expected near term
payoff of the debt with the proceeds from the offering.
New accounting pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123's accounting provisions were followed. Management has determined
not to adopt SFAS No. 123's accounting recognition provisions related to stock
options granted to employees and accordingly, will continue following APB No.
25's accounting provisions. All other requirements of SFAS No. 123 will be
implemented on January 1, 1996 and are not expected to have a material effect on
the Company's financial statements.
Unaudited financial statements
The unaudited financial statements and the related notes thereto for March
31, 1995 and 1996 include all normal and recurring adjustments which in the
opinion of management are necessary for a fair presentation and are prepared on
the same basis as audited annual statements. The interim results are not
necessarily indicative of the results that may be expected for the full year.
NOTE C -- BUSINESS COMBINATIONS
Amsco Sterile Recoveries, Inc.
Effective July 31, 1994, the Company acquired from Amsco Sterile in the
Acquisition substantially all of its assets, principally reusable surgical
products, property, plant and equipment, and accounts receivable. Amsco
Sterile's parent is American Sterilizer Company, a subsidiary of AMSCO
International, Inc.
F-9
<PAGE> 52
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
("AMSCO"). Two of the Company's officers and major shareholders were formerly
executive officers of Amsco Sterile. The total consideration of approximately
$15,300,000 consisted of:
<TABLE>
<S> <C>
Cash.................................................................... $ 5,012,000
Acquisition debt to Amsco Sterile....................................... 9,871,000
Liabilities assumed..................................................... 265,000
Direct acquisition costs................................................ 152,000
--------
$15,300,000
========
</TABLE>
The cash was provided from: (i) $1,012,000 contributed by the Company's
three shareholders; (ii) $1,000,000 from a convertible note agreement with an
individual who became a director of the Company (see Note F); (iii) $1,470,000
from the concurrent factoring of certain of the acquired accounts receivable
(see Note E); and (iv) $1,530,000 from the concurrent sale of one of the
facilities acquired from Amsco Sterile, including reusable surgical products, to
an unrelated third party.
The acquisition was accounted for as a purchase transaction. The purchase
cost was allocated based on the fair value of the net assets acquired or
estimated amounts expected to be received upon disposal, as follows:
<TABLE>
<S> <C>
Accounts receivable..................................................... $ 3,847,000
Inventories............................................................. 127,000
Reusable surgical products.............................................. 5,226,000
Property, plant and equipment........................................... 4,570,000
--------
13,770,000
Assets sold concurrently................................................ 1,530,000
--------
$15,300,000
========
</TABLE>
The Company's active operations commenced upon the acquisition of Amsco
Sterile's business on July 31, 1994; therefore, the statement of operations
includes the acquired business' operating results from August 1, 1994.
Surgipro
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 $76,000 due in 1998 (or on the earlier completion of the
offering), for approximately $500,000 of assets and the assumption of
approximately $400,000 of liabilities. The note payable amount is subject to
further adjustment upon final determination. Any adjustment is not expected to
exceed $35,000 and will result in an increase to recorded goodwill. 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 $540,000 being allocated to goodwill. The results of operations
are included in the accompanying Statement of Operations from the acquisition
date.
F-10
<PAGE> 53
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma financial information assumes that the
purchase had occurred at the beginning of the respective periods after giving
effect to 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.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenues.................................................... $6,062,430 $7,444,371
Net income (loss)........................................... $ (451,341) $ 122,330
Net income (loss) per common share.......................... $ (.13) $ .04
</TABLE>
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL ------------------------- MARCH 31,
LIVES IN YEARS 1994 1995 1996
-------------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land and building................ 38 $ 314,369 $ 314,369 $ 320,568
Leasehold improvements........... 2-18 1,298,697 1,300,698 1,310,549
Machinery and equipment.......... 3-12 2,677,164 2,928,415 3,105,059
Office furniture and equipment... 5-10 341,853 366,390 424,657
------- ------- -------
4,632,083 4,909,872 5,160,833
Less: Accumulated depreciation
and amortization............... 169,778 591,032 751,723
------- ------- -------
$4,462,305 $4,318,840 $4,409,110
======= ======= =======
</TABLE>
NOTE E -- NOTES PAYABLE -- WORKING CAPITAL LOAN FACILITY
In July 1994, the Company established a factoring arrangement with a
finance company whereby the Company factors substantially all of its trade
receivables on a recourse basis. The arrangement had an initial term of 180 days
and automatically renews after each successive 365-day term. The finance company
may terminate the arrangement at the end of any of the successive 365-day terms
upon written notice of at least 60 days prior to the end of any such term or at
any time upon an event of default (including nonpayment of indebtedness when
declared due or a bankruptcy filing) or if the finance company reasonably deems
itself insecure as to the intent or ability of the Company to pay any of its
indebtedness under the arrangement. Generally, the Company may borrow up to 90%
of the unpaid face amount of such receivables less a reserve amount equal to
previously issued unpaid advances and an amount established by the lender to
cover for disputed and/or underpaid billings not repurchased by the Company. The
agreement requires the Company to repurchase the receivables which are unpaid
after 90 days and allows the Company to repurchase the receivables and terminate
the arrangement at any time upon payment to the factor of all advances made and
all interest and fees owed. Interest on the cash drawings are at a base lending
rate (8.75% and 8.25% at December 31, 1995 and March 31, 1996, respectively)
plus 4% (adjusted to 2% at March 1, 1996). The factor also receives a commission
on the face amount of the receivables financed. Interest and fees totaled
$307,327 in 1994, $422,234 in 1995 and $114,477 in 1996. Advances owed under
this arrangement total $1,061,341, $1,810,119, and $1,975,386 at December 31,
1994, December 31, 1995, and March 31, 1996, respectively. Available borrowings
under this arrangement at December 31, 1995 and March 31, 1996 approximate
$373,000 and $493,000, respectively.
F-11
<PAGE> 54
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- NOTES PAYABLE -- RELATED PARTIES
Notes payable -- related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Convertible demand promissory note............. $1,000,000 $ -- $ 1,000,000
Note payable other............................. -- -- 133,977
---------- ---------- ----------
$1,000,000 $ -- $ 1,133,977
========== ========== ==========
</TABLE>
Convertible Demand Promissory Note
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
that 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 another $1,000,000 from the director
pursuant to another Convertible Demand Promissory Note. Beginning on March 1,
1997, the Convertible Note becomes payable on demand and may be redeemed by the
Company for face value. At any time before that date, $750,000 of the
Convertible Note is convertible to Common Stock at $5.85 per share. The $250,000
balance is not convertible and is payable on maturity. The Convertible Note has
a stated interest rate of 8.5% and is secured by a first lien on the Company's
Houston, Texas facility and the equipment located at the facility.
The Company incurred interest expense related to the two demand notes of
$50,000, $70,000, $30,000 and $7,000 for the five months ended December 31,
1994, the year ended December 31, 1995, and the three months ended March 31,
1995 and 1996.
Note Payable Other
In connection with the Surgipro acquisition (Note C), the Company will
issue a note payable in the amount of $76,000 due in four equal quarterly
installments of $18,988 beginning April 1997. The full amount of the note is
payable ten days after the Company closes the offering. Issuance of the note has
been deferred pending post-closing adjustments which are not expected to exceed
$35,000. Interest on the note accrues after July 1996 at a stated rate equal to
the prime rate announced from time to time by the Company's principal bank and
is payable in quarterly installments beginning October 1996 and continuing until
the note is paid in full.
Also, in connection with the same acquisition, the Company assumed a
non-interest bearing note payable of $58,025 due in three equal monthly
installments of $19,342 beginning April 1996.
The weighted average interest rates of all the Company's notes payable at
December 31, 1994 and 1995 and March 31, 1996 were 12.26%, 12.75%, and 10.73%
respectively.
F-12
<PAGE> 55
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- ACQUISITION DEBT
Acquisition debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Purchase money note -- Amsco Sterile; monthly principal
payments of $100,000 through July 1997 with a balloon
payment due August 1997; interest at a bank's prime
rate (8.75% at December 31, 1995 and March 31, 1996)
plus 1.5%; collateralized by all Company assets,
excluding accounts receivable and real and personal
property at the Houston, Texas facility.............. $9,880,832 $9,080,832 $8,680,832
========== ========== ==========
</TABLE>
At December 31, 1995, aggregate maturities of acquisition debt are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
----------------------------------------------------------------- ----------
<S> <C>
1996........................................................... $1,200,000
1997........................................................... 7,880,832
----------
$9,080,832
==========
</TABLE>
The Purchase Money Security Agreement with Amsco Sterile contains various
financial related covenants, including, among other things, limiting in 1996 the
Company's total allowed capital expenditures and general indebtedness to
approximately $4,400,000 and $18,600,000, respectively. In addition, certain
limitations exist as to the permitted amount of Common Stock dividends and
distributions. If the Company completes the offering of common stock described
in Note K, the entire debt would be paid off from the proceeds of the offering.
Interest expense for the five months ended December 31, 1994, the year
ended December 31, 1995, and the three months ended March 31, 1995 and 1996
totaled $378,758, $977,711, $247,021, and $221,021, respectively.
NOTE H -- COMMITMENTS
Operating Leases
The Company leases offices, facilities and distribution vehicles under
noncancelable operating leases with terms ranging from one year to nine years.
At present the Company intends to exercise certain of these renewal options when
the initial term expires. The office and processing facility leases contain
various renewal options and escalating payments. The vehicle leases contain
contingent rentals based on mileage.
Future minimum lease payments at December 31, 1995 under leases in excess
of one year are as follows:
<TABLE>
<S> <C>
Year ending
1996................................................................ $1,635,345
1997................................................................ 1,211,563
1998................................................................ 1,011,777
1999................................................................ 788,511
2000................................................................ 720,800
Thereafter.......................................................... 1,166,413
----------
$6,534,409
==========
</TABLE>
F-13
<PAGE> 56
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense for the five-month period ended December 31, 1994, the year
ended December 31, 1995, and the three months ended March 31, 1995 and 1996
totaled $815,235, $1,866,246, $432,491 and $477,042 (including contingent
rentals of approximately $100,000, $230,000, $55,000 and $45,000), respectively.
Management Incentive Plan
The Company has established a Management Incentive Plan in which forty (40)
employees participated in 1995. The incentives are based on various performance
factors and can be 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 and the
participant must still be an employee of the Company at that time.
Approximately $195,000 and $30,000 of estimated incentives were recognized
during the year ended December 31, 1995 and the three months ended March 31,
1996.
Financial Consultant Agreement
In accordance with a financial consulting agreement dated October 18, 1995
with a director, upon the successful completion of the offering, approximately
$255,000 cash remuneration will be payable to the consultant. Because payment
for the consultant services is contingent upon successful completion of the
offering, which is uncertain, no amounts have been accrued.
Management Employment Agreements
On May 2, 1996, the Board approved employment agreements with four
executives in which each executive would receive severance pay equal to three
years of base salary in the event that the executive is terminated following a
change in control of the Company.
Shareholder Agreement
The Company and its shareholders have entered into a shareholder agreement
(amended as of February 20, 1996) whereby the Company has the first option and
the shareholders the second option to purchase any (but not less than all)
shares that a shareholder intends to transfer to any person other than the
Company, generally at the same price contemplated by the intended transfer. This
agreement will automatically terminate upon completion of the offering.
NOTE I -- SHAREHOLDERS' EQUITY
Common Stock
The Company, on December 21, 1995, increased the number of authorized
Common Stock shares from 10,000,000 to 30,000,000 at $.001 par value per share.
Subject to preferences that might be applicable to any then 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 therefor. 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.
The Company, on December 21, 1995, declared a 3-for-1 stock split which was
effectuated as a 200% stock dividend. All share and per share data in the
Company's financial statements and notes thereto have been retroactively
restated to give effect to the split.
F-14
<PAGE> 57
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 J -- STOCK OPTIONS
The Company maintains two stock option plans which were adopted by the
Board of Directors and were approved by the shareholders of the Company on
December 21, 1995, the Company's 1995 Stock Option Plan (the "Employee Plan")
and on May 2, 1996, the Company's 1996 Non-Employee Director Plan (the "Non-
Employee Plan").
The Employee Plan
The Employee Plan provides for the grant to employees of incentive or
non-qualified options to purchase up to 500,000 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 represents 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 vest until completion of the offering, and then
vest ratably over the four-year period following the completion of the offering.
All outstanding options vest upon the change in control of the Company. Options
granted under the Employee Plan expire not later than ten years after the date
granted or sooner in the event of death, disability, retirement or termination
of employment. Upon completion of the offering, all employees as a group that
participate in the Employee Plan will also be granted options to purchase a
total of 219,500 shares of Common Stock at the initial offering price per share.
Included in these options are 70,000 options to an employee who is also a
director of the Company. Each of these options vests ratably over the five-year
period following the completion of the offering.
The Non-Employee Plan
The Non-Employee Plan provides for the grant of nonqualified 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. As of the date of these
financial statements, such members held no options under the Non-Employee Plan.
Upon the completion of the offering, each non-employee director will be granted
options to purchase 4,000 shares of Common Stock for each full remaining year of
the director's term at the offering price. 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. Each non-employee director 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.
F-15
<PAGE> 58
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Stock Options
In March 1995, in conjunction with an employment termination and an
agreement that the former employee would be a future independent sales
representative for the Company, 12,500 options at $1.00 a share exercise price
were granted to the individual. The option term is for 10 years and includes a
put option whereby the Company could be required to buy back the option at the
net book value per share of the Company's Common Stock at the preceding year end
value, less $1.00 a share. At March 31, 1996, the put option has no value (i.e.
net book value per share is less than $1.00 a share).
In October 1995, in conjunction with a financial consulting arrangement
with an individual who has become a director 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, exercisable as follows: (1) 22,000
shares upon the completion of an interim financing (completed in March 1996);
and (2) 44,000 upon completing an initial public offering before September 1,
1996. 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.
The following table summarizes the activity in Common Stock subject to
options since the Company's inception:
<TABLE>
<CAPTION>
PRICE
SHARES PER SHARE
-------- -------------
<S> <C> <C>
Outstanding at July 31, 1994 and December 31, 1994.......... -- --
Granted
March, 1995............................................ 12,500 $ 1.00
October, 1995.......................................... 66,000 $ 4.43
December, 1995......................................... 94,000 $ 5.85
Exercised................................................. --
Cancelled................................................. --
------- -------------
Outstanding at December 31, 1995 and March 31, 1996......... 172,500 $1.00 - $5.85
======= =============
</TABLE>
At December 31, 1995 and March 31, 1996, stock options for 12,500 shares
($1.00 a share) and 34,500 shares ($1.00 -- $4.43 a share) were exercisable,
respectively.
NOTE K -- PRO FORMA INFORMATION (UNAUDITED)
Pro forma income taxes
In conjunction with the completion of the offering, the Company will
terminate its S Corporation election and become subject to corporate income
taxes from that date forward.
The statements of operations for all periods presented reflect the pro
forma effect on income taxes (benefits) as if the Company's earnings (losses)
had been subjected to federal and state income taxes as a C Corporation.
In the determination whether to recognize any tax benefits from the
Company's operating losses on a pro forma basis, management considered the
Company's history of net operating losses. While management acknowledges that
the Company's recent fiscal quarters demonstrate the Company's ability to be
profitable, management believes using the more likely than not criteria
established by SFAS No. 109, "Accounting for
F-16
<PAGE> 59
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes," that no tax benefits should be recognized for any reported
period, except for the three months ended March 31, 1996. As the table below
reflects, the estimated income tax expense before utilization of the Company's
net operating loss carryforwards was approximately $65,000 on the earnings for
the first quarter of 1996.
Reconciliation of the income tax expense (benefit) calculated using the
federal statutory income tax rate of 34% to the income tax expense (benefit)
recorded is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, --------------------
1994 1995 1995 1996
------------ ------------ --------- --------
<S> <C> <C> <C> <C>
Federal income taxes (benefit) at
statutory rates................................ $ (406,000) $ (205,000) $(153,000) $ 58,000
State income taxes, net of federal benefit....... (44,000) (22,000) (16,000) 6,000
Net operating losses not currently utilizable.... 444,000 224,000 167,000 --
Utilization of net operating carryforwards....... -- -- -- (65,000)
Other, net....................................... 6,000 3,000 2,000 1,000
------------ ----------- - ---------- ---------
Income tax expense (benefit)..................... $ -- $ -- $ -- $ --
============ ============ ========== =========
</TABLE>
Since the Company's cumulative net operating losses have passed directly to
its S Corporation shareholders, the losses will not be available to the Company
upon conversion to C Corporation status.
At December 31, 1994 and 1995 and March 31, 1996, there were differences
between the bases for the Company's assets and liabilities as reported for
income tax return purposes and as reported for financial statement purposes. The
aggregate bases difference at these dates has been approximately $500,000
representing principally reported liabilities, such as accrued vacation expense,
which have no bases for income tax purposes.
Pro forma net income (loss) per common share
Pro forma net income (loss) per common share is computed by dividing pro
forma net income (loss) by the weighted average number of shares of common stock
outstanding. 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. All Common Stock and
options issued within one year prior to the Company's offering are deemed
outstanding for all periods. In addition, the Company assumed that the
Convertible Demand Promissory Note issued March 1996 (see Notes F and L) would
be converted prior to or concurrently with the offering and accordingly, the
resulting shares of Common Stock are included in the net income (loss) per
common share calculation. The Company used the treasury stock method to
calculate the Common Stock equivalents that the stock options would represent.
The additional shares assumed outstanding in the calculation of income (loss)
per common share, relate primarily to the Common Stock issued as described in
the Statement of Shareholders' Equity and Notes C, F and L of the financial
statements and the previously described convertible notes.
<TABLE>
<CAPTION>
FIVE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1994 1995 1995 1996
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Actual weighted average shares
outstanding.............................. 3,000,000 3,094,086 3,000,000 3,255,807
Additional shares.......................... 512,815 418,729 512,815 257,008
--------- --------- --------- ---------
Weighted average shares used in income per
share calculation........................ 3,512,815 3,512,815 3,512,815 3,512,815
========= ========= ========= =========
</TABLE>
F-17
<PAGE> 60
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company is contemplating the offering in the amount of $22,000,000,
from which proceeds will be used to retire approximately $10,700,000 of debt.
The supplementary pro forma income per common share for 1995 and the three
months ended March 31, 1996 as if this debt has been retired at the beginning of
the respective periods, would be $.18 and $.11 per share (assuming 4,507,558 and
4,411,992 weighted average common shares outstanding, respectively).
NOTE L -- RELATED PARTY TRANSACTIONS
During fiscal years 1994 and 1995 and the three months ended March 31,
1996, SRI purchased repair parts and services for the Company's water and heat
reclamation equipment from a company which is owned by a director and
shareholder of the Company, incurring total expense of $4,000, $8,000 and
$14,000, respectively, which is included in cost of revenues.
In March 1996, the Company's financial consultant who subsequently became a
director (see Note H) and a member of the law firm representing the Company as
general counsel, contributed $250,000 and $50,000 in cash for 42,735 and 8,547
shares of the Company's Common Stock, respectively. The shares of Common Stock
were valued at $5.85 a share, representing its estimated fair value as
determined by the Company's Board of Directors upon considering various factors,
including an independent third-party firm's valuation, the Company's inability
to obtain other financing, and a contemporaneous transaction at the same
purchase price per share.
In both July 1994 and March 1996, the Company received $1,000,000 in cash
from a director and significant shareholder. In each case, the cash was received
for a Convertible Demand Promissory Note (see Note F).
F-18
<PAGE> 61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Sterile Recoveries, Inc.
