<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File Number: 000-20997
STERILE RECOVERIES, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA 59-3252632
(State of incorporation) (I. R. S. Employer
Identification No.)
28100 U.S. HIGHWAY 19 NORTH, SUITE 201
CLEARWATER, FLORIDA 34621
(Address of Principal Executive Offices)
(813) 726-4421
(Registrant's Telephone Number)
Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes No X
---- ----
Number of outstanding shares of each class of Registrant's Common Stock as of
August 15, 1996:
Common Stock, par value $.001 - 5,517,089
Page 1 of 14
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements
Condensed Statements of Operations for the three and
six month periods ended June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . 3
Condensed Balance Sheets as of June 30, 1996 (unaudited)
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flow for the six month
periods ended June 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 13
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
Page 2 of 14
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
STERILE RECOVERIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
----------- ---------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 7,953 $ 6,063 $ 15,284 $ 11,880
Cost of revenues 5,398 4,222 10,422 8,403
----------- ---------- ----------- -----------
Gross profit 2,555 1,841 4,862 3,477
Distribution expenses 749 691 1,472 1,385
Selling and administrative expenses 1,200 1,011 2,267 2,025
----------- ---------- ----------- -----------
Income from operations 606 139 1,123 67
Interest expense 345 374 692 753
----------- ---------- ----------- -----------
Net income (loss) $ 261 $ (235) $ 431 $ (686)
=========== ========== =========== ===========
Pro forma income tax expense - - - -
----------- ---------- ----------- -----------
Pro forma net income (loss) $ 261 $ (235) $ 431 $ (686)
=========== ========== =========== ===========
Pro forma net income (loss) per common share $ 0.07 $ (0.07) $ 0.12 $ (0.20)
=========== ========== =========== ===========
Weighted average common shares outstanding 3,513 3,513 3,513 3,513
=========== ========== =========== ===========
</TABLE>
(See accompanying Notes to Condensed Financial Statements)
Page 3 of 14
<PAGE> 4
STERILE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(unaudited)
<S> <C>
-- ASSETS --
Cash $ 268,444 $ 251,444
Accounts receivable, net 4,302,189 3,389,243
Inventories 704,060 305,450
Prepaid expenses and other assets 582,923 303,309
Reusable surgical products, net of accumulated
amortization of $1,829,946 and $l,137,603,
respectively 5,907,085 4,924,271
Property, plant and equipment, net 4,530,043 4,318,840
Goodwill, net 564,498 -
------------ ------------
Total assets $ 16,859,242 $ 13,492,557
============ ============
-- LIABILITIES AND SHAREHOLDERS' EQUITY --
LIABILITIES:
Notes payable - working capital loan facility $ 2,503,693 $ 1,810,119
Notes payable - related parties 1,109,000 -
Accounts payable 1,762,282 1,166,657
Employee related accrued expenses 701,155 652,990
Other accrued expenses 830,590 568,084
Acquisition debt 8,480,832 9,080,832
------------ ------------
Total liabilities 15,387,552 13,278,682
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred Stock - $.001 par value;
authorized, 5,000,000 shares;
issued, none - -
Common Stock - $.001 par value;
authorized, 30,000,000 shares;
issued and outstanding, 3,367,089 and
3,225,807 shares, respectively 3,367 3,226
Additional paid-in capital 2,835,133 2,008,774
Accumulated deficit (1,366,810) (1,798,125)
------------ ------------
Total shareholders' equity 1,471,690 213,875
------------ ------------
Total liabilities and shareholders' equity $ 16,859,242 $ 13,492,557
============ ============
</TABLE>
(See accompanying Notes to Condensed Financial Statements)
Page 4 of 14
<PAGE> 5
STERILE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 431,315 $ (686,063)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and intangible amortization . . . . . . . . . . . . . . 236,854 206,166
Amortization of reusable surgical products . . . . . . . . . . . . . 529,009 375,039
Provision for reusable surgical products shrinkage . . . . . . . . . 163,333 -
Change in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . (849,144) 369,541
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (192,366) (82,260)
Prepaid expenses and Other . . . . . . . . . . . . . . . . . . . . (147,128) (41,540)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 474,125 (260,009)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 132,587 234,679
------------ ------------
Net cash provided by operating activities . . . . . . . . . . . . 778,585 115,553
------------ ------------
Cash flows from investing activities
Purchases of property, plant and equipment . . . . . . . . . . . . . . (427,612) (94,200)
Purchases of reusable surgical products . . . . . . . . . . . . . . . . (1,675,156) (76,523)
Net of cash acquired for acquisition . . . . . . . . . . . . . . . . . 5,634 -
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . (2,097,134) (170,723)
