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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO. 000-20997
STERILE RECOVERIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Florida 59-3252632
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(State of Incorporation) (IRS Employer Identification No.)
28100 U.S. HIGHWAY 19 NORTH, SUITE 201, CLEARWATER, FLORIDA 33761
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 726-4421
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 - 5,659,894
Indicate by check mark 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on
March 16, 1998, as reported on the Nasdaq National Market, was approximately
$29,780,341. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The Registrant had outstanding 5,659,894 shares of Common Stock as of
March 16, 1998.
__________________________
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders
to be held on May 19, 1998 is incorporated by reference in Part III
of this report to the extent stated herein.
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STERILE RECOVERIES, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Section Page
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PART I
Item 1: Business 1
Item 2: Properties 9
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
PART II
Item 5: Market for the Registrant's Common Equity and Related
Shareholder Matters 11
Item 6: Selected Financial Data 12
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8: Financial Statements and Supplementary Data 21
Item 9: Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 40
PART III
Item 10: Directors and Executive Officers of the Registrant 40
Item 11: Executive Compensation 40
Item 12: Security Ownership of Certain Beneficial Owners
and Management 40
Item 13: Certain Relationships and Related Transactions 40
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 40
SIGNATURES 44
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PART I
ITEM 1. BUSINESS
Sterile Recoveries, Inc. ("SRI" or the "Company") provides hospitals
and surgery centers with a comprehensive surgical procedure-based daily
delivery service. The foundations of this service are SRI's reusable surgical
products including gowns, towels, drapes and basins, and its daily delivery and
retrieval of these products for each customer. The Company complements its
reusable products with cost-effective disposable accessory packs to provide a
comprehensive offering for surgical procedures. SRI believes its superior
quality reusable products and its service solutions, including direct delivery
to its customers' departments, differentiate SRI from its competitors.
At eight regional facilities, SRI collects, sorts, cleans, inspects,
packages, sterilizes, and delivers its reusable products on a just-in-time
basis. SRI offers an integrated "closed-loop" reprocessing service which 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 which is liquid and bacterial
resistant.
The Company currently serves a growing customer base of over 300
hospitals and surgery centers located in 20 states, including Duke University
Medical Center (Durham), Henry Ford Hospital (Detroit), Johns Hopkins Medical
Center (Baltimore), St. Luke's Episcopal Hospital (Houston), Jackson Memorial
Hospital (Miami), IHC Hospitals, Inc. (Salt Lake City), and Hospital of the
Good Samaritan (Los Angeles). None of the foregoing customers individually
accounts for a material portion of the Company's revenues. The Company
recently announced agreements to supply two group purchasing organizations.
Through an existing Purchase Agreement of Standard Textile Co., Inc. with VHA,
Inc., the Company now offers its reusable products service to VHA members. The
Company's agreement with Hospital Services Corporation of America now
designates the Company as an approved vendor of reusable surgical products to
HSCA's hospital and surgery center members.
The Company believes that its reusable surgical product delivery and
retrieval service is a superior and competitively priced alternative to
disposable surgical products or to operating an in-house reusable program for
surgical products. The Company's delivery service offers savings to hospitals
by reducing or eliminating costly steps associated with the disposable or
in-house alternatives: (i) disposing of biohazardous wastes, (ii) carrying an
inventory of disposable surgical products, and (iii) in-house processing of
reusable surgical products. In addition to these cost savings, the Company's
liquidproof and liquid resistant gowns offer surgeons and surgical staff
enhanced protection against transmission of blood-borne pathogens, including
the HIV and hepatitis viruses. Also, the Company's reusable gowns are made
with a breathable surgical fabric, which is designed for superior comfort
during long procedures.
SRI offers its customers disposable accessory packs containing smaller
surgical items which are not reusable, such as needles, syringes, and tubing.
SRI complements its reusable surgical product delivery and retrieval service
with disposable surgical products that are not available in reusable form. The
Company believes the flexibility it offers its customers by combining reusable
surgical gowns, towels, drapes, and basins with disposable products have
improved the Company's competitive position in the marketplace.
SRI 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").
* GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
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THE MARKET
The United States health care system includes approximately 7,100 acute
care hospitals, over 2,400 freestanding surgery centers, and a variety of other
health care facilities. According to industry sources, approximately 31
million surgical procedures were performed at hospitals and surgery centers in
1996. The Company believes between $40-$50 of reusable surgical products
service revenues can be realized from a typical surgical procedure.
In the 1980's, hospitals began using custom procedure trays because
of their convenience, a trend which continued to grow until recently. A
custom procedure tray typically contains, in disposable form, most of the
sterile products used in a particular surgical or other medical procedure.
According to industry sources, total sales of custom procedure trays in the
United States were an estimated $1.5 billion in 1995. However, the Company
believes that custom procedure trays have several shortcomings relative to
reusable products, including costs associated with excessive product content,
storage, handling, and waste disposal, and the working capital requirements
required to carry product inventory.
Most hospitals which converted to custom procedure trays eliminated
the in-house personnel and equipment necessary to process reusable surgical
products. Furthermore, hospitals using in-house facilities are increasingly
unwilling to support those personnel and capital requirements. With the
growth of managed care, many hospitals and surgery centers are seeking
significant cost reduction solutions. The Company believes that a service
which provides daily delivery of substantially better quality surgical products
without any capital investment by the hospital, thereby reducing employee and
space needs, should become an attractive managed care option for hospitals.
The following developments have created a market opportunity for SRI's
reusable surgical product delivery and retrieval service:
Continued Pressure on Hospitals to Contain Cost and Raise
Productivity. With the growth of managed care, economic constraints continue
to require hospitals to become more efficient by limiting capital investments
and reducing staff and costs. Hospitals are continually seeking to decrease
their cost of operations including supplies and waste disposal. SRI offers a
service which eliminates the need for in-house inventory or processing
facilities or the process costs associated with stocking and discarding
disposable products.
Concern Regarding the Transmission of Infectious Diseases. The health
care industry confronts daily the risk of transmission of infectious diseases
through cross-infections. These concerns have increased the desirability of
surgical barrier fabrics that protect surgeons and surgical staff from patient
liquids. SRI's liquidproof gown prevents liquid and viral strike-through in
critical areas during surgical procedures involving higher risk. The Company's
standard gown is specially designed to resist liquid and bacterial
strike-through in most other surgical procedures.
Concern Regarding the Handling and Disposal of Biohazardous Waste.
The disposal of large volumes of infectious and hazardous waste generated by
the health care industry continues to attract increased public awareness. The
increased burdens on hospitals generating biohazardous waste due to
restrictions on incineration and access to dump sites give a competitive
advantage to reprocessing systems, such as SRI's, which replace disposable
surgical products with reusable surgical products. The SRI reprocessing system
substantially reduces biohazardous waste and its impact on the environment.
Increased Outsourcing of Hospital Functions That Do Not Involve
Patient Care. Hospitals with significant staff, capital and space dedicated to
in-house processing of reusable surgical products are increasingly outsourcing
this function to more efficient outside providers. This trend is consistent
with the overall industry focus on efficiency and improved patient care. SRI's
service allows hospitals to outsource to SRI the ownership and reprocessing of
surgical products, and inventory management of complementary disposable
products as well.
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STRATEGY
The Company's objective is to continue its growth and become a leading
provider of reusable surgical products and related delivery and retrieval
services to hospitals and surgery centers. The Company's principal strategies
for achieving this objective are as follows:
Leverage Infrastructure With Increased Penetration in Existing
Markets. The Company believes its existing facilities currently operate at
approximately 60% of their aggregate annual revenue capacity, allowing it to
add a substantial amount of sales without the need for significant additional
capital expenditures for equipment or new facilities. To obtain increased
operating leverage and expand profit margins, the Company intends to grow its
customer base within its existing markets and focus on expanding its
relationships with existing customers by servicing additional surgical
procedures.
Accelerate the Sales Process. The Company believes that its service
solutions address many of the requirements of hospitals to reduce total costs
of operations required by the managed care revenue reductions. Therefore, the
Company has increased its sales force from 15 to 22 people during 1997 to
increase prospective customer awareness of its value. More importantly, SRI's
presentation shows the total value of it's services in reducing product
expenditures, supply chain process costs, biohazardous waste, and instrument
costs when its programs are fully implemented.
Expand National and Regional Agreements. To date, the Company's
service agreements are primarily with individual hospitals. Management
believes that there is a trend toward group purchasing among hospitals. To
address this consolidation, management intends to offer its reusable products
delivery service through agreements with national and regional hospital groups.
SRI recently announced agreements to supply national group purchasing
organizations VHA, Inc. and Health Services Corporation of America, reflecting
significant progress in this effort (See "Business--Group Purchasing
Agreements").
Add Facilities in Selected Markets. SRI currently services customers
in 20 states through eight regional facilities. SRI serves several large
metropolitan areas through highway transport and satellite (depots) supported
by a regional facility. To expand geographically, the Company expects to build
additional facilities when needed in markets previously served by highway
transport. For example, the Company re-opened its Dallas facility in April
1997 to better serve its customers in Northern Texas and Southern Oklahoma that
were previously serviced from the Company's facility in Houston, Texas. From
each new facility, SRI will be able to serve new metropolitan areas which were
previously too far from an existing regional facility. The Company believes
this strategy of incremental geographic expansion will allow the Company to
operate these new facilities profitably by beginning operations with an
existing customer base.
Decentralize Operations to Facilities. The Company operates each of
its facilities on a stand alone basis, with the general manager of each
facility accountable to senior management for sales, service, operations, and
profitability within the facility's market area. The Company believes
individual general managers with operational experience in local markets are
best suited to respond to local business opportunities with overall direction
and support from the Company's corporate staff. The Company's incentive
compensation plan provides compensation awards for the general managers and
certain key production, customer service and sales employees based on
individual and facility performance, as well as overall Company performance.
Each general manager also participates in the Company's stock option plan.
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Utilize Operational Knowledge. The Company's management gained
substantial knowledge in operating Amsco Sterile's facilities. Amsco Sterile
invested approximately $100 million during the period from 1991 to 1994,
allowing management to implement innovative techniques and processes. As a
result, when the Company acquired these facilities, management had developed a
high degree of expertise in operations and was ready to capitalize upon Amsco
Sterile's development efforts. The Company continues to utilize this expertise
to provide superior products and services at a competitive cost.
