<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, 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
July 30, 1997:
Common Stock, par value $.001 - 5,658,094
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C> <C> <C>
Item 1 Financial Statements
Condensed Statements of Earnings for the three month
period and six month period ended June 30, 1997
(unaudited) and three month period and six month
period ended June 30, 1996 (unaudited)........................................................ 1
Condensed Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996 ........................................................................ 2
Condensed Statements of Cash Flow for the six month
period ended June 30, 1997 (unaudited) and the six
period ended June 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.............................................................................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
SIGNATURE.......................................................................................................14
</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 Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 9,675 $ 7,953 $ 18,712 $ 15,284
Cost of revenues 6,470 5,398 12,419 10,422
-------- -------- -------- --------
Gross profit 3,205 2,555 6,293 4,862
Distribution expenses 729 749 1,486 1,472
Selling and administrative expenses 1,395 1,200 2,723 2,267
-------- -------- -------- --------
Income from operations 1,081 606 2,084 1,123
Interest expense (income), net (38) 345 (82) 692
-------- -------- -------- --------
Income before income tax expense 1,119 261 2,166 431
Income tax expense 431 -- 850 --
-------- -------- -------- --------
Net income $ 688 $ 261 $ 1,316 $ 431
======== ======== ======== ========
Pro forma information
Historical net income $ 688 $ 261 $ 1,316 $ 431
Pro forma income tax expense -- 100 -- 166
-------- -------- -------- --------
Pro forma net income $ 688 $ 161 $ 1,316 $ 265
======== ======== ======== ========
Historical(1997)and pro forma
(1996) net income per common
share, primary $ 0.12 $ 0.05 $ 0.22 $ 0.08
======== ======== ======== ========
Weighted average common shares
outstanding, primary 5,897 3,513 5,851 3,513
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements Page 1 of 14
<PAGE> 4
STERILE RECOVERIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1997 1996
----------- ----------
(unaudited)
ASSETS
<S> <C> <C>
Cash $ 3,299 $ 5,199
Accounts receivable, net 5,236 5,253
Inventories 1,608 1,240
Prepaid expenses and other assets 648 530
Reusable surgical products, net of
accumulated amortization of $3,278
and $2,388, respectively 8,458 6,915
Property, plant and equipment, net 6,452 5,102
Goodwill, net 536 550
Deferred income taxes 217 217
------- ------
Total assets $26,454 $25,006
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable--related parties $ -- $ 1,000
Accounts payable 2,405 1,360
Employee related accrued expenses 752 901
Other accrued expenses 460 989
------- -------
Total liabilities $ 3,617 $ 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
5,656,094 and 5,521,189 shares respectively 6 6
Additional paid-in capital 20,140 19,376
Retained earnings 2,691 1,374
------- -------
Total shareholders' equity 22,837 20,756
------- -------
Total liabilities and shareholders' equity $26,454 $25,006
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements Page 2 of 14
<PAGE> 5
STERILE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOW
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Increase (decrease) in cash Cash flows from operating activities:
Net income .......................................................... $ 1,316 $ 431
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 297 237
(Gain) Loss on sale of equipment/reusable surgical products ....... (1) 0
Amortization of reusable surgical products ........................ 906 529
Provision for reusable surgical products shrinkage ................ 282 163
Change in assets and liabilities (net of business combination):
Accounts receivable ............................................. 17 (849)
Inventories ..................................................... (362) (192)
Prepaid expenses and other assets ............................... (115) (147)
Accounts payable ................................................ 1,044 474
Accrued expenses ................................................ (626) 132
------- -------
Net cash provided by operating activities ..................... 2,758 778
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment .......................... (1,636) (428)
Purchases of reusable surgical products ............................. (2,741) (1,675)
Proceeds from sale of equipment/reusable surgical products .......... 6 0
Payment for acquisition of business, net of cash acquired ........... 0 6
------- -------
Net cash used in investing activities ......................... (4,371) 2,097
------- -------
Cash flows from financing activities:
Proceeds from convertible demand notes .............................. 0 1,000
Payments on related party debt ...................................... (250) 0
Payments on acquisition debt ........................................ 0 (658)
Net proceeds from working capital facility .......................... 0 694
Net proceeds from issuance of common stock .......................... (37) 300
------- -------
Net cash provided by (used in) financing activities ........... (287) 1,336
------- -------
Increase (decrease) in cash ............................................. (1,900) 17
Cash and cash equivalents at beginning of period ........................ 5,199 251
------- -------
Cash and cash equivalents at end of period .............................. $ 3,299 $ 268
======= =======
Supplemental cash flow information:
Cash paid for interest .............................................. $ 35 $ 679
======= =======
Cash paid for income taxes .......................................... $ 1,098 $ --
======= =======
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 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.