We have audited the accompanying statements of operations of Amsco Sterile
Recoveries, Inc. (a wholly-owned subsidiary of American Sterilizer Company and
predecessor to Sterile Recoveries, Inc.) and the related statements of cash
flows for the year ended December 31, 1993 and the seven months ended July 31,
1994. These financial statements are the responsibility of 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 results of operations of Amsco Sterile Recoveries,
Inc. and cash flows for the year ended December 31, 1993 and the seven months
ended July 31, 1994, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Tampa, Florida
May 10, 1996
F-19
<PAGE> 62
AMSCO STERILE RECOVERIES, INC.
(PREDECESSOR TO STERILE RECOVERIES, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, JULY 31,
1993 1994
------------ ------------
<S> <C> <C>
Revenues
Reusable surgical products service............................ $ 7,988,117 $ 12,069,411
Cost of revenues................................................ 15,089,952 14,091,339
--------- ---------
Gross profit (deficit)..................................... (7,101,835) (2,021,928)
Distribution expenses........................................... 980,937 1,309,603
Selling and administrative expenses............................. 12,132,167 7,374,720
Restructuring expense........................................... 1,550,000 --
--------- ---------
Loss from operations.......................................... (21,764,939) (10,706,251)
Interest expense................................................ 5,727,107 4,790,888
--------- ---------
Loss before income taxes...................................... (27,492,046) (15,497,139)
Income taxes.................................................... -- --
--------- ---------
Net loss...................................................... $(27,492,046) $(15,497,139)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 63
AMSCO STERILE RECOVERIES, INC.
(PREDECESSOR TO STERILE RECOVERIES, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, JULY 31,
1993 1994
------------ ------------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net loss...................................................... $(27,492,046) $(15,497,139)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 1,904,070 1,388,032
Amortization of reusable surgical products................. 1,401,899 2,564,912
Provision for reusable surgical product shrinkage.......... 1,151,335 950,747
Change in assets and liabilities:
Accounts receivable...................................... (1,602,749) (1,609,963)
Prepaid expenses and other assets........................ (641,466) (450,646)
Accounts payable......................................... (2,703,893) 49,955
Accrued expenses......................................... 1,197,470 23,804
Accrued restructuring.................................... 1,550,000 (549,014)
------------ ------------
Net cash used in operating activities................. (25,235,380) (13,129,312)
------------ ------------
Cash flows from investing activities
Purchases of property, plant and equipment.................... (7,156,044) (1,390,265)
Purchases of reusable surgical products....................... (15,301,269) (5,125,698)
------------ ------------
Net cash used in investing activities................. (22,457,313) (6,515,963)
------------ ------------
Cash flows from financing activities
Advances and loans (net) from parent.......................... 46,932,851 19,752,400
------------ ------------
Net cash provided by financing activities............. 46,932,851 19,752,400
------------ ------------
Increase (decrease) in cash..................................... (759,842) 107,125
Cash at beginning of period..................................... 800,031 40,189
------------ ------------
Cash at end of period........................................... $ 40,189 $ 147,314
============ ============
Supplemental cash flow information
Cash paid for interest(1)..................................... $ 5,727,107 $ 4,790,888
============ ============
</TABLE>
- ---------------
(1) Accrued through intercompany charges.
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 64
AMSCO STERILE RECOVERIES, INC.
(PREDECESSOR TO STERILE RECOVERIES, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF ORGANIZATION AND BUSINESS
AMSCO Sterile Recoveries, Inc. ("Amsco Sterile") was a wholly-owned
subsidiary of American Sterilizer Company, a Pennsylvania corporation whose
parent, AMSCO International, Inc. ("AMSCO"), is a Delaware corporation. The
Amsco Sterile corporate headquarters were located in Clearwater, Florida.
Amsco Sterile commenced business in September 1991 when it acquired Amsco
Sterile's predecessor, a Delaware corporation, which at that time had no assets
or liabilities, except for exclusive rights under a distribution agreement with
a manufacturer of certain fabric material used in Amsco Sterile's products.
Amsco Sterile provided hospitals and surgery centers with a comprehensive
surgical procedure-based delivery and retrieval service for reusable gowns,
towels, drapes and basins, necessary for surgery. At regional facilities located
in various states, Amsco Sterile collected, sorted, cleaned, inspected,
packaged, sterilized, and delivered its reusable products on a just-in-time
basis.
In 1993, one customer accounted for approximately 12% of revenues. In 1994,
no customer accounted for more than 10% of revenues.
Amsco Sterile contracted with third party vendors for the weaving of
microfiber fabric and the cutting and sewing of gowns, wraps, and drapes. Amsco
Sterile's business was substantially dependent on its ability to obtain a key
component of its surgical products from two principal vendors.
Effective July 31, 1994, Amsco Sterile consummated a sale of substantially
all its assets to Sterile Recoveries, Inc. (see Note B).
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement presentation
Amsco Sterile maintained separate books and records as its operations were
generally on the stand alone basis as it related to its affiliated group, except
that Amsco Sterile was solely dependent on its parent to finance its operations
through intercompany loans and advances and Amsco Sterile and its parent had
many common customers. The accompanying financial statements therefore may not
necessarily be indicative of the results of operations that would be obtained if
Amsco Sterile had operated exclusively as an independent entity.
The statement of operations reflect the interest charged by AMSCO on the
intercompany debt. The other services provided by AMSCO that are material have
been included in the financial statements (see below). While Amsco Sterile was
part of AMSCO's consolidated income tax return, Amsco Sterile's income tax
provision herein is determined on the separate return basis (see note E).
AMSCO's Board of Directors, on June 23, 1994, approved a plan to divest or
wind down Amsco Sterile's business and engaged a nationally recognized
investment banking firm to solicit bids to purchase Amsco Sterile. AMSCO's
decision was based on the difficulties encountered in achieving Amsco Sterile's
growth objectives in the healthcare environment existing at that time. In
connection with this divestment plan, Amsco Sterile consummated the sale of
substantially all of its assets on July 31, 1994 to a newly formed company,
Sterile Recoveries, Inc. (the "Successor"), a Florida corporation, owned by two
former executive officers of Amsco Sterile and another individual. These two
former executive officers were also two of the founders and stockholders of
Amsco Sterile's predecessor in September 1991 (see Note A). The purchase price
totaled approximately $14,883,000 (exclusive of assumed liabilities of
$265,000), consisting of cash of $5,012,000 and a purchase money note of
$9,871,000. The purchase price was substantially less than the recorded cost of
the assets disposed.
F-22
<PAGE> 65
AMSCO STERILE RECOVERIES, INC.
(PREDECESSOR TO STERILE RECOVERIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying financial statements do not contain any adjustments such
as writedown of assets or establishment of reserves resulting from AMSCO's
decision to discontinue Amsco Sterile's operations and/or to sell most of the
assets effective July 31, 1994.
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.
Use of estimates in financial statements
In preparing financial statements in conformity with generally accepted
accounting principles, management made 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 have differed from those estimates.
Revenues
Revenues are recognized as the agreed upon services, as described in Note A
to the financial statements, are delivered, which is generally daily. Amsco
Sterile's revenues were principally generated from service agreements with
varying terms of one to three years, which are cancelable by either party with
generally a 90-day notice. All reusable surgical products provided to the
customers under these agreements, are used by the customer, but remain Amsco
Sterile's property.
Depreciation of property, plant and equipment
Depreciation and amortization is provided using the straight-line method
over the estimated useful lives of the assets: 40 years for buildings; 5-20
years for leasehold improvements; 3-12 years for machinery and equipment; and
5-10 years for office furniture and equipment. Leasehold improvements are
amortized using the lesser of the asset's useful lives or the lease term.
Amortization of reusable surgical products
The products are amortized on a basis similar to the unit of production
method. Estimated useful lives are based on the estimated total number of
available uses for each product. The expected total available uses generally
ranges from 75 to 125 uses, which correlates to a 3 to 7 year time period and is
based on several factors, including studies performed by Amsco Sterile's
management. The estimates, however, are subject to revision if actual experience
differs from the estimated available uses.
In addition to the amortization of the reusable surgical products, Amsco
Sterile provided for shrinkage of the product. The provision was generally 8% of
revenues and was based on management estimates.
Goodwill amortization
Goodwill amortization is provided using the straight-line method over 40
years. The goodwill is related to the purchase of Amsco Sterile's predecessor
and is accounted for at the subsidiary level using push down accounting by
AMSCO.
NOTE C -- RELATED PARTY TRANSACTIONS
Administrative costs
AMSCO charged fees to Amsco Sterile to develop certain computer software
for Amsco Sterile's use. Such fees allocated by AMSCO, based on estimates of
actual time incurred, which management believed to be a reasonable allocation
method, aggregated approximately $41,000 and $400,000 for the year ended
F-23
<PAGE> 66
AMSCO STERILE RECOVERIES, INC.
(PREDECESSOR TO STERILE RECOVERIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1993 and seven months ended July 31, 1994, respectively. AMSCO also
processed payroll, collected Amsco Sterile's accounts receivable and performed
computer processing for Amsco Sterile at no charge to Amsco Sterile. No estimate
of these costs has been reflected in these financial statements as management
believed that the amounts were not material to the financial statements.
Interest expense
AMSCO charged Amsco Sterile interest monthly on borrowings made by Amsco
Sterile based upon the average balance owed to AMSCO at a rate comparable to
that which is paid by AMSCO on its borrowings (approximately 9% at July 31,
1994). Amsco Sterile's management believed that the interest allocation method
was reasonable.
Purchase of property, plant and equipment
Amsco Sterile purchased various equipment from AMSCO, which AMSCO also
marketed and sold to its other customers, totaling $700,000 and $-0- in 1993 and
1994.
NOTE D -- RESTRUCTURING
Amsco Sterile decided by December 31, 1993 to close three of its facilities
and reduce some of its workforce in 1994, consequently Amsco Sterile recorded a
$1,550,000 restructuring provision in 1993 consisting of (1) $900,000 for lease
termination charges; (2) $300,000 for severance and relocation costs; and (3)
$350,000 for various other matters. Through July 31, 1994, approximately
$550,000 of these items were paid.
NOTE E -- INCOME TAXES
Amsco Sterile's tax provision was determined on a separate return basis.
Amsco Sterile incurred substantial losses since inception. In addition,
substantially all of Amsco Sterile's assets were sold at July 31, 1994 for an
amount which was less than the assets' carrying values. The statements of
operations do not reflect any income tax benefits for Amsco Sterile's losses as,
under the circumstances described above and in Note B to the financial
statements, none have been or are likely to be realized.
NOTE F -- COMMITMENTS
The terms of the acquisition agreement with Amsco Sterile's predecessor
also included additional consideration under the terms of an earn-out provision
based on net profits of the Company through December 31, 1996. Because of the
substantial losses incurred since the September 1991 acquisition through July
31, 1994, there have been no adjustments to the original purchase price.
NOTE G -- OPERATING LEASES
Amsco Sterile leased offices, facilities and distribution vehicles under
noncancelable operating leases with terms ranging from 1 year to 10 years. The
office and processing facility leases contained various renewal options and
escalating payments. The vehicle leases contained contingent rentals based on
mileage.
Total rental expense for the year ended December 31, 1993, and the seven
months ended July 31, 1994 aggregated approximately $1,125,000 and $670,000
(including contingent rentals of approximately $178,000 and $155,000),
respectively.
F-24
<PAGE> 67
AMSCO STERILE RECOVERIES, INC.
(PREDECESSOR TO STERILE RECOVERIES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- EMPLOYEE BENEFIT PLANS
Employees of Amsco Sterile were entitled to participate in the benefit
plans of AMSCO. AMSCO's plans consisted of the following:
AMSCO Employees' Retirement Account
AMSCO administered the AMSCO Employees' Retirement Account (the "Plan"),
which is a qualified employee stock ownership plan.
The Plan enabled eligible employees, including Amsco Sterile's management,
to receive an equity participation in AMSCO. Contributions declared by the
Board of Directors, up to a maximum of 25% of eligible employee
compensation, were made to the Plan. The Plan in turn used the funds to
purchase shares of the AMSCO's stock or made investments in certain other
securities.
AMSCO Pension Plan
AMSCO had a defined benefit pension plan which covered substantially all
domestic union employees and provided pension benefits of stated amounts
for each year of service of the employee. The following table sets forth
the pension plan's funded status at December 31, 1993:
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of benefit obligations
Vested............................................................... $(29,421,000)
Nonvested............................................................ (982,000)
-----------
Projected benefit obligation (equal to the accumulated benefit
obligation).......................................................... (30,403,000)
Plan assets at fair value.............................................. 26,462,000
-----------
Plan assets less than projected benefit obligation................... $ (3,941,000)
============
</TABLE>
Amsco Sterile's expenses relating to these benefit plans were approximately
$0 and $243,000 in 1993 and 1994, respectively.
F-25
<PAGE> 68
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 May 10, 1996, which is
included in the Prospectus constituting Part I of this Registration Statement,
we have also audited Schedule II for the five months ended December 31, 1994 and
the year ended December 31, 1995. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Tampa, Florida
May 10, 1996
S-1
<PAGE> 69
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
STERILE RECOVERIES, INC.
<TABLE>
<CAPTION>
COLUMN C
------------------------------
COLUMN B ADDITIONS
---------- ------------------------------ COLUMN D COLUMN E
COLUMN A BALANCE AT CHARGED TO CHARGED TO ------------ --------------
- --------------------------------- BEGINNING COSTS AND OTHER ACCOUNTS -- DEDUCTIONS -- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- --------------------------------- ---------- ---------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Five months ended December 31,
1994:
Allowance for doubtful
accounts.................... $ -- $ 6,000 -- $ -- $ 6,000
Year ended December 31, 1995:
Allowance for doubtful
accounts.................... 6,000 25,000 -- (10,000)(1) 21,000
</TABLE>
- ---------------
(1) Write-offs of uncollectible accounts.
S-2
<PAGE> 70
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 AMSCO Sterile
Recoveries, Inc. referred to in our report dated May 10, 1996, which is included
in the Prospectus constituting Part I of this Registration Statement, we have
also audited Schedule II for the year ended December 31, 1993 and the seven
months ended July 31, 1994. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Tampa, Florida
May 10, 1996
S-3
<PAGE> 71
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
AMSCO STERILE RECOVERIES, INC.
<TABLE>
<CAPTION>
COLUMN C
------------------------------
COLUMN B ADDITIONS
---------- ------------------------------ COLUMN D COLUMN E
COLUMN A BALANCE AT CHARGED TO CHARGED TO ------------ --------------
- --------------------------------- BEGINNING COSTS AND OTHER ACCOUNTS -- DEDUCTIONS -- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- --------------------------------- ---------- ---------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
Allowance for doubtful
accounts.................... $ -- $ 27,182 -- $ (2,182)(1) $ 25,000
Seven Months ended July 31, 1994:
Allowance for doubtful
accounts.................... 25,000 125,000 150,000
</TABLE>
- ---------------
(1) Write-offs of uncollectible accounts.
S-4
<PAGE> 72
[MAP SHOWING LOCATION OF FACILITIES
AND DEPOTS THROUGHOUT THE UNITED STATES]
<PAGE> 73
- -------------------------------------------------------
- -------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
The Company............................ 11
Use of Proceeds........................ 13
Dividend Policy........................ 13
Dilution............................... 14
Capitalization......................... 15
Selected Financial Data................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 23
Management............................. 30
Certain Transactions................... 33
Principal Shareholders................. 34
Description of Capital Stock........... 35
Shares Eligible for Future Sale........ 38
Underwriting........................... 39
Legal Matters.......................... 40
Experts................................ 40
Available Information.................. 40
Index to Financial Statements.......... F-1
</TABLE>
---------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
2,000,000 SHARES
STERILE RECOVERIES, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
ROBERT W. BAIRD & CO.
INCORPORATED
RAYMOND JAMES &
ASSOCIATES, INC.
July , 1996
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering (excluding underwriting discounts
and commissions) are as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
---------------------------------------------------------------- -------
<S> <C>
SEC Registration Fee............................................ $ 9,518
NASD Filing Fee................................................. 3,260
Listing Fees.................................................... 30,918
Transfer Agent and Registrar Fees............................... *
Printing and Engraving Expenses................................. *
Legal Fees and Expenses......................................... *
Accounting Fees and Expenses.................................... *
Blue Sky Qualification Fees and Expenses (including legal
fees)......................................................... 12,960
Director and Officer Liability Insurance Premium................ *
Consulting Fees and Expenses.................................... *
Miscellaneous................................................... *
-------
Total................................................. *
=======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 6, Section 6.1, of the Company's Articles of Incorporation provides
for the indemnification of the Company's directors and executive officers to the
fullest effect permitted by law. Reference is made to the Company's Articles of
Incorporation filed as Exhibit 3.1 to the Registration Statement. Pursuant to
the Florida Business Corporation Act, the Company may, and in some cases, shall,
indemnify its directors and executive officers against certain liabilities. In
addition, the Company has entered into an indemnity agreement with each of its
current directors and executive officers pursuant to which it is obligated to
indemnify those persons to the fullest extent authorized by law and to advance
payments to cover defense costs against an unsecured obligation to repay such
advances if it is ultimately determined that the recipient of the advance is not
entitled to indemnification. Reference is made to the form of Indemnification
Agreement filed as Exhibit 10.3 to the Registration Statement.
Additionally, the Company maintains a director and officer liability
insurance policy in the face amount of $5,000,000, that insures its officers and
directors against certain liabilities incurred in their capacities as officers
and directors of the Company. Further, pursuant to the Underwriting Agreement
filed as a Exhibit 1.1 to this Registration Statement, the Underwriters have
agreed to indemnify the Company and its officers, directors, and controlling
persons against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the last three years preceding the filing of this Registration
Statement, the Company has sold the following securities that were not
registered under the Securities Act:
On its formation in June 1994, the Company issued an aggregate of 3,000,000
shares to Messrs. Isel, Peterson, and Boosales for $1,011,000 in aggregate
consideration and transfer of certain contractual rights to initially capitalize
the Company.
II-1
<PAGE> 75
In July 1994, the Company issued a Convertible Demand Promissory Note to
Lee R. Kemberling for $1,000,000. Mr. Kemberling converted the Convertible Note
into 225,807 shares of the Company's Common Stock in September 1995 at an
effective price of $4.43 per share. In March 1996, the Company issued another
Convertible Demand Promissory Note to Mr. Kemberling in exchange for another
investment of $1,000,000, of which $750,000 is convertible for one year from its
issuance into 128,205 shares of the Common Stock at a conversion price of $5.85
per share.
In March 1995, the Company issued stock options for 12,500 shares of Common
Stock to Robert Normyle, a former employee, exercisable at a price of $1.00 per
share. In October 1995, the Company issued stock options for 66,000 shares of
Common Stock to Bertram T. Martin, Jr., exercisable at a price of $4.43 per
share. In December 1995, the Company issued to its employees options to purchase
94,000 shares of Common Stock, exercisable at an exercise price of $5.85 per
share. On May 2, 1996, the Company issued to James M. Emanuel options to
purchase 7,500 shares of Common Stock, exercisable at an exercise price of $8.00
per share.
In February 1996, the Company issued 90,000 shares of the Common Stock and
a promissory note to Clayton W. Page in connection with its acquisition of
Surgipro, Inc. The amount of the promissory note will be approximately $110,000,
subject to adjustment.
In March 1996, the Company issued 42,735 shares of Common Stock to Bertram
T. Martin, Jr. in connection with his investment of $250,000 in the Company, and
the Company issued 8,547 shares of Common Stock to David S. Felman in connection
with his investment of $50,000 in the Company.