DELIVERY, RETRIEVAL AND REPROCESSING SYSTEM
SRI's closed-loop reprocessing service picks up soiled reusable
surgical products from its customers and sorts, cleans, inspects, packages,
sterilizes, and redelivers the products. In one trip, SRI's trucks deliver
clean carts of sterilized surgical products to the hospital or surgical center
and retrieve carts containing soiled products and return them to its facility
for reprocessing. The specially designed aluminum carts hold sterile products,
lock to maintain security and sterilization, conveniently roll for delivery
within the hospital and convert into hampers to hold soiled products after the
procedure. The customer avoids the need to maintain secondary stock locations
and the costs of either reprocessing reusable products or stocking and
discarding disposable products.
Upon return to SRI's facility, the contents of the soiled carts are
sorted in a decontamination area. Soiled fabric products are routed through an
automated washing and drying process that delivers clean, dry, and
decontaminated products to a pack room where they are carefully inspected for
damage, repaired if necessary, folded and assembled into packs. The packs are
steam sterilized, sorted, and combined with complementary disposable products
for delivery to the customer. SRI separately cleans, dries, and decontaminates
its carts, stainless steel basins, and other hard reusable products through
special automatic tunnel washers before redelivery. Processing through the
facility occurs in three to five days.
Because the Company's ability to manage its amortization expense
depends on maintaining its sewn goods' useful lives, SRI closely monitors its
reprocessing to ensure longevity. SRI uses a bar coding system to track its
reusable surgical products' status, history, and number of uses. SRI continues
to refine the washing and sterilization processes, building on Amsco Sterile's
substantial investments of time and money to initially develop those
operations.
The growth of SRI's business reflects its products' appeal, its
service quality, and general customer resistance to change when the SRI system
is in place. SRI also believes its direct relationship with hospital staff has
been important in attracting and retaining customers. Many of SRI's
competitors use a distributor system which introduces an intermediary between
the competition and their customers which SRI believes adds costs.
The Company's sales process for new customers is typically six to
twelve months in duration from initial contact to a 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. Conversely, the Company's high
service level, quality products, and customer resistance to change favors its
retention of existing customers.
SRI bills its customers weekly for the previous week's deliveries on a
per-use basis under service contracts or purchase orders. Consistent with
industry custom, these contracts generally are cancellable by either party with
90 days' notice, and customers may unilaterally reduce their use of the
Company's services under such contracts without penalty. The Company does not
have any order backlog because its products are generally delivered daily in
response to customer orders.
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PRODUCTS
SRI's principal reusable surgical products are its liquidproof and
liquid resistant surgical gowns, towels, drapes, and stainless steel basin
sets. SRI offers these products in a variety of packs configured to the
hospital's specific needs. Packs are comprised of various combinations of
gowns, absorbent towels, liquidproof backtable covers, mayo stand covers, and
stainless components.
The Company's liquidproof gown has GORE(R) Surgical Barrier Fabric in
critical areas to provide protection for procedures which present a higher risk
of liquid strike-through and provide more comfort. This protection is critical
to SRI's customers given current concerns of doctors, staff, and regulatory
authorities regarding transmission of blood-borne pathogens, including the HIV
and hepatitis viruses. The Company's liquid resistant gown is made of an
advanced microfiber polyester fabric designed to resist liquid and bacterial
strike-through in most surgical procedures. All of SRI's gowns and drapes
offer the wearer both comfort and breathability, combined with a high level of
protection from liquid penetration that SRI believes is superior to that
offered by disposable products.
SRI contracts with third-party vendors for the weaving of microfiber
fabric and the cutting and sewing of garments, wraps and drapes. The other
components of the Company's products are currently available at reasonable
costs from a variety of suppliers. To complement its reusable surgical
products, the Company offers disposable accessory packs containing smaller
surgical products, such as needles, syringes, and tubing. The Company develops
these packs with its customers' cooperation to assure a desirable and cost
effective product mix. SRI purchases the products from major manufacturers,
assembles the products in packs, arranges for ethylene oxide sterilization by a
third party, and delivers them to customers on its carts with its reusable
products.
EMPLOYEES
As of December 31, 1997, SRI employed approximately 774 people,
consisting of approximately 35 persons in management, administration and
finance at its corporate office and approximately 739 people in various
positions at the Company's facilities. The Company's employees are not covered
by a collective bargaining agreement, and the Company considers its employee
relations to be good.
GROUP PURCHASING AGREEMENTS
The Company recently announced separate agreements that will allow
members of VHA, Inc. and Health Services Corporation of America ("HSCA") to
choose SRI's reusable surgical products service.
The Company's relationship with VHA, Inc. through its agreement with
Standard Textile Co., Inc. ("Standard") allows the Company to offer its
reusable surgical product service to VHA's approximately 1,600 community-owned
health care organizations and their physicians. The initial term of agreement
is for two years from January 1, 1998 through December 31, 1999. After the
initial term, the agreement is terminable by either party on 90 days advance
notice. Standard sells a variety of medical products to VHA members under a
Purchasing Agreement with VHA, but has been limited in delivering a reusable
product service to VHA members by the geographical scope that its one
reprocessing facility covers. SRI's service to VHA's members will be offered
under Standard's existing Purchasing Agreement with VHA, but in the broad
geographical area covered by the Company's facilities. The agreement also
provides for Standard's sales staff to assist the Company in selling SRI's
services to VHA members and for the Company to purchase part of its reusable
products from Standard, the nation's largest manufacturer of reusable
healthcare textiles and apparel.
The Company's agreement with HSCA designates the Company as an
approved vendor of reusable surgical products to HSCA's hospital and surgery
center members. The agreement runs for five years from November 1, 1997
through October 31, 2002, and is terminable by either party on three months'
advance notice. HSCA is a national group purchasing organization for 1,000
hospitals and surgery centers.
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The agreements do not involve purchase commitments, but the Company
expects that its relationships with these purchasing organizations will
facilitate its sales efforts with member hospitals and surgery centers.
COMPETITION
SRI competes with sellers of both reusable and disposable gowns,
drapes, utensils, and other products for surgical procedures. The market is
dominated by disposables, especially custom procedure trays. SRI believes it
is the leading provider of high quality reusable surgical gowns and drapes, and
that with its complementary disposable products, SRI's surgical supply service
can effectively compete with suppliers of disposable custom procedure trays.
Unlike SRI, many of SRI's competitors can offer full national coverage
and have much greater resources than the Company. The Company's principal
competitors are the Convertors division of Allegiance Corporation, which has a
substantial market share, and Maxxim Medical Inc..
The Company competes based primarily on price, service, quality,
process improvement, and its ability to save its customers waste disposal
costs. The changing healthcare environment in recent years has led to
increasingly intense competition among health care suppliers based on price,
service, and product performance. Hospitals are seeking cost reductions in
response to pressure from governments, insurance companies, and health
maintenance organizations. The Company believes its high degree of expertise
in operations significantly assists it in offering a superior product at a
competitive cost. In addition, hospitals are increasingly seeking buying
leverage by purchasing in integrated networks. SRI believes that competitive
pressure in these areas will continue.
REGULATION
Substantially all of the Company's products and services are subject to
extensive government regulation in the United States by federal, state and local
governmental agencies, including the Food and Drug Administration (the "FDA"),
the Department of Transportation ("DOT"), and the Occupational Safety and Health
Administration ("OSHA"). The Company's products are subject to regulation by
the FDA as medical devices. The regulated devices include the Company's gowns,
towels, drapes, basins, boots, surgical wraps, surgical packs, and delivery
blankets. The FDA regulates the development, production, distribution, and
promotion of medical devices in the United States. Various states in which the
Company's products are being sold or may be sold in the future might impose
additional regulatory requirements. Pursuant to the Federal Food Drug and
Cosmetics Act (the "FDA Act"), a medical device is subject to general controls
regarding FDA inspections of facilities, "Current Good Manufacturing Practices
("CGMPs")," labeling, maintenance of records, and filings with the FDA. FDA
pre-market approval of these devices is obtained under Section 510(k) of
regulations issued under the FDA Act, which provides for FDA approval on an
expedited basis for products that can be shown to be substantially equivalent to
devices legally marketed before May 1976 (the month and year of enactment of the
FDA Act). Products must be produced in registered establishments and be
manufactured in accordance with CGMPs, as defined under the FDA Act. The CGMP
requirements have recently been substantially revised and incorporated into what
is now known as the "Quality System Regulation" (21 CFR Part 820). This action
was taken to add pre-production design controls to the regulations and to try
and achieve consistency with worldwide quality system requirements. The majority
of the changes to the regulations went into effect on June 1, 1997 with full
implementation scheduled for June 1, 1998. Since June 1, 1997, the focus of most
routine FDA inspections has largely been on compliance to the rule. As can be
expected with the introduction of any new regulations, there has been a
significant learning curve on both sides (manufacturer and FDA) as to the intent
and interpretation of several parts of the rule. As a result, it has not been
uncommon for the FDA to issue an "FDA Form 483" and "Warning Letter" following
an inspection dealing with issues associated with the new regulation. Since the
legislation went into effect June 1, 1997, SRI has been inspected five times,
all of which resulted in the issuance of an FDA Form 483. Two inspections
resulted in the issuance of a Warning Letter. Both Warning Letters dealt mainly
with issues associated with the new regulations. To date, the corrections made
by SRI have been reviewed and deemed satisfactory for all inspections except for
one response which remains open pending a final response from the FDA. In
addition, all medical devices must be periodically listed with the FDA.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. If the Company fails to
comply with the applicable provisions of the FDA Act, the FDA can institute
proceedings to detain or seize products, enjoin future violations, impose
product labeling restrictions or enforce product recalls or withdrawals from the
market. The Medical Device Reporting ("MDR") regulation obligates the Company
to provide information to the FDA on injuries alleged to have been associated
with the use of a product or in connection with certain product failures which
could cause serious injury or death.
SRI and its hospital customers also must comply with regulations of
OSHA, including the blood-borne pathogen rule requiring that "universal
precautions" be observed to minimize exposure to blood and other bodily fluids.
To comply with these requirements, SRI's employees wear protective gear in
handling soiled linens in the facility's decontamination area. Properly used,
SRI's products allow its hospital customers to protect their employees in
compliance with these regulations. The Company must comply with local
regulations governing the discharge of water used in its operations. SRI uses
local licensed contractors to dispose of any biohazardous waste generated by the
hospital and received by SRI and therefore does not need to obtain permits for
biohazardous waste disposal. The Company must comply with DOT and OSHA
regulations governing the transportation of hazardous materials. These
regulations concern, among other things, labeling, marketing, placarding, using
proper containers, and reporting discharges. The Company complies with these
regulations by putting soiled products in marked liquidproof bags and locked,
marked transfer carts. Sterilization of the Company's disposable accessory
packs is provided under
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contract by a third-party. The use of ethylene oxide by that third-party in the
sterilization of the Company's disposable accessory packs is subject to
regulation by OSHA and the Environmental Protection Agency. In addition to the
foregoing, numerous other federal, state and local regulatory authorities,
including those enforcing laws which relate to the environment, fire hazard
control, and working conditions, have jurisdiction to take actions which could
have a material adverse effect on the Company. SRI makes expenditures from time
to time to comply with environmental regulations, but does not expect any
material capital expenditures for environmental compliance in the current or
next fiscal year.
