<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 September 30, 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 33761
(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 October 16, 1997:
Common Stock, par value $.001 - 5,659,694
<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 and nine month period ended September 30, 1997
(unaudited) and three month period and nine
month period ended September 30, 1996 (unaudited)........ 1
Condensed Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 ....................... 2
Condensed Statements of Cash Flow for the nine month
period ended September 30, 1997 (unaudited) and the
nine month period ended September 30, 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........................................ 12
Item 2 Changes in Securities.................................... 12
Item 3 Defaults Upon Senior Securities.......................... 12
Item 4 Submission of Matters to a Vote of Security Holders...... 12
Item 5 Other Information........................................ 12
Item 6 Exhibits and Reports on Form 8-K......................... 12
SIGNATURE.................................................................. 13
</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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------ ------- -------
<S> <C> <C> <C> <C>
Revenues $10,110 $8,230 $28,822 $23,513
Cost of revenues 6,627 5,611 19,048 16,032
------- ------ ------- -------
Gross profit 3,483 2,619 9,774 7,481
Distribution expenses 811 773 2,296 2,245
Selling and administrative expenses 1,581 1,179 4,303 3,446
------- ------ ------- -------
Income from operations 1,091 667 3,175 1,790
Interest expense (income), net (24) 22 (105) 714
------- ------ ------- -------
Income before income tax expense 1,115 645 3,280 1,076
Income tax expense 429 (14) 1,278 (14)
------- ------ ------- -------
Net income $ 686 $ 659 $ 2,002 $ 1,090
======= ====== ======= =======
Pro forma information
Historical net income $ 686 $ 645 $ 2,002 $ 1,076
Pro forma income tax expense -- 248 -- 414
------- ------ ------- -------
Pro forma net income $ 686 $ 397 $ 2,002 $ 662
======= ====== ======= =======
Historical (1997) and pro forma
(1996) net income per common
share $ 0.12 $ 0.08 $ 0.34 $ 0.16
======= ====== ======= =======
Weighted average common shares
outstanding 5,871 5,203 5,856 4,076
======= ====== ======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 1 of 13
<PAGE> 4
STERILE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, Dec. 31,
1997 1996
------------- --------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 1,155 $ 5,199
Accounts receivable, net 5,467 5,253
Inventories 1,951 1,240
Prepaid expenses and other assets 765 530
Reusable surgical products, net of
accumulated amortization of $3,810
and $2,388, respectively 9,569 6,915
Property, plant and equipment, net 6,934 5,102
Goodwill, net 528 550
Deferred income taxes 217 217
------- -------
Total assets $26,586 $25,006
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable--related parties $ -- $ 1,000
Accounts payable 1,874 1,360
Employee related accrued expenses 647 901
Other accrued expenses 517 989
------- -------
Total liabilities 3,038 4,250
Commitments and contingencies -- --
Shareholders' equity
Preferred stock--authorized 5,000,000 shares
of $.001 par value; no shares issued and
outstanding -- --
Common stock--authorized 30,000,000 shares
of $.001 par value; issued and outstanding
5,659,694 and 5,521,189 shares respectively 6 6
Additional paid-in capital 20,166 19,376
Retained earnings 3,376 1,374
------- -------
Total shareholders' equity 23,548 20,756
------- -------
Total liabilities and shareholders' equity $26,586 $25,006
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 2 of 13
<PAGE> 5
STERILE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOW
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net income $ 2,002 $ 1,090
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 481 362
Amortization of reusable surgical products 1,447 863
Provision for reusable surgical products shrinkage 433 290
Deferred income taxes 0 (200)
Change in assets and liabilities (net of
business combination):
Accounts receivable (214) (1,303)
Inventories (692) (308)
Prepaid expenses and other assets (262) (74)
Accounts payable 514 189
Accrued expenses (674) 339
------- -------
Net cash provided by operating activities 3,035 1,248
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,292) (784)
Purchases of reusable surgical products (4,525) (2,566)
Payment for acquisition of business, net of cash acquired 0 6
------- -------
Net cash used in investing activities (6,817) (3,344)
------- -------
Cash flows from financing activities:
Proceeds from convertible demand notes 0 1,000
Payments on related party debt (250) (167)
Payments on acquisition debt 0 (9,081)
Net proceeds from working capital facility 0 (1,810)
Distribution from earned surplus (52) 0
Net proceeds from issuance of common stock 40 18,484
------- -------
Net cash provided by (used in) financing activities (262) 8,426
------- -------
Increase (decrease) in cash (4,044) 6,330
Cash and cash equivalents at beginning of period 5,199 251
------- -------
Cash and cash equivalents at end of period $ 1,155 $ 6,581
======= =======
Supplemental cash flow information:
Cash paid for interest $ 44 $ 876
======= =======
Cash paid for income taxes $ 1,577 $ --
======= =======
Supplemental schedule of non-cash investing activities:
Purchase of Surgipro (1996)
Fair value of assets acquired $ -- $ 952
Cash received 0 6
Common stock issued 0 (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 13
<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.