No person acted as an underwriter with respect to the transactions
described above. In each of the foregoing instances, the Company relied on
Section 4(2) of the Securities Act or Rule 701 promulgated under the Securities
Act for the exemption from the registration requirements of the Securities Act,
since no public offerings were involved.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
1.1 Proposed form of Underwriting Agreement.
2.1 Asset Purchase Agreement dated July 31, 1994, between the Company and Amsco Sterile
Recoveries, Inc.*
2.2 Agreement and Plan of Merger dated as of February 26, 1996, between Surgipro, Inc.
and the Company.*
2.3 Articles of Merger dated as of February 26, 1996, between Surgipro, Inc. and the
Company.*
3.1 Restated Articles of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 See Exhibits 3.1 and 3.2.
4.2 Specimen certificate for Common Stock.**
4.3 Form of Lock-up Agreement.
5.1 Opinion of Glenn Rasmussen & Fogarty, P.A., regarding the validity of issuance of
the securities being registered.**
10.1 1995 Stock Option Plan, as amended.*
10.2 Form of Stock Option Agreement between the Company and participants under the 1995
Stock Option Plan.*
10.3 Form of Indemnity Agreement between the Company and each of its executive officers.*
</TABLE>
II-2
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.4 Consulting Agreement dated October 18, 1995, between the Company and Corporate
Strategic Directions, Inc.*
10.5 Stock Option Agreement dated March 20, 1995, between the Company and Robert
Normyle.*
10.6 Shareholder Agreement dated July 28, 1994, among all shareholders of the Company.*
10.7 Factoring Agreement and Security Agreement dated July 14, 1994, as amended, between
the Company and Metro Factors, Inc.*
10.8 Purchase Money Note dated as of July 31, 1994, as amended, executed by the Company
in favor of Amsco Sterile Recoveries, Inc.*
10.9 Purchase Money Security Agreement dated as of July 31, 1994, as amended, between
Amsco Sterile Recoveries, Inc. and the Company.*
10.10 Form of Registration Rights Agreement executed in connection with the private
placement of Common Stock.*
10.11 Convertible Demand Promissory Note dated March 1, 1996, executed by the Company in
favor of Lee R. Kemberling.*
10.12 Convertible Note Agreement dated March 1, 1996, between Lee R. Kemberling and the
Company.*
10.13 Promissory Note executed by the Company in favor of Clayton W. Page.
10.14 Form of Employment Agreement between the Company and each of Messrs. Isel, Peterson,
and Boosales.**
10.15 Employment Agreement dated as of February 26, 1996, between Clayton W. Page and the
Company.*
10.16 Lease Agreement dated August 16, 1991, between Coastal 2920 Corporation and Amsco
Sterile Recoveries, Inc., as amended and assigned to the Company.*
10.17 Lease dated August 28, 1992, among Winchester Homes Inc. and Weyerhaeuser Real
Estate Company and Amsco Sterile Recoveries, Inc., as assigned to the Company.*
10.18 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.*
10.19 Lease dated March 30, 1992, between Walter D'Aloisio and Amsco Sterile Recoveries,
Inc., as assigned to the Company.*
10.20 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.*
10.21 Carolina Central Industrial Center Lease dated April 22, 1992, between Industrial
Development Associates and Amsco Sterile Recoveries, Inc., as assigned to the
Company.*
10.22 Lease Agreement dated September 2, 1993, between Price Pioneer Company, Ltd. and
Amsco Sterile Recoveries, Inc., as assigned to the Company.*
10.23 Service Center Lease dated December 4, 1991, between QP One Corporation and Amsco
Sterile Recoveries, Inc., as amended and assigned to the Company.*
10.24 Lease Agreement dated January 31, 1996, between Florida Conference Association of
Seventh-Day Adventists and Surgipro, Inc., as assigned to the Company.*
10.25 License Agreement dated July 31, 1994, between the Company and Amsco Sterile
Recoveries, Inc.*
10.26 Marketing and Distribution Agreement dated November 15, 1994, between Sterile
Concepts, Inc. and the Company.*
</TABLE>
II-3
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
10.27 Stock Option Agreement dated as of October 18, 1996, between Bertram T. Martin, Jr.
and the Company.*
10.28 Stock Option Agreement dated as of May 2, 1996, between James M. Emanuel and the
Company.**
10.29 1996 Non-Employee Director Stock Option Plan.*
10.30 Form of Severance Agreement between the Company and each of Messrs. Isel, Peterson,
Boosales, and Martin.**
10.31 Commitment letter dated June 5, 1996, between First Union National Bank of Florida
and the Company.
23.1 (a) Consent of Grant Thornton LLP (relating to Amsco Sterile Recoveries, Inc.)
(b) Consent of Grant Thornton LLP (relating to the Company)
23.2 Consent of Counsel (included in Exhibit 5.1).**
24.1 Power of Attorney relating to subsequent amendments.*
27.1 Financial Data Schedules.*
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Clearwater,
State of Florida, on June 23, 1996.
STERILE RECOVERIES, INC.
By: /s/ RICHARD T. ISEL
--------------------------------------
Richard T. Isel
President and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- -------------------------------------- --------------
<C> <S> <C>
/s/ RICHARD T. ISEL President, Chief Executive Officer, June 23, 1996
- --------------------------------------- and Director (Principal Executive
Richard T. Isel Officer)
/s/ * Executive Vice President -- Operations June 23, 1996
- --------------------------------------- and Director
Wayne R. Peterson
/s/ JAMES T. BOOSALES Executive Vice President, Chief June 23, 1996
- --------------------------------------- Financial Officer, and Director
James T. Boosales (Principal Financial Officer and
Principal Accounting Officer)
/s/ * Director June 23, 1996
- ---------------------------------------
Bertram T. Martin, Jr.
/s/ * Director June 23, 1996
- ---------------------------------------
Lee R. Kemberling
/s/ * Director June 23, 1996
- ---------------------------------------
James M. Emanuel
*By:/s/JAMES T. BOOSALES
- ---------------------------------------
JAMES T. BOOSALES
Attorney in Fact
</TABLE>
II-5
<PAGE> 79
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
- ------ --------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement..............................
2.1 Asset Purchase Agreement dated July 31, 1994, between the Company and
Amsco Sterile Recoveries, Inc.*......................................
2.2 Agreement and Plan of Merger dated as of February 26, 1996, between
Surgipro, Inc. and the Company.*.....................................
2.3 Articles of Merger dated as of February 26, 1996, between Surgipro,
Inc. and the Company.*...............................................
3.1 Restated Articles of Incorporation of the Company.*..................
3.2 Bylaws of the Company*...............................................
4.1 See Exhibits 3.1 and 3.2.............................................
4.2 Specimen certificate for Common Stock.**.............................
4.3 Form of Lock-up Agreement............................................
5.1 Opinion of Glenn Rasmussen & Fogarty, P.A., regarding the validity of
issuance of the securities being registered.**.......................
10.1 1995 Stock Option Plan, as amended.*.................................
10.2 Form of Stock Option Agreement between the Company and participants
under the 1995 Stock Option Plan.*...................................
10.3 Form of Indemnity Agreement between the Company and each of its
executive officers.*.................................................
10.4 Consulting Agreement dated October 18, 1995, between the Company and
Corporate Strategic Directions, Inc.*................................
10.5 Stock Option Agreement dated March 20, 1995, between the Company and
Robert Normyle.*.....................................................
10.6 Shareholder Agreement dated July 28, 1994, among all shareholders of
the Company.*........................................................
10.7 Factoring Agreement and Security Agreement dated July 14, 1994, as
amended, between the Company and Metro Factors, Inc.*................
10.8 Purchase Money Note dated as of July 31, 1994, as amended, executed
by the Company in favor of Amsco Sterile Recoveries, Inc.*...........
10.9 Purchase Money Security Agreement dated as of July 31, 1994, as
amended, between Amsco Sterile Recoveries, Inc. and the Company.*....
10.10 Form of Registration Rights Agreement executed in connection with the
private placement of Common Stock.*..................................
10.11 Convertible Demand Promissory Note dated March 1, 1996, executed by
the Company in favor of Lee R. Kemberling.*..........................
10.12 Convertible Note Agreement dated March 1, 1996, between Lee R.
Kemberling and the Company.*.........................................
10.13 Promissory Note to be executed by the Company in favor of Clayton W.
Page.................................................................
10.14 Form of Employment Agreement between the Company and each of Messrs.
Isel, Peterson, and Boosales.**......................................
10.15 Employment Agreement dated as of February 26, 1996, between Clayton
W. Page and the Company.*............................................
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT DESCRIPTION NUMBERED PAGE
- ------ --------------------------------------------------------------------- -------------
<C> <S> <C>
10.16 Lease Agreement dated August 16, 1991, between Coastal 2920
Corporation and Amsco Sterile Recoveries, Inc., as amended and
assigned to the Company.*............................................
10.17 Lease dated August 28, 1992, among Winchester Homes Inc. and
Weyerhaeuser Real Estate Company and Amsco Sterile Recoveries, Inc.,
as assigned to the Company.*.........................................
10.18 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.*.......................
10.19 Lease dated March 30, 1992, between Walter D'Aloisio and Amsco
Sterile Recoveries, Inc., as assigned to the Company.*...............
10.20 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.*............................................................
10.21 Carolina Central Industrial Center Lease dated April 22, 1992,
between Industrial Development Associates and Amsco Sterile
Recoveries, Inc., as assigned to the Company.*.......................
10.22 Lease Agreement dated September 2, 1993, between Price Pioneer
Company, Ltd. and Amsco Sterile Recoveries, Inc., as assigned to the
Company.*............................................................
10.23 Service Center Lease dated December 4, 1991, between QP One
Corporation and Amsco Sterile Recoveries, Inc., as amended and
assigned to the Company.*............................................
10.24 Lease Agreement dated January 31, 1996, between Florida Conference
Association of Seventh-Day Adventists and Surgipro, Inc., as assigned
to the Company.*.....................................................
10.25 License Agreement dated July 31, 1994, between the Company and Amsco
Sterile Recoveries, Inc.*............................................
10.26 Marketing and Distribution Agreement dated November 15, 1994, between
Sterile Concepts, Inc. and the Company.*.............................
10.27 Stock Option Agreement dated as of October 18, 1996, between Bertram
T. Martin, Jr. and the Company.*.....................................
10.28 Stock Option Agreement dated as of May 2, 1996, between James M.
Emanuel and the Company.**...........................................
10.29 1996 Non-Employee Director Stock Option Plan.*.......................
10.30 Form of Severance Agreement between the Company and each of Messrs.
Isel, Peterson, Boosales, and Martin.**..............................
10.31 Commitment letter dated June 5, 1996 between First Union National
Bank of Florida and the Company......................................
23.1 (a) Consent of Grant Thornton LLP (relating to Amsco Sterile
Recoveries, Inc.)....................................................
(b) Consent of Grant Thornton LLP (relating to the Company)..........
23.2 Consent of Counsel (included in Exhibit 5.1).**......................
24.1 Power of Attorney relating to subsequent amendments (included on the
signature page of this Registration Statement).*.....................
27.1 Financial Data Schedules (for SEC use only).*........................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
STERILE RECOVERIES, INC.
2,000,000 Shares of Common Stock(1)
FORM OF UNDERWRITING AGREEMENT
JULY __, 1996
ROBERT W. BAIRD & CO. INCORPORATED
RAYMOND JAMES & ASSOCIATES, INC.
As Representatives of the Several Underwriters
Identified in Schedule II Annexed Hereto
c/o Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Ladies and Gentlemen:
1. INTRODUCTORY. Sterile Recoveries, Inc., a Florida
corporation (the "Company") proposes to sell 2,000,000 shares (the "Firm
Shares") of common stock, $.001 par value per share (the "Common Stock"), to
the several underwriters identified in Schedule II annexed hereto (the
"Underwriters"), who are acting severally and not jointly. In addition, the
Company and the Shareholders of the Company identified in Schedule I annexed
hereto (the "Selling Shareholders"), have agreed to grant to the Underwriters
an option to purchase up to 300,000 additional shares of Common Stock (the
"Optional Shares") as provided in section 6 hereof; provided, however, that the
Optional Shares purchased through the option shall be derived fifty percent
(50%) from the Company and fifty percent (50%) from the Selling Shareholders as
follows: 54,000 shares from Richard T. Isel, 46,500 shares from James T.
Boosales, and 49,500 shares from Wayne R. Peterson. In the event that the
Underwriters elect to purchase less than all of the Optional Shares, the
obligation of the Selling Shareholders to the Underwriters shall be to sell to
the Underwriters that number of Optional Shares that bears the same proportion
to the number of Optional Shares to be purchased by the Underwriters as the
number of shares set forth opposite the name of each Selling Shareholder above
bears to the total number of Optional Shares to be purchased by the
Underwriters under Section 6 of the Agreement. The Firm Shares and, to the
extent such option is exercised, the Optional Shares are hereinafter
collectively referred to as the "Shares."
You, as representatives of the Underwriters (the "Representatives"),
have advised the
____________________
(1) Plus an option to acquire up to 300,000 additional shares of Common
Stock from the Company and the Selling Shareholders, to cover over-allotments.
- 1 -
<PAGE> 2
Company and the Selling Shareholders that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon hereafter as
in your judgment is advisable and that the public offering price of the Shares
initially will be $________ per share.
The Company and the Selling Shareholders hereby confirm their
respective agreements with the Underwriters and each other as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company and
the Selling Shareholders, jointly and severally, represent and warrant to, and
agree with, the several Underwriters, and shall be deemed to represent and
warrant to the several Underwriters on each Closing Date (as hereinafter
defined), that:
(a) The Company has been duly incorporated and is validly
existing as a corporation and in good standing or its status is active, as the
case may be, under the laws of its jurisdiction of incorporation, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as presently conducted and described in the Prospectus (as
hereinafter defined) and the Registration Statement; the Company is duly
registered and qualified to do business as a foreign corporation under the laws
of, and is in good standing as such in, each jurisdiction in which such
registration or qualification is required, except where the failure to so
register or qualify would not have a material adverse effect on the condition
(financial or other), business, property, net worth or results of operations of
the Company, taken as a whole ("Material Adverse Effect"); and no proceeding has
been instituted in any such jurisdiction revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification.
Complete and correct copies of the articles of incorporation and by-laws, as
amended or restated ("Articles of Incorporation" and "By-laws," respectively),
of the Company as in effect on the date hereof have been delivered to the
Representatives, and no changes thereto will be made on or subsequent to the
date hereof and prior to each Closing Date.
(b) The shares of Common Stock issued and outstanding
immediately prior to the issuance and sale of the Shares to be sold by the
Company hereunder as set forth in the Prospectus have been duly authorized and
validly issued, are fully paid and nonassessable and conform to the description
thereof contained in the Prospectus and the Registration Statement. There are
no preemptive, preferential or, except as described in the Prospectus, other
rights to subscribe for or purchase any shares of Common Stock (including the
Shares), and no shares of Common Stock have been issued in violation of such
rights. The Shares to be issued and sold by the Company to the Underwriters
have been duly authorized and, when issued, delivered and paid for pursuant to
this Agreement, will be validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus and the
Registration Statement. The delivery of certificates for the Shares to be
issued and sold by the Company hereunder and payment therefor pursuant to the
terms of this Agreement will pass valid title to such Shares to the
Underwriters, free and clear of any lien, claim, encumbrance or defect in title.
Except as described in the Prospectus, there are no outstanding options,
warrants or other rights of any description, contractual or otherwise, entitling
any person to be issued any class of security by
- 2 -
<PAGE> 3
the Company, and there are no holders of Common Stock or other securities of the
Company, or of securities that are convertible or exchangeable into Common Stock
or other securities of the Company, that have rights to the registration of such
Common Stock or securities under the Securities Act of 1933, as amended, and the
regulations thereunder (together, the "Act") or the securities laws or
regulations of any of the states (the "Blue Sky Laws").
(c) The Company does not currently have and never has had
any subsidiaries and does not own any equity interest in or control, directly or
indirectly, any other corporation, limited liability company, partnership,
limited liability partnership, joint venture, association, trust or other
business organization.
(d) The Company has full corporate power and authority to
enter into and perform this Agreement, and the execution and delivery by the
Company of this Agreement and the performance by the Company of its obligations
hereunder and the consummation of the transactions described herein, have been
duly authorized with respect to the Company by all necessary corporate action
and will not: (i) violate any provisions of the Articles of Incorporation or
By-laws of the Company; (ii) violate any provisions of, or result in the breach,
modification or termination of, or constitute a default under, any provision of
any agreement, lease, franchise, license, indenture, permit, mortgage, deed of
trust, evidence of indebtedness or other instrument to which the Company is a
party or by which the Company, or any property owned or leased by the Company,
may be bound or affected which violation, breach or default could have a
Material Adverse Effect; (iii) violate any statute, ordinance, rule or
regulation applicable to the Company, or order or decree of any court,
regulatory or governmental body, arbitrator, administrative agency or
instrumentality of the United States or other country or jurisdiction having
jurisdiction over the Company; or (iv) result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company. No
consent, approval, authorization or other order of any court, regulatory or
governmental body, arbitrator, administrative agency or instrumentality of the
United States or other country or jurisdiction is required for the execution and
delivery of this Agreement by the Company, the performance of its obligations
hereunder or the consummation of the transactions contemplated hereby, except
for compliance with the Act, the Securities Exchange Act of 1934, as amended,
and the regulations thereunder (together, the "Exchange Act"), the Blue Sky Laws
applicable to the public offering of the Shares by the several Underwriters and
the clearance of such offering and the underwriting arrangements evidenced
hereby with the National Association of Securities Dealers, Inc. (the "NASD").
This Agreement has been duly executed and delivered by and on behalf of the
Company and is a valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except that rights to indemnity or
contribution may be limited by applicable law and except as enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium, or similar
laws generally affecting the rights of creditors and by equitable principles
limiting the right to specific performance or other equitable relief.
(e) A registration statement on Form S-1 (Reg. No.
333-03745) with respect to the Shares, including a preliminary form of
prospectus, has been carefully prepared by the Company in conformity with the
requirements of the Act and has been filed with the Securities
- 3 -
<PAGE> 4
and Exchange Commission (the "Commission"). If the Company files a registration
statement to register a portion of the Shares and relies on Rule 462(b) for such
registration statement to become effective upon filing with the Commission (the
"Rule 462(b) Registration Statement"), then any reference to the "Registration
Statement" (as defined below) shall be deemed to include the Rule 462(b)
Registration Statement, as amended from time to time. Such registration
statement, as finally amended and revised at the time such registration
statement was or is declared effective by the Commission (including the
information contained in the form of final prospectus, if any, filed with the
Commission pursuant to Rule 424(b) and Rule 430A under the Act and deemed to be
part of the registration statement if the registration statement has been
declared effective pursuant to Rule 430A(b)) and as thereafter amended by
post-effective amendment, if any, is herein referred to as the "Registration
Statement." The related final prospectus in the form first filed with the
Commission pursuant to Rule 424(b) or, if no such filing is required, as
included in the Registration Statement, or any supplement thereto, is herein
referred to as the "Prospectus." The prospectus subject to completion in the
form included in the Registration Statement at the time of the initial filing of
the Registration Statement with the Commission, and each such prospectus as
amended from time to time until the date of the Prospectus, is referred to
herein as the "Preliminary Prospectus." The Company has prepared and filed such
amendments to the Registration Statement since its initial filing with the
Commission, if any, as may have been required to the date hereof, and will file
such additional amendments thereto as may hereafter be required. There have
been delivered to the Representatives two signed copies of the Registration
Statement and each amendment thereto, if any, together with two copies of each
exhibit filed therewith, and such number of conformed copies for each of the
Underwriters of the Registration Statement and each amendment thereto, if any
(but without exhibits), and of each Preliminary Prospectus and of the Prospectus
as the Representatives have requested.