CERTAIN CONSIDERATIONS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance,
business prospects, new products, and similar matters. These
statements are based on current expectations and actual results might
differ materially. Among the factors which could cause actual results
and experience to differ are the following:
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. See
"Business--The Market."
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. SRI estimates that its capital
expenditures for new carts and reusable surgical products will be approximately
$750,000 per month in the next twelve months, although the amount will
fluctuate depending on the growth rate of SRI's business. The Company also
expects to make additional expenditures of approximately $2.0 million in 1998
for equipment upgrades and maintenance as required to increase the aggregate
capacity of its facilities. This includes approximately $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.
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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Dependence on a Significant Customer and Market Consolidation. During
1997, Columbia/HCA Healthcare Corporation ("Columbia") hospitals, with which
the Company currently does business, accounted for approximately 11% of SRI's
sales, compared to 15% in 1996. Although each Columbia hospital currently
makes its purchasing decisions on an individual basis, and no single hospital
accounted for more than 4% 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.
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Dependence on a Key Supplier. A significant percentage of the
Company's business is dependent upon its ability to obtain the GORE(R)Surgical
Barrier Fabric from W. L. Gore & Associates, Inc. This material is a key
component of SRI's liquidproof surgical gowns, which accounted for approximately
20% of gowns leased by SRI. The Company does not have a long-term commitment
from W. L. Gore & Associates, Inc. for the supply of this fabric and is
currently unaware of any equivalent substitute for the GORE(R) product.
However, we are continuing to evaluate several alternative products. Sustained
loss of this supply relationship would have a material adverse effect on the
Company. See "Business--Reusable Products."
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. See "Business--Competition."
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.
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.
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 (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and Note B of Notes
to Financial Statements).
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. See "Business--The
Market."
-8-
<PAGE> 11
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 these 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.
ITEM 2: PROPERTIES
SRI operates eight processing facilities of approximately 23,000 to
32,000 square feet each in Baltimore, Dallas, Detroit, Houston, Los Angeles,
Raleigh, Salt Lake City, and Tampa. Each facility contains a uniform set of
computerized and fully automated heavy washers, dryers, and sterilizers to
achieve consistent cleaning and sterilization cycles for reusable surgical
products. The Company uses standard operating procedures at each facility, and
regularly implements at all facilities efficiencies which are developed and
tested at one location.
The Company's properties and the major markets which they serve are
summarized below. All the properties are leased, with the exception of the
Houston processing facility. SRI believes its existing facilities adequately
serve its current requirements.
<TABLE>
<CAPTION>
SQUARE FEET
FACILITY AND LOCATION (APPROX.) LEASE EXPIRATION(1) SELECTED MARKETS SERVED
- --------------------- --------- ------------------- ------------------------
<S> <C> <C> <C>
Processing facilities:
Baltimore, Maryland 32,000 July 31, 2002 Baltimore, Philadelphia,
Pittsburgh, Washington, D.C.
Dallas, Texas 31,000 March 31, 2002 Dallas, Oklahoma City, Tulsa
Detroit, Michigan 23,000 September 30, 2002 Chicago, Detroit, Louisville,
Milwaukee, Toledo
Houston, Texas 30,000 Owned Houston, San Antonio, Austin
Los Angeles, California 30,000 November 30, 2002 San Diego, Sacramento, Los Angeles,
San Francisco
Raleigh, North Carolina 31,500 April 30, 2002 Richmond, Atlanta, South Carolina, North
Carolina
Salt Lake City, Utah 24,000 November 30, 2003 Utah, Idaho
Tampa, Florida 29,000 January 24, 2002 Tampa, Miami, Orlando, Jacksonville
Depots:
Atlanta, GA 2,500 June 30, 2000 --
Chicago, Illinois 3,000 September 30, 1998 --
Louisville, Kentucky 3,000 December 31, 1998 --
Miami, Florida 4,000 January 31, 2000 --
San Francisco, California 6,000 May 31, 1999 --
San Marcos, Texas 3,600 September 30, 2000 --
Warehouse:
Salt Lake City, Utah 5,500 Month to Month --
Disposable products facility:
Orlando, Florida 18,500 February 28, 1999 --
Corporate office:
Clearwater, Florida 10,000 October 31, 2001 --
</TABLE>
(1) Excludes renewal options in the leases which range from one to 10
years.
-9-
<PAGE> 12
ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any
litigation or other legal proceeding expected to have a material effect on the
Company or its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
-10-
<PAGE> 13
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades publicly on The Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol "STRC." The table
below sets forth the high and low bid quotations for the Company's Common Stock
from July 18, 1996 (the date on which trading commenced on the Nasdaq National
Market) through December 31, 1997. These bid prices represent prices between
dealers without adjustment for retail mark-ups, mark-downs, or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK PRICE RANGE
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
Third Quarter (from July 18, 1996) $14.750 $10.875
Fourth Quarter $15.250 $14.125
1997
----
First Quarter $19.125 $15.125
Second Quarter $19.000 $16.625
Third Quarter $19.500 $14.375
Fourth Quarter $17.125 $13.875
</TABLE>
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently expects that its earnings will be retained for
development and expansion, and does not anticipate paying dividends on its
Common Stock in the foreseeable future. Additionally, financial covenants in
the Company's credit facility prohibit the payment of cash dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Notes to Financial
Statements." On February 26, 1998, there were approximately 70 holders of
record of the Common Stock.
-11-
<PAGE> 14
ITEM 6: SELECTED FINANCIAL DATA
The following table contains certain selected financial data and is
qualified by the more detailed Financial Statements and Notes thereto included
elsewhere in this report. The selected financial data for the years ended
December 31, 1997, December 31, 1996, December 31, 1995 and the five-months
ended December 31, 1994, have been derived from the Company's audited financial
statements. The selected financial data (statement of income data only) set
forth below for the seven months ended July 31, 1994 and the year ended
December 31, 1993, have been derived from audited financial statements of Amsco
Sterile (the predecessor company). The Balance Sheet data as of July 31, 1994
and December 31, 1993 have been derived from the unaudited balance sheets of
Amsco Sterile exclusive of notes thereto, which include all adjustments that
Amsco Sterile considers necessary for a fair presentation of its results of
operation and financial position for the period presented. The following
information should be read in conjunction with the Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
Sterile Recoveries, Inc. Predecessor Company (1)
------------------------------------------------------------------ --------------------------
Years Ended Five Months Seven Months
-------------------------------------------------- Ended Ended Year Ended
December 31, December 31, December 31, December 31, July 31, December 31,
1997 1996 1995 1994 1994 1993
------------ ----------- ------------ ------------ ---------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 39,854 $ 32,168 $ 25,320 $ 9,285 $ 12,069 $ 7,988
Cost of revenues 26,286 21,764 17,659 6,550 14,091 15,090
---------- --------- ------------ ----------- --------- ---------
Gross profit (loss) 13,568 10,404 7,661 2,735 (2,022) (7,102)
Distribution expenses 3,150 3,000 2,801 1,032 1,309 981
Selling and administrative
expenses 5,924 4,734 3,975 2,162 7,375 12,132
Restructuring expenses -- -- -- -- -- 1,550
---------- --------- ------------ ----------- --------- ---------
Income (loss) from
operations 4,494 2,670 885 (459) (10,706) (21,765)
Interest expense (income), net (142) 648 1,489 735 4,791 5,727
---------- --------- ------------ ----------- --------- ---------
Income (loss) before
income taxes 4,636 2,022 (604) (1,194) (15,497) (27,492)
Income tax expense (2) 1,835 190 -- -- -- --
---------- --------- ------------ ----------- --------- ---------
Net income (loss) $ 2,801 $ 1,832 $ (604) $ (1,194) $ (15,497) $ (27,492)
========== ========= ============ =========== ========= =========
UNAUDITED PRO FORMA INFORMATION (2):
Historical net income (loss) $ 2,022 $ (604) $ (1,194)
Pro forma income tax expense 778 -- --
--------- ------------ -----------
Pro forma net income (loss) $ 1,244 $ (604) $ (1,194)
========= ============ ===========
Historical (1997 only)
and pro forma net
income per common
share, basic $ 0.50 $ 0.29 $ (0.20) $ (0.40)
========== ========= ============ ===========
Historical (1997 only)
and pro forma net
income per common
share, diluted $ 0.48 $ 0.28 $ (0.20) $ (0.40)
========== ========= ============ ===========
Weighted average
common shares
outstanding, basic 5,637 4,300 3,094 3,000
========== ========= ============ ===========
Weighted average
common shares
outstanding, diluted 5,862 4,491 3,094 3,000
========== ========= ============ ===========
BALANCE SHEET DATA:
Reusable surgical
products, net $ 10,034 $ 6,915 $ 4,924 $ 4,867 $ 32,836 $ 31,226
Total assets 27,546 25,006 13,493 13,388 67,651 63,871
Total indebtedness -- 1,000 10,891 11,942 115,841 96,088
Shareholders' equity (deficit) 24,348 20,756 214 (182) (50,293) (34,796)
</TABLE>
-12-
<PAGE> 15
STERILE RECOVERIES, INC.
SELECTED FINANCIAL DATA - (CONTINUED)
(1) The table covers periods before and after the Company acquired its
business from Amsco Sterile on July 31, 1994. A comparison of the
Company's operating results for the periods after the Acquisition to
the operating results before the Acquisition is not meaningful. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
(2) As an S Corporation for federal income tax purposes, the Company had
not been subject to income tax until the date of the Offering at which
time the Company became a C Corporation. On a pro forma basis,
assuming the Company had been subject to income tax for all periods
presented, the Company would not have recognized any corporate income
tax expense prior to 1996. See Notes B and J of Notes to Financial
Statements.
-13-
<PAGE> 16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and the Notes thereto included
elsewhere in this report. This discussion and analysis contains trend analysis
and might contain forward-looking statements. These statements are based on
current expectations and actual results might differ materially. Among the
factors that could cause actual results to vary are those described in this
"Overview" section and in "Business - Certain Considerations."
