<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 March 31, 1997
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 X No
----- -----
Number of outstanding shares of each class of Registrant's Common
Stock as of April 23, 1997:
Common Stock, par value $.001 - 5,654,894
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Statements of Earnings for the three
month period ended March 31, 1997 (unaudited) and
three month period ended March 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . 1
Condensed Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Statements of Cash Flow for the three month
period ended March 31, 1997 (unaudited) and three month
period ended March 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 2 Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 11
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
STERILE RECOVERIES, INC.
CONDENSED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Revenues $ 9,038 $ 7,330
Cost of revenues 5,950 5,024
------- -------
Gross profit 3,088 2,306
Distribution expenses 757 722
Selling and administrative expenses 1.328 1,067
------- -------
Income from operations 1,003 517
Interest expense (income), net (44) 347
------- -------
Income before income tax expense 1,047 170
Income tax expense 419 --
------- -------
Net income $ 628 $ 170
======= =======
Pro forma information
Historical net income $ 170
Adjustment to historical income tax expense 68
-------
Pro forma net income $ 102
=======
Historical (1997) and pro forma (1996) net
income per common share, primary $ 0.11 $ 0.03
======= =======
Weighted average common shares outstanding,
primary 5,806 3.513
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements Page 1 of 12
<PAGE> 4
STERILE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 4,676 $ 5,199
Accounts receivable, net 5,210 5,253
Inventories 1,220 1,240
Prepaid expenses and other assets 597 530
Reusable surgical products, net of
accumulated amortization of $2,807
and $2,388, respectively 7,628 6,915
Property, plant and equipment, net 5,736 5,102
Goodwill, net 543 550
Deferred income taxes 217 217
------- -------
Total assets $25,827 $25,006
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable--related parties $ - $ 1,000
Accounts payable 1,941 1,360
Employee related accrued expenses 576 901
Other accrued expenses 1,175 989
------- -------
Total liabilities 3,692 4,250
Commitments and contingencies - -
Shareholders' equity
Preferred stock--authorized 5,000,000 shares
of $.001 par value; no shares issued and
outstanding - -
Common stock--authorized 30,000,000 shares
of $.001 par value; issued and outstanding
5,652,894 and 5,521,189 shares respectively 6 6
Additional paid-in capital 20,127 19,376
Retained earnings 2,002 1,374
------- -------
Total shareholders' equity 22,135 20,756
------- -------
Total liabilities and shareholders' equity $25,827 $25,006
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements Page 2 of 12
<PAGE> 5
STERILE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOW
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, March 31,
1997 1996
-------- --------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net income $ 628 $ 170
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 146 113
Amortization of reusable surgical products 425 255
Provision for reusable surgical products shrinkage 136 61
Change in assets and liabilities (net of business
combination)
Accounts receivable 43 (390)
Inventories 20 (167)
Prepaid expenses and other assets (67) 47
Accounts payable 581 239
Accrued expenses (139) (290)
-------- --------
Net cash provided by operating activities 1.773 38
-------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (772) (191)
Purchases of reusable surgical products (1,275) (805)
Payment for acquisition of business, net of cash
acquired - 6
-------- --------
Net cash used in investing activities (2,047) (990)
-------- --------
Cash flows from financing activities
Proceeds from convertible demand notes - 1,000
Payments on related party debt (250) -
Payments on acquisition debt - (400)
Net proceeds from working capital facility - 165
Net proceeds from issuance of common stock 1 300
-------- --------
Net cash provided by (used in) financing activities (249) 1,065
-------- --------
Increase (decrease) in cash (523) 113
Cash and cash equivalents at beginning of period 5,199 252
-------- --------
Cash and cash equivalents at end of period $ 4,676 $ 365
======== ========
Supplemental cash flow information
Cash paid for interest $ 26 $ 419
======== ========
Cash paid for income taxes $ 258 $ -
======== ========
Supplemental schedule of non-cash investing activities:
Purchase of Surgipro
Fair value of assets acquired $ - $ 952
Cash received - 6
Common stock issued - (526)
-------- --------
Liabilities incurred or assumed $ - $ 432
======== ========
Conversion of Convertible Demand Note into 128,205
shares of Common Stock $ 750 $ -
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements Page 3 of 12
<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 the Company's Form 10-K for
year ended December 31, 1996 filed with the Securities and
Exchange Commission. 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 months ended March 31, 1997 are not
necessarily indicative of the results that can be expected for
the entire year ending December 31, 1997. The unaudited
financial statements should be read in conjunction with the
financial statements and the notes thereto included in the
Form 10-K.
(b) Pro Forma Income Taxes. Pro forma income taxes are
reported as though the Company had been a C Corporation since
January 1, 1996, using an effective tax rate of approximately
40%, which approximates the statutory rate, as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,1996
(in thousands)
<S> <C>
Historical income before income taxes $ 170
Pro forma income tax expense 68
-----
Pro forma net income $ 102
=====
</TABLE>
The Company will use this pro forma presentation of
1996 operations for the interim reporting periods of 1997, and
will adjust 1996 historical income tax expense to reflect an
effective tax rate of approximately 40%.