(f) Neither the Commission nor any state securities
commission has issued any order preventing or suspending the use of any
Preliminary Prospectus, nor, to the knowledge of the Company or the Selling
Shareholders, have any proceedings for that purpose been initiated or
threatened, and each Preliminary Prospectus filed with the Commission as part of
the Registration Statement (excluding from this representation the information
referred to in Section 5), as originally filed or as part of any amendment or
supplement thereto complied when so filed with the requirements of the Act and,
as of its date, did not include any untrue statement of a material fact or omit
to state, a material fact required to be stated therein or necessary to make
the statements therein not misleading. As of the effective date of the
Registration Statement, and at all times subsequent thereto up to each Closing
Date, the Registration Statement and the Prospectus contained or will contain
all statements that are required to be stated therein in accordance with the Act
and conformed or will conform in all respects to the requirements of the Act,
and neither the Registration Statement nor the Prospectus (excluding from this
representation the information referred to in Section 5), included or will
include any untrue statement of a material fact or omitted or will omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Company, nor any person that
controls, is controlled by or is under common control with the Company, has
distributed or will distribute prior to each Closing Date any offering material
in connection with the offering
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<PAGE> 5
and sale of the Shares other than a Preliminary Prospectus, the Prospectus, the
Registration Statement or other materials permitted by the Act and provided to
the Representatives.
(g) Grant Thornton, L.L.P., which has expressed its
opinion with respect to the combined financial statements and schedules filed
with the Commission and included as a part of each Preliminary Prospectus, the
Prospectus or the Registration Statement, are independent accountants as
required by the Act.
(h) The combined financial statements and the related
notes thereto included in each Preliminary Prospectus, the Prospectus and the
Registration Statement present fairly the financial position, results of
operations and cash flows of the Company as of their respective dates or for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles consistently applied throughout the periods involved. The
financial statement schedules, if any, included in the Registration Statement
present fairly the information required to be stated therein on a basis
consistent with the combined financial statements of the Company contained
therein. The Company had an outstanding capitalization as set forth in the
Registration Statement and under "Capitalization" in the Prospectus as of the
date indicated therein, and there has been no material change thereto since such
date except as disclosed in the Prospectus. The financial and statistical
information and data relating to the Company in each Preliminary Prospectus, the
Prospectus and the Registration Statement are accurately presented and prepared
on a basis consistent with the audited combined financial statements and books
and records of the Company. The combined financial statements and schedules and
the related notes thereto included in each Preliminary Prospectus, the
Prospectus or the Registration Statement are the only such financial statements
and schedules required under the Act to be set forth therein.
(i) The Company is not currently, nor with the giving of
notice or passage of time or both, would be, in violation or in breach of: (i)
its Articles of Incorporation or By-laws; (ii) any statute, ordinance, order,
rule or regulation applicable to the Company; (iii) any order or decree of any
court, regulatory body, arbitrator, administrative agency or other
instrumentality of the United States or other country or jurisdiction having
jurisdiction over the Company; or (iv) any provision of any agreement, lease,
franchise, license, indenture, permit, mortgage, deed of trust, evidence of
indebtedness or other instrument to which the Company is a party or by which
any property owned or leased by the Company is bound or affected which
violation, breach or default could be expected to have a Material Adverse
Effect. The Company has received no notice of any violation of any applicable
statute, ordinance, order, rule or regulation applicable to the Company, except
any such violation that could not be expected to have a Material Adverse
Effect. The Company has obtained and holds, and is in compliance with, all
permits, certificates, licenses, approvals, registrations, franchises, consents
and authorizations of governmental or regulatory authorities required under all
laws, rules and regulations in connection with its business (hereinafter
"permit" or "permits"), and all of such permits are in full force and effect;
and the Company has fulfilled and performed all of its obligations with respect
to each such permit and no event has occurred which would result in, or after
notice or lapse of time would result in, revocation or termination of any such
permit or result in any other impairment of the rights of the holder of such
permit. The Company is not nor has it been (by virtue of any action, omission
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<PAGE> 6
to act, contract to which it is a party or other occurrence) in violation of any
applicable foreign, federal, state, municipal or local statutes, laws,
ordinances, rules, regulations or orders (including those relating to
environmental protection, occupational safety and health and equal employment
practices) heretofore or currently in effect, except any such violation which
has been fully cured or satisfied without recourse or which could not be
expected to have a Material Adverse Effect.
(j) There are no legal or governmental proceedings or
investigations pending or, to the knowledge of the Company or the Selling
Shareholders, threatened to which the Company is or may be a party or to which
any property owned or leased by the Company is or may be subject, including,
without limitation, any such proceedings that are related to environmental or
employment discrimination matters, which are required to be described in the
Registration Statement or the Prospectus which are not so described, or which
question the validity of this Agreement or any action taken or to be taken
pursuant hereto. Except as described in the Registration Statement or the
Prospectus, the Company: (i) is not in violation of any statute, ordinance,
rule or regulation, or any decision, order or decree of any court, regulatory
body, arbitrator, administrative agency or other instrumentality of the United
States or other country or jurisdiction having jurisdiction over the Company
relating to the use, disposal or release of hazardous or toxic substances or
relating to the protection or restoration of the environmental or human exposure
to hazardous or toxic substances (collectively, "environmental laws"); (ii) does
not own or operate any real property contaminated with any substance that is
subject to any environmental laws; (iii) is not liable for any off-site disposal
or contamination pursuant to any environmental laws; or (iv) is not subject to
any claim relating to any environmental laws, which violation, contamination,
liability or claim could be expected to have a Material Adverse Effect.
(k) There is no transaction, relationship, obligation,
agreement or other document required to be described in the Registration
Statement or the Prospectus or to be filed or deemed to be filed as an exhibit
to the Registration Statement by the Act, which has not been described or filed
as required. All such contracts or agreements to which the Company is a party
have been duly authorized, executed and delivered by the Company, constitute
valid and binding agreements of the Company, and are enforceable by and against
the Company, in accordance with the respective terms thereof.
(l) The Company has good and valid title to all property
and assets reflected as owned by the Company in the Company's combined financial
statements included in the Registration Statement (or elsewhere in the
Registration Statement or the Prospectus), free and clear of all liens, claims,
mortgages, security interests or other encumbrance of any kind or nature
whatsoever except those, if any, reflected in such financial statements (or
elsewhere in the Registration Statement or the Prospectus) or which could not be
expected to have a Material Adverse Effect. All property (real and personal)
held or used by the Company under leases, licenses, franchises or other
agreements is held by the Company under valid, subsisting, binding and
enforceable leases, franchises, licenses or other agreements except those that
are not material to the Company and which do not interfere in any material
respect with the use of the property by, or the conduct of the business of, the
Company.
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<PAGE> 7
(m) Neither the Company nor any person that controls, is
controlled by or is under common control with the Company has taken or will
take, directly or indirectly, any action designed to cause or result in, or
which constituted, or which could cause or result in, stabilization or
manipulation, under the Exchange Act or otherwise, of the price of any security
of the Company to facilitate the sale or resale of the Common Stock.
(n) Except as described in the Registration Statement or
the Prospectus, since the respective dates as of which information is given in
the Registration Statement or the Prospectus and prior to each Closing Date: (i)
the Company has not or will not have incurred any liability or obligation,
direct or contingent, or entered into any transaction, that is material to the
Company, except as in the ordinary course of business; (ii) the Company has not
and will not have paid or declared any dividend or other distribution with
respect to its capital stock and the Company is not or will not be delinquent in
the payment of principal or interest on any outstanding debt obligation; and
(iii) there has not been and will not have been any change in the capital stock,
any material change in the indebtedness of the Company, or any change or
development involving or which could be expected to involve, a Material Adverse
Effect, whether or not arising from transactions in the ordinary course of
business.
(o) Neither the Company nor any person that controls, is
controlled by or is under common control with the Company has, directly or
indirectly: (i) made any unlawful contribution to any candidate for political
office, or failed to disclose fully any contribution in violation of law; or
(ii) made any payment to any federal, state or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof or applicable foreign jurisdictions.
(p) The Company owns or possesses adequate rights to use
all patents, patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, copyrights and licenses
presently used in or necessary for the conduct of its business or ownership of
its properties, the absence of which could be expected to have a Material
Adverse Effect on the Company, and the Company has not violated or infringed
upon the rights of others in a manner that could be expected to have a Material
Adverse Effect on the Company, or received any notice of conflict with the
asserted rights of others, in respect thereof.
(q) The Company has in place and effective such policies
of insurance, with limits of liability in such amounts, as are normal and
prudent in the ordinary course of the business of the Company.
(r) No labor dispute with the employees of the Company
exists or, to the knowledge of the Company and the Selling Shareholders, is
imminent, and the Company is not a party to any collective bargaining agreement
and, to the knowledge of the Company and the Selling Shareholders, no union
organizational attempts have occurred or are pending. There has been no change
in the relationship of the Company with any of its principal suppliers,
manufacturers, contractors or customers resulting in or that could be expected
to result in a
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<PAGE> 8
Material Adverse Effect.
(s) The Company is not an "investment company", an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company", as such terms are defined in the Investment Company Act of
1940, as amended.
(t) All federal, state and local tax returns required to
be filed by or on behalf of the Company have been filed (or are the subject of
valid extension) with the appropriate federal, state and local authorities, and
all such tax returns, as filed, are accurate in all material respects; all
federal, state and local taxes (including estimated tax payments) required to be
shown on all such tax returns or claimed to be due from or with respect to the
business of the Company have been paid or reflected as a liability on the
financial statements of the Company for appropriate periods; all deficiencies
asserted as a result of any federal, state or local tax audits have been paid or
finally settled, and no issue has been raised in any such audit which, by
application of the same or similar principles, reasonably could be expected to
result in a proposed deficiency for any other period not so audited; no state of
facts exist or has existed which would constitute grounds for the assessment of
any tax liability with respect to the periods which have not been audited by
appropriate federal, state or local authorities; there are no outstanding
agreements or waivers extending the statutory period of limitation applicable to
any federal, state or local tax return of any period; and the Company has never
been a member of an affiliated group of corporations filing consolidated federal
income tax returns, other than a group of which the Company is and has been the
common parent. A valid election with respect to the taxation of the Company
under Subchapter S of the Internal Revenue Code of 1986, as amended, has been
continuously in effect with respect to the Company from its inception through
the effective date of the Registration Statement.
(u) The Company is not a participating employer or plan
sponsor with respect to any employee pension benefit plan as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or any employee welfare benefit plan as defined in Section 3(1) of
ERISA, including, without limitation, any multi-employer welfare or pension
plan. With respect to each defined benefit retirement plan, such plan does not
have benefit liabilities (as defined in Section 4001(a)(16) of ERISA) exceeding
the assets of the plan. The Company or the administrator of each of any
employee benefit plan (the "Plans"), as the case may be, has timely filed the
reports required to be filed by ERISA and the Code in connection with the
maintenance of the Plans, and no facts, including, without limitation, any
"reportable event" as defined by ERISA and the regulations thereunder, exist in
connection with the Plans which, under applicable law, would constitute grounds
for the termination of any of the Plans by the Pension Benefit Guaranty
Corporation or for the appointment by the appropriate United States District
Court of a trustee to administer any of the Plans.
(v) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that: (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of combined
financial statements in conformity with generally accepted
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<PAGE> 9
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorizations; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) None of the Company, any officer or director of the
Company, or any person who owns of record or beneficially any class of
securities issued by the Company is: (i) an officer, director or partner of any
brokerage firm, broker or dealer that is a member of the NASD ("NASD Member");
or (ii) directly or indirectly, a "person associated with" an NASD member or an
"affiliate" of an NASD member, as such terms are used in the NASD Rules of Fair
Practice.
(x) The Company has prepared and filed with the Commission
a registration statement for the Common Stock pursuant to Section 12(g) of the
Exchange Act. Such registration statement either has been declared effective by
the Commission under the Exchange Act or will be declared effective by the
Commission prior to or concurrently with the commencement of the public offering
of the Shares. The Common Stock has been approved for designation upon notice
of issuance as a Nasdaq National Market security on The Nasdaq Stock Market
("Nasdaq").
(y) Neither the Company, nor any affiliate of the Company
does business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075 of the Florida Statutes,
and the Company agrees to comply with such Section if, prior to the completion
of the distribution of the Shares, the Company, or any affiliate of the Company
commences doing such business.
(z) All offers and sales of the securities of the Company
prior to the date hereof were made in compliance with the Act and all other
applicable state and federal laws or regulations.
(aa) The Company has obtained for the benefit of the
Underwriters the agreement, enforceable by Robert W. Baird & Co. Incorporated
("Baird"), of each of the officers and directors of the Company, and each of the
current shareholders of the Company that for a period of 180 days after the date
of the Prospectus, such persons will not, without the prior written consent of
Baird, directly or indirectly, offer, sell, transfer, or pledge, contract to
sell, transfer or pledge, or cause or in any way permit to be sold, transferred,
pledged, or otherwise disposed of, any: (i) shares of Common Stock; (ii) rights
to purchase shares of Common Stock (including, without limitation, shares of
Common Stock that may be deemed to be beneficially owned by any such shareholder
in accordance with the applicable regulations of the Commission and shares of
Common Stock that may be issued upon the exercise of a stock option, warrant or
other convertible security); or (iii) securities that are convertible or
exchangeable into shares of Common Stock.
(ab) A copy of the Durable Power of Attorney and Custody
Agreement executed
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<PAGE> 10
by each of the Selling Shareholders and a copy of each of the Selling
Shareholder's Selling Shareholder's Questionnaire has been furnished to counsel
for the Underwriters prior to the date hereof, along with such other information
as such counsel may reasonably request in connection with their review thereof.
A certificate signed by any officer of the Company and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed a representation and warranty by the Company and the Selling Shareholders
to the Underwriters as to the matters covered thereby. A certificate delivered
by the Company to its counsel for purposes of enabling such counsel to render
the opinion referred to in section 10(d) will also be furnished to the
Representatives and counsel for the Underwriters and shall be deemed to be
additional representations and warranties to the Underwriters by the Company as
to the matters covered thereby.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder, severally and not jointly, represents and warrants to
and agrees with the several Underwriters and the Company, and shall be deemed to
represent and warrant to the several Underwriters and the Company on each
Closing Date, that:
(a) Such Selling Shareholder has duly executed a durable
power of attorney and custody agreement ("Durable Power of Attorney and Custody
Agreement") naming David S. Felman, Esq. and Robert C. Rasmussen, Esq., or
either of them, as such Selling Shareholder's attorney(s)-in-fact
("Attorneys-in-Fact") for the purpose of entering into and carrying out this
Agreement and naming First Union Bank of North Carolina as custodian
("Custodian") of the Shares of such Selling Shareholder for the purpose of
selling such Shares to the Underwriters on each Closing Date and receiving
payment therefor.
(b) All consents, approvals, authorizations and orders
necessary for the execution and delivery by such Selling Shareholder of this
Agreement and the Durable Power of Attorney and Custody Agreement, and for the
sale and delivery of the Shares to be sold by such Selling Shareholder
hereunder, as set forth on Schedule I annexed hereto, have been obtained. Such
Selling Shareholder has, and at the time of delivery thereof hereunder such
Selling Shareholder will have, good and valid title to the Shares proposed to be
sold by such Selling Shareholder hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, security interests, equities, claims and
community or marital property rights, other than any created by the Durable
Power of Attorney and Custody Agreement or this Agreement for the benefit of the
Underwriters. Such Selling Shareholder has full right, power and authority to
enter into this Agreement and the Durable Power of Attorney and Custody
Agreement and to sell, assign, transfer and deliver such Shares hereunder, free
and clear of all voting trust arrangements, liens, encumbrances, security
interests, equities, claims and community or marital property rights, other than
any created by the Durable Power of Attorney and Custody Agreement or this
Agreement for the benefit of the Underwriters. Upon delivery of and payment for
such Shares hereunder, the Underwriters will acquire good and valid title
thereto, free and clear of all voting trust arrangements, liens, encumbrances,
security interests, equities, claims and community or
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<PAGE> 11
marital property rights.
(c) Such Selling Shareholder has not distributed and will
not distribute any Preliminary Prospectus, the Prospectus or any other material
in connection with the offering and sale of the Shares. Such Selling
Shareholder has not taken and will not take, directly or indirectly, any action
designed to or which could cause or result in, under the Exchange Act or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common Stock.
(d) The execution, delivery and performance by such
Selling Shareholder of this Agreement, and the Durable Power of Attorney and
Custody Agreement will not, if applicable, result in the violation of any
provisions of the Articles of Incorporation, By-laws or other governing
documents of such Selling Shareholder, or constitute a breach, or be in
contravention, of any provision of any agreement, franchise, license, indenture,
mortgage, deed of trust or other instrument to which such Selling Shareholder is
a party or by which such Selling Shareholder or such Selling Shareholder's
property may be bound or affected, or any statute, rule or regulation applicable
to such Selling Shareholder, or violate any order or decree of any court,
regulatory body, administrative agency or other governmental body having
jurisdiction over such Selling Shareholder or any of such Selling Shareholder's
property. No consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body is required
for the execution and delivery of, and performance under, this Agreement by such
Selling Shareholder or the consummation by such Selling Shareholder of the
transactions contemplated by this Agreement, except for compliance with the Act,
the Exchange Act, the Blue Sky Laws applicable to the public offering of the
Shares by the Underwriters and the clearance of such offering with the NASD.
Such Selling Shareholder hereby represents and warrants that each Attorney-
in-Fact has been duly appointed as attorney-in-fact by such Selling Shareholder
for the purpose of entering into and carrying out this Agreement, and the
Durable Power of Attorney and Custody Agreement has been duly executed and
delivered by or on behalf of such Selling Shareholder to the Representatives.
(e) This Agreement and the Durable Power of Attorney and
Custody Agreement are each valid and binding agreements of such Selling
Shareholder enforceable in accordance with their respective terms.
(f) Such Selling Shareholder has deposited in custody,
under the Durable Power of Attorney and Custody Agreement, certificates in
negotiable form for the Shares to be sold hereunder by such Selling Shareholder
as set forth opposite such Selling Shareholder's name on Schedule I annexed
hereto (including the maximum number of Optional Shares set forth on Schedule I)
for the purpose of further delivery pursuant to this Agreement. Such Selling
Shareholder agrees that the Shares of such Selling Shareholder on deposit with
the Custodian are subject to the interests of the Company, the Underwriters and
the other Selling Shareholders, that the arrangements made for such custody, and
the appointment of the Attorneys-in-Fact pursuant to the Durable Power of
Attorney
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<PAGE> 12
and Custody Agreement, are to that extent irrevocable, and that the obligations
of such Selling Shareholder hereunder and under the Durable Power of Attorney
and Custody Agreement shall not be terminated, except as provided in this
Agreement and the Durable Power of Attorney and Custody Agreement, by any act of
such Selling Shareholder, by operation of law, whether in the case of an
individual Selling Shareholder, by the death or incapacity of such Selling
Shareholder or, in the case of a trust or estate, by the death of the trustee or
trustees or the executor or executors or the termination of such trust or
estate, or, in the case of a partnership or corporation, by the dissolution,
winding up or other event affecting the legal life of such entity, or by the
occurrence of any other event. If any individual Selling Shareholder, trustee
or executor should die or become incapacitated, or any such trust, estate,
partnership or corporation should be terminated, or if any other event should
occur before the delivery of the Shares hereunder, the certificates for Shares
then on deposit with the Custodian shall, to the extent such Shares are
purchased by the Underwriters, be delivered by the Custodian in accordance with
the terms and conditions of this Agreement and the Durable Power of Attorney and
Custody Agreement as if such death, incapacity, termination or other event had
not occurred, regardless of whether or not the Custodian shall have received
notice thereof. Such Selling Shareholder represents that each Attorney-in-Fact
has been authorized by such Selling Shareholder to execute and deliver this
Agreement and the Custodian has been authorized to receive and acknowledge
receipt of the proceeds of sale of the Shares sold by such Selling Shareholder
against delivery thereof and otherwise to act on behalf of such Selling
Shareholder.