OVERVIEW
The Company's revenues are derived from providing hospitals and
surgery centers with reusable gowns, towels, drapes, and basins for use in
surgical procedures through a daily comprehensive surgical procedure-based
delivery and retrieval system, and also from the sale of disposable surgical
products that supplement its reusable surgical product service. The Company's
revenue growth is primarily affected by the number of customers, the number and
type of surgical procedures it services for each customer, and the pricing by
type of surgical pack.
As of December 31, 1997, the Company believes its facilities operated
at approximately 60% of their estimated aggregate annual revenue capacity of
approximately $80 million at current prices. Estimated annual revenue capacity
is based on the Company's estimate of revenues that would be derived from the
full utilization of the facilities at current prices and without addition of
equipment. Variations in maximum revenue potential by facility result from
differences in product mix and pricing for each facility. The Company's
ability to use this excess revenue capacity will depend on its success in
substantially increasing its volume of business. A primary strategy of the
Company is to increase its operating leverage by expanding revenues within
existing markets.
The Company amortizes its reusable surgical products on a per-use
basis, based on estimates of the products' useful lives. SRI's purchase of
used reusable surgical products in the Acquisition at approximately 17% of
Amsco Sterile's net book value has resulted in lower amortization expense since
the Acquisition. The Company's purchases of new reusable surgical products at
current replacement cost increased amortization expense in 1997 and will
increase future amortization expense. However, the Company's current
replacement cost is substantially less than Amsco Sterile's original cost due
to significantly improved sourcing of fabrics. See "Business--Certain
Considerations - Increasing Replacement and Amortization Costs" and Note B of
Notes to Financial Statements.
The Company completed its initial public offering (the "Offering") of
2,150,000 shares of its Common Stock (including shares sold in the
overallotment) in July and August 1996. The net proceeds of the Offering
received by the Company after payment of expenses were $17.9 million, of which
approximately $11 million was used to retire its acquisition debt and working
capital facility.
Before the Offering, the Company was an S Corporation for state and
federal income tax purposes and not subject to corporate income taxes. Upon
completion of the Offering, the Company's S Corporation status terminated and
the Company became subject to corporate income taxes. See Notes B and K of
Notes to Financial Statements.
-14-
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the statements of operations
of the Company.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 66.0 67.7 69.7
----- ----- -----
Gross profit 34.0 32.3 30.3
Distribution expenses 7.8 9.3 11.1
Selling and administrative expenses 14.9 14.7 15.7
----- ----- -----
Income from operations 11.3 8.3 3.5
Interest expense (income), net (0.3) 2.0 5.9
----- ----- -----
Income (loss) before income taxes 11.6 6.3 (2.4)
Income tax expense 4.6 0.6 --
----- ----- -----
Net income (loss) 7.0% 5.7% (2.4)%
===== ===== =====
Pro forma information:
Historical income (loss) before income taxes 6.3% (2.4)%
Pro forma income tax expense 2.4 --
----- -----
Pro forma net income (loss) 3.9% (2.4)%
===== =====
</TABLE>
-15-
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Revenues increased $7.7 million, or 23.9%, to $39.9 million in 1997
from $32.2 million in 1996. The revenue increases for the period were
attributable to the activities of the Company's sales force, which was
increased by 45% during 1997. The revenue increases were achieved equally from
new customers and increased revenue from current customers.
Gross Profit
Gross profit increased $3.2 million, or 30.4%, to $13.6 million in
1997 from $10.4 million in 1996. As a percentage of revenues, gross profit
increased to 34.0% in 1997 from 32.3% in 1996. The improvement in gross profit
is largely attributable to increased revenues, labor efficiencies, and the
economies of scale associated with spreading fixed costs over increased
revenues. These favorable factors 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 $150,000, or 5.0%, to $3.15 million in
1997 from $3.0 million in 1996. As a percentage of revenues, distribution
expenses decreased to 7.8% in 1997 from 9.3% in 1996. The improvement in
distribution expenses as a percentage of revenues resulted primarily 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 truck leasing contract.
Selling and Administrative Expenses
Selling and administrative expenses increased $1.2 million, or 25.1%,
to $5.9 million in 1997 from $4.7 million in 1996. As a percentage of
revenues, selling and administrative expenses increased to 14.9% in 1997 from
14.7% in 1996. This increase was largely attributable to the Company
increasing its sales force by 45% and hiring staff to manage anticipated
revenue growth.
Interest Expense (Income), Net
Interest expense (income) changed from interest expense of $648,000 in
1996 to interest income of $142,000 in 1997, primarily due to the elimination
of the acquisition debt to Amsco Sterile repaid from the Offering proceeds 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 $4.6 million in 1997, from $2.0 million in 1996. As a percentage
of revenues, income before taxes in 1997 was 11.6% of revenues compared to 6.3%
in 1996.
-16-
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Historical Income Tax Expense
Income tax expense increased $1.6 million to $1.8 million in 1997 from
$200,000 in 1996. The Company's effective tax rate increased to 39.6% in 1997
from 9.4% in 1996. During 1996, the Company changed from an S Corporation to
a C Corporation for Federal income tax purposes. The lower effective tax rate
in 1996 reflects the recording of a deferred tax asset and the benefit from the
allocation of the year's earnings between the C Corporation and the S
Corporation (see Note J of the financial statements).
Pro Forma Income Tax Expense
Pro forma income tax expense for 1996 reflects the statutory rate of
38.5% as if the Company had been treated as a C Corporation for the entire
year.
Net Income Per Share
The Company recorded a historical net income per share of $0.48 on a
diluted basis, and $0.50 on a basic per share basis for 1997, compared with
$0.28 for diluted and $0.29 for basic pro forma per share net income in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Revenues increased $6.9 million, or 27.0%, to $32.2 million in 1996
from $25.3 million in 1995. The revenue increases for the period were equally
attributable to new customers and increased revenues from current customers.
Gross Profit
Gross profit increased $2.7 million, or 35.8%, to $10.4 million in
1996 from $7.7 million in 1995. The improvement in gross profit is largely
attributable to labor efficiencies and the economies of scale associated with
spreading fixed costs over increased revenues. These favorable factors were
partially offset by higher amortization 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 $200,000, or 7.1%, to $3.0 million in
1996 from $2.8 million in 1995. As a percentage of revenues, distribution
expenses decreased to 9.3% in 1996 from 11.1% in 1995. The improvement in
distribution expenses as a percentage of revenues resulted primarily from
efficiencies derived from delivering more volume over existing routes.
Selling and Administrative Expenses
Selling and administrative expenses increased approximately $700,000,
or 19.1%, to $4.7 million in 1996 from $4.0 million in 1995. This increase
was largely attributable to additional sales personnel, the addition of an
executive officer after the Offering, and the expense associated with being a
public company. As a percentage of revenues, selling and administrative
expenses decreased to 14.7% in 1996 from 15.7% in 1995, primarily due to
leveraging of fixed administrative expenses over additional revenues.
-17-
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Interest Expense, Net
Interest expense decreased by approximately $850,000, or 56.5%, to
$648,000 in 1996 from $1.5 million in 1995, primarily due to the elimination of
the acquisition debt to Amsco Sterile repaid from the Offering proceeds, and
the interest and other income earned in the amount of $181,000 since the
Offering.
Income Before Income Tax Expense
As a result of the foregoing, the Company's income before taxes
increased to $2.0 million in 1996, from a loss before taxes of $604,000 in
1995. As a percentage of revenues, income before taxes in 1996 was 6.3% of
revenues compared to a loss before taxes of 2.4% in 1995.
Historical Income Tax Expense
During 1996, the Company changed from an S Corporation to a C
Corporation for federal income tax purposes. This change resulted in an
effective tax rate for the Company of 9.4% compared to the statutory income tax
rate of 38.5%. The lower effective tax rate reflects the recording of a
deferred tax asset and the benefit from the allocation of the year's earnings
between the C Corporation and the S Corporation (see Note J of the Financial
Statements).
Pro Forma Income Tax Expense
In conjunction with the completion of the Offering, the Company
terminated its S Corporation status. For pro forma income tax purposes only,
the S Corporation's cumulative net operating losses as of December 31, 1995, of
approximately $1.6 million were not treated as C Corporation losses.
Accordingly, the 1996 pro forma income tax expense reflects the 38.5% statutory
rate (See Note J of the Financial Statements.)
Net Income Per Share
The Company recorded a pro forma net income per share of $0.29 on a
basic per share basis, and $0.28 on a diluted per share basis for 1996,
compared with ($0.20) for both basic and diluted pro forma per share net (loss)
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from
operations, sales of its debt and equity securities including the Offering,
operating leases for facilities and distribution vehicles, and borrowings under
its working capital loan facility.
The Company's positive cash flow from operating activities was $3.9
million in 1997, compared to $1.7 million in 1996. The increase in cash from
operating activities from 1996 to 1997 resulted primarily from increased net
income before amortization and depreciation expense, and improved accounts
receivable collections. This increase was partially offset by cash used for
increased prepaid expenses and a decrease in accrued expenses. Inventories at
December 31, 1997 were $1,979,000 compared to $1,240,000 at December 31, 1996.
The increase in inventory reflects the continued growth of disposable surgical
products to supplement the Company's reusable products.
The Company used approximately $3.6 million more net cash in investing
activities in 1997 than in 1996. To support sales growth, the Company made
capital expenditures in 1997 for equipment of $2.8 million and for reusable
surgical products and carts of $6.0 million compared to $1.3 million for
equipment and $4.0 million for reusable surgical products and carts in 1996.
These expenditures were funded from proceeds of the Offering and cash provided
by operating activities. The Company has not raised any cash in financing
activities since the Offering.
-18-
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
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 expects to incur internal staff costs, consulting and
other expenses for infrastructure and facilities' enhancements to prepare its
computer systems and applications for the year 2000. The Company will make its
computer systems year 2000 compliant as part of its $1 million of expenditures
for new technology software and related computer hardware. There can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that another company's failure to convert
will not adversely affect the Company's operations.
