<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, 1998
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
April 23, 1998:
Common Stock, par value $.001 - 5,659,894
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Statements of Earnings for the three
month period ended March 31, 1998 (unaudited)
and the three month period ended March 31, 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Statements of Cash Flow for the three
month period ended March 31, 1998 (unaudited)
and three month period ended March 31, 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
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, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Revenues $ 11,732 $ 9,038
Cost of revenues 7,734 5,950
--------- --------
Gross profit 3,998 3,088
Distribution expenses 887 757
Selling and administrative expenses 1,697 1,328
--------- --------
Income from operations 1,414 1,003
Interest expense (income), net (7) (44)
--------- --------
Income before income tax expense 1,421 1,047
Income tax expense 554 419
--------- --------
Net income $ 867 $ 628
========= ========
Net income per common share - basic $ 0.15 $ 0.11
========= ========
Net income per common share - diluted $ 0.15 $ 0.11
========= ========
Weighted average common shares outstanding - basic 5,660 5,573
========= ========
Weighted average common shares outstanding - diluted 5,859 5,856
========= ========
</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,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 516 $ 380
Accounts receivable, net 6,087 6,016
Inventories 2,074 1,979
Prepaid expenses and other assets 643 1,203
Reusable surgical products, net 11,084 10,034
Property, plant and equipment, net 7,687 7,253
Goodwill, net 514 521
Deferred income taxes 160 160
-------- --------
Total assets $ 28,765 $ 27,546
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,694 $ 1,603
Employee related accrued expenses 757 926
Other accrued expenses 1,099 669
-------- --------
Total liabilities 3,550 3,198
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
5,659,894 shares 6 6
Additional paid-in capital 20,167 20,167
Retained earnings 5,042 4,175
-------- --------
Total shareholders' equity 25,215 24,348
-------- --------
Total liabilities and shareholders' equity $ 28,765 $ 27,546
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 2 of 12
<PAGE> 5
STERILE RECOVERIES, INC.
CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, March 31,
1998 1997
-------- --------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net income $ 867 $ 628
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 203 146
Amortization of reusable surgical products 675 425
Provision for reusable surgical products shrinkage 256 136
Change in assets and liabilities
Accounts receivable (71) 43
Inventories (95) 20
Prepaid expenses and other assets 560 (67)
Accounts payable 91 581
Accrued expenses 261 (139)
-------- ---------
Net cash provided by operating activities 2,747 1,773
-------- ---------
Cash flows from investing activities
Purchases of property, plant and equipment (630) (772)
Purchases of reusable surgical products (1,981) (1,275)
-------- ---------
Net cash used in investing activities (2,611) (2,047)
-------- ---------
Cash flows from financing activities
Payments on related party debt 0 (250)
Net proceeds from issuance of common stock 0 1
-------- ---------
Net cash provided by (used in) financing activities 0 (249)
-------- ---------
Increase (decrease) in cash 136 (523)
Cash and cash equivalents at beginning of period 380 5,199
-------- ---------
Cash and cash equivalents at end of period $ 516 $ 4,676
======== =========
Supplemental cash flow information
Cash paid for interest $ 10 $ 26
======== =========
Cash paid for income taxes $ 97 $ 258
======== =========
Conversion of Convertible Demand Note into 128,205
shares of Common Stock $ 0 $ 750
======== =========
</TABLE>
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
the year ended December 31, 1997 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, 1998 are not
necessarily indicative of the results that can be expected for
the entire year ending December 31, 1998. The unaudited
financial statements should be read in conjunction with the
financial statements and the notes thereto included in the
Form 10-K.
2. INDEBTEDNESS
The Company does not have any borrowings under its
$15.0 million unsecured revolving credit facility with First
Union National Bank.