(g) Insofar as it relates to such Selling Shareholder,
each Preliminary Prospectus, as of its date, has conformed in all material
respects with the requirements of the Act and, as of its date, has not included
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading; and on the effective
date of the Registration Statement and at all times subsequent thereto up to
each Closing Date, (i) the Registration Statement and the Prospectus, as they
relate to such Selling Shareholder, did or will conform to the requirements of
the Act, and (ii) neither the Registration Statement nor the Prospectus as it
relates to such Selling Shareholder did or will include any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(h) The information contained in such Selling
Shareholder's Selling Shareholders' Questionnaire completed in connection with
the Company's public offering and delivered to the Representatives was, as of
the date of such questionnaire, and is, as of the date of this Agreement, true
and correct.
A certificate signed by or on behalf of any Selling Shareholder
as such and delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by such Selling Shareholder to the
Underwriters as to the matters covered thereby. A certificate delivered by or
on behalf of any Selling Shareholder to counsel for the Selling Shareholders for
purposes of enabling such counsel to render the opinion referred in Section
10(e) will also be furnished to the Representatives and counsel for the
Underwriters and shall be deemed to be additional representations and warranties
to the Underwriters by such Selling Shareholder as to the matters covered
thereby.
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<PAGE> 13
4. REPRESENTATIVES OF UNDERWRITERS. The Representatives will act
as the representatives for the several Underwriters in connection with the
public offering of the Shares, and any action under or in respect of this
Agreement taken by the Representatives will be binding upon all of the
Underwriters.
5. INFORMATION FURNISHED BY THE UNDERWRITERS. The information set
forth in the last paragraph on the outside front cover page of the Prospectus
concerning the terms of the offering by the Underwriters, the paragraph on the
inside front cover page of the Prospectus relating to stabilization practices,
and the information appearing under the caption "Underwriting" in the Prospectus
constitute all of the information furnished to the Company by and on behalf of
the Underwriters for use in connection with the preparation of the Registration
Statement and the Prospectus, as such information is referred to in this
Agreement.
6. PURCHASE, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters identified in Schedule II
annexed hereto 2,000,000 Firm Shares, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company the number of Firm
Shares as hereinafter set forth at the price per share of $__________. The
obligation of each Underwriter to the Company shall be to purchase from the
Company that number of full Firm Shares which (as nearly as practicable in full
shares as determined by the Representatives) bears the same proportion to the
number of Firm Shares to be sold by the Company as the number of shares set
forth opposite the name of such Underwriter in Schedule II annexed hereto bears
to the total number of Firm Shares to be purchased by all of the Underwriters
under this Agreement.
(b) On the First Closing Date (as hereinafter defined),
the Company will deliver to the Representatives, at the offices of Robert W.
Baird & Co. Incorporated, 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202,
or through the facilities of The Depository Trust Company, for the accounts of
the several Underwriters, certificates representing the Firm Shares to be sold
by it against payment in Milwaukee, Wisconsin of the purchase price therefor by
certified or official bank check or checks in New York Clearing House (next day)
funds payable to the order of the Company with respect to the Firm Shares being
sold by the Company. As referred to in this Agreement, the "First Closing Date"
shall be on the third full business day after the date of the Prospectus, at
9:00 a.m., Milwaukee, Wisconsin time, or at such other date or time not later
than ten full business days after the date of the Prospectus as the
Representatives and the Company may agree. The certificates for the Firm
Shares to be so delivered will be in denominations and registered in such names
as the Representatives request by notice to the Company prior to the First
Closing Date, and such certificates will be made available for checking and
packaging at 9:00 a.m., Milwaukee, Wisconsin time on the first full business day
preceding the First Closing Date at a location to be designated by the
Representatives.
(c) In addition, on the basis of the representations,
warranties and agreements
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<PAGE> 14
herein contained, and subject to the terms and conditions herein set forth, the
Company and the Selling Shareholders hereby agree to sell to the Underwriters,
and the Underwriters, severally and not jointly, shall have the right at any
time within thirty days after the date of the Prospectus to purchase up to
150,000 Optional Shares from the Company and up to 150,000 Optional Shares from
the Selling Shareholders, at the purchase price per share to be paid for the
Firm Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised upon notice by the Representatives to the
Company and the Attorneys-in-Fact, or either of them, within thirty (30) days
after the date of the Prospectus setting forth the aggregate number of Optional
Shares to be purchased by the Underwriters and sold by the Company and the
Selling Shareholder, the names and denominations in which the certificates for
such shares are to be registered and the date and place at which such
certificates will be delivered. Such date of delivery (the "Second Closing
Date") shall be determined by the Representatives, provided that the Second
Closing Date, which may be the same as the First Closing Date, shall not be
earlier than the First Closing Date and, if after the First Closing Date, shall
not be earlier than three nor later than ten full business days after delivery
of such notice to exercise. The number of Optional Shares to be sold to the
Underwriters pursuant to such notice shall be sold by the Selling Shareholders
and the Company in the amounts set forth in Section 1 of this Agreement.
Certificates for the Optional Shares will be made available for checking and
packaging at 9:00 a.m., Milwaukee, Wisconsin time, on the first full business
day preceding the Second Closing Date at a location to be designated by the
Representatives. The manner of payment for and delivery of (including the
denominations of and the names in which certificates are to be registered) the
Optional Shares shall be the same as for the Firm Shares.
(e) The Representatives have advised the Company and the
Attorneys-in-Fact that each Underwriter has authorized the Representatives to
accept delivery of the Shares and to make payment therefor. It is understood
that the Representatives, individually and not as representatives of the
Underwriters, may (but shall not be obligated to) make payment for any Shares to
be purchased by any Underwriter whose funds shall not have been received by the
Representatives by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any obligation under this Agreement. As referred
to in this Agreement, "Closing Date" shall mean either the First Closing Date or
the Second Closing Date.
7. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters that:
(a) If the effective time of the Registration Statement is
not prior to the execution and delivery of this Agreement, the Company will use
its best efforts to cause the Registration Statement to become effective at the
earliest possible time and, upon notification from the Commission that the
Registration Statement has become effective, will so advise the Representatives
and counsel to the Underwriters promptly. If the effective time of the
Registration Statement is prior to the execution and delivery of this Agreement
and any information shall have been omitted therefrom in reliance upon Rule
430A, the Company, at the
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<PAGE> 15
earliest possible time, will furnish the Representatives with a copy of the
Prospectus to be filed by the Company with the Commission to comply with Rule
424(b) and Rule 430A under the Act and, if the Representatives do not object to
the contents thereof, will comply with such Rules. Upon compliance with such
Rules, the Company will so advise the Representatives promptly. The Company
will advise the Representatives and counsel to the Underwriters and the
Attorneys-in-Fact promptly of the issuance by the Commission or any state
securities commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, or of any notification of the suspension of qualification of the Shares
for sale in any jurisdiction or the initiation or threatening of any proceedings
for that purpose, and will also advise the Representatives and counsel to the
Underwriters and the Attorneys-in-Fact promptly of any request of the Commission
for amendment or supplement of the Registration Statement, of any Preliminary
Prospectus or of the Prospectus, or for additional information, and the Company
will not file any amendment or supplement to the Registration Statement (either
before or after it becomes effective), to any Preliminary Prospectus or to the
Prospectus (including a prospectus filed pursuant to Rule 424(b)) if the
Representatives have not been furnished with a copy prior to such filing (with a
reasonable opportunity to review such amendment or supplement) or if the
Representatives object to such filing.
(b) If, at any time when a prospectus relating to the
Shares is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event occurs as a result of which the Prospectus
would include an untrue statement of a material fact, or would omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to supplement the Prospectus to
comply with the Act, the Company promptly will advise the Representatives and
counsel to the Underwriters and the Attorneys-in-Fact thereof and will promptly
prepare and file with the Commission, at its expense, an amendment to the
Registration Statement which will correct such statement or omission or an
amendment which will effect such compliance; and, if any Underwriter is required
to deliver a prospectus nine months or more after the effective date of the
Registration Statement, the Company, upon request of the Representatives but at
the expense of such Underwriter, will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act. The Company consents to the use, in accordance
with the provisions of the Act and with the Blue Sky Laws of the jurisdictions
in which the Shares are offered by the several Underwriters and by dealers, of
each Preliminary Prospectus.
(c) The Company will not, prior to the Second Closing
Date, if any, incur any liability or obligation, direct or contingent, or enter
into any material transaction, other than in the ordinary course of business, or
enter into any transaction with an "affiliate," as defined in Rule 405 under the
Act, which is required to be described in the Prospectus pursuant to Item 404 of
Regulation S-K under the Act, except as described in the Prospectus.
(d) The Company will not, prior to the Second Closing
Date, if any, acquire any of the Common Stock nor will the Company declare or
pay any dividend or make any other distribution upon its Common Stock payable to
shareholders of record on a date prior to such
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<PAGE> 16
earlier date, except as described in the Prospectus.
(e) The Company will make generally available to its
security holders and the Representatives an earnings statement as soon as
practicable, but in no event later than sixty days after the end of its fiscal
quarter in which the first anniversary of the effective date of the Registration
Statement occurs, covering a period of twelve consecutive calendar months
beginning after the effective date of the Registration Statement, which will
satisfy the provisions of the last paragraph of Section 11(a) of the Act and
Rule 158 promulgated thereunder.
(f) During such period as a prospectus is required by law
to be delivered in connection with sales by an Underwriter or dealer, the
Company will furnish to the Representatives, at the expense of the Company,
copies of the Registration Statement, the Prospectus, any Preliminary Prospectus
and all amendments and supplements to any such documents in each case as soon as
available and in such quantities as the Representatives may reasonably request.
(g) The Company will apply the net proceeds from the sale
of the Shares to be sold by it hereunder for the purposes set forth in the
Prospectus, and will timely file Form SR, and any amendments thereto, as
required by Rule 463 under the Act.
(h) The Company will cooperate with the Representatives
and counsel to the Underwriters in qualifying or registering the Shares for sale
under the Blue Sky Laws of such jurisdictions as the Representatives designates,
and will continue such qualifications or registrations in effect so long as
reasonably requested by the Representatives to effect the distribution of the
Shares. The Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any such jurisdiction
where it is not presently qualified. In each jurisdiction where any of the
Shares shall have been qualified as provided above, the Company will file such
reports and statements as may be required to continue such qualification for a
period of not less than one year from the date of the Prospectus. The Company
shall promptly prepare and file with the Commission, from time to time, such
reports as may be required to be filed by the Act and the Exchange Act, and the
Company shall comply in all respects with the undertakings given by the Company
in connection with the qualification or registration of the Shares for offering
and sale under the Blue Sky Laws.
(i) During the period of three years from the date of the
Prospectus, the Company will furnish to each of the Representatives and to each
of the other Underwriters who may so request, as soon as available, each report,
statement or other document of the Company or its Board of Directors mailed to
its shareholders or filed with the Commission, and such other information
concerning the Company as the Representatives may reasonably request.
(j) The Company shall deliver the requisite notice of
issuance to Nasdaq and shall take all necessary or appropriate action within its
power to maintain the authorization for trading of the Common Stock as a Nasdaq
National Market security, or take such action to authorize the Common Stock for
listing on the New York Stock Exchange or the American Stock Exchange, for a
period of at least thirty-six months after the date of the Prospectus.
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<PAGE> 17
(k) Except for the issuance and sale by the Company of
Common Stock upon exercise of presently existing outstanding stock options, the
sale of the Shares to be sold by the Company pursuant to this Agreement, the
issuance of Common Stock pursuant to the Company's 1995 Stock Option Plan
effective December 21, 1995 and the Company's 1996 Director/Nonemployee Stock
Option Plan effective May 2, 1996, and provided that none of such options shall
be exercisable during the 180-day period herein described, the Company shall
not, for a period of 180 days after the date of the Prospectus, without the
prior written consent of Baird, directly or indirectly, offer, sell or otherwise
dispose of, contract to sell or otherwise dispose of, or cause or in any way
permit to be sold or otherwise disposed of, any: (i) shares of Common Stock;
(ii) rights to purchase shares of Common Stock; or (iii) securities that are
convertible or exchangeable into shares of Common Stock.
(l) The Company will maintain a transfer agent and, if
required by law or the rules of The Nasdaq Stock Market or any national
securities exchange on which the Common Stock is listed, a registrar (which, if
permitted by applicable laws and rules, may be the same entity as the transfer
agent) for its Common Stock.
(m) If at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any rumor, publication or
event relating to of affecting the Company shall occur as a result of which, in
the opinion of Baird, the market price of the Common Stock has been or is likely
to be materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to the Prospectus), the Company will, after
written notice from Baird advising the Company of any of the matters set forth
above, promptly consult with Baird concerning the advisability and substance of,
and, if the Company and Baird determine that it is appropriate, disseminate, a
press release or other public statement responding to or commenting on, such
rumor, publication or event.
(n) If the sale to the Underwriters of the Shares is not
consummated on or before ___________ __, 1996 because (i) the Company decides
not to proceed with the Offering and the Underwriters are prepared to proceed
with an offering within the expected filing range of $10 to $12 per share, or
(ii) the Underwriters decide not to proceed with the Offering due to a material,
adverse change in the financial condition, results of operations, business or
prospects of the Company, which, in the reasonable opinion of the Underwriters,
would adversely affect the Offering, the Company agrees to reimburse the
Underwriters for all of their out-of-pocket expenses incurred in connection with
the Offering, including without limitation, fees and expenses of counsel for the
Underwriters, and the provisions of Sections 9 and 12 hereof shall at all times
be effective and apply. Notwithstanding the foregoing, if the sale to the
Underwriters of the Shares is not consummated for any reason other than
termination of this Agreement by the Underwriters pursuant to section 13 hereof,
and the Company or any of the shareholders of the Company enter into an
agreement on or before one year from the date of this Agreement with respect to
the sale, lease, disposition or other transfer of all or substantially all of
the Company's assets or a majority interest in its capital stock, directly or
indirectly, by merger, share exchange, business combination or otherwise (such
sale, lease, disposition or other transfer of assets or stock is hereinafter
referred to as a "Business Combination"), then the Company shall engage the
Representatives as its financial advisors for any such Business Combination and
the Company
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<PAGE> 18
shall pay the Representatives a financial advisory fee in the amount of $420,000
in immediately available funds upon consummation of such Business Combination
for financial advisory services to be rendered by the Representatives in
connection therewith.
(o) The Company will comply or cause to be complied with
the conditions to the obligations of the Underwriters in sections 10(a), (b)(i),
(d), (e), (g), (h), (i), (j), and (k) hereof.
8. COVENANTS OF THE SELLING SHAREHOLDERS. Each Selling
Shareholder, severally and not jointly, covenants and agrees with the several
Underwriters and the Company as follows:
(a) If the effective time of the Registration Statement is
not prior to the execution and delivery of this Agreement, such Selling
Shareholder will cooperate to the extent necessary to cause the Registration
Statement to become effective at the earliest possible time; and such Selling
Shareholder will do and perform all things to be done and performed by such
Selling Shareholder prior to each Closing Date, pursuant to this Agreement or
the Durable Power of Attorney and Custody Agreement.
(b) Such Selling Shareholder agrees to deliver to the
Custodian on or prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable
substitute form or statement specified by Treasury Department regulations in
lieu thereof).
(c) Such Selling Shareholder will pay all federal and
other taxes, if any, on the transfer or sale of the Shares being sold by such
Selling Shareholder to the Underwriters.
(d) For a period of 180 days after the date of the
Prospectus, such Selling Shareholder will not, without the prior written consent
of Baird, directly or indirectly, offer, sell, transfer, or pledge, contract to
sell, transfer or pledge or cause or in any way permit to be sold, transferred,
pledged or otherwise disposed of any: (i) shares of Common Stock; (ii) rights
to purchase shares of Common Stock (including, without limitation, shares of
Common Stock that may be deemed to be beneficially owned by such Selling
Shareholder in accordance with the rules and regulations of the Commission and
shares of Common Stock that may be issued upon exercise of a stock option,
warrant or other convertible security); or (iii) securities that are convertible
or exchangeable into shares of Common Stock.
(e) Such Selling Shareholder will furnish any documents,
instruments or other information which the Representatives may reasonably
request in connection with the sale and transfer of the Shares to the
Underwriters.
9. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective, or
if this Agreement is terminated for any reason, the Company will pay the costs,
fees and expenses incurred in connection with the public
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<PAGE> 19
offering of the Shares. Such costs, fees and expenses to be paid by the Company
include, without limitation:
(a) All costs, fees and expenses (excluding the expenses
incurred by the Underwriters and the legal fees and disbursements of counsel for
the Underwriters, but including such fees and disbursements described in
subsection (b) of this section 9) incurred in connection with the performance of
the Company's obligations hereunder, including without limiting the generality
of the foregoing: the registration fees related to the filing of the
Registration Statement with the Commission; the fees and expenses related to the
quotation or listing of the Shares on Nasdaq or other national securities
exchange; the fees and expenses of the Company's counsel, accountants, transfer
agent and registrar; the costs and expenses incurred in connection with the
preparation, printing, shipping and delivery of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all agreements and supplements provided for herein, this
Agreement and the Preliminary and Supplemental Blue Sky Memoranda and the
Durable Power of Attorney and Custody Agreement, including, without limitation,
shipping expenses via overnight delivery and/or courier service to comply with
applicable prospectus delivery requirements; and the costs and expenses
associated with the production of materials related to, and travel expenses
incurred by the management of the Company in connection with, the various
meetings to be held between the Company's management and prospective investors.
(b) All registration fees and expenses, including legal
fees (which in no event shall exceed $5,000) and disbursements of counsel for
the Underwriters incurred in connection with qualifying or registering all or
any part of the Shares for offer and sale under the Blue Sky Laws (including
applicable Canadian securities laws) and the clearing of the public offering and
the underwriting arrangements evidenced hereby with the NASD.
(c) All fees and expenses related to printing of the
certificates for the Shares, and all transfer taxes, if any, with respect to the
sale and delivery of the Shares.
Moreover, each Selling Shareholder shall be solely responsible
for any underwriting discount with respect to, and transfer or sales tax imposed
upon, the transfer and sale of each Selling Shareholder's Shares to the
Underwriters and for the Selling Shareholder's respective pro rata share of all
fees and expenses of the Attorneys-in-Fact and the Custodian and the fees and
expenses of any counsel retained by the Selling Shareholder. All costs and
expenses incident to the performance of any Selling Shareholder's obligations
hereunder that are not otherwise specifically provided for in this section will
be borne and paid solely by each such Selling Shareholder. In the event any
Selling Shareholder shall fail to pay the Selling Shareholder's pro rata share
of the costs, fees and expenses described in this paragraph within five days
after demand by the Representatives therefor, the Company shall be obligated to
pay such costs, fees and expenses on demand.
10. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters under this Agreement shall be subject to
the accuracy of the representations
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<PAGE> 20
and warranties on the part of the Company and the Selling Shareholders herein
set forth as of the date hereof and as of each Closing Date, to the accuracy of
the statements of the Company's officers, the Selling Shareholders and the
Attorneys-in-Fact on behalf of the Selling Shareholders made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Shareholders of their respective obligations hereunder, and to the following
additional conditions, unless waived in writing by the Representatives:
(a) The Registration Statement shall have been declared
effective by the Commission not later than 5:30 p.m., Washington, D. C. time, on
the date of this Agreement, or such later time as shall have been consented to
by the Representatives, which consent shall be deemed to have been given if the
Registration Statement shall have been declared effective on or before the date
and time requested in the acceleration request submitted on behalf of the
Representatives pursuant to Rule 461 under the Act; all filings required by
Rules 424(b) and 430A under the Act shall have been timely made; no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the Commission or any state securities commission nor, to the
knowledge of the Company or the Selling Shareholders, shall any proceedings for
that purpose have been initiated or threatened; and any request of the
Commission or any state securities commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to the satisfaction of the Representatives.