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
the year ended December 31, 1996 filed with the Securities and
Exchange Commission. 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 nine months ended September
30, 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 38.5%,
which approxi mates the statutory rate, as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept.30, 1996 Sept. 30, 1996
(in thousands) (in thousands)
<S> <C> <C>
Historical income before
income taxes $645 $1,076
Pro forma income tax expense 248 414
---- ------
Pro forma net income $397 $ 662
==== ======
</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 38.5%.
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 loss for 1994 and 1995 was
carried forward to offset the income presented.
Page 4 of 13
<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 38.5%.
(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 Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Actual weighted average
shares outstanding 5,658,079 5,057,399 5,628,867 3,893,432
Additional shares 212,709 145,726 227,461 182,820
--------- --------- --------- ---------
Weighted average shares
used in income per
share calculation -
primary 5,870,788 5,203,125 5,856,328 4,076,252
========= ========= ========= =========
</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 at the Company's option for
face value. At any time before that date, the holder could
convert up to $750,000 of the Convertible Note into Common
Stock at $5.85 per share. The remaining $250,000 principal
balance was not convertible and was payable on maturity. The
holder of the note converted seven hundred fifty thousand
dollars ($750,000) of the note into 128,205 shares on February
24, 1997. Also on that date, the Company repaid the remaining
$250,000 principal balance of the note, and the note holder
released his lien on the Company's Houston, Texas facility.
The Company has no current borrowings under its $15.0
million unsecured revolving credit facility with First Union
National Bank.
Page 5 of 13
<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>
Nine Months Ended
Sept. 30, 1996
----------------------
(In thousands,
except per share data)
<S> <C>
Revenues $23,627
Net income after income tax expense $ 632
Net income per common share, primary $ .16
</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 presenta tion of basic and diluted
earnings per share together with disclo sure 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 13
<PAGE> 9
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 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. ("AMSCO Sterile"), 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 65.5 68.2 66.1 68.2
----- ----- ----- -----
Gross profit 34.5 31.8 33.9 31.8
Distribution expense 8.0 9.4 8.0 9.5
Selling and administrative expenses 15.7 14.3 14.9 14.7
----- ----- ----- -----
Income from operations 10.8 8.1 11.0 7.6
Interest expense (income),net (0.2) .3 (0.4) 3.0
----- ----- ----- -----
Income before income taxes 11.0 7.8 11.4 4.6
Income tax expense 4.2 (0.2) 4.5 --
----- ----- ----- -----
Historical net income 6.8 8.0 6.9 4.6
Adjustment for pro forma income
tax expense -- 3.2 -- 1.8
----- ----- ----- -----
Historical (1997) and pro forma (1996)
net income 6.8% 4.8% 6.9% 2.8%
===== ===== ===== =====
</TABLE>
Gore(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
Page 7 of 13
<PAGE> 10
REVENUES. The Company's revenues increased $1.9 million, or 22.8%, to
$10.1 million in the three months ended September 30, 1997 from $8.2 million in
the three months ended September 30, 1996. In the nine months ended September
30, 1997, the Company's revenues increased to $28.8 million, or 22.6%, from
$23.5 million in the nine months ended September 30, 1996. The revenue increases
were equally attributable to new customers and increased revenues from current
customers.