------------ ------------
Cash flows from financing activities
Proceeds from convertible demand notes . . . . . . . . . . . . . . . . 1,000,000 -
Payments on acquisition debt . . . . . . . . . . . . . . . . . . . . . (658,025) (200,000)
Net proceeds from working capital loan . . . . . . . . . . . . . . . . 693,574 261,198
Proceeds from issuance of Common Stock . . . . . . . . . . . . . . . . 300,000 -
------------ ------------
Net cash provided by financing activities . . . . . . . . . . . . . 1,335,549 61,198
------------ ------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 6,028
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 251,444 287,881
------------ ------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,444 $ 293,909
============ =============
Supplemental cash flow information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . $ 678,760 $ 760,342
============ =============
Supplemental schedule of non-cash investing:
Purchase of Surgipro (1996)
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . $ 952,000 $ -
Cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 -
Common Stock issued . . . . . . . . . . . . . . . . . . . . . . . . . (526,000) -
------------ ------------
Liabilities incurred or assumed . . . . . . . . . . . . . . . . . . . $ 432,000 $ -
============ =============
</TABLE>
(See accompanying Notes to Condensed Financial Statements)
Page 5 of 14
<PAGE> 6
STERILE RECOVERIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation. The accompanying unaudited condensed
financial statements of Sterile Recoveries, Inc. (the
"Company") have been prepared in accordance with the
Securities and Exchange Commission's instructions to Form 10-Q
and, therefore, omit or condense footnotes and certain other
information normally included in financial statements prepared
in accordance with generally accepted accounting principles.
The accounting policies followed for quarterly financial
reporting conform with generally accepted accounting
principles for interim financial statements and include those
accounting policies disclosed in Note 1 to the Notes to
Financial Statements included in the Company's Registration
Statement on Form S-1, as amended (the "Registration
Statement"), filed with the Securities and Exchange
Commission in connection with the Company's initial public
offering (the "Offering"). In the opinion of management, all
adjustments of a normal recurring nature that are necessary
for a fair presentation of the financial information for the
interim periods reported have been made. The results of
operations for the three and six months ended June 30, 1996
are not necessarily indicative of the results that can be
expected for the entire fiscal year ending December 31, 1996.
The unaudited condensed financial statements should be read in
conjunction with the financial statements and the notes
thereto included in the Registration Statement.
(b) Pro Forma Income Taxes. On completion of the Offering on
July 24, 1996, the Company terminated its S Corporation
election and became 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
subject to federal and state income taxes as a C Corporation.
The Company's losses incurred while it was an S Corporation
will not be available to the Company on its conversion to C
Corporation status.
Based on the criteria established by SFAS No. 109, "Accounting
for Income Taxes", the Company anticipates recording a
deferred tax asset of approximately $225,000 during the third
quarter of 1996, primarily as a result of recognition of
reserves for insurance, vacation and inventory shrinkage to
account for the difference between book and tax basis.
(c) 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 Offering are deemed outstanding for all periods.
<TABLE>
<CAPTION>
Three Months and
Six Months Ended June 30,
1996 1995
---------- ----------
<S> <C> <C>
Actual weighted average shares outstanding . . . . . . . 3,311,448 3,000,000
Additional shares . . . . . . . . . . . . . . . . . . . . 201,367 512,815
--------- ---------
Weighted average shares used in income per
share calculation . . . . . . . . . . . . . . . . . . . 3,512,815 3,512,815
========= =========
</TABLE>
Page 6 of 14
<PAGE> 7
STERILE RECOVERIES, INC.
Notes to Condensed Financial Statements (Cont'd.)
2. INDEBTEDNESS
Acquisition debt consisted of the following as of the following dates:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ----------
<S> <C> <C>
Purchase money note - AMSCO Sterile Recoveries,
Inc., 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% and 7.25% at December 31, 1995 and
June 30, 1996, respectively) plus 1.5%;
collateralized by all Company assets, excluding
accounts receivable and real and personal
property at the Houston, Texas facility . . . . . . . . . . . . . $8,480,832 $9,080,832
========== ==========
</TABLE>
The Purchase Money Security Agreement with AMSCO Sterile Recoveries,
Inc. ("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. Subsequent to June 30, 1996, the entire debt to
AMSCO Sterile was paid from proceeds of the Offering.