The Company has established with First Union National Bank a $15.0
million unsecured revolving credit facility scheduled to mature in August
1999. The facility imposes certain financial covenants. Beginning January 1,
1997, total outstanding borrowings under the facility are limited to three
times the Company's earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the previous four quarters (declining to two and
one-half times by the last year). The Company must maintain a minimum tangible
net worth of $18,750,000 during 1997, increasing to $20,745,000 for 1998 and
$23,745,000 for the balance of the loan term. The Company may elect to convert
up to $5.0 million of the available facility into term loans for capital
expenditures that are repayable ratably over five years and secured by
equipment acquired with the loan proceeds. All borrowings accrue interest at
the London Interbank Offering Rate (LIBOR) plus 190 basis points (7.50% as of
December 31, 1997). The facility restricts the declaration of dividends and
prohibits the Company from encumbering its assets. Through December 31, 1997,
there are no borrowings under this credit facility.
As of December 31, 1997, the Company had cash of approximately
$380,000. The Company believes that this cash balance, 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. See "Business - Certain Considerations--Need for Capital."
-19-
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Sterile Recoveries, Inc.
We have audited the accompanying balance sheets of Sterile Recoveries,
Inc. as of December 31, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sterile Recoveries,
Inc., as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
February 16, 1998
-20-
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STERILE RECOVERIES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Revenues $ 39,854 $ 32,168 $ 25,320
Cost of revenues 26,286 21,764 17,659
------------- ------------ --------------
Gross profit 13,568 10,404 7,661
Distribution expenses 3,150 3,000 2,801
Selling and administrative expenses 5,924 4,734 3,975
------------- ------------ --------------
Income from operations 4,494 2,670 885
Interest expense (income), net (142) 648 1,489
------------- ------------ --------------
Income (loss) before income taxes 4,636 2,022 (604)
Income tax expense 1,835 190 --
------------- ------------ --------------
Net income (loss) $ 2,801 $ 1,832 $ (604)
============= ============ ==============
Historical net income (loss) per
common share - basic $ 0.50 $ 0.43 $ (0.20)
============= ============ ==============
Historical net income (loss) per
common share - diluted $ 0.48 $ 0.41 $ (0.20)
============= ============ ==============
Unaudited pro forma information
Historical income (loss) before income taxes $ 2,022 $ (604)
Pro forma income tax expense 778 --
------------ --------------
Pro forma net income (loss) $ 1,244 $ (604)
============ ==============
Pro forma net income per common share - basic $ 0.29 $ (0.20)
============ ==============
Pro forma net income per common share - diluted $ 0.28 $ (0.20)
============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-21-
<PAGE> 24
STERILE RECOVERIES, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996
------------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 380 $ 5,199
Accounts receivable, net 6,016 5,253
Inventories 1,979 1,240
Prepaid expenses and other assets 1,203 530
Reusable surgical products 10,034 6,915
Property, plant and equipment, net 7,253 5,102
Goodwill, net 521 550
Deferred income taxes 160 217
---------- ----------
Total assets $ 27,546 $ 25,006
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable--related parties $ - $ 1,000
Accounts payable 1,603 1,360
Employee related accrued expenses 926 901
Other accrued expenses 669 989
---------- ----------
Total liabilities 3,198 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 5,659,894 and
5,521,189 shares, respectively 6 6
Additional paid-in capital 20,167 19,376
Retained earnings 4,175 1,374
---------- ----------
Total shareholders' equity 24,348 20,756
---------- ----------
Total liabilities and shareholders' equity $ 27,546 $ 25,006
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-22-
<PAGE> 25
STERILE RECOVERIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except for share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 3,000,000 $ 3 $ 1,009 $ (1,194) $ (182)
Conversion of note payable 225,807 -- 1,000 -- 1,000
Net loss -- -- -- (604) (604)
--------- --------- ----------- -------- ---------
BALANCE AT DECEMBER 31, 1995 3,225,807 3 2,009 (1,798) 214
Issuance of common stock for cash 51,282 -- 300 -- 300
Acquisition of Surgipro 90,000 1 526 -- 527
Initial Public Offering, net 2,150,000 2 17,926 -- 17,928
S Corp Shareholder Distribution -- -- (52) -- (52)
Recapitalization of Company for
change from S Corporation to
C Corporation -- -- (1,340) 1,340 --
Exercise of stock options 4,100 -- 7 -- 7
Net income -- -- -- 1,832 1,832
--------- --------- ----------- -------- ---------
BALANCE AT DECEMBER 31, 1996 5,521,189 6 19,376 1,374 20,756
Conversion of note payable 128,205 -- 750 -- 750
Exercise of stock options 10,500 -- 41 -- 41
Net income -- -- -- 2,801 2,801
--------- --------- ----------- -------- ---------
BALANCE AT DECEMBER 31, 1997 5,659,894 $ 6 $ 20,167 $ 4,175 $ 24,348
========= ========= =========== ======== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
-23-
<PAGE> 26
STERILE RECOVERIES, INC.
STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ----------- ----------
1995
---------
<S> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net income (loss) $ 2,801 $ 1,832 $ (604)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 689 512 421
Amortization of reusable surgical products 2,015 1,293 764
Provision for reusable surgical products shrinkage 606 422 --
Deferred income taxes 57 (217) --
Change in assets and liabilities (net of business combination)
Accounts receivable (763) (1,800) (94)
Inventories (739) (728) (88)
Prepaid expenses and other assets (673) (94) (45)
Accounts payable 243 71 487
Accrued expenses (295) 439 272
----------- --------- -----------
Net cash provided by operating activities 3,941 1,730 1,113
----------- --------- -----------
Cash flows from investing activities
Purchases of property, plant, and equipment (2,811) (1,261) (278)
Purchases of reusable surgical products (5,740) (3,705) (820)
Payment for acquisition of business, net of cash acquired 0 6 --
----------- --------- -----------
Net cash used in investing activities (8,551) (4,960) (1,098)
----------- --------- ----------
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) (800)
Net proceeds from working capital facility 0 (1,810) 749
Net proceeds from issuance of common stock 41 18,235 --
----------- --------- ----------
Net cash provided by (used in) financing activities (209) 8,177 (51)
----------- --------- ----------
Increase (decrease) in cash (4,819) 4,947 (36)
Cash and cash equivalents at beginning of period 5,199 252 288
----------- --------- ------------
Cash and cash equivalents at end of period $ 380 $ 5,199 $ 252
=========== ========= ============
Supplemental cash flow information
Cash paid for interest $ 67 $ 697 $ 1,419
=========== ========= ============
Cash paid for income taxes $ 1,870 $ 96 $ --
=========== ========= ============
Supplemental schedule of non-cash investing activities
Purchase of Surgipro (1996)
Fair value of assets acquired $ -- $ 986 $ --
Cash received -- 6 --
Common stock issued -- (526) --
----------- --------- ------------
Liabilities incurred or assumed $ -- $ 466 $ --
=========== ========= ============
Conversion of Convertible Demand Note into 128,205
shares of common stock $ 750 $ -- $ 1,000,000
=========== ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-24-
<PAGE> 27
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF ORGANIZATION AND BUSINESS
Sterile Recoveries, Inc. ("SRI" or the "Company") was incorporated in
June 1994 in Florida to acquire all of the assets of its predecessor, AMSCO
Sterile Recoveries, Inc. on July 31, 1994 (the "Acquisition"). The Company's
corporate office is located in Clearwater, Florida.
SRI provides hospitals and surgery centers with a comprehensive
surgical procedure-based delivery and retrieval service for reusable gowns,
towels, drapes and basins, and, additionally provides disposable products
necessary for surgery. At eight regional facilities located in various states,
SRI collects, sorts, cleans, inspects, packages, sterilizes, and delivers its
reusable products on a just-in-time basis. On February 26, 1996, the Company
acquired Surgipro, Inc. ("Surgipro"), which became its disposable products
division, in order to expand its revenues from disposable accessory packs
containing small surgical items such as needles and sutures. While its
emphasis is providing a reusable surgical product delivery and retrieval
service, the Company also earns revenues from the sale of disposable surgical
products, representing 9% or less of total revenues for all periods presented
herein.
SRI contracts with third-party vendors for the weaving of microfiber
fabric and the cutting and sewing of gowns, wraps and drapes. A significant
percentage of the Company's business is dependent on its ability to obtain a
key component of its liquid-proof surgical products from one principal vendor.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial statement presentation
The Company operates on a 52-53 week fiscal year ending the Sunday
nearest December 31. The financial statements reflect the Company's year-end
as December 31 for presentation purposes.
Use of estimates in financial statements
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company has no
cash equivalents for any of the periods presented.
Collectibility of accounts receivable
The Company grants credit to customers who meet pre-established credit
requirements. The Company does not require collateral when trade credit is
granted to customers. Credit losses have been less than $35,000 for each
period presented herein. The allowance for doubtful accounts at December 31,
1997 and 1996 is $39,000 and $35,000, respectively
Inventories
Inventories consist principally of consumables, supplies, and
disposable surgical products since the acquisition of Surgipro and are stated
at the lower of cost or market - cost being determined on the first-in,
first-out method.
-25-
<PAGE> 28
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reusable surgical products
Reusable surgical products are stated at historical cost, net of
amortization. The products are amortized on a basis similar to the units of
production method. Estimated useful lives are based on the estimated total
number of available uses for each product. The expected total available usage
for its products using the three principal fabrics (accounting for 85% of its
products) are 75, 100, and 125 uses based on several factors including studies
performed by management. Based on current reusable product turnover, the
expected total available usage equates to a time period of approximately three
to seven years. The estimates, however, are subject to revision if actual
experience differs from the estimated available uses. Accumulated amortization
at December 31, 1997 and 1996 approximates $4,325,000 and $2,388,000,
respectively.
The Company has experienced minor amounts of shrinkage, with actual
shrinkage currently ranging 1% - 1.5% of revenues. As of December 31, 1997 and
1996, the Company has established a reserve for shrinkage of $195,000 and
$135,000 respectively, to account for the estimated amount of product at
customer locations which will not be returned to the Company. The Company will
continue to evaluate, at least quarterly, the actual shrinkage experience and
trends, and will review the shrinkage provision if deemed necessary.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, or the term
of the related leases for leasehold improvements, if less than the useful
lives. For 1997, accelerated methods are used for tax purposes.
Goodwill
Goodwill, which resulted from the acquisition of Surgipro, is stated
at cost less accumulated amortization which is provided using the straight-line
method over 20 years.
Impairment of long-lived and intangible assets
On a quarterly basis, the Company evaluates the projected undiscounted
cash flows of each business unit (reusable and disposable) to determine, when
indicators of impairment are present, whether or not there has been permanent
impairment of its long-lived assets, and accrues expenses for the amount, if
any, determined to be permanently impaired. No impairment exists as of
December 31, 1997.