(b) Since the dates as of which information is given in
the Registration Statement:
(i) there shall not have occurred any change or
development involving, or which could be expected to
involve, a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of
business; and
(ii) the Company shall not have sustained any loss
or interference from any labor dispute, strike, fire,
flood, windstorm, accident or other calamity (whether
or not insured) or from any court or governmental
action, order or decree,
the effect of which on the Company, in any such case described in
clause (i) or (ii) above, is in the opinion of the Representatives so material
and adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares on the terms and in the manner
contemplated in the Registration Statement and the Prospectus.
(c) The Representatives shall not have advised the Company
that the Registration Statement or the Prospectus contains an untrue statement
of fact that, in the opinion of the Representatives or counsel for the
Underwriters, is material, or omits to state a fact that, in the opinion of the
Representatives or such counsel, is material and is required to be stated
therein or necessary to make the statements therein not misleading.
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<PAGE> 21
(d) The Representatives shall have received an opinion of
Glenn Rasmussen & Fogarty, P.A., counsel for the Company addressed to the
Representatives, as the representatives of the Underwriters, and dated the First
Closing Date or the Second Closing Date, as the case may be, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation and whose status is
active under the laws of its jurisdiction of
incorporation, with full corporate power and authority
to own, lease and operate its properties and conduct
its business as presently conducted and as described
in the Prospectus and the Registration Statement; and
to the knowledge of such counsel, the Company is duly
registered and qualified to do business as a foreign
corporation under the laws of, and is in good standing
as such in, each jurisdiction in which such
registration or qualification is required, except
where the failure to so register or qualify would not
have a Material Adverse Effect;
(ii) The authorized capital stock of the Company
consists of 30,000,000 shares of Common Stock, par
value $0.001 per share, and 5,000,000 shares of
Preferred Stock, par value $0.001 per share, and all
such stock conforms as to legal matters to the
descriptions thereof in the Prospectus and the
Registration Statement;
(iii) The issued and outstanding shares of capital
stock of the Company immediately prior to the issuance
and sale of the Shares to be sold by the Company
hereunder have been duly authorized and validly
issued, are fully paid and nonassessable, and there
are no preemptive, preferential or, except as
described in the Prospectus and to such counsel's
knowledge, other rights to subscribe for or purchase
any shares of capital stock of the Company, and to
such counsel's knowledge, no shares of capital stock
of the Company have been issued in violation of such
rights;
(iv) To such counsel's knowledge the Company has no
subsidiaries, and the Company does not own any equity
interest in or control, directly or indirectly, any
other corporation, limited liability company,
partnership, limited liability partnership, joint
venture, association, trust or other business
organization except as described in the Prospectus and
the Registration Statement;
(v) The certificates for the Shares to be
delivered hereunder are in due and proper form and
conform to the requirements of applicable law; and
when duly countersigned by the Company's transfer
agent, and delivered to the Representatives or upon
the order of the Representatives against payment of
the agreed consideration therefor in accordance with
the provisions of this Agreement, the Shares to be
sold by the Company represented thereby
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<PAGE> 22
will be duly authorized and validly issued, fully paid
and nonassessable, and free of any preemptive,
preferential or other rights to subscribe for or
purchase shares of Common Stock;
(vi) The Registration Statement has become effective
under the Act, and to such counsel's knowledge, no
stop order suspending the effectiveness of the
Registration Statement has been issued and no
proceedings for that purpose have been initiated or
are threatened under the Act or any Blue Sky Law; the
Registration Statement and the Prospectus and any
amendment or supplement thereto (except for the
financial statements and other statistical or
financial data included therein as to which such
counsel need express no opinion) comply as to form in
all material respects with the requirements of the
Act; no facts have come to the attention of such
counsel which lead it to believe that the Registration
Statement or the Prospectus or any amendment or
supplement (if any) thereto, contains any untrue
statement of a material fact or omitted to state a
material fact required to be stated therein or
necessary to make the statements therein not
misleading or that the Prospectus, as of the First
Closing Date or the Second Closing Date, as the case
may be, contained any untrue statement of a material
fact or omits to state a material fact required to be
stated therein or necessary to make the statements
therein not misleading in light of the circumstances
under which they were made (except, in each case, for
the financial statements and other financial data
included therein as to which such counsel need express
no opinion); to such counsel's knowledge, there are no
legal or governmental proceedings pending or
threatened, including, without limitation, any such
proceedings that are related to environmental or
employment discrimination matters, required to be
described in the Registration Statement or the
Prospectus which are not so described or which
question the validity of this Agreement or any action
taken or to be taken pursuant thereto, nor is there
any transaction, relationship, agreement, contract or
other document of a character required to be described
in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement
by the Act, which is not described or filed as
required;
(vii) The Company has full corporate power and
authority to enter into and perform this Agreement;
the performance of the Company's obligations hereunder
and the consummation of the transactions described
herein have been duly authorized by the Company by all
necessary corporate action and this Agreement has been
duly executed and delivered by and on behalf of the
Company, and is a legal, valid and binding agreement
of the Company enforceable against the Company in
accordance with its terms, except that rights to
indemnity or contribution may be limited by applicable
law and except as enforceability of this Agreement
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<PAGE> 23
may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting
creditors' rights generally, and by equitable
principles limiting the right to specific performance
or other equitable relief; no consent, approval,
authorization or other order or decree of any court,
regulatory or governmental body, arbitrator,
administrative agency or other instrumentality of the
United States, Florida, or to the knowledge of such
counsel, any other jurisdiction having jurisdiction
over the Company is required for the execution and
delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement (except
for compliance with the Act, the Exchange Act,
applicable Blue Sky Laws and the clearance of the
underwriting arrangements by the NASD);
(viii) The execution, delivery and performance of
this Agreement by the Company will not: (A) violate
any provisions of the Articles of Incorporation or
By-laws of the Company; (B) violate any provisions of,
or result in the breach, modification or termination
of, or constitute a default under, any agreement,
lease, franchise, license, indenture, permit,
mortgage, deed of trust, other evidence of
indebtedness or other instrument known to such
counsel, to which the Company is a party or by which
the Company, or any of its owned or leased property is
bound, and which is filed as an exhibit to the
Registration Statement; or (C) violate any statute,
ordinance, order, rule, decree or regulation of any
court, regulatory or governmental body, arbitrator,
administrative agency or other instrumentality of the
United States, Florida, or to the knowledge of such
counsel, any other jurisdiction having jurisdiction
over the Company (assuming compliance with all
applicable federal and state securities laws);
(ix) To such counsel's knowledge, except as
described in the Prospectus, there are no holders of
Common Stock or other securities of the Company, or
securities that are convertible or exchangeable into
Common Stock or other securities of the Company, that
have rights to the registration of such securities
under the Act or any Blue Sky Laws;
(x) The Common Stock has been designated for
inclusion as a National Market security on The Nasdaq
Stock Market;
(xi) The Common Stock is registered under the
Exchange Act;
(xii) The Company is not, nor with the giving of
notice or passage of time or both would be, in
violation of its Articles of Incorporation or By-laws
or, to such counsel's knowledge, in default in any
material respect in the performance of any agreement,
lease, franchise, license, permit, mortgage, deed of
trust, evidence of indebtedness or other instrument or
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<PAGE> 24
document that is filed as an exhibit to the
Registration Statement, to which the Company is
subject or bound;
(xiii) The Company is not an "investment company", an
"affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company", as such
terms are defined in the Investment Company Act of
1940, as amended, and, upon its receipt of any
proceeds from the sale of the Shares, assuming
application of the proceeds in the manner set forth
under the caption "Use of Proceeds" in the Prospectus,
the Company will not become or be deemed to be an
"investment company" thereunder;
(xiv) The description in the Registration Statement
and the Prospectus of statutes, law, regulations,
legal and governmental proceedings, and contracts and
other legal documents described therein fairly and
correctly presents, in all material respects, the
information required to be included therein by the
Act; and
(xv) All offers and sales by the Company of its
capital stock before the date hereof were at all
relevant times duly registered under or exempt from
the registration requirements of the Act, and were
duly registered under or the subject of an available
exemption from the registration requirements of any
applicable Blue Sky Laws.
In rendering such opinion, counsel for the Company may rely, to
the extent counsel deems such reliance proper, as to matters of fact upon
certificates of officers of the Company and of governmental officials, and
copies of all such certificates shall be furnished to the Representatives and
for the Underwriters on or before each Closing Date.
(e) The Representatives shall have received an opinion
from Glenn Rasmussen & Fogarty, P.A., counsel for the Company and the Selling
Shareholders, dated the Second Closing Date, as the case may be, to the effect
that:
(i) Each of this Agreement and the Durable Power
of Attorney and Custody Agreement has been duly
authorized, executed and delivered by or on behalf of
each Selling Shareholder and such agreement
constitutes the valid and binding agreement of each
Selling Shareholder, enforceable in accordance with
its respective terms, except that rights to indemnity
or contribution thereunder may be limited by
applicable law and except as enforceability of such
agreement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws generally
affecting the rights of creditors and by equitable
principles limiting the right to specific performance
or other equitable relief;
(ii) The execution and delivery of this Agreement
and the Durable
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<PAGE> 25
Power of Attorney and Custody Agreement and the
consummation of the transactions herein and therein
contemplated will not, if applicable, result in the
violation of any provisions of the Articles of
Incorporation, By-laws or other governing documents of
such Selling Shareholder, or constitute a breach, or
be in contravention, of any provision of any
agreement, franchise, license, indenture, mortgage,
deed of trust or other instrument known to such
counsel, to which such Selling Shareholder is a party
or by which such Selling Shareholder or such Selling
Shareholder's property may be bound or affected, which
has been filed as an Exhibit to the Registration
Statement, or any Florida, federal, or to such
counsel's knowledge, any other statute, rule or
regulation applicable to such Selling Shareholder, or
violate any order or decree of any Florida, federal
or, to such counsel's knowledge, any other court,
regulatory or governmental body, administrative body
or instrumentality of the United States or other
jurisdiction having jurisdiction over such Selling
Shareholder or any of such Selling Shareholder's
property, which violation would reasonably be expected
to have a material adverse effect on the condition
(financial or otherwise), business, properties, net
worth or results of operations of such Selling
Shareholder;
(iii) To the knowledge of such counsel, such Selling
Shareholder has full legal right, power and authority,
and has secured any consent, approval, authorization
and order required to enter into and perform this
Agreement and the Durable Power of Attorney and
Custody Agreement and to sell, assign, transfer and
deliver title to such Shares to be sold by such
Selling Shareholder as provided herein; and upon
delivery to the Underwriters or upon the order of the
Representatives against payment of the agreed
consideration therefor in accordance with the
provisions of this Agreement, the Underwriters will
acquire good and marketable title to the Shares to be
sold hereunder by such Selling Shareholder, free and
clear of all voting trust arrangements, liens,
encumbrances, security interests, equities, claims and
community or marital property rights; and
(iv) To such counsel's knowledge, the information
concerning the Selling Shareholders contained in the
Prospectus under the caption "Principal and Selling
Shareholders" complies in all material respects with
the Act.
In rendering such opinion, counsel for the Selling Shareholders
may rely, to the extent counsel deems such reliance proper, as to matters of
fact upon certificates of the Selling Shareholders, and copies of all such
certificates shall be furnished to the Representatives and counsel for the
Underwriters on or before each Closing Date.
(f) The Representatives shall have received an opinion of
Holland & Knight, counsel for the Underwriters, dated the First Closing Date or
the Second Closing Date, as the case
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<PAGE> 26
may be, with respect to the issuance and sale of the Shares by the Company, the
Registration Statement and other related matters as the Representatives may
require, and the Company shall have furnished to such counsel such documents and
shall have exhibited to them such papers and records as they request for the
purpose of enabling them to pass upon such matters.
(g) The Representatives shall have received on each
Closing Date, a certificate of Richard T. Isel, in his capacity as President and
Chief Executive Officer; and James T. Boosales, in his capacity as Executive
Vice President, Treasurer and Chief Financial Officer, of the Company, to the
effect that:
(i) The representations and warranties of the
Company and the Selling Shareholders set forth in
section 2 hereof are true and correct in all material
respects as of the date of this Agreement and as of
the date of such certificate, and the Company has
complied with all the agreements and satisfied all the
conditions to be performed or satisfied by it at or
prior to the date of such certificate;
(ii) The Commission has not issued an order
preventing or suspending the use of the Prospectus or
any Preliminary Prospectus or any amendment or
supplement thereto; no stop order suspending the
effectiveness of the Registration Statement has been
issued; and to the knowledge of the respective
signatories, no proceedings for that purpose have been
initiated or are pending or contemplated under the Act
or under the Blue Sky Laws of any jurisdiction;
(iii) Each of the respective signatories has
carefully examined the Registration Statement and the
Prospectus, and any amendment or supplement thereto,
and such documents contain all statements required to
be stated therein, and do not include any untrue
statement of a material fact or omit to state any
material fact required to be stated therein or
necessary to make the statements therein not
misleading, and since the date on which the
Registration Statement was initially filed, no event
has occurred that was required to be set forth in an
amended or supplemented prospectus or in an amendment
to the Registration Statement that has not been so set
forth; and
(iv) Since the date on which the Registration
Statement was initially filed with the Commission,
there shall not have occurred any change or
development involving, a Material Adverse Effect,
whether or not arising from transactions in the
ordinary course of business, except as disclosed in
the Prospectus and the Registration Statement as
heretofore amended or (but only if the Representatives
expressly consent thereto in writing) as disclosed in
an amendment or supplement thereto filed with the
Commission and delivered to the Representatives after
the execution of this Agreement; since such date and
except as so disclosed or in the ordinary course of
business, the Company has not incurred any liability
or obligation, direct or indirect, or entered into any
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<PAGE> 27
transaction which is material to the Company; since
such date and except as so disclosed, there has not
been any change in the outstanding capital stock of
the Company, or any change that is material to the
Company in the short-term debt or long-term debt of
the Company; since such date and except as so
disclosed, the Company has not acquired any of the
Common Stock or other capital stock of the Company nor
has the Company declared or paid any dividend, or made
any other distribution, upon its outstanding Common
Stock payable to shareholders of record on a date
prior to such Closing Date; since such date and except
as so disclosed, the Company has not incurred any
material contingent obligations, and no material
litigation is pending or threatened against the
Company; and, since such date and except as so
disclosed, the Company has not sustained any material
loss or interference from any strike, fire, flood,
windstorm, accident or other calamity (whether or not
insured) or from any court or governmental action,
order or decree.
The delivery of the certificate provided for in this subsection
(g) shall be and constitute a representation and warranty of the Company as to
the facts required in the immediately foregoing clauses (i), (ii), (iii) and
(iv) to be set forth in said certificate.
(h) The Representatives shall have received a certificate
from each Selling Shareholder (which may be signed by such Selling Shareholder's
Attorneys-in-Fact, or either of them), dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that: (i) the
representations and warranties of such Selling Shareholder in Section 3 of this
Agreement are true and correct, in all material respects, as of the date of this
Agreement and as of the date of such certificate, as if again made on and as of
such Closing Date, and such Selling Shareholder has complied with all of the
agreements and satisfied all of the conditions to be performed or satisfied by
such Selling Shareholder at or prior to such Closing Date; and (ii) such Selling
Shareholder has no reason to believe that the Registration Statement or any
amendment thereto at the time it was declared effective by the Commission
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus, as amended or supplemented,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(i) At the time this Agreement is executed and also on
each Closing Date, there shall be delivered to the Representatives a letter
addressed to the Representatives, as the representatives of the Underwriters,
from Grant Thornton, L.L.P., the Company's independent accountants, the first
letter to be dated the date of this Agreement, the second letter to be dated the
First Closing Date and the third letter (if applicable) to be dated the Second
Closing Date, which shall be in form and substance satisfactory to the
Representatives and shall contain information as of a date within five days of
the date of such letter. There shall not have been any change or decrease set
forth in any of the letters referred to in this subsection (i) which makes it
impracticable or inadvisable in the judgment of the Representatives to proceed
with the public offering or purchase of the Shares as contemplated hereby.
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<PAGE> 28
(j) The Shares shall have been qualified or registered for
sale under the Blue Sky Laws of such jurisdictions as shall have been specified
by the Representatives, the underwriting terms and arrangements for the offering
shall have been cleared by the NASD, and the Common Stock shall have been
designated for inclusion as a Nasdaq National Market security on the Nasdaq
Stock Market and shall have been registered under the Exchange Act.
(k) Such further certificates and documents as the
Representatives may reasonably request (including certificates of officers of
the Company).
(l) The Representatives and its counsel shall have
received a certificate from the Company, dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that (i) the Company does
not currently use the "Sterilization Technology," as defined in Section 3.1(h)
of the Asset Purchase Agreement, dated as of July 31, 1994, by and between AMSCO
Sterile Recoveries, Inc. and the Company, (ii) that the Sterilization Technology
is not material to the current operations of the Company and is not material to
its future operations, and (iii) the Company has only used the Sterilization
Technology in connection with the lease or sale of reuseable surgical gowns or
drapes and for no other purpose.
All such opinions, certificates, letters and documents shall be
in compliance with the provisions hereof only if they are satisfactory to the
Representatives and to Holland & Knight, counsel for the Underwriters. The
Company and the Selling Shareholders shall furnish the Representatives with such
manually signed or conformed copies of such opinions, certificates, letters and
documents as the Representatives may reasonably request.
If any condition to the Underwriters' obligations hereunder to
be satisfied prior to or at either Closing Date is not so satisfied when and as
required by this Agreement, this Agreement at the election of the
Representatives will terminate upon notification to the Company and the
Attorneys-in-Fact, or any one of them, for the Selling Shareholders without
liability on the part of any Underwriter, including the Representatives, the
Company or the Selling Shareholders except for the provisions of section 7(n)
hereof, the expenses to be paid by the Company and the Selling Shareholders
pursuant to section 9 hereof and except to the extent provided in section 12
hereof.
11. MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENT. The Company
will use its best efforts and the Selling Shareholders will use their best
efforts to prevent the issuance of any stop order suspending the effectiveness
of the Registration Statement, and, if such stop order is issued, to obtain as
soon as possible the lifting thereof.
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<PAGE> 29
12. INDEMNIFICATION.
(a) The Company and each of the Selling Shareholders,
jointly and severally, subject to the last paragraph of this Section 12, agree
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Act or the Exchange Act, from
and against any losses, claims, damages, expenses, liabilities or actions in
respect thereof ("Claims"), joint or several, to which such Underwriter or each
such controlling person may become subject under the Act, the Exchange Act, Blue
Sky Laws or other federal or state statutory laws or regulations, at common law
or otherwise (including payments made in settlement of any litigation), insofar
as such Claims arise out of or are based upon any breach of any representation,
warranty or covenant made by the Company and the Selling Shareholders in this
Agreement, or any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or in any application filed
under any Blue Sky Law or other document executed by the Company for that
purpose or based upon written information furnished by the Company and filed in
any state or other jurisdiction to qualify any or all of the Shares under the
securities laws thereof (any such document, application or information being
hereinafter called a "Blue Sky Application") or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading. The
Company and each of the Selling Shareholders, jointly and severally, subject to
the last paragraph of this Section 12, agree to reimburse each Underwriter and
each such controlling person for any legal fees or other expenses incurred by
such Underwriter or any such controlling person in connection with investigating
or defending any such Claim; provided, however, that the Company and the Selling
Shareholders will not be liable in any such case to the extent that: (i) any
such Claim arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus or supplement thereto or in any Blue
Sky Application in reliance upon and in conformity with the written information
furnished to the Company pursuant to section 5 of this Agreement; or (ii) such
statement or omission was contained or made in any Preliminary Prospectus and
corrected in the Prospectus and (1) any such Claim suffered or incurred by any
Underwriter (or any person who controls any Underwriter) resulted from an
action, claim or suit by any person who purchased Shares which are the subject
thereof from such Underwriter in the offering, and (2) such Underwriter failed
to deliver or provide a copy of the Prospectus to such person at or prior to the
confirmation of the sale of such Shares in any case where such delivery is
required by the Act, unless such failure was due to failure by the Company to
provide copies of the Prospectus to the Underwriters as required by this
Agreement. The indemnification obligations of the Company and each of the
Selling Shareholders as provided above are in addition to and in no way limit
any liabilities the Company and each of the Selling Shareholders may otherwise
have.