GROSS PROFIT. Gross profit increased $864,000, or 33.0%, to $3.5
million in the three months ended September 30, 1997 from $2.6 million in the
three months ended September 30, 1996; and $2.5 million, or 30.7%, to $9.8
million, in the nine months ended September 30, 1997 from $7.5 million in the
nine months ended September 30, 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 $38,000, or
4.9%, to $811,000 in the three months ended September 30, 1997 from $773,000 in
the three months ended September 30, 1996; and increased $51,000, or 2.3%, to
$2.3 million in the nine months ended September 30, 1997 from $2.2 million in
the nine months ended September 30, 1996. Distribution expenses as a percentage
of revenues decreased 1.4% to 8.0% in the three months ended September 30, 1997
from 9.4% in the three months ended September 30, 1996; and 1.5% to 8.0% in the
nine months ended September 30, 1997 from 9.5% in the nine months ended
September 30, 1996. The improvement in distribution expenses as a percentage of
revenues resulted from efficiencies derived from delivering more volume over
existing routes, from adding additional routes and equipment at a slower pace
than revenue growth, and from a renegotiated fleet contract.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $402,000, or 34.1%, to $1.6 million in the three months ended
September 30, 1997 from $1.2 million in the three months ended September 30,
1996; and $857,000, or 24.9%, to $4.3 million in the nine months ended September
30, 1997 from $3.4 million in the nine months ended September 30, 1996. As a
percentage of revenues, selling and administrative expenses increased 1.4% to
15.7% during the three months ended September 30, 1997 from 14.3% during the
three months ended September 30, 1996; and .2% to 14.9% in the nine months ended
September 30, 1997 from 14.7% during the nine months ended September 30, 1996.
The Company has significantly increased its sales capabilities since the third
quarter of 1996 by increasing the number of its sales and customer service field
personnel by approximately 50%.
INTEREST EXPENSE (INCOME), NET. Interest expense decreased $46,000, or
209.1%, to a positive income of $24,000 in the three months ended September 30,
1997 from an expense of $22,000 in the three months ended September 30, 1996;
and decreased $819,000, or 114.7%, to a positive income of $105,000 in the nine
months ended September, 30, 1997 from an expense of $714,000 in the nine months
ended September 30, 1996. As a percentage of revenues, interest expense
decreased .5% to a positive income of 0.2% during the three months ended
September 30, 1997 from an
Page 8 of 13
<PAGE> 11
expense of .3% during the three months ended September 30, 1996; and decreased
3.4% to a positive income of 0.4% in the nine months ended September 30, 1997
from an expense of 3.0% in the nine months ended September 30, 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 $1.1 million in the three months
ended September 30, 1997 from income before taxes of $645,000 in the three
months ended September 30, 1996; and to $3.3 million in the nine months ended
September 30, 1997 from income before taxes of $1.1 million in the nine months
ended September 30, 1996. As a percentage of revenues, income before taxes in
the three months ended September 30, 1997 was 11.0% of revenues compared to
income before taxes of 7.8% of revenues in the three months ended September 30,
1996; income before taxes in the nine months ended September 30, 1997 was 11.4%
of revenues compared to 4.6% in the nine months ended September 30, 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
$0.12 on a primary per share basis for the three months ended September 30,
1997, compared with $0.12 historical primary per share net income (or $0.08
adjusted for pro forma primary per share net income) in the three months ended
September 30, 1996; and net income per share of $0.34 on a primary per share
basis for the nine months ended September 30, 1997 compared with $0.26
historical primary per share net income (or $0.16 adjusted for primary pro forma
per share net income) in the nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's positive cash flow from operating activities was $3.0
million during the nine months ended September 30, 1997, compared to $1.2
million during the nine months ended September 30, 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, and was partially offset
by expenditures for inventory associated with the Company's Disposable Products
Division and a decrease in accrued expenses.
The Company used approximately $3.5 million more net cash in investing
activities in the nine months ended September 30, 1997 than in the nine months
ended September 30, 1996. The Company has made capital expenditures in the nine
months ended September 30, 1997 for equipment (primarily additional washers,
dryers and sterilizers) of $2.3 million and for reusable surgical products of
$4.5 million as compared to $784,000 for equipment and $2.6 million for reusable
surgical products during the nine months ended September 30, 1996. These
expenditures were funded primarily by cash provided by operating activities and
excess cash from the proceeds of the Company's public offering.
Page 9 of 13
<PAGE> 12
As of September 30, 1997, the Company had cash of approximately $1.2
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. As of the third quarter, the Company has
completed its planned capacity expansions at its Houston, Los Angeles and
Raleigh/Durham facilities. Over the next nine months, the Company expects to
complete expansion at its Tampa, Baltimore and Detroit facilities for
approximately $900,000.
The Company does not have any borrowings under its $15.0 million
unsecured revolving credit facility with First Union National Bank. The Company
anticipates drawing on this facility for its capital requirements in the first
quarter of 1998 and throughout 1998. The interest rate on this facility is LIBOR
plus 200 basis points.
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.
FACTORS THAT MIGHT AFFECT FUTURE RESULTS
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 and its management, (iii) statements of
future economic performance, and (iv) assumptions underlying statements
regarding the Company or its business. The cautionary statements set forth below
discuss important factors that could cause actual results to differ materially
from any forward-looking statements.