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 six months ended June 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 Six Months Ended
June 30,1996 June 30, 1996
(in thousands) (in thousands)
<S> <C> <C>
Historical income before
income taxes $ 261 $ 431
Pro forma income tax expense 100 166
----- -----
Pro forma net income $ 161 $ 265
===== =====
</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 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 14
<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%.
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 Six Months
Ended June 30, Ended June 30,
----------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Actual weighted average
shares outstanding 5,655,628 3,311,448 5,614,261 3,311,448
Additional shares 240,977 201,367 237,197 201,367
--------- --------- --------- ---------
Weighted average shares
used in income per
share calculation -
primary 5,896,605 3,512,815 5,851,458 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 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 14
<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>
Six Months Ended
June 30, 1996
-------------
(In thousands,
except per share data)
<S> <C>
Revenues $15,398
Net income after income tax expense $ 236
Net income per common share, primary $ 0.07
</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 14
<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 Six Months Ended
June 30, June 30,
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues ............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues ..................... 66.9 67.9 66.4 68.2
----- ----- ----- -----
Gross profit ...................... 33.1 32.1 33.6 31.8
Distribution expense ................. 7.5 9.4 7.9 9.6
Selling and administrative expenses .. 14.4 15.1 14.6 14.9
----- ----- ----- -----
Income from operations ............ 11.2 7.6 11.1 7.3
Interest expense (income), net........ (.4) 4.3 (.5) 4.5
----- ----- ----- -----
Income before income taxes ........ 11.6 3.3 11.6 2.8
Income tax expense ................... 4.5 -- 4.6 --
----- ----- ----- -----
Historical net income ................ 7.1 3.3 7.0 2.8
Pro forma income tax expense ......... -- 1.3 -- 1.1
----- ----- ----- -----
Historical (1997) and pro forma (1996)
net income ........................ 7.1% 2.0% 7.0% 1.7%
===== ===== ===== =====
</TABLE>
Gore(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
Page 7 of 14
<PAGE> 10
REVENUES. The Company's revenues increased $1.7 million, or 21.7%, to
$9.7 million in the three months ended June 30, 1997, from $8.0 million in the
three months ended June 30, 1996. In the six months ended June 30, 1997, the
Company's revenues increased $3.4 million, or 22.4%, to $18.7 million, from
$15.3 million in the six months ended June 30, 1996. The revenue increases were
equally attributable to new customers and increased revenues from current
customers.
GROSS PROFIT. Gross profit increased $650,000, or 25.4%, to $3.2
million in the three months ended June 30, 1997, from $2.6 million in the three
months ended June 30, 1996; and $1.4 million, or 29.4%, to $6.3 million in the
six months ended June 30, 1997, from $4.9 million in the six months ended June
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 amortiza tion 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. The Company's reopening of its Dallas facility in April 1997
caused it to incur higher production costs due to slower than expected ramp-up
of the facility to full efficiency and duplication of expenses as the Company
transferred business from Houston to Dallas.
DISTRIBUTION EXPENSES. Distribution expenses decreased $20,000, or
2.7%, to $729,000 in the three months ended June 30, 1997, from $749,000 in the
three months ended June 30, 1996; and increased $14,000, or 1.0% to $1,486,000
in the six months ended June 30, 1997, from $1,472,000 in the six months ended
June 30, 1996. Distribution expenses as a percentage of revenues decreased 1.9%
to 7.5% in the three months ended June 30, 1997, from 9.4% in the three months
ended June 30, 1996; and 1.7% to 7.9% in the six months ended June 30, 1997,
from 9.6% in the six months ended June 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 $195,000, or 16.3%, to $1.4 million in the three months ended
June 30, 1997, from $1.2 million in the three months ended June 30, 1996; and
$456,000, or 20.1%, to $2.7 million in the six months ended June 30, 1997, from
$2.3 million in the six months ended June 30, 1996. As a percentage of revenues,
selling and administrative expenses decreased .7% to 14.4% during the three
months ended June 30, 1997, from 15.1% during the three months ended June 30,
1996; and .3% to 14.6% in the six months ended June 30, 1997, from 14.9% during
the six months ended June 30, 1996. Though significantly increasing its sales
force since the second quarter of 1996, the Company continues to leverage
administrative costs over more revenues.