Page 4 of 12
<PAGE> 7
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., 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
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 65.9 65.8
------ ------
Gross profit 34.1 34.2
Distribution expense 7.6 8.4
Selling and administrative expenses 14.4 14.7
------ ------
Income from operations 12.1 11.1
Interest expense (income),net 0.0 (0.5)
------ ------
Income before income taxes 12.1 11.6
Income tax expense 4.7 4.6
------ ------
Net income 7.4% 7.0%
====== ======
</TABLE>
GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
Page 5 of 12
<PAGE> 8
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. The Company's revenues increased $2.7 million, or 29.8%, to
$11.7 million in the first quarter of 1998 from $9.0 million in the first
quarter of 1997. The revenue increases were equally attributable to new
customers and increased revenues from current customers.
Gross Profit. Gross profit increased $910,000, or 29.5%, to $4.0
million in the first quarter of 1998 from $3.1 million in the first quarter of
1997. The Company continues to benefit from labor efficiencies in the pack
room and the economies of scale associated with spreading fixed costs over more
revenues. These benefits 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.
As a percentage of revenues, gross profit remained about the same at 34.1% in
the first quarter of 1998, compared to 34.2% in the first quarter of 1997.
Distribution Expenses. Distribution expenses increased $130,000, or
17.2%, to $887,000 in the first quarter of 1998 from $757,000 in the first
quarter of 1997. Distribution expenses as a percentage of revenues decreased
by 0.8% to 7.6% in the first quarter of 1998 from 8.4% in the first quarter of
1997. 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 $369,000, or 27.8%, to $1.7 million in the first quarter of
1998, from $1.3 million in the first quarter of 1997. As a percentage of
revenues, selling and administrative expenses decreased by 0.3% to 14.4% during
the first quarter of 1998 from 14.7% during the first quarter of 1997. The
Company's continuing increase in its sales force in the first quarter of 1998
was offset by its continuing ability to leverage administrative costs over more
revenues.
Interest Expense (Income), Net. Interest income decreased $37,000,
or 84.1%, to an income of $7,000 in the first quarter of 1998 from an income of
$44,000 in the first quarter of 1997, due to a reduction of cash available for
investing.
Income Before Income Tax Expense. As a result of the foregoing, the
Company's income before taxes increased to $1.4 million in the first quarter of
1998, from income before taxes of $1.0 million in the first quarter of 1997.
As a percentage of revenues, income before taxes in the first quarter of 1998
was 12.1% of revenues compared to income before taxes of 11.6% of revenues in
the first quarter of 1997.
Page 6 of 12
<PAGE> 9
Income Tax Expense. Income tax expense increased $135,000 to
$554,000 in the first quarter of 1998, compared to $419,000 in the first
quarter of 1997. The Company's effective tax rate decreased to 39.0% in the
first quarter of 1998, compared to 40.0% in the first quarter of 1997.
Net Income Per Share. The Company recorded a net income per share of
$0.15 on a basic and diluted per share basis for the first quarter of 1998,
compared with $0.11 basic and diluted per share net income in the first quarter
of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's positive cash flow from operating activities was $2.7
million during the first three months of 1998, compared to $1.8 million during
the first three months of 1997. The increase in cash from operating activities
resulted primarily from increased net income before amortization and
depreciation expense and a decrease in prepaid expenses.
The Company used approximately $564,000 more net cash in investing
activities in the first three months of 1998 than in the first three months of
1997. The Company has made capital expenditures in the first three months of
1998 for equipment of $630,000 and for reusable surgical products of $2.0
million compared to $772,000 for equipment and $1.3 million for reusable
surgical products during the first three months of 1997. These expenditures
were funded primarily by cash provided by operating activities.