Revenues
Revenues are recognized as the agreed upon services are delivered,
generally daily. The Company's revenues are principally generated from service
agreements with varying terms of one to three years, which are cancellable by
either party, generally with a 90-day notice. All reusable surgical products
provided to a customer under these agreements are used by the customer, but
remain the Company's property.
Income taxes
At the time of the completion of the offering in July 1996 (see Note
H), the Company terminated its S Corporation status and became subject to
corporate income taxes. Accordingly, income taxes are presented on a
historical basis for 1997 and 1996. Pro forma taxes are presented for 1996 and
1995 using an effective rate of 38.5%.
.
-26-
<PAGE> 29
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of financial instruments
The carrying amounts of cash, receivables, payables, accrued expenses
and notes payable approximate fair value because of the short-term nature of
the items.
Earnings per common share
The Company has adopted Standard of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings Per Share" as this standard became effective
for financial statements issued after December 15, 1997. SFAS No. 128
eliminates primary and fully dilutive net income per common share and replaces
them with basic and diluted net income per common share. Accordingly, all
income per common share for the previous periods have been restated to conform
to the new standard.
Accounting for Stock-Based Compensation
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as it
relates to employment awards. It applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock.
New Accounting Pronouncements
SFAS No. 130, Reporting Comprehensive Income, is effective for fiscal
years beginning after December 15, 1997. This Statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The new rule requires that
the Company (a) classify items of other comprehensive income by their nature in
a financial statement, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The Company plans to adopt
SFAS No. 130 in 1998 and expects no material impact to the Company's financial
statement presentation.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, is effective for fiscal years beginning after December 15, 1997.
This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of All
Majority-Owned Subsidiaries. This Statement requires annual financial
statements to disclose information about products and services, geographic
areas and major customers based on a management approach, along with interim
reports. The management approach requires disclosing financial and descriptive
information about an enterprises's reportable operating segments based on
reporting information the way management organizes the segments for making
business decisions and assessing performance. It also eliminates the
requirement to disclose additional information about subsidiaries that were not
consolidated. The Company plans to adopt SFAS No. 131 in 1998 with impact only
to the Company's disclosure information and not its results of operations.
-27-
<PAGE> 30
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C--BUSINESS COMBINATIONS
In February 1996, the Company purchased the operations of Surgipro.
The Company paid consideration of approximately $600,000, consisting of 90,000
shares of the Company's Common Stock valued at $526,500 and a note payable of
approximately $109,000, which was paid at the completion of the offering, for
approximately $500,000 of assets and the assumption of approximately $400,000
of liabilities. This acquisition was accounted for as a purchase transaction
and, accordingly, the purchase price was allocated to the assets and
liabilities based upon their estimated fair values at the time of the
acquisition, with the excess of approximately $574,000 being allocated to
goodwill. The results of operations are included in the accompanying Statement
of Operations from the acquisition date.
The following unaudited pro forma financial information assumes the
purchase had occurred at the beginning of the respective periods after the
effect of certain pro forma adjustments including, among others, adjustments to
reflect amortization of goodwill. The pro forma information is presented for
informational purposes only and may not be indicative of actual results had the
purchase occurred at the beginning of the respective periods.
<TABLE>
<CAPTION>
Years Ended
December 31, December 31,
-------------------------------------------
1996 1995
---------------- -----------------
(Unaudited)
<S> <C> <C>
Revenues $ 32,281,858 $ 26,315,051
Net income (loss) $ 1,875,019 $ (683,968)
Pro forma net income (loss) per common share - basic $ 0.44 $ (0.22)
Pro forma net income (loss) per common share - diluted $ 0.42 $ (0.22)
</TABLE>
NOTE D--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
Useful Lives ---------------------------------------------
in Years 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Land and buildings 38 $ 375,120 $ 324,474
Leasehold improvements & signs 2-18 1,530,812 1,323,655
Machinery and equipment 3-12 6,042,063 4,035,436
Office furniture, equipment & computers 3-10 1,044,154 497,593
------------- ------------
8,992,149 6,181,158
Less: Accumulated depreciation and amortization 1,739,644 1,078,890
------------- ------------
$ 7,252,505 $ 5,102,268
============= ============
</TABLE>
During 1997, 1996 and 1995, depreciation expense totaled approximately
$660,000, $488,000 and $421,000, respectively.
-28-
<PAGE> 31
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E--LINE OF CREDIT
The Company has established with First Union National Bank a $15
million unsecured revolving credit facility that is scheduled to mature in
August 1999. The facility imposes certain financial covenants. Beginning
January 1, 1997, total outstanding borrowings under the facility are limited to
three times the Company's earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the previous four quarters (declining to two and
one-half times by the third year). The facility also imposes a covenant
concerning the maintenance during the 1997 year of minimum tangible net worth
of $19,245,000. The minimum net worth requirement increases to $20,745,000 for
1998. Thereafter, the minimum net worth requirement will be $23,745,000.
Pursuant to the terms of the credit facility, the Company may elect to convert
up to $5 million of the available facility into term loans for capital
expenditures that are ratably payable over five years, and are secured by the
equipment acquired with these loans. All borrowings accrue interest at the
London Interbank Offering Rate (LIBOR) plus 190 basis points through October
15, 1998 (7.50% as of December 31, 1997), and 175 basis points thereafter until
maturity. The facility restricts the declaration of dividends and prohibits
the Company from encumbering its assets. Through December 31, 1997, there are
no borrowings under this credit facility.
NOTE F--NOTES PAYABLE
In conjunction with the Acquisition, the Company borrowed $1,000,000
from a director of the Company pursuant to a secured Convertible Demand
Promissory Note which accrued interest at 12% per annum. In September, 1995,
the note was converted into 225,807 shares of Common Stock at an effective
conversion price of $4.43 per share.
In March 1996, the Company borrowed $1,000,000 from a director
pursuant to an 8.5% Convertible Demand Promissory Note. Seven hundred fifty
thousand dollars of the Convertible Note was convertible to Common Stock at
$5.85 per share and was converted on February 24, 1997 into 128,205 shares of
common stock. The $250,000 non-convertible balance was paid on the same date.
The Company incurred interest expense related to the demand notes of
approximately $13,310, $71,000 and $70,000, respectively, for the years ended
December 31, 1997, 1996 and 1995.
Total interest expense and related fees for 1997, 1996 and 1995 was
approximately $67,000, $829,000 and $1,489,000, respectively.
-29-
<PAGE> 32
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases offices, facilities, office equipment, and
distribution vehicles under non-cancelable operating leases with terms ranging
from one year to nine years. The office and processing facility leases contain
various renewal options and escalating payments. At present, the Company
intends to exercise certain aspects of these renewal options when the initial
term expires. The vehicle leases contain contingent rentals based on mileage.
Future minimum lease payments as of December 31, 1997 under leases in
excess of one year are as follows:
<TABLE>
<CAPTION>
Year ending
<S> <C>
1998 $1,523,311
1999 1,404,293
2000 1,323,739
2001 1,250,714
2002 772,573
Thereafter 208,676
----------
Total $6,483,306
==========
</TABLE>
Rental expense for years ended December 31, 1997, 1996 and 1995
totaled $1,570,960, $1,960,346, and $1,866,246 (including contingent rentals
of approximately $211,000, $228,000, and $230,000), respectively.
Legal Proceedings
Neither the Company nor any of its property is subject to any
litigation or other legal proceedings expected to have a material effect on the
Company or its business.
Management Incentive Plan
The Company has a Management Incentive Plan, the incentives of which
are based on various performance factors and are adjusted to reflect the
Company's overall performance as determined by the Board of Directors. Payment
of the cash incentives is made at the end of the second month after the end of
the incentive year. The participant must still be an employee of the Company
at that time. Approximately $295,000, $375,000 and $195,000 of estimated
incentives were recognized during the years ended December 31, 1997, 1996 and
1995, respectively.
Management Employment Agreements
The Company has approved employment agreements with four executives
and one other employee in which each person would receive severance pay equal
to two years of base salary in the event that the executive or employee is
terminated following a change in control of the Company.
-30-
<PAGE> 33
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY
Common Stock
Subject to preferences which might be applicable to any outstanding
Preferred Stock, the holders of the Common Stock are entitled to receive
dividends when, as, and if declared from time to time by the Board of Directors
out of funds legally available. In the event of liquidation, dissolution, or
winding-up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities subject to prior
distribution rights of any Preferred Stock then outstanding. The Common Stock
has no preemptive or conversion rights and is not subject to call or assessment
by the Company. There are no redemption or sinking fund provisions applicable
to the Common Stock.
On July 24, 1996, the Company completed the Offering of 2,000,000
shares of its Common Stock priced at $9.50 per share. The net proceeds of the
Offering, after deducting commissions of approximately $1,330,000 and
approximately $1,100,000 in expenses, were approximately $16,570,000. In
addition, the underwriters on August 9, 1996 exercised their overallotment
option to purchase 150,000 additional shares of the Company's Common Stock.
Proceeds to the Company of the underwriters' purchase of shares pursuant to
their exercise of the overallotment option were $1,325,250 after commissions.
The Company used approximately $11,000,000 of the proceeds to retire debt.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred
Stock, $.001 par value per share. The Board of Directors has the authority,
without any further vote or action by the Company's shareholders, to issue
Preferred Stock in one or more series and to fix the number of shares,
designations, relative rights (including voting rights), preferences, and
limitations of those series to the full extent now or hereafter permitted by
Florida law. The Company believes that this power to issue Preferred Stock
will provide flexibility in connection with possible corporate transactions.
The issuance of Preferred Stock, however, could adversely affect the voting
power of holders of Common Stock and restrict their rights to receive payments
upon liquidation and could have the effect of delaying, deferring, or
preventing a change in control of the Company. The Company has no present
intention to issue shares of Preferred Stock, although it may determine to do
so in the future.
NOTE I--STOCK OPTIONS
The Company maintains two stock option plans, the 1995 Stock Option
Plan (the "Employee Plan") and the Company's 1996 Non-Employee Director Plan
(the "Non-Employee Plan").
The Employee Plan
The Employee Plan provides employees with incentive or non-qualified
options to purchase up to 700,000 shares of Common Stock. On December 21,
1995, the Company granted non-qualified stock options covering a total of
94,000 shares of Common Stock to various employees at an exercise price of
$5.85 per share. The exercise price represented the estimated fair value of
the Company's Common Stock at the time of the grant, as approved by the Board
of Directors based upon various factors including an independent third-party
firm's valuation. None of the options vested until completion of the
Offering, and are then vested ratably over the four-year period following the
completed Offering. Since the Offering, the Company has granted 455,000
options under this Plan. The options vest ratably over five years from the
date of the grant. All outstanding options vest upon a change in control of
the company. Options granted under the Employee Plan expire no later than ten
years after the date granted or sooner in the event of death, disability,
retirement or termination of employment. Included in these options are options
to purchase 140,000 shares issued to an employee who is also a director and an
officer of the Company.