The Company presented no income tax expense on a pro
forma basis for the first three quarters of 1996 (included in
the Form S-1 and Forms 10-Q, respectively), as it was assumed
that the Company's net operating basis for 1994 and 1995 was
carried forward to offset the income presented. The
utilization of net operating losses is not assumed for the
1997 interim reports to enhance the comparability between the
periods.
Page 4 of 12
<PAGE> 7
STERILE RECOVERIES, INC.
Notes to Financial Statements (Cont'd.)
(c) Historical Income Taxes. Historical income taxes for 1997
have been computed using an effective tax rate of 40%. This
effective tax rate may vary as additional historical data
becomes available.
(d) Historical (1997) and Pro Forma (1996) Net Income Per Common
Share. Net income per common share is computed by
dividing net income by the weighted average number of shares
of Common Stock outstanding. Net income for 1996 includes a
pro forma provision for income taxes assuming the Company had
been subject to income taxes since January 1, 1996.
Net income per common share has been computed by
dividing net income by the weighted average number of shares
of common stock outstanding plus the dilutive common stock
equivalents (stock options), using the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Actual weighted average shares
outstanding 5,572,894 3,255,807
Additional shares 233,513 257,008
--------- ---------
Weighted average shares used in
income per share calculation - primary 5,806,407 3,512,815
========= =========
</TABLE>
Fully diluted and primary share calculations result
in the same net income per common share.
2. INDEBTEDNESS
In March 1996, the Company borrowed $1,000,000 from a
director pursuant to an 8.5% Convertible Demand Promissory
Note that was secured by a first lien on the Company's
Houston, Texas facility and the equipment located at the
facility. Beginning on March 1, 1997, the Convertible Note
was payable on demand and redeemable by the Company for face
value. At any time before that date, up to $750,000 of the
Convertible Note was convertible into Common Stock at $5.85
per share. The $250,000 balance was not convertible and was
payable on maturity. Seven hundred fifty thousand dollars
($750,000) of the note was converted on February 24, 1997 into
128,205 shares, the remaining principal was repaid, and the
lien on the Company's Houston, Texas facility was removed.
Currently, there are no borrowings under the $15.0
million unsecured revolving credit facility the Company has
established with First Union National Bank of Florida.
Page 5 of 12
<PAGE> 8
STERILE RECOVERIES, INC.
Notes to Financial Statements (Cont'd.)
3. ACQUISITION TRANSACTION
The following unaudited pro forma financial
information assumes that the acquisition of Surgipro had
occurred at the beginning of 1996 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 might not reflect actual results had the purchase occurred
at the beginning of 1996.
<TABLE>
<CAPTION>
Three Months
Ended
March 31,1996
-------------
(In thousands,
except per share data)
<S> <C>
Revenues $ 7,444
Net income after income tax expense $ 73
Net income per common share, primary $ .02
</TABLE>
4. NEW ACCOUNTING PRONOUNCEMENT
The FASB has issued Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE, which is effective for
financial statements issued after December 15, 1997. Early
adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per
share, and requires presentation of basic and diluted earnings
per share together with disclosure of how the per share
amounts were computed. The adoption of this new standard is
not expected to have a material impact on the disclosure of
earnings per share in the financial statements.
Page 6 of 12
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report, other documents that are publicly disseminated by the
Company, and oral statements that are made on behalf of the Company contain or
might contain both statements of historical fact and forward-looking
statements. Examples of forward-looking statements include: (i) projections of
revenue, earnings, capital structure and other financial items, (ii) statements
of the plans and objectives of the Company or its management, (iii) statements
of future economic performance, and (iv) assumptions underlying statements
regarding the Company or its business. See "Business - Certain Considerations"
in the Company's Annual Report on Form 10-K for 1996 for additional information
regarding forward-looking statements, including a list of important factors,
risks, and uncertainties that could cause actual results to differ materially
from any forward-looking statements.
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 eight 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 EARNINGS
The following table sets forth for the periods shown the percentage of
revenues represented by certain items reflected in the statement of earnings of
the Company.
Gore(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
Page 7 of 12
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 65.8 68.5
----- -----
Gross profit 34.2 31.5
Distribution expense 8.4 9.9
Selling and administrative expenses 14.7 14.5
----- ------
Income from operations 11.1 7.1
Interest expense (income),net (0.5) 4.8
----- ------
Income before income taxes 11.6 2.3
Income tax expense 4.6 -
----- ------
Historical net income 7.0 2.3
Pro forma income tax expense - .9
----- ------
Historical (1997) and pro forma (1996)
net income 7.0% 1.4%
===== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES. The Company's revenues increased $1.7 million, or 23.3%,
to $9.0 million in the first quarter of 1997 from $7.3 million in the first
quarter of 1996. The revenue increases were equally attributable to new
customers and increased revenues from current customers.