(b) Each of the Selling Shareholders and the Company,
severally and not jointly, subject to the last paragraph of this Section 12,
agrees to indemnify and hold harmless each Underwriter and each controlling
person from and against any Claims to which such Underwriter or each such
controlling person may become subject under the Act, the Exchange
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<PAGE> 30
Act, Blue Sky Laws or other federal or state statutory laws or regulations, at
common law or otherwise (including payments made in settlement of any
litigation), insofar as such Claims arise out of or are based upon any breach of
any representations, warranty or covenant made by such parties in this
Agreement.
(c) Each Underwriter, severally and not jointly, will
indemnify and hold harmless the Company, each of its directors and each of its
officers who signs the Registration Statement, and each person, if any, who
controls the Company within the meaning of the Act or the Exchange Act, and each
Selling Shareholder against any Claim to which the Company, or any such
director, officer, controlling person, or Selling Shareholder may become subject
under the Act, the Exchange Act, Blue Sky Laws or other federal or state
statutory laws or regulations, at common law or otherwise (including payments
made in settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter and Baird), insofar as such Claim arises out
of or is based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or in any Blue Sky
Application, or arises out of or is based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
or in any Blue Sky Application, in reliance solely upon and in conformity with
the written information furnished by the Representatives to the Company pursuant
to section 5 of this Agreement. Each Underwriter will severally reimburse any
legal fees or other expenses incurred by the Company, or any such director,
officer, controlling person, or Selling Shareholder in connection with
investigating or defending any such Claim, and from any and all Claims solely
resulting from failure of an Underwriter to deliver a Prospectus, if the person
asserting such Claim purchased Shares from such Underwriter and a copy of the
Prospectus (as then amended if the Company shall have furnished any amendments
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended) would have cured the defect giving rise to such Claim. The
indemnification obligations of each Underwriter as provided above are in
addition to any liabilities any such Underwriter may otherwise have.
Notwithstanding the provisions of this section, no Underwriter shall be required
to indemnify or reimburse the Company, or any officer, director, controlling
person, or Selling Shareholder in an aggregate amount in excess of the total
price at which the Shares purchased by any such Underwriter hereunder were
offered to the public, less the amount of any damages such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.
(d) Each Selling Shareholder agrees to indemnify and hold
harmless the Company, each of its directors and each of its officers who signs
the Registration Statement, and each person, if any, controlling the Company
within the meaning of the Act or the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Underwriter set forth in subsection
(a) of this section. In case any Claim shall be brought or asserted against the
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<PAGE> 31
Company, its directors, such officers or any such controlling person, in respect
of which indemnity may be sought against the Selling Shareholder, the Selling
Shareholder shall have the rights and duties given to the Company, and the
Company, such directors or officers and any such controlling person shall have
the rights and duties given to the Underwriters by subsection (a) of this
section.
(e) Promptly after receipt by an indemnified party under
this section of notice of the commencement of any action in respect of a Claim,
such indemnified party will, if a Claim in respect thereof is to be made against
an indemnifying party under this section, notify the indemnifying party in
writing of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve an indemnifying party from any liability it
may have to any indemnified party under this section or otherwise. In case any
such action is brought against any indemnified party, and such indemnified party
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in and, to the extent that he, she or it
may wish, jointly with all other indemnifying parties, similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and any indemnifying party and the
indemnified party shall have been advised by counsel that there may be legal
defenses available to the indemnified party which are different from or
additional to those available to any indemnifying party and in the reasonable
judgment of such counsel it is advisable for the indemnified party to employ
separate counsel, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. The indemnifying party will not be liable for any settlement of any
proceeding effected without its written consent, which shall not be unreasonably
withheld.
(f) Upon receipt of notice from the indemnifying party to
such indemnified party of the indemnifying party's election to assume the
defense of such action and upon approval by the indemnified party of counsel
selected by the indemnifying party, the indemnifying party will not be liable to
such indemnified party under this section for any legal fees or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof, unless:
(i) the indemnified party shall have employed
separate counsel in connection with the assumption of
legal defenses in accordance with the proviso to the
last sentence of subsection (e) of this section (it
being understood, however, that the indemnifying party
shall not be liable for the legal fees and expenses of
more than one separate counsel, approved by the
Representatives, if one or more of the Underwriters or
their controlling persons are the indemnified
parties);
(ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a
reasonable time after the indemnified party's notice
to the indemnifying party of commencement of the
action; or
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<PAGE> 32
(iii) the indemnifying party has authorized the
employment of counsel at the expense of the
indemnifying party.
(g) If the indemnification provided for in this section is
unavailable to an indemnified party under subsection (a), (b), (c) or (d) hereof
in respect of any Claim referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall, subject to the limitations
hereinafter set forth, contribute to the amount paid or payable by such
indemnified party as a result of such Claim:
(i) in such proportion as is appropriate to
reflect the relative benefits received by the Company,
each Selling Shareholder and the Underwriters from the
offering of the Shares; or
(ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative
benefits referred to in clause (i) above, but also the
relative fault of the Company, the Selling
Shareholders, and the Underwriters in connection with
the statements or omissions which resulted in such
Claim, as well as any other relevant equitable
considerations.
The relative benefits received by each of the Company, the
Selling Shareholders, and the Underwriters shall be deemed to be in such
proportion so that the Underwriters are responsible for that portion represented
by the percentage that the amount of the underwriting discounts and commissions
per share appearing on the cover page of the Prospectus bears to the public
offering price per share appearing thereon, and the Company (including its
officers and directors and controlling persons) and each of the Selling
Shareholders, is responsible for the remaining portion. The relative fault of
the Company, such Selling Shareholder, and the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, such Selling
Shareholder, or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the Claims
referred to above shall be deemed to include, subject to the limitations set
forth in subsections (e) and (f) of this section, any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim.
(h) The Company, the Selling Shareholders, and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this section were determined by pro rata or per capita allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method or allocation which does not take into account the equitable
considerations referred to in subsection (g) of this section. Notwithstanding
the other provisions of this section, no Underwriter shall be required to
contribute any amount that is greater than the amount by which the total price
at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
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<PAGE> 33
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
section are several in proportion to their respective underwriting commitments
and not joint.
(i) Notwithstanding any provision of this section 12 to
the contrary, the aggregate liability of all of the Selling Shareholders arising
under this section 12 shall be limited to the proceeds received by the Selling
Shareholders from the Underwriters for the Shares sold by the Selling
Shareholders and the liability of any Selling Shareholder shall not exceed his
pro rata share (based on the proceeds received from the Underwriters) of the
Selling Shareholders' aggregate liability. In addition, the parties agree that
the indemnification obligations of such Selling Shareholder under this section
12, with respect to any matter with respect to which such Selling Shareholder
and the Company are both required to indemnify the Underwriters hereunder, shall
be subject to the determination by the Representatives, on behalf of the
Underwriters, that, in the reasonable commercial judgment of the
Representatives, the Company is or will be unable to discharge fully its
obligations to the Underwriters hereunder. To the extent the Company is or will
be able, in the reasonable commercial judgment of the Representatives, to
discharge the Company's obligations to the Underwriters with respect to any
matter that such Selling Shareholder and the Company are both required to
indemnify the Underwriters hereunder, the Underwriters shall, to such extent,
seek indemnification from the Company.
13. DEFAULT OF UNDERWRITERS. It shall be a condition to the
obligations of each Underwriter to purchase the Shares in the manner as
described herein, that, except as hereinafter provided in this section, each of
the Underwriters shall purchase and pay for all the Shares agreed to be
purchased by such Underwriter hereunder upon tender to the Representatives of
all such Shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Shares hereunder on either
the First Closing Date or the Second Closing Date and the aggregate number of
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed ten percent (10%) of the total number of Shares which
the Underwriters are obligated to purchase on such Closing Date, the
Representatives may make arrangements for the purchase of such Shares by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date the nondefaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Shares which such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults occur
is greater than ten percent (10%) of the total number of Shares which the
Underwriters are obligated to purchase on such Closing Date, and arrangements
satisfactory to the Representatives for the purchase of such Shares by other
persons are not made within thirty-six hours after such default, this Agreement
will terminate without liability on the part of any nondefaulting Underwriter or
the Company, or any Selling Shareholder except for the expenses to be paid by
the Company and the Selling Shareholders pursuant to section 9 hereof and except
to the extent provided in section 12 hereof.
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<PAGE> 34
In the event that Shares to which a default relates are to be
purchased by the nondefaulting Underwriters or by another party or parties, the
Representatives shall have the right to postpone the First Closing Date or the
Second Closing Date, as the case may be, for not more than seven business days
in order that the necessary changes in the Registration Statement, Prospectus
and any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
14. EFFECTIVE DATE. This Agreement shall become effective upon the
execution and delivery of this Agreement by the parties hereto. Such execution
and delivery shall include an executed copy of this Agreement sent by
telecopier, facsimile transmission or other means of transmitting written
documents.
15. TERMINATION. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof, this Agreement may be
terminated by the Representatives prior to or on the First Closing Date and the
over-allotment option from the Company and the Selling Shareholders referred to
in section 6 hereof, if exercised, may be cancelled by the Representatives at
any time prior to or on the Second Closing Date, if in the judgment of the
Representatives, payment for and delivery of the Shares is rendered
impracticable or inadvisable because:
(a) additional governmental restrictions, not in force and
effect on the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally established on
the New York Stock Exchange or the American Stock Exchange, or trading in
securities generally shall have been suspended or materially limited on either
such exchange or on The Nasdaq Stock Market or a general banking moratorium
shall have been established by either federal or state authorities in New York,
Florida or Wisconsin;
(b) any development or prospective development involving
particularly the business or properties or securities of the Company or
transactions contemplated by this Agreement has occurred that, in the judgment
of the Representatives makes it impractical or inadvisable to offer or deliver
the Shares; or
(c) an outbreak or escalation of hostilities or other
national or international calamity or any substantial change in political,
financial or economic conditions shall have occurred or shall have accelerated
to such extent, in the judgment of the Representatives, as to have a material
adverse effect on the financial markets of the United States, or to make it
impracticable or inadvisable to proceed with completion of the sale of and
payment for the Shares as provided in this Agreement.
Any termination pursuant to this Section shall be without
liability on the part of any Underwriter to the Company, or any Selling
Shareholder, or on the part of the Company, or any Selling Shareholder to any
Underwriter, except for expenses to be paid by the Company and the Selling
Shareholders pursuant to section 9 hereof or reimbursed by the Company pursuant
to section
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<PAGE> 35
7(n) hereof and except as to indemnification to the extent provided in section
12 hereof.
16. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties, covenants and
other statements of the Company, of its officers or directors, of the Selling
Shareholders, and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, Selling Shareholder or
the Company or any of its or their partners, officers, directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder.
17. NOTICES. All communications hereunder will be in writing and,
if sent to the Representatives, will be mailed, delivered, telecopied (with
receipt confirmed) or telegraphed and confirmed to Robert W. Baird & Co.
Incorporated at 201 North Franklin Street, Suite 2800, Tampa, Florida 33602,
Attention: Thomas E. Lange, Senior Vice President, with a copy to Robert J.
Grammig, Esq., Holland & Knight, 400 North Ashley Drive, Suite 2300, Tampa,
Florida, 33602 and if sent to the Company, will be mailed, delivered, telecopied
(with receipt confirmed) or telegraphed and confirmed to the Company at 28100
U.S. Highway 19 North, Suite 201, Clearwater, Florida 34621, Attention: James T.
Boosales, with a copy to David S. Felman, Esq., Glenn Rasmussen & Fogarty,
P.A., 100 South Ashley Drive, Suite 1300, Tampa, Florida 33602; and, if sent to
the Selling Shareholders, will be mailed, delivered, telecopied (with receipt
confirmed) or telegraphed and confirmed to the Attorneys-in-Fact, or either of
them, in care of the Company, with copies to David S. Felman, Esq., Glenn
Rasmussen & Fogarty, P.A.
18. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors, personal
representatives and assigns, and to the benefit of the officers and directors
and controlling persons referred to in section 12 hereof and no other person
will have any right or obligation hereunder. The term "successors" shall not
include any purchaser of the Shares as such from any of the Underwriters merely
by reason of such purchase.
19. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph clause or provision hereof.
20. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Florida
without reference to conflict of law principles thereunder. This Agreement may
be signed in various counterparts which together shall constitute one and the
same instrument, and shall be effective when at least one counterpart hereof
shall have been executed by or on behalf of each party hereto.
- 35 -
<PAGE> 36
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, each of the
Selling Shareholders, and the several Underwriters, including the
Representatives, all in accordance with its terms.
Very truly yours,
STERILE RECOVERIES, INC.
By:
-------------------------------------
Richard T. Isel, President
and Chief Executive
Officer
THE SELLING SHAREHOLDERS:
By:
-------------------------------------
Richard T. Isel
By:
-------------------------------------
Wayne R. Peterson
By:
-------------------------------------
James T. Boosales
- 36 -
<PAGE> 37
The foregoing Underwriting
Agreement is hereby confirmed
and accepted as of the date
first above written.
By: ROBERT W. BAIRD & CO. INCORPORATED RAYMOND
JAMES & ASSOCIATES, INC.
Acting as Representatives of the several
Underwriters (including themselves) identified
in Schedule II annexed hereto.
By:
____________________________________
Authorized Representative
By:
____________________________________
Authorized Representative
- 37 -
<PAGE> 38
Sterile Recoveries, Inc.
Schedule I
NUMBER OF FIRM NUMBER OF OPTIONAL
SHARES SHARES
------ ------
The Company 2,000,000 150,000
The Selling Shareholders:
Richard T. Isel 54,000
Wayne R. Peterson 46,500
James T. Boosales 49,500
- 38 -
<PAGE> 39
Sterile Recoveries, Inc.
SCHEDULE II
NUMBER OF FIRM
SHARES
NAME OF UNDERWRITER BE PURCHASED
------------------- ------------
Robert W. Baird & Co. Incorporated
Raymond James & Associates, Inc.
- 39 -
<PAGE> 40
Sterile Recoveries, Inc.
Schedule 2(u)
NONE
- 40 -
<PAGE> 1
EXHIBIT 4.3
FORM OF
LOCK-UP LETTER
______ __, 1996
Sterile Recoveries, Inc.
28100 U.S. Highway 19 North, Suite 201
Clearwater, Florida 34621
Robert W. Baird & Co. Incorporated
Raymond James & Associates, Inc.
c/o Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53201
Ladies and Gentlemen:
The undersigned understands that Robert W. Baird & Co.
Incorporated ("Baird") and Raymond James & Associates, Inc., the
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), intend to enter into an Underwriting Agreement with Sterile
Recoveries, Inc., a Florida corporation (the "Company"), providing for the
public offering (the "Public Offering") by the Underwriters, including the
Representatives, of common stock (the "Common Stock") of the Company. The
undersigned further understands that the Public Offering will be made pursuant
to a registration statement to be filed with the Securities and Exchange
Commission, which will include a form of prospectus (the "Prospectus"), and
that the Prospectus will contain a statement to the effect that the Company,
its officers and directors, and all of its shareholders have agreed not to sell
or otherwise dispose of any shares of Common Stock without the prior written
consent of Baird.
In consideration of the Underwriters' agreement to purchase
shares of Common Stock in and undertake the Public Offering, and in recognition
of the benefit that the Public Offering will confer on the undersigned as a
director, officer or shareholder of the Company, and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
undersigned agrees that, without the prior written consent of Baird, the
undersigned will not, for a period of 180-days after the date of the final
Prospectus (the "180-day period"), except for the ____ shares of Common Stock
sold by the undersigned on ________ __, 1996, directly or indirectly, offer,
sell, transfer, pledge, contract to sell, transfer or pledge, or cause or in
any way permit to be sold, transferred, pledged or otherwise disposed of,
except pursuant to bona fide gifts to donees who agree to be bound by the same
restrictions set forth herein, any: (i) shares of Common Stock; (ii) rights to
purchase shares of Common Stock (including, without limitation, shares of
Common Stock that may be deemed to be beneficially owned by the undersigned in
accordance with the rules and regulations of the Securities and Exchange
Commission and shares of Common Stock that may be issued upon exercise of a
stock option, warrant or other convertible security); or (iii) securities that
are convertible or exchangeable into shares of Common Stock.
<PAGE> 2
Sterile Recoveries, Inc.
Robert W. Baird & Co. Incorporated
, 1996
- ----------
Page 2
In addition, the undersigned agrees that during the 180-day period,
the Company may cause the transfer agent for the Company to note stop transfer
instructions on the transfer books and records of the Company with respect to
any shares of Common Stock owned by the undersigned.
The undersigned understands that the Company and the
Underwriters, including the Representatives, will proceed with the Public
Offering in reliance on this letter agreement.
The undersigned hereby represents and warrants that the
undersigned has full power and authority to enter into this letter agreement,
that the information set forth below is true and complete, and that, upon
request, the undersigned will execute any additional documents necessary or
desirable in connection with the enforcement hereof. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of
the undersigned and any obligations of the undersigned shall be binding upon
the spouse, heirs, personal representatives, successors and assigns of the
undersigned.
Very truly yours,
-----------------------------------
Signature
-----------------------------------
Signature if held jointly
- ------------------------------
- ------------------------------
Name if held jointly
- ------------------------------
- ------------------------------
<PAGE> 3
Sterile Recoveries, Inc.
Robert W. Baird & Co. Incorporated
, 1996
- ----------
Page 3
- -------------------------------------------
Address
- -------------------------------------------
Social Security or
Taxpayer Identification No.
- -------------------------------------------
Number of shares of
Common Stock owned
- -------------------------------------------
Number of shares of Common
Stock that may be acquired
pursuant to warrants, options
or convertible securities
<PAGE> 1
EXHIBIT 10.13
CONFORMED COPY
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAW, AND HAS BEEN ISSUED BY THE COMPANY IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. THIS NOTE MUST BE
HELD UNTIL MATURITY IN ACCORDANCE WITH ITS TERMS AND CANNOT BE SOLD, ASSIGNED,
ENDORSED, OR OTHERWISE TRANSFERRED. THIS NOTE IS SUBJECT TO CONDITIONS OF THAT
CERTAIN SUBORDINATION AGREEMENT DATED MARCH 1996 BY AND AMONG CLAY PAGE, AMSCO
STERILE RECOVERIES, INC. AND STERILE RECOVERIES, INC.
$109,000.00
STERILE RECOVERIES, INC.
PROMISSORY NOTE
STERILE RECOVERIES, INC. (the "Company"), a Florida corporation,
promises to pay to CLAYTON W. PAGE ("Payee"), at 112 Bayside Court, Sanford,
Florida 32771, the principal amount of ONE HUNDRED NINE THOUSAND AND NO/100
DOLLARS ($109,000.00), and to pay interest on the unpaid principal amount from
the date of this Promissory Note (this "Note"), at the rate, on the dates, and
subject to the conditions specified in this Note. As used in this instrument,
the term "Note" includes any Note issued and delivered in exchange and
substitution for this Note.
1. INTEREST. Interest will accrue on the unpaid principal amount
of this Note from July 1, 1996, until its payment in full at an annual rate
equal to the "Prime Rate" announced from time to time by the financial
institution at which the Company maintains its principal deposit relationship.
(Interest will not accrue from the date of this Note through June 30, 1996.)
Subject to the terms of the Subordination Agreement (as hereinafter defined),
the Company shall pay all accrued interest quarterly on October 1, January 1,
April 1, and July 1 of each year, beginning on October 1, 1996, and continuing
on each succeeding quarterly payment date until this Note is paid in full.