In March 1996, the Company borrowed $1,000,000 from a director 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.
The Company has a commitment from First Union National Bank of Florida
for a $15.0 million unsecured revolving credit facility that will
expire in July 1999. The facility imposes certain financial
covenants. Beginning January 1, 1997, total outstanding borrowings
under the facility are limited to three times the Company's earnings
before interest, taxes, depreciation, and amortization (EBITDA) for
the previous four quarters (declining to two and one-half times by the
third year). The facility also imposes a covenant concerning the
maintenance at the 1996 year end of minimum tangible net worth of at
least $1.3 million plus the amount of the net proceeds of the
Offering. The minimum net worth amount increases by $1.5 million in
1997 and $3.0 million in 1998. Pursuant to the terms of the credit
facility, the Company 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 Offering Rate (LIBOR) plus 200 basis points (7.5%
as of August 16, 1996). The facility restricts the declaration of
dividends and prohibits the Company from encumbering its assets.
Page 7 of 14
<PAGE> 8
STERILE RECOVERIES, INC.
Notes to Condensed Financial Statements (Cont'd.)
3. ACQUISITION TRANSACTIONS
In February 1996, the Company purchased the operations of Surgipro.
The Company paid consideration of approximately $600,000, consisting
of 90,000 shares of the Company's Common Stock valued at $526,500 and
a note payable of approximately $109,000 due on the completion of the
Offering, for approximately $500,000 of assets and the assumption of
approximately $400,000 of liabilities. This acquisition was accounted
for as a purchase transaction and, accordingly, the purchase price was
allocated to the assets and liabilities based upon their estimated
fair values at the time of the acquisition, with the excess of
approximately $540,000 being allocated to goodwill.
The following unaudited pro forma financial information assumes that
the acquisition of Surgipro 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1996 1995
-------------------- ------------- --------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $6,332,379 $15,397,724 $12,394,808
Net income (loss) . . . . . . . . . . . . . $ (225,172) $ 383,333 $ (675,944)
Net income (loss) per common share . . . . $ (.06) $ .11 $ (.19)
</TABLE>
4. SUBSEQUENT EVENTS
On July 24, 1996, the Company completed the Offering of 2,000,000
shares of its Common Stock priced at $9.50 per share. The net
proceeds of the Offering, after deducting commissions of $1,330,000
and approximately $1,050,000 in expenses, were $16,620,000. In
addition, the underwriters on August 9, 1996 exercised their
overallotment option to purchase 150,000 additional shares of the
Company's Common Stock. Proceeds to the Company of the underwriters'
purchase of shares pursuant to their exercise of the overallotment
option were $1,325,250 after commissions. The Company used
approximately $11,000,000 of the proceeds to retire debt, including
$8,380,832 of debt owed to AMSCO Sterile and $2,139,759 of debt owed
to a lender, Metro Factors, Inc. The supplementary pro forma income
per common share for the three months and six months ended June 30,
1996 as if this debt has been retired at the beginning of the
respective periods, would be $.12 and $.23 per share, assuming
4,634,522 and 4,659,231 weighted average common shares outstanding,
respectively.
Page 8 of 14
<PAGE> 9
STERILE RECOVERIES, INC.
Notes to Condensed Financial Statements (Cont'd.)
The underwriters also on August 9, 1996, exercised their overallotment
option to purchase 150,000 additional shares of Common Stock granted
to them by shareholders Richard T. Isel, Wayne R. Peterson and James
T. Boosales. The Company did not receive any proceeds from these
transactions with its shareholders.
The following table sets forth certain balance sheet accounts of the
Company (i) as of June 30, 1996, and (ii) as adjusted to reflect the
application of the net proceeds from the issuance and sale by the
Company of 2,150,000 shares of Common Stock.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable - working capital loan facility $ 1,975 $ -
Notes payable - related parties . . . . . . . . . . . . . . . . . $ 1,109 $ 1,109
Acquisition debt . . . . . . . . . . . . . . . . . . . . . . . . $ 8,481 $ -
Shareholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 5
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 2,835 20,778
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (1,367) (1,367)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . $ 1,471 $ 19,416
======== ========
</TABLE>
Page 9 of 14
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
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, the Company
collects, sorts, cleans, inspects, packages, sterilizes, and delivers its
reusable products on a just-in-time basis. The Company 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 purchased the assets of its business from AMSCO Sterile
Recoveries, Inc. an indirect wholly owned subsidiary of AMSCO International,
Inc., on July 31, 1994 (the "Acquisition").