Sales Process and Market Acceptance of Products and Services. The
Company's future performance depends on its ability to increase revenues to new
and existing customers. The Company's sales process for new customers is
typically between six and twelve months in duration from initial contact to
purchase commitment. The extended sales process is typically due to the
complicated approval process within hospitals for purchases from new suppliers,
the long duration of existing supply contracts, and implementation delays
pending termination of a hospital's previous supply relationships. The long
sales process inhibits the ability of the Company to quickly increase revenues
from new and existing customers or enter new markets. SRI's future performance
will also depend on market acceptance of its combination of reusable surgical
products, disposable accessory packs, and direct delivery and retrieval service.
SRI's market is now dominated by disposable products, and the Company's primary
strategic emphasis on reusable surgical products and reprocessing services
requires its customers to change their customary purchasing patterns. There is
no assurance that a significant portion of the market will shift from disposable
products to the Company's reusable surgical products and reprocessing services.
The Company's inability to gain wider market acceptance of its reusable
Page 10 of 13
<PAGE> 13
products and reprocessing services would have a material adverse effect on the
Company's operating and expansion plans.
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. 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.
Dependence on a Significant Customer and Market Consolidation. During
1996, Columbia/HCA Healthcare Corporation ("Columbia") hospitals, with which the
Company currently does business, accounted for approximately 15% of SRI's sales.
Although each Columbia hospital currently makes its purchasing decisions on an
individual basis, and no single hospital accounted for more than 3% of the
Company's sales, the Company believes the executive management of Columbia has
the ability to influence the selection of particular vendors. However, recent
changes at Columbia HCA are believed to have lessened executive management's
likelihood of such an influence. Nevertheless, the loss of a substantial portion
of the Columbia hospitals' business would have a material adverse effect on the
Company. Additionally, hospitals are increasingly buying products and services
in groups to improve efficiency and lower costs. Although SRI is increasingly
targeting these groups for its sales efforts, a change of its customers'
purchasing patterns could have a material adverse effect on the Company.
Competition. The Company's business is highly competitive. The
Company's competitors include a number of distributors and manufacturers, as
well as the in-house reprocessing operations of hospitals. Certain of the
Company's existing and potential competitors possess substantially greater
resources than the Company, and the Company's market is dominated by their
disposable products. Some of the Company's competitors 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.
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 continues to receive follow-up
treatment. He has returned to work on a full-time basis, but there is no
assurance his condition will permit him to continue providing the same level of
service to the Company 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.
Increasing Replacement and Amortization Costs. SRI acquired its
equipment and surgical products at a cost substantially below both their
original cost and current replacement cost, which has resulted in lower
depreciation, amortization, and shrinkage expense for those assets since the
Acquisition, as compared to the expenses incurred by Amsco Sterile. Since the
Acquisition, SRI has purchased equipment and surgical products at current
replacement cost, resulting in increased depreciation, amortization, and
shrinkage expense. SRI amortizes its reusable surgical products on a per use
basis. If the products' actual number of uses proves to be shorter than SRI's
current estimates, SRI's annual product amortization expense would increase,
which would adversely affect its profitability. The amount of shrinkage (loss
and scrap of reusable surgical products) experienced by the Company is
influenced by a variety of factors including the customers' surgical product
rotation and operating room control procedures, the Company's internal tracking
of reusable surgical products through bar coding and the Company's increased
use of standardized surgical packs.
Page 11 of 13
<PAGE> 14
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
EXHIBITS
27 - Financial Data Schedule (for SEC use only).
REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the six months
ended September 30, 1997.
Page 12 of 13
<PAGE> 15
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: November 5, 1997 By: /s/ James T. Boosales
---------------------------------------
James T. Boosales
Executive Vice President and
Chief Financial Officer
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF STERILE RECOVERIES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,155
<SECURITIES> 0
<RECEIVABLES> 5,519
<ALLOWANCES> 52
<INVENTORY> 1,951
<CURRENT-ASSETS> 0
<PP&E> 8,472
<DEPRECIATION> 1,538
<TOTAL-ASSETS> 26,586
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 23,542
<TOTAL-LIABILITY-AND-EQUITY> 26,586
<SALES> 28,822
<TOTAL-REVENUES> 28,822
<CGS> 19,048
<TOTAL-COSTS> 19,048
<OTHER-EXPENSES> 6,599
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (105)
<INCOME-PRETAX> 3,280
<INCOME-TAX> 1,278
<INCOME-CONTINUING> 2,002
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,002
<EPS-PRIMARY> 34
<EPS-DILUTED> 0
</TABLE>