-31-
<PAGE> 34
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Non-Employee Plan
The Non-Employee Plan provides for the grant of non-qualified stock
options to purchase up to 100,000 shares of Common Stock to members of the
Board of Directors who are not employees of the Company. At the completion of
the Offering, each non-employee director was granted options to purchase 4,000
shares of Common Stock for each full remaining year of the director's term.
Thereafter, on the date on which a new non-employee director is first elected
or appointed, he will automatically be granted options to purchase 4,000 shares
of Common Stock for each year of his initial term, and will be granted options
to purchase 4,000 shares of Common Stock for each year of any subsequent term
to which he is elected. All options become exercisable ratably over the
director's term and have an exercise price equal to the fair market value of
the Common Stock on the date of grant. As of December 31, 1997, options to
purchase 28,000 shares have been granted under this Plan.
Other Stock Options
In October 1995, in conjunction with a financial consulting
arrangement with an individual who has become a director and an officer of the
Company, the Company granted the individual a non-qualified stock option for
66,000 shares of its Common Stock at an exercise price of $4.43 a share which
were exercisable as follows: (1) 22,000 shares upon the completion of an
interim financing (completed in March 1996); and (2) 44,000 at the completion
of an initial public offering. The exercise price was determined by the
Board of Directors to approximate the estimated fair value of the Company's
Common Stock at the date of grant based on various factors, including the
Company's history of operating losses.
On May 2, 1996, the Company issued to a recently appointed director,
an option to purchase 7,500 shares of the Company's Common Stock for $8.00 per
share, which vests one-third on completion of the offering, one-third at the
1997 annual meeting of shareholders, and one-third at the 1998 annual meeting
of shareholders.
On November 21, 1997, the Company issued to an officer and director an
option to purchase 20,000 shares of the Company's Common Stock for $15.06 per
share, which vests ratably over five years.
If the Company had elected to recognize compensation expense based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed by SFAS 123, the Company's net income (loss)
and earnings (loss) per share would be reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C> <C>
Net income (loss) As reported $2,801 $ 1,244 $ (604)
Pro forma (unaudited) $2,390 $ 1,069 $ (608)
Basic earnings (loss) per share As reported $ 0.50 $ 0.29 $ (0.20)
Pro forma (unaudited) $ 0.43 $ 0.25 $ (0.20)
Diluted earnings (loss) per share As reported $ 0.48 $ 0.28 $ (0.20)
Pro forma (unaudited) $ 0.41 $ 0.24 $ (0.20)
</TABLE>
-32-
<PAGE> 35
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using the
Binomial options-pricing model with the following weighted-average assumptions
used for grants in 1997, 1996 and 1995, respectively, no dividend yield for all
years, expected volatility of 47, 32 and 38 percent; risk-free interest rates
of 6.5, 5.6 and 6.5 percent, and expected lives of 4.1, 3.8 and 3.7 years.
A summary of the status of the Company's fixed stock option plan as of December
31, 1997, 1996 and 1995, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
-------- --------
<S> <C> <C>
Outstanding as of December 31, 1994 -- --
Granted 172,500 $ 4.96
Exercised -- --
Forfeited -- --
-------
Outstanding as of December 31, 1995 172,500 $ 4.96
Granted 258,000 $ 9.64
Exercised (4,100) $ 1.71
Forfeited (2,400) $ 5.85
-------
Outstanding as of December 31, 1996 424,000 $ 7.83
Granted 252,500 $ 16.45
Exercised (10,500) $ 3.94
Forfeited (34,800) $ 10.96
-------
Outstanding as of December 31, 1997 631,200 $ 11.17
=======
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
OUTSTANDING SHARES
Weighted Average
Remaining
Range of Number Contractual Life Weighted Average
Exercise Prices Outstanding (years) Exercise Price
- ----------------- ----------- ------------------ ----------------
<S> <C> <C> <C>
$1.00 - 4.42 3,500 7.2 $ 1.00
$4.43 - 5.85 145,800 7.9 $ 5.21
$5.86 - 9.50 224,400 8.4 $ 9.45
$9.51 - 17.50 257,500 9.5 $ 16.20
EXERCISABLE SHARES
$ 1.00 - 4.42 3,500 $ 1.00
$ 4.43 - 5.85 97,200 $ 4.89
$ 5.86 - 9.50 52,700 $ 9.36
$ 9.51 - 17.50 3,000 $ 12.69
</TABLE>
-33-
<PAGE> 36
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J--INCOME TAX
Historical Income Taxes
In accordance with the provisions of the Internal Revenue Code, upon
the completion of the Offering and the conversion to a C Corporation in 1996, a
portion of the income earned after the conversion was allocated to the S
Corporation. As a result of this allocation, the effective rate for
calculating income taxes is lower than the statutory rates. In addition, the
accounting rules require the establishment of deferred taxes for all existing
temporary differences in the Company's assets' and liabilities' basis for
income and financial reporting purposes at the date of conversion to a C
Corporation. The Company recorded deferred tax assets of approximately
$200,000 at the date of conversion.
The provision for income taxes for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Income taxes currently payable $ 1,778,000 $ 407,000
Deferred income tax expense (benefit) 57,000 (217,000)
----------- ----------
Income tax expense $ 1,835,000 $ 190,000
=========== ==========
</TABLE>
Reconciliation of the federal statutory income tax rate of 34.0% to
the effective income tax rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Federal statutory income tax rate 34.0% 34.0%
State income taxes, net of federal 4.5 4.5
Net earnings allocated to the S Corporation period - (21.3)
Deferred tax asset previously not recognized - (10.7)
Other, net 1.1 2.9
------- -----
39.6% 9.4%
======= =====
</TABLE>
Deferred tax asset and liability components resulting from the
differences between accounting for financial statement purposes and purposes
pursuant to SFAS No. 109 are as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory shrinkage reserve $ 93,000 $ 52,000
Health insurance reserve 55,000 64,000
Vacation pay accrual 58,000 56,000
Other 33,000 45,000
-------- --------
239,000 217,000
Deferred tax liabilities - accumulated depreciation (79,000) -
-------- --------
Net deferred income taxes $160,000 $217,000
======== ========
</TABLE>
No valuation allowance has been established as management considers the
utilization of the deferred tax asset probable.
Pro forma income taxes
In conjunction with the completion of the Offering in 1996, the
Company terminated its S Corporation status. For pro forma income tax
purposes, the S Corporation's cumulative net operating losses as of December
31, 1995 of approximately $1.6 million have not been used to reduce pro forma
income tax expense in 1996. For 1996, the Company chose to recognize income
tax expense using an effective rate of 38.5% of historical income before income
taxes.
-34-
<PAGE> 37
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of the income tax expense (benefit) calculated using
the federal statutory income tax rate of 34% to the income tax expense recorded
is as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Federal income taxes (benefit) at statutory rate $ 687,000 $(205,000)
State income taxes, net of federal benefit 91,000 (27,000)
Net operating losses not currently utilizable - 232,000
---------- ---------
Income tax expense $ 778,000 $ --
========== =========
</TABLE>
NOTE K--WEIGHTED AVERAGE COMMON SHARES
Historical and pro forma net income (loss) per common share is
computed by dividing pro forma net income (loss) by the basic and diluted
weighted average number of shares of common stock outstanding. For 1996 and
1995, pro forma net income (loss) includes a pro forma provision for income
taxes assuming the Company had been subject to income taxes during the period
it was an S Corporation for income tax purposes. For diluted weighted
average shares outstanding, the Company used the treasury stock method to
calculate the Common Stock equivalents that the stock options would represent.
-35-
<PAGE> 38
STERILE RECOVERIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
BASIC
- -----
Actual weighted average shares outstanding;
weighted average shares used in income per
calculation - basic 5,636,607 4,300,125 3,094,086
DILUTED
- -------
Actual weighted average shares outstanding 5,636,607 4,300,125 3,094,086
Additional shares 225,013 190,827 418,729
--------- -------- ---------
</TABLE>
The following table sets forth the computation of historical basic and
diluted earnings (loss) per share:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $2,801,000 $1,832,000 $ (604,000)
========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding 5,636,607 4,300,125 3,094,086
Effect of dilutive securities:
Employee stock options 211,847 141,097 -
Convertible notes 13,366 49,736 -
---------- ----------- ----------
225,213 190,827 -
Denominator for diluted earnings per share 5,861,820 4,490,952 3,094,086
========= ========== ==========
Net income (loss) per common share - basic $ 0.50 $ 0.43 $ (0.20)
========== ========== ==========
Net income (loss) per common share - diluted $ 0.48 $ 0.41 $ (0.20)
========== ========== ==========
</TABLE>
The effect of all dilutive securities (see Notes F and I) for 1995
were not included in the calculation of diluted net loss per common
share as the effect would have been anti-dilutive.
Options to purchase 186,500 shares of common stock were not included
for all or a portion of the 1997 computation of diluted net income per
common share as the options' exercise price were greater than the
average market price of the common shares and therefore the effect
would be anti-dilutive.
-36-
<PAGE> 39
NOTE L--RELATED PARTY TRANSACTIONS
SRI paid $76,000, $56,000 and $8,000 in 1997, 1996 and 1995 to a
company to design and supply the components for water reclamation systems for
six SRI facilities. The company providing these services to SRI is owned by a
director and shareholder of SRI.
During 1997, 1996 and 1995, the Company paid approximately $20,000,
$257,000, and $22,000 respectively, to the Company's corporate law firm, a
member of which is a shareholder of the Company.
-37-
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL SCHEDULE
Board of Directors
Sterile Recoveries, Inc.
In connection with our audit of the financial statements of Sterile
Recoveries, Inc., referred to in our report dated February 16, 1998, which is
included in this annual report on SEC Form 10-K for the year ended December 31,
1997, we have also audited Schedule II for the years ended December 31, 1995,
1996 and 1997. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set forth therein.
GRANT THORNTON LLP
Tampa, Florida
February 16, 1998
-38-
<PAGE> 41
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
STERILE RECOVERIES, INC.