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 67.9 69.6 68.2 70.7
----- ----- ----- -----
Gross profit 32.1 30.4 31.8 29.3
Distribution expenses 9.4 11.4 9.6 11.7
Selling and administrative expenses 15.1 16.7 14.9 17.1
----- ----- ----- -----
Income from operations 7.6 2.3 7.3 0.5
Interest expense 4.3 6.2 4.5 6.3
----- ----- ----- -----
Net income (loss) 3.3% (3.9)% 2.8% (5.8)%
===== ===== ===== =====
</TABLE>
REVENUES. The Company's revenues increased $1.9 million, or 31.2%,
to $8.0 million in the second quarter of 1996 from $6.1 million in the second
quarter of 1995. Revenues for the first six months of 1996 increased $3.4
million, or 28.7%, to $15.3 million from $11.9 million in the first six months
of 1995. The revenue increases in each period were equally attributable to new
customers and increased revenues from current customers.
GROSS PROFIT. Cost of revenues increased $1.2 million or 27.9%, to
$5.4 million in the second quarter of 1996 from $4.2 million in the second
quarter of 1995. Cost of revenues increased $2.0 million, or 24.0%, to $10.4
million in the first six months of 1996 from $8.4 million in the first six
months of 1995. Gross profit increased 1.7% to 32.1% in the second quarter of
1996 from 30.4% in the second quarter of 1995. Gross profit increased 2.5% to
31.8% in the first six months of 1996, compared to 29.3% in the first six
months of 1995. The improvement in gross profit is largely attributable to
labor efficiencies in the pack room and the economies of scale associated with
GORE(R) is a registered trademark of W.L. Gore & Associates, Inc.
Page 10 of 14
<PAGE> 11
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 profit on its distribution of
a third party vendor's disposable products.
DISTRIBUTION EXPENSES. Distribution expenses increased $58,000, or
8.4%, to $749,000 in the second quarter of 1996 from $691,000 in the second
quarter of 1995. Distribution expenses increased $87,000, or 6.3%, to $1.5
million in the first six months of 1996 from $1.4 million in the first six
months of 1995. Distribution expenses decreased by 2.0% of sales to 9.4% in
the second quarter of 1996 compared to 11.4% in the second quarter of 1995.
For the first six months of 1996, distribution expenses decreased 2.1% to 9.6%
compared to 11.7% in the first six months of 1995. The Company incurs
distribution expenses both in transporting its reusable surgical products
locally and to 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 in the second quarter of 1995.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $189,000 or 18.7%, to $1.2 million in the second quarter of
1996 from $1.0 million in the second quarter of 1995. Selling and
administrative expenses increased $242,000, or 12.0%, to $2.3 million in the
first six months of 1996 from $2.0 million in the first six months of 1995. As
a percentage of revenues, selling and administrative expenses decreased 1.6% to
15.1% during the second quarter of 1996 from 16.7% during the second quarter of
1995, and decreased 2.2% to 14.9% during the first six months of 1996 from
17.1% during the first six months of 1995, primarily due to the leveraging of
fixed administrative expenses over additional revenues.
INTEREST EXPENSE. Interest expense decreased $29,000 or 7.8%, to
$345,000 in the second quarter of 1996 from $374,000 in the second quarter of
1995. Interest expense decreased $61,000, or 8.1%, to $692,000 in the first
six months of 1996 from $753,000 in the first six months of 1995. As a
percentage of revenues, interest expense decreased by 1.9% to 4.3% during the
second quarter of 1996 from 6.2% during the second quarter of 1995, and
decreased by 1.8% to 4.5% during the first six months of 1996 from 6.3% during
the first six months of 1995. These decreases occurred as the result of a
lower variable interest rate on the Company's working capital loan and the note
due to AMSCO Sterile, conversion of a $1.0 million convertible note into Common
Stock in September 1995, and a reduction in the principal balance of the AMSCO
Sterile note.
NET INCOME. As a result of the foregoing, the Company's net income
increased to $261,000 in the second quarter of 1996, from a net loss of
$235,000 in the second quarter of 1995. For the first six months of 1996, net
income increased to $431,000, from a net loss of $686,000 in the first six
months of 1995. As a percentage of revenues, net income in the second quarter
of 1996 was 3.3% of revenues compared to a net loss of 3.9% of revenues in the
second quarter of 1995, and net income in the first six months of 1996 was 2.8%
of revenues compared to a net loss of 5.8% of revenues in the first six months
of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal 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 July and August 1996, the Company raised
$17.9 million through the sale of 2,150,000 shares of its Common Stock in an
initial public offering (the "Offering").