INTEREST EXPENSE (INCOME), NET. Interest expense decreased $383,000, or
111.0%, to a positive income of ($38,000) in the three months ended June 30,
1997, from an expense of $345,000 in the three months ended June 30, 1996; and
decreased $774,000, or 111.8%, to a positive income of ($82,000) in the six
months ended June
Page 8 of 14
<PAGE> 11
30, 1997, from an expense of $692,000 in the six months ended June 30, 1996. As
a percentage of revenues, interest expense decreased 4.7% to (0.4)% during the
three months ended June 30, 1997, from 4.3% during the three months ended June
30, 1996; and decreased 5.0% to (0.5)% in the six months ended June 30, 1997,
from 4.5% in the six months ended June 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 June 30, 1997, from income before taxes of $261,000 in the three months
ended June 30, 1996; and to $2.2 million in the six months ended June 30, 1997,
from income before taxes of $431,000 in the six months ended June 30, 1996. As a
percentage of revenues, income before taxes in the three months ended June 30,
1997 was 11.6% of revenues compared to income before taxes of 3.3% of revenues
in the three months ended June 30, 1996; income before taxes in the six months
ended June 30, 1997 was 11.6% of revenues compared to 2.8% in the six months
ended June 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 June 30, 1997,
compared with $0.07 historical primary per share net income (or $0.05 adjusted
for pro forma primary per share net income) in the three months ended June 30,
1996; and net income per share of $0.22 on a primary per share basis for the six
months ended June 30, 1997 compared with $0.12 historical primary per share net
income (or $0.08 adjusted for primary pro forma per share net income) in the six
months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's positive cash flow from operating activities was $2.8
million during the six months ended June 30, 1997, compared to $778,000 during
the six months ended June 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 a decrease in
accrued expenses.
The Company used approximately $2.3 million more net cash in investing
activities in the six months ended June 30, 1997 than in the six months ended
June 30, 1996. The Company has made capital expenditures in the six months ended
June 30, 1997 for equipment (primarily additional washers, dryers and
sterilizers) of $1.6 million and for reusable surgical products of $2.7 million
as compared to $428,000 for equipment and $1.7 million for reusable surgical
products during the six months ended June 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 14
<PAGE> 12
As of June 30, 1997, the Company had cash of approximately $3.3
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.
The Company does not have any borrowings under its $15.0 million
unsecured revolving credit facility with First Union National Bank.
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 products
and reprocessing services would have a material adverse effect on the Company's
operating and expansion plans.
Page 10 of 14
<PAGE> 13
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. 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.
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.
Page 11 of 14
<PAGE> 14
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.
Health Care Reform. Numerous proposals have been debated in Congress
and in several state legislatures regarding health care legislation intended to
control the cost and availability of health care services. It is not possible to
determine what health care reform legislation will be adopted by Congress or any
state legislature, or if and when any such legislation will be adopted and
implemented by regulations. In that event, there can be no assurance the Company
will be able to adjust effectively to any regulatory changes made by future
health care reform legislation and remain profitable. The Company is unable to
predict accurately the nature and effect, if any, that the adoption of health
care legislation or regulations or changing interpretations at the federal or
state level would have upon the Company.
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 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.
Page 12 of 14
<PAGE> 15
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
At the annual meeting of the Company's shareholders on April 30, 1997,
the shareholders voted on a proposal to elect James T. Boosales and Lee
R. Kemberling as directors of the Company to serve until the 2000
annual meeting. The following sets forth the votes in this election:
<TABLE>
<CAPTION>
Director Votes For Votes Against or Withheld
------- -------- -------------------------
<S> <C> <C>
James T. Boosales 5,201,994 3,125
Lee R. Kemberling 5,201,894 3,225
</TABLE>
Richard T. Isel, Wayne R. Peterson, Bertram T. Martin, Jr., and James
M. Emanuel continue to serve as directors. The shareholders also
approved amendments to the Company's 1995 Stock Option Plan, including
an increase in the number of shares included in the Plan from 500,000
to 700,000 by a vote of 4,983,050 votes for and 213,251 votes against
or withheld.
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 June 30, 1997.
Page 13 of 14
<PAGE> 16
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 11, 1997 By: /s/ James T. Boosales
----------------------------
James T. Boosales
Executive Vice President and
Chief Financial Officer
Page 14 of 14
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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0
0
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