The Company and the holder of this Note intend to comply strictly with
applicable law regulating the maximum allowable rate or amount of interest that
Payee may charge and collect on this Note. Accordingly, and notwithstanding
anything in this Note to the contrary, the aggregate amount of interest and
other charges constituting interest under applicable law that are payable,
chargeable, or receivable under this Note shall not exceed the maximum amount
of interest now allowed by applicable law or any greater amount of interest
allowed because of a future amendment to existing law. The Company is not
liable for any interest in excess of the maximum lawful amount, and any excess
interest charged or collected by the
<PAGE> 2
holder of this Note will constitute an inadvertent mistake and, if charged but
not paid, will be cancelled automatically, or, if paid, will be either refunded
to the Company or credited against the outstanding principal amount of this
Note, at the election of the Company.
2. PRINCIPAL; PREPAYMENT. Subject to the terms of the
Subordination Agreement, the Company shall repay the principal outstanding
under this Note in four equal, quarterly installments of $27,250 each,
beginning on April 1, 1997, or, if earlier, ten days after the Company closes
an initial public offering of its common stock. Subject to the terms of the
Subordination Agreement, the Company may (but is not required to) prepay this
Note in whole or in part at any time, without penalty or premium to the holder
of this Note. Upon full payment of this Note, the holder of this Note shall
surrender it to the Company for cancellation.
3. PLACE AND METHOD OF PAYMENT. The Company shall pay all
principal and interest under this Note in legal tender of the United States of
America at the address shown in the register maintained by the Company for that
purpose. If any payment date under this Note occurs on a day that is a
Saturday, Sunday, or bank holiday in Tampa, Florida, that payment date will be
extended automatically to the next succeeding day that is not a Saturday,
Sunday, or bank holiday in Tampa, Florida, and, during the extension, the
Company shall pay interest on the unpaid principal amount at the rate stated
for the payment of interest. The Company shall pay all principal and interest
due under this Note without any presentation of the Note. Any repayment of
this Note will be applied first to accrued interest and then to principal.
4. SUBORDINATION; POTENTIAL OFFSET. Pursuant to the terms of
that certain Subordination Agreement by and among Payee, Company and AMSCO
Sterile Recoveries, Inc., dated March 1996 ("Subordination Agreement"), Payee
has subordinated the indebtedness owed to him by the Company under this Note
(the "Subordinated Debt") to the indebtedness of the Company to AMSCO Sterile
Recoveries, Inc. ("Amsco") under the Purchase Money Note dated July 31, 1994
(the "Amsco Note"), as amended, and this Note and the rights and obligations
hereunder are subject to the terms of the Subordination Agreement. Payee
further acknowledges that this Note has been delivered to Payee pursuant to the
Agreement and Plan of Merger dated as of February 26, 1996 (the "Merger
Agreement"), among Payee, the Company, and Surgipro, Inc., and is subject to
offset pursuant to Section 3.7 of the Merger Agreement.
5. PERSON DEEMED OWNER. The Company may treat the person in
whose name this Note is registered on its books as the absolute owner of this
Note for the purpose of receiving any payment under this Note and for all other
purposes. All payments issued to the registered holder of this Note, or upon
-2-
<PAGE> 3
his order, will satisfy, to the extent of the amount paid, the Company's
liability under this Note for the amount paid or issued. Any demand, request,
or consent of the registered holder of this Note will be conclusive and binding
on that holder and upon all future holders and registered owners of the Note.
6. DEFAULTS AND REMEDIES. An occurrence of any of the following
events will constitute a "Default" under this Note:
(a) The nonpayment when due of any principal or accrued
interest under this Note, whether at maturity, by acceleration, or
otherwise, which continues 15 days after Payee provides to the Company
written notice of nonpayment;
(b) The adoption of a resolution by the Company's board
of directors for the dissolution or liquidation of the Company;
(c) The issuance by the Florida Department of State of a
certificate of involuntary dissolution of the Company, if the Company
is not reinstated as a corporation within 30 days after the effective
date of involuntary dissolution;
(d) The Company merges into, consolidates with, or leases
or transfers all or substantially all its assets to, any other person
unless (i) the person is a corporation or limited partnership; (ii)
the person assumes by a written assumption and modification of the
Note the obligations of the Company under the Note (except that it
need not assume the obligation of the Company as to conversion of the
Note if pursuant to section 10 above the Company or another person
enters into a written modification of the Note obligating it to
deliver cash, securities, or other property upon conversion of the
Note); and (iii) a Default does not exist immediately after the
transaction;
(e) The filing by the Company of a petition seeking relief
or reorganization under any bankruptcy, insolvency, or other debtor
relief law or the Company giving written notice to any creditor of a
proposed general assignment for the benefit of its creditors;
(f) The filing of a bankruptcy petition against the
Company that is not dismissed within 90 days after it is filed;
-3-
<PAGE> 4
(g) The appointment of a trustee, receiver, or custodian
for the Company generally or for all or substantially all its assets;
(h) The sequestration or assumption of custody by a court
of competent jurisdiction of all or substantially all the assets of
the Company, if the custody or sequestration is not terminated within
30 days after it becomes effective;
(i) The entry of a final judgment against the Company for
the payment of money or damages in excess of 10% of its consolidated
total assets, if the judgment is not discharged or the issuance of a
writ of execution or similar process with respect to the judgment is
not stayed within the time allowed by law; or
(j) The issuance of a levy, garnishment, attachment, writ
of execution, or similar process against the Company (whether or not
pursuant to a final judgment) in connection with a claim for the
payment of money or damages in excess of 10% of its consolidated total
assets, if the writ is not stayed or vacated within ten days after its
issuance.
Upon the occurrence at any time of a Default and subject to the terms and
conditions of the Subordination Agreement, the holder of this Note may
accelerate the maturity date of this Note and declare the entire unpaid
principal amount of this Note and all interest accrued on it immediately due
and payable without further notice to the Company, and the holder of this Note
also may proceed otherwise to protect its rights as provided by applicable law.
The Company and every other person liable at any time for payment of this Note
waive presentment, protest, notice of protest, and notice of dishonor with
respect to this Note. Every right, power, or remedy conferred by this Note on
the holder of this Note, or by any agreement or instrument executed pursuant to
it, is not exclusive of any other right, power, or remedy conferred on the
holder of this Note in this Note or in any other agreement or instrument now or
later available to it at law or in equity.
7. RENEWALS, EXTENSIONS, AND INDULGENCES. The Company expressly
consents to all renewals and extensions of this Note, as a whole or in part,
and all delays in time of payment or other performance under this Note, that
the holder of this Note allows, without limitation and without notice to, or
further consent of, the Company.
8. NOTICES. Every notice, consent, and demand required or
permitted by this Note will be valid only if it is (a) given in writing, (b)
hand delivered or sent by telex, telecopy, telegraph, commercial courier, or
the United States
-4-
<PAGE> 5
Postal Service, and (c) addressed by the sender, if to the Company: to Sterile
Recoveries, Inc., 28100 U.S. Highway 19 North, Suite 241, Clearwater, Florida
34621; and, if to the holder of this Note: to the address set forth in the
first paragraph of this Note, or to such other addresses as either party
designates by written notice to the other. A validly given notice, consent, or
demand will be effective on the earlier of its receipt, if hand delivered or
sent by telex, telecopy, telegraph, or commercial courier, or the third day
after it is postmarked by the United States Postal Service for dispatch by
first class, postage prepaid, United States mail (whether or not certified or
registered and regardless of whether a return receipt is requested or
received).
9. NO RECOURSE AGAINST OTHERS. A director, officer, employee, or
shareholder, as such, of the Company is not liable for, and, by accepting this
Note, each holder of this Note waives and releases all of them from liability
for, any obligation of the Company under this Note or any claim based on, in
respect of, or by reason of, those obligations or their creation. This waiver
and release are part of the consideration for the issue of the Note.
10. CHOICE OF LAW; LEGAL PROCEEDINGS. Each party to this Note
stipulates that the proper, exclusive, and convenient venue for any legal
proceeding arising out of this Agreement is Pinellas County, Florida, for state
court proceedings, and the Middle District of Florida, for federal district
court proceedings and waives any defense, whether asserted by motion or
pleading, that Pinellas County, Florida, or the Middle District of Florida, is
an improper or inconvenient venue. The validity, construction, interpretation,
and enforcement of this Note are governed by the laws of the State of Florida,
excluding the laws of that state pertaining to the resolution of conflicts with
laws of other jurisdictions.
11. PAYMENT OF COSTS. In any litigation or other dispute
(including trial, pretrial, appellate, bankruptcy, or judgment execution
proceedings) between the parties that relate to this Note, the losing party
shall reimburse the prevailing party, on its demand, for all costs and expenses
that are incurred by the prevailing party as the result of that dispute or
litigation.
-5-
<PAGE> 6
12. RESTRICTIONS ON TRANSFER. THIS NOTE CANNOT BE SOLD, ASSIGNED,
PLEDGED, OR OTHERWISE TRANSFERRED. ANY ATTEMPTED TRANSFER WILL BE NULL AND
VOID.
EXECUTED: June 11, 1996 STERILE RECOVERIES, INC.
By: /s/ James T. Boosales
---------------------------
James T. Boosales
Executive Vice President
[CORPORATE SEAL]
-6-
<PAGE> 1
EXHIBIT 10.31
CONFORMED COPY
June 5, 1996
Mr. James T. Boosales
Executive Vice President
Sterile Recoveries, Inc.
28100 U.S. Highway 19 North
Suite 201
Clearwater, Florida 34621
Re: Revolving Credit Facility Loan Commitment
Dear Mr. Boosales:
First Union National Bank of Florida ("First Union") is pleased to offer you a
commitment to lend on the following terms and conditions:
BORROWER:
Sterile Recoveries, Inc.
LOAN:
A Revolving Credit Facility in an amount not to exceed Fifteen Million Dollars
($15,000,000.00).
PURPOSE:
To provide working capital, with a $5,000,000 non-revolving sub-limit for
equipment purchases.
INTEREST RATE:
The interest accrual rate on the principal balance outstanding shall be as
follows:
Year 1: 200 basis points above the 30 day Reserve Adjusted LIBOR Base Rate.
Year 2: 190 basis points above the 30 day Reserve Adjusted LIBOR Base Rate.
Year 3+: 175 basis points above the 30 day Reserve Adjusted LIBOR Base Rate.
<PAGE> 2
Sterile Recoveries, Inc.
June 5, 1996
Page 2
The Reserve Adjusted LIBOR Base Rate is defined as that rate per annum at which,
in the opinion of the Bank, United States Dollars in the amount of $5,000,000.00
are being offered to major top credit quality banks at 11:00 a.m. London time,
two business days prior to the commencement of an applicable monthly interest
period for settlement in immediately available funds by major top credit quality
banks in the London Interbank Market for a period equal to 30 days. The
interest rate shall be adjusted at the beginning of each monthly period and
shall remain fixed for the entire ensuing monthly period. Interest shall be
calculated using a year base of 360 days and charged for the actual number of
days elapsed in an interest period.
REPAYMENT:
Interest only monthly on the revolving portion, with all remaining principal and
interest due July 5, 1999.
Advances utilized for equipment purchases to be amortized up to five (5) years,
with level principal payments plus interest.
EQUIPMENT PURCHASES SUBLIMIT:
Three (3) year availability with advances taken during this period amortized up
to five (5) years. Exact amortization and amount of financing to be based upon
specific equipment purchased and determined at the time of advance. Collateral
will include a Purchase Money Security Interest in equipment financed. The
variable interest rate referenced above shall also apply for this sublimit.
Upon Borrower's request, fixed rate options will be provided at time of funding
based upon prevailing market rates. A prepayment penalty may apply if a fixed
interest rate is selected.
LOAN FEES:
Commitment Fee:
Up-front commitment fee equal to Thirty Seven Thousand Five Hundred Dollars
($37,500.00), of which Five Thousand Dollars ($5,000.00) has been paid as a
non-refundable underwriting fee. The balance, or Thirty Two Thousand, Five
Hundred Dollars ($32,500.00), shall be payable at loan closing.
Unused Fee:
Equal to one quarter percent (1/4%) of the average unused amount, payable
quarterly in arrears.
Term Advance Fees:
Equal to one quarter percent (1/4%) of the term draw amount payable at each
funding under the sublimit.
COLLATERAL:
Unsecured. However, Borrower agrees not to encumber any assets now owned or
hereafter acquired, except for the equipment term advances contemplated herein
which shall be secured with purchase money security interest in equipment.
<PAGE> 3
Sterile Recoveries, Inc.
June 5, 1996
Page 3
BORROWER FINANCIAL STATEMENTS:
Borrower will annually provide audited financial statements reflecting its
operations, including, without limitation, a balance sheet, profit and loss
statement and statement of cash flows, with supporting schedules and a 10K
report.
Borrower will also provide unaudited management-prepared quarterly financial
statements, including, without limitation, a balance sheet, profit and loss
statement, and statement of cash flows, with supporting schedules and a 10Q
report.
COVENANTS:
In addition to the covenants customarily required by First Union for similar
loans, the covenants described on the Covenants Schedule to this letter will be
required.
DOCUMENTATION:
The loan will be evidenced by documents prepared by Bank counsel (to be
determined) and acceptable to First Union.
ITEMS TO BE FURNISHED:
Borrower shall furnish to First Union the following items prior to closing:
Borrower shall submit to First Union satisfactory evidence of equity
contributions previously made and readily available in the aggregate amount of
not less than $17,750,000 from the contemplated initial public stock offering.
The preceding terms and conditions are not exhaustive, and this commitment is
subject to certain other terms and closing conditions customarily required by
First Union for similar transactions. This commitment will expire unless it is
closed on or before July 31, 1996. The transaction will be evidenced by
documents in form and content acceptable to First Union, and this commitment
letter shall not survive closing.
Borrower represents and agrees that all financial statements and other
information delivered to First Union are correct and complete. No material,
adverse change may occur in, nor any adverse circumstance be discovered as to,
the business or financial condition of the Borrower prior to closing. First
Union's obligations under this commitment are conditioned on the fulfillment to
First Union's sole satisfaction of each term and condition referenced by this
commitment.
This commitment supersedes all prior commitments and proposals with respect to
this transaction, whether written or oral, including any previous loan proposals
made by First Union or anyone acting with its authorization. No modification
shall be valid unless made in writing and signed by an authorized officer of
First Union. This commitment is not assignable, and no party other than
Borrower shall be entitled to rely on this commitment.
<PAGE> 4
Sterile Recoveries, Inc.
June 5, 1996
Page 4
Please indicate your acceptance of this offer and the terms and conditions
contained herein by signing below and returning one executed copy of this
commitment letter to the undersigned. This offer of commitment shall expire
unless accepted on or before June 14, 1996.
Thank you for allowing First Union to be of service. We look forward to a long
and mutually beneficial relationship with Sterile Recoveries, Inc.
Sincerely,
FIRST UNION NATIONAL BANK OF FLORIDA
/s/ Timothy J. Coop
- -------------------
Timothy J. Coop
Vice President
ACCEPTANCE OF LOAN COMMITMENT:
The above commitment is agreed to and accepted on the terms and conditions
provided in this letter.
STERILE RECOVERIES, INC.
By: /s/ James T. Boosales Date: June 13, 1996
------------------------------------------- -------------
James T. Boosales, Executive Vice President
<PAGE> 5
Sterile Recoveries, Inc.
June 5, 1996
Page 5
COVENANTS SCHEDULE
Attached to Commitment Letter to Sterile Recoveries, Inc. dated June 5,
1996.
FINANCIAL COVENANTS.
- - MINIMUM TANGIBLE NET WORTH. Actual covenant will be determined after the IPO
proceeds are known based upon the following formula:
A. At FYE 96 minimum TNW equal to net IPO proceeds plus $1,300,000.
B. At FYE 97 minimum TNW equal to A plus $1,500,000.
C. At FYE 98 minimum TNW equal to B plus $3,000,000.
- - SENIOR DEBT/EBITDA. As follows:
- Beginning 12/31/96 and measured quarterly during 1997, senior debt at
quarter end shall not exceed 3.0 times EBITDA for the most recent twelve
month period.
- Measured quarterly during 1998, senior debt at quarter end shall not
exceed 2.75 times EBITDA for the most recent twelve month period.
- Measured quarterly during 1999, senior debt at quarter end shall not
exceed 2.5 times EBITDA for the most recent twelve month period.
- - LIMITATION ON DEBT. Borrower shall not erase, assume or become liable for any
debt, contingent or direct, if giving effect to such additional debt on a pro
forma basis causes the aggregate amount of Borrower's debt, excluding
obligations to Bank and Permitted Debt & Liens as described in Exhibit A, to
exceed $50,000.
- - LOANS AND ADVANCES. Borrower shall not make loans or advances, excepting
ordinary course of business travel and expense advances, to any person or
entity, which total more than $50,000 in the aggregate.
- - DIVIDENDS. Borrower shall not, during the fiscal year, declare or pay
dividends. In no event shall Borrower declare or pay a dividend if there
shall exist a Default or a condition which, upon the giving of notice or
lapse of time or both, would become a Default under this Agreement or the
Note.
AFFIRMATIVE COVENANTS:
- - DEPOSIT RELATIONSHIP. Borrower will maintain its primary depository account
with Bank.
NEGATIVE COVENANTS:
Until the obligations in connection with the loan are paid in full, Borrower
shall not:
- - DEFAULT ON OTHER CONTRACTS OR OBLIGATIONS. Default on any material contract
with or obligation when due to a third party or default in the performance of
any obligation to a third party incurred for money borrowed in an amount in
excess of $50,000.
<PAGE> 6
Sterile Recoveries, Inc.
June 5, 1996
Page 6
- - JUDGMENT ENTERED. Permit the entry of any monetary judgment or the
assessment against, the filing of any tax lien against, or the issuance
of any writ of garnishment or attachment against any property of or debts
due Borrower in an amount in excess of $50,000 and that is not discharged
or execution is not stayed within 30 days of entry.
- - CHANGE IN FISCAL YEAR. Neither Borrower or nor any guarantor may change
its fiscal year without the consent of Bank.
- - ENCUMBRANCES. Create, assume, or permit to exist any mortgage, security
deed, deed of trust, pledge, lien, charge or other encumbrance on any of
its assets, whether now owned or hereafter acquired, other than: (i)
security interests required by the Loan Documents; (ii) liens for taxes
contested in good faith; (iii) liens accruing by law for employee
benefits; or (iv) Permitted Liens as described in Exhibit A to this
commitment.
- - INVESTMENTS. Purchase any stock, securities, or evidence of indebtedness
of any other person or entity except investments in direct obligations of
the United States Government and certificates of deposit of United States
commercial banks having a tier 1 capital ratio of not less than 6% and
then in an amount not exceeding 10% of the issuing bank's unimpaired
capital and surplus.
<PAGE> 7
Sterile Recoveries, Inc.
June 5, 1996
Page 7
EXHIBIT A
PERMITTED DEBT AND LIENS
- - $1,000,000 convertible demand promissory note payable to Mr. Lee R.
Kemberling with a stated interest rate of 8.5% and secured by a first lien
on the Company's Houston, Texas facility and the equipment located at the
facility. Beginning March 1, 1997 the convertible note becomes payable on
demand and may be redeemed by the company for face value. Up to $750,000
may be converted to common stock at any time before that date.
<PAGE> 1
EXHIBIT 23.1(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated May 10, 1996 accompanying the financial
statements and financial schedule of AMSCO Sterile Recoveries, Inc. contained
in the Registration Statement and Prospectus. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
Tampa, Florida
June 25, 1996
<PAGE> 1
EXHIBIT 23.1(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated May 10, 1996 accompanying the financial
statements and financial schedule of Sterile Recoveries, Inc. contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
Tampa, Florida
June 25, 1996