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------ -------- -------- -------- ---------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) OF PERIOD
----------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts $ 6,000 $ 25,000 $(10,000) (1) $ 21,000
Year ended December 31, 1996:
Allowance for doubtful accounts $ 21,000 $ 34,000 $(20,000) (1) $ 35,000
Year ended December 31, 1997:
Allowance for doubtful accounts $ 35,000 $ 36,000 $(32,000) (1) $ 39,000
</TABLE>
- -------------------------
(1) Write-offs of uncollectible accounts
-39-
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
executive officers and directors is incorporated by reference to the
information set forth under the captions "Proposal No. 1: Election of
Directors" and "Other Information" in the Company's Proxy Statement for the
1998 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information set forth under the caption "Executive Officer Compensation" in
the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information set forth under the caption "Other Information" in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information set forth under the caption "Certain Relationships" in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The Company did not file a Report on Form 8-K during the last quarter
of 1997.
Exhibits
The following exhibits are filed as part of this report:
-40-
<PAGE> 43
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
2.1(1) Asset Purchase Agreement dated July 31, 1994, between the Company and
Amsco Sterile Recoveries, Inc.
2.2(1) Agreement and Plan of Merger dated as of February 26, 1996, between Surgipro,
Inc. and the Company.
2.3(1) Articles of Merger dated as of February 26, 1996, between Surgipro, Inc. and
the Company.
3.1(1) Restated Articles of Incorporation of the Company.
3.2(1) Bylaws of the Company.
4.3(1) Specimen certificate for Common Stock.
10.1(1) 1995 Stock Option Plan, as amended.
10.2(1) Form of Stock Option Agreement between the Company and participants under
the 1995 Stock Option Plan.
10.3(1) Form of Indemnity Agreement between the Company and each of its executive
officers.
10.4(1) Stock Option Agreement dated March 20, 1995, between the Company and
Robert Normyle.
10.5(1) Form of Registration Rights Agreement executed in connection with the private
placement of Common Stock.
10.6(3) Employment Agreement between the Company and each of Messrs. Isel,
Peterson, Boosales and Martin:
(a) Isel
(b) Peterson
(c) Boosales
(d) Martin
10.7(1) Employment Agreement dated as of February 26, 1996, between Clayton W. Page
and the Company.
10.8(1) Lease Agreement dated August 16, 1991, between Coastal 2920 Corporation and
Amsco Sterile Recoveries, Inc., as amended and assigned to the Company.
10.9(1) Lease dated August 28, 1992, among Winchester Homes, Inc. and Weyerhaeuser
Real Estate Company and Amsco Sterile Recoveries, Inc., as assigned to the Company.
</TABLE>
-41-
<PAGE> 44
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
10.10(1) Texas Industrial Net Lease dated March 19, 1992, between the Trustees of the
Estate of James Campbell, Deceased, and Amsco Sterile Recoveries, Inc., as assigned
to the Company.
10.11(1) Lease dated March 30, 1992, between Walter D'Aloisio and Amsco Sterile
Recoveries, Inc., as assigned to the Company.
10.12(1) Standard Industrial Lease -- Multi-Tenant (American Industrial Real Estate
Association) dated February 24, 1992, between Borstein Enterprises and Amsco
Sterile Recoveries, Inc., as assigned to the Company.
10.13(1) Carolina Central Industrial Center Lease dated April 22, 1992, between Industrial
Development Associates and Amsco Sterile Recoveries, Inc., as assigned to the
Company.
10.14(1) Lease Agreement dated September 2, 1993, between Price Pioneer Company, Ltd.,
and Amsco Sterile Recoveries, Inc., as assigned to the Company.
10.15(1) Service Center Lease dated December 4, 1991, between QP One Corporation
and Amsco Sterile Recoveries, Inc., as assigned to the Company.
10.16(1) Lease Agreement dated January 31, 1996, between Florida Conference
Association of Seventh-Day Adventists and Surgipro, Inc., as assigned to the
Company.
10.17(1) License Agreement dated July 31, 1994, between the Company and Amsco
Sterile Recoveries, Inc.
10.18(1) Stock Option Agreement dated as of October 18, 1996, between Bertram T.
Martin, Jr. and the Company.
10.19(3) Stock Option Agreement dated as of May 2, 1996, between James M. Emanuel
and the Company.
10.20(1) 1996 Non-Employee Director Stock Option Plan.
10.21(3) Retention Agreements between the Company and each of Messrs. Isel,
Peterson, Boosales and Martin:
(a) Isel
(b) Peterson
(c) Boosales
(d) Martin
10.21(4) Loan Agreement dated October 15, 1996, between First Union National Bank of
Florida and the Company.
</TABLE>
-42-
<PAGE> 45
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
10.22(4) Revolving Line of Credit Promissory Note dated October 15, 1996, executed by
the Company in favor of First Union National Bank of Florida.
10.23(4) Security Agreement dated October 15, 1996, executed by the Company in favor
of First Union National Bank of Florida.
10.24(5) Amendments No. 2 and 3 to the 1995 Stock Option Plan.
10.25 Stock Option Agreement dated November 21, 1997, between Bertram T. Martin,
Jr. and the Company.
10.26 Corporate Service Agreement dated October 21, 1997, between Standard Textile
Company, Inc. and the Company.
10.27 Corporate Service Agreement dated October 31, 1997, between Health Services
Corporation of America and the Company.
10.28 1998 Stock Option Plan
23.1 Consent of Grant Thornton, LLP
27.1 Financial Data Schedule for year ended December 31, 1997 (for
SEC use only).
27.2 Restated Financial Data Schedule for year ended December 31,
1996 (for SEC use only).
27.3 Restated Financial Data Schedule for year ended December 31,
1995 (for SEC use only).
</TABLE>
____________
(1) Incorporated by reference to the Registration Statement on Form S-1 filed
by the Registrant on May 15, 1996.
(2) Incorporated by reference to Amendment No. 2 to the Registration Statement
on Form S-1 filed by the Registrant on July 15, 1996.
(3) Incorporated by reference to Amendment No. 3 to the Registration Statement
on Form S-1 filed by the Registrant on July 18, 1996.
(4) Incorporated by reference to the Quarterly Report on Form 10-Q filed by the
Registrant on November 12, 1996.
(5) Incorporated by reference to the Annual Report on Form 10-K filed by the
Registrant on March 24, 1997.
-43-
<PAGE> 46
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES AND
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.
BY: /s/ RICHARD T. ISEL
-----------------------------------
Richard T. Isel
Chairman of the Board
Dated: March 24, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD T. ISEL Chairman, Chief Executive Officer March 24, 1998
- --------------------------- and Director
Richard T. Isel
/s/ BERTRAM T. MARTIN, JR. President, Chief Operating Officer March 24, 1998
- --------------------------- and Director
Bertram T. Martin, Jr.
/s/ WAYNE R. PETERSON Executive Vice President and March 24, 1998
- --------------------------- Director
Wayne R. Peterson
/s/ JAMES T. BOOSALES Executive Vice President, March 24, 1998
- --------------------------- Chief Financial Officer and
James T. Boosales Director
/s/ JAMES M. EMANUEL Director March 24, 1998
- ---------------------------
James M. Emanuel
/s/ LEE R. KEMBERLING Director March 24, 1998
- ---------------------------
Lee R. Kemberling
</TABLE>
-44-
<PAGE> 1
EXHIBIT 10.25
----------------------------
STOCK OPTION AGREEMENT
20,000 SHARES*
----------------------------
Date of Grant: November 21, 1997
Expiration Date: November 21, 2007
Exercise Price: $15.06 Per Share
----------------------------
TO: Bertram T. Martin, Jr.
In recognition of the importance of your contributions to Sterile
Recoveries, Inc. and to enhance your interest in its sustained success and
profitability, you have been granted as of the Date of Grant stated above a
non-qualified stock option to purchase up to 20,000 shares of its common stock,
$.001 par value, at an exercise price of $15.06 per share, subject to all the
following terms and conditions:
1. DEFINITIONS. As used in this Agreement, the capitalized terms
defined below have the respective meanings ascribed to them:
"ADMINISTRATIVE COMMITTEE" means the Board of Directors of the Company
or any Committee of the Company's Board of Directors which has been appointed
to administer the Company's 1995 Stock Option Plan.
"AGREEMENT" means this Stock Option Agreement, as originally executed
by you and the Company, and as subsequently amended or modified in accordance
with its terms.
"BOARD OF DIRECTORS" means the Board of Directors of the Company.
"CHANGE IN CONTROL" means any of the following: (a) the shareholders
of the Company approve a liquidation of all or substantially all the
consolidated assets of the
- --------------------------
*The shares granted under this Agreement are not subject to any of the
company's Stock Option Plan.
<PAGE> 2
Company and its Subsidiaries, other than a liquidation of a Subsidiary into
the Company or another Subsidiary (unless the transaction is subsequently
abandoned or otherwise fails to occur); (b) the shareholders of the Company
approve a sale, lease, exchange, or other transfer to any person other than the
Company or a Subsidiary (in a single transaction or related series of
transactions) of all or substantially all of consolidated assets of the Company
and its Subsidiaries, excluding the creation (but not the foreclosure) of a
lien, mortgage, or security interest (unless the transaction is subsequently
abandoned or otherwise fails to occur); (c) the shareholders of the Company
approve a merger, consolidation, reorganization, tender offer, exchange offer,
or share exchange in which the Company will not be the surviving corporation or
will become a majority-owned subsidiary of a person other than a Subsidiary
(unless the transaction is subsequently abandoned or otherwise fails to occur);
or (d) the occurrence of any event, transaction, or arrangement that results in
any person or group becoming a beneficial owner of (i) a majority of the
outstanding Common Stock of the Company or any Subsidiary that contributed more
than 50% of the Company's consolidated revenues for its last fiscal year, (ii)
securities of the Company representing a majority of the combined voting power
of all the outstanding securities of the Company that are entitled to vote
generally in the election of its directors, or (iii) with respect to any
Subsidiary that contributed more than 50% of the Company's consolidated
revenues for its last fiscal year, securities of that Subsidiary representing a
majority of the combined voting power of all the outstanding securities of that
Subsidiary that are entitled to vote generally in the election of its
directors, unless in each case the beneficial owner is the Company, a
Subsidiary, an employee benefit plan sponsored by the Company, a person or
group who is a record or beneficial owner of 25% or more of the outstanding
Shares on the Date of Grant, or a person who becomes a beneficial owner of 25%
or more of the outstanding Shares solely by becoming a trustee of an inter
vivos trust created by a person who is the record or beneficial owner of 25% or
more of the outstanding Shares on the Date of Grant.
"COMMON STOCK" means the common stock, $.001 par value, of the Company.
"COMPANY" means Sterile