GROSS PROFIT. Gross profit increased $782,000, or 33.9%, to $3.1
million in the first quarter of 1997 from $2.3 million in the first quarter of
1996. The improvement in gross profit 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 higher amortization expense of reusable surgical products
as the Company supplements the products purchased in the Acquisition with
products purchased at current higher replacement cost. Increased revenues from
relatively lower margin disposable surgical products also offset some of the
efficiency gains.
DISTRIBUTION EXPENSES. Distribution expenses increased $35,000, or
4.8%, to $757,000 in the first quarter of 1997 from $722,000 in the first
quarter of 1996. Distribution expenses as a percentage of revenues decreased
1.5% to 8.4% in the first quarter of 1997 from 9.9% in the first quarter of
1996. The improvement in distribution expenses as a percentage of revenues
resulted primarily from efficiencies derived from delivering more volume over
existing routes, and from adding additional routes and equipment at a slower
pace than revenue growth.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $261,000, or 24.5% to $1.3 million in the first quarter of
1997 from $1.1 million in the first quarter of 1996. As a percentage of
revenues, selling and administrative expenses increased 0.2% to 14.7% during
the first quarter of 1997 from 14.5% during the first quarter of 1996. Though
more than doubling its
Page 8 of 12
<PAGE> 11
sales force since the first quarter of 1996, the Company continues to leverage
administrative costs over more revenues, resulting in only a 0.2% increase.
INTEREST EXPENSE (INCOME), NET. Interest expense decreased $391,000,
or 112.7%, to a positive income ($44,000) in the first quarter of 1997 from an
expense of $347,000 in the first quarter of 1996. As a percentage of revenues,
interest expense decreased 5.3% to (0.5%) during the first quarter of 1997 from
4.8% during the first quarter of 1996, primarily due to the elimination of
acquisition debt to Amsco Sterile repaid in July 1996 from the proceeds of the
Company's public offering, and the interest and other income earned from
investing excess cash.
INCOME BEFORE INCOME TAX EXPENSE. As a result of the foregoing, the
Company's income before taxes increased to $1.0 million in the first quarter of
1997, from income before taxes of $170,000 in the first quarter of 1996. As a
percentage of revenues, income before taxes in the first quarter of 1997 was
11.6% of revenues compared to income before taxes of 2.3% of revenues in the
first quarter of 1996.
INCOME TAX EXPENSE. The statement of earnings for 1996 reflects the
pro forma effect on income taxes as if the Company had been a C Corporation
since January 1, 1996.
NET INCOME PER SHARE. The Company recorded a net income per share of
$0.11 on a primary per share basis for the first quarter of 1997, compared with
$0.03 primary pro forma per share net income in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's positive cash flow from operating activities was $1.8
million during the first three months of 1997, compared to $38,000 during the
first three months of 1996. The increase in cash from operating activities
resulted primarily from increased net income before amortization and
depreciation expense, increased collections of accounts receivable, and better
management of accounts payable.
The Company used approximately $1.1 million more net cash in investing
activities in the first three months of 1997 than in the first three months of
1996. The Company has made capital expenditures in the first three months of
1997 for equipment of $772,000 and for reusable surgical products of $1.3
million as compared to $191,000 for equipment and $805,000 for reusable
surgical products during the first three months of 1996. These expenditures
were funded primarily by cash provided by operating activities.
On February 24, 1997, a director converted $750,000 of a $1,000,000
convertible demand promissory note into 128,205 shares of the Company's Common
Stock, and the Company repaid the remaining principal of $250,000.
As of March 31, 1997, the Company had cash of approximately $4.7
million, consisting primarily of the remaining proceeds of its public offering.
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.
Page 9 of 12
<PAGE> 12
Currently, there are no borrowings under the $15.0 million unsecured
revolving credit facility the Company has established with First Union National
Bank of Florida.
The Company believes its current cash balance, 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
the next twelve months. In the longer term, the Company expects its capital
requirements will be substantial and will depend on its growth and
opportunities. The Company expects to fund additional capital expenditures
from a combination of internal cash flow, its credit facility, and other
capital sources.
Page 10 of 12
<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 three months
ended March 31, 1997.
Exhibits
--------
27 Financial Data Schedule (for SEC use only)
Page 11 of 12
<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: May 12, 1997 By: /s/ James T. Boosales
--------------------------------
James T. Boosales
Executive Vice President and
Chief Financial Officer
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,676
<SECURITIES> 0
<RECEIVABLES> 5,266
<ALLOWANCES> 56
<INVENTORY> 1,220
<CURRENT-ASSETS> 0
<PP&E> 6,953
<DEPRECIATION> 1,217
<TOTAL-ASSETS> 25,827
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 22,129
<TOTAL-LIABILITY-AND-EQUITY> 25,827
<SALES> 9,038
<TOTAL-REVENUES> 9,038
<CGS> 5,950
<TOTAL-COSTS> 5,950
<OTHER-EXPENSES> 2,085
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (44)
<INCOME-PRETAX> 1,047
<INCOME-TAX> 419
<INCOME-CONTINUING> 628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 628
<EPS-PRIMARY> .11
<EPS-DILUTED> 0
</TABLE>