The Company continues to increase its expenditures for reusable
surgical products, primarily to support anticipated increases in business. The
Company's business is capital intensive and will require substantial capital
expenditures for additional surgical products and equipment during the next
several years to achieve its operating and expansion plans. To adequately
service a new customer, the Company estimates that it makes an investment in
new reusable surgical products and carts equal to approximately 50% of the
projected first year revenue from the customer. The Company estimates capital
expenditures for new carts and reusable surgical products will be approximately
$750,000 per month for the next 12 months, although the amount will fluctuate
with the growth of its business. The Company also expects to make additional
expenditures of approximately $1.0 million in 1998 for equipment upgrades and
maintenance to increase the aggregate capacity of its facilities and $1.0
million for new technology software and related computer hardware. Depending
on its growth, the Company expects to add a facility at the end of 1998 or
beginning of 1999, at an estimated cost of between $2.5 and $5.0 million
depending on size and location.
The Company does not have any borrowings under its $15.0 million
unsecured revolving credit facility with First Union National Bank.
Page 7 of 12
<PAGE> 10
As of March 31, 1998, the Company had cash of approximately $516,000.
The Company believes this 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. The Company expects to fund additional capital
expenditures from a combination of internal cash flow, its credit facility, and
other capital sources.
Certain Considerations
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.
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. In the longer term, the Company expects that its needs for
capital expenditures will be substantial and will depend on its growth and
opportunities. The Company's inability to obtain adequate capital could have a
material adverse effect on the Company. See -- "Liquidity and Capital
Resources."
Dependence on a Significant Customer and Market Consolidation. During
the first quarter of 1998, Columbia/HCA Healthcare Corporation ("Columbia")
hospitals, with which the Company currently does business, accounted for
approximately 15% of SRI's revenues, compared to 16% in the first quarter of
Page 8 of 12
<PAGE> 11
1997. 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 revenues, 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, including the
Convertors division of Allegiance Corporation, 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, Bertram T. Martin,
Jr., Wayne R. Peterson, and James T. Boosales, its principal officers. The
loss of the services of one or more of these key executives could have a
material adverse effect on the Company. In December 1997, the Company appointed
Mr. Isel as its Chairman of the Board and Mr. Martin as its President. These
changes recognize Mr. Isel's shift from responsibility for day-to-day
operations to focus on longer-term business opportunities, including additional
products and services, strategic relationships, and joint venture or
acquisition opportunities.
Increased 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.
Government Regulation. Significant aspects of the Company's
businesses are subject to state and federal statutes and regulations governing,
among other things, medical waste-disposal and workplace health and safety. In
Page 9 of 12
<PAGE> 12
addition, most of the products furnished or sold by the Company are subject to
regulation as medical devices by the U.S. Food and Drug Administration, as
well as by other federal and state agencies. The FDA has the power to enjoin
future violations, seize adulterated or misbranded devices, to require the
manufacturer to remove them from the market, and to publicize relevant facts.
The Company's facilities have been subject to regular inspections by FDA
officials and the Company has received warning letters regarding its compliance
with the FDA's Current Good Manufacturing Practices. The Company has either
adequately addressed the concerns or is actively working with the FDA to
resolve the issues. There can be no assurance that federal or state
governments will not impose additional restrictions or adopt interpretations of
existing laws that could materially adversely affect the Company's business,
results of operations, or financial conditions.
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, 1998.
EXHIBITS
Exhibit 27 - Financial Data Schedule is filed herewith.
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, 1998 By /s/ 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 516
<SECURITIES> 0
<RECEIVABLES> 6,139
<ALLOWANCES> 52
<INVENTORY> 2,074
<CURRENT-ASSETS> 0
<PP&E> 9,622
<DEPRECIATION> 1,935
<TOTAL-ASSETS> 28,765
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 25,209
<TOTAL-LIABILITY-AND-EQUITY> 28,765
<SALES> 11,732
<TOTAL-REVENUES> 11,732
<CGS> 7,734
<TOTAL-COSTS> 7,734
<OTHER-EXPENSES> 2,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7)
<INCOME-PRETAX> 1,421
<INCOME-TAX> 554
<INCOME-CONTINUING> 867
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 867
<EPS-PRIMARY> .15
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