The Company's positive cash flow from operating activities was
$778,585 during the first six months of 1996, compared to $115,553 during the
first six months of 1995. The increase in cash from operating activities from
1995 to 1996 resulted primarily from increased income before amortization
expense and the increased accounts payable balance. This increase was
partially offset by cash used for increased accounts receivable. Inventories
at June 30, 1996 were $704,060, compared to $305,450 at December 31, 1995. The
increase in inventory 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.
Page 11 of 14
<PAGE> 12
The Company used approximately $1.9 million more net cash in investing
activities in the first six months of 1996 than in the first six months of
1995. The Company has made capital expenditures in 1996 for equipment of
$428,000 and for reusable surgical products of $1.7 million to support sales
growth, as compared to $94,000 for equipment and $77,000 for reusable surgical
products in the first six months of 1995. These expenditures were funded
primarily by cash provided by operations and financing activities. The Company
received approximately $2.0 million during the first six months of 1996 from a
private sale of Common Stock for $300,000, a $1,000,000 loan from a director
pursuant to a secured convertible note, and approximately $700,000 of advances
under the Company's working capital loan facility. These funds were used to
purchase the additional assets and to repay $600,000 of acquisition debt owed
to AMSCO Sterile.
During 1996, the Company has substantially increased its expenditures
for reusable surgical products, primarily to support anticipated increases in
business. The Company's business is capital intensive and will require
substantial capital expenditures for additional surgical product and equipment
during the next several years to achieve its operating and expansion plans. To
adequately service a new customer, the Company estimates that it makes an
investment in new reusable surgical products and carts equal to approximately
50% of the projected first year revenue from the customer. Until the beginning
of 1996, the Company 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. The Company estimates
that its capital expenditures for new carts and reusable surgical products will
continue at a relatively increased rate for the next 12 months, although the
amount will fluctuate depending on the growth rate of its business.
The Company amortizes its reusable surgical products on a per use
basis, based on estimates of the products' useful lives. The Company'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 amortization
and shrinkage expense for those assets.
At June 30, 1996, the Company had approximately $12 million of notes
payable and acquisition debt outstanding. Approximately $11 million of the net
proceeds of the Offering was used to repay most of this outstanding
indebtedness. 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 the first six months of 1996 was $692,000. The
use of a portion of the Offering proceeds to retire most of the Company's
outstanding indebtedness will, on an annualized basis, eliminate interest
expense of approximately $1.3 million and principal payments to AMSCO Sterile
of approximately $1.2 million. Subsequent to the Offering, the Company has
cash of approximately $7.0 million, which it will invest to create interest
income. The excess cash and cash generated from operations will be used to
fund purchases of additional stocks of reusable surgical products, primarily to
support anticipated growth in revenues, and other capital expenditures as
necessary to support additional facility capacity.
The Company has a commitment from First Union National Bank of Florida
for a $15.0 million unsecured revolving credit facility that will expire in
July 1999. The facility imposes certain financial covenants. Beginning
January 1, 1997, total outstanding borrowings under the facility are limited to
three times the Company's earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the previous four quarters (declining to two and
one-half times by the third year). The facility also imposes a covenant
concerning the maintenance at the 1996 year end of minimum tangible net worth
of at least $1.3 million plus the amount of the net proceeds of the Offering.
The Company currently complies with these covenants. The minimum tangible net
worth amount increases by $1.5 million in 1997 and $3.0 million in 1998.
Pursuant to the terms of the credit facility, the Company 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 Offering Rate (LIBOR) plus 200 basis points
(7.5% as of August 16, 1996). The facility restricts the declaration of
dividends and prohibits the Company from encumbering its assets.
Page 12 of 14
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. 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.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K
The Company did not file a report on Form 8-K during the six months
ended June 30, 1996.
Exhibits
The following exhibit is filed as part of this report:
Exhibit 27 Financial Data Schedule (for SEC use only)
Page 13 of 14
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERILE RECOVERIES, INC.
Date: August 28, 1996 By: /s/ James T. Boosales
--------------------------
James T. Boosales
Executive Vice President and
Chief Financial Officer
Page 14 of 14
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<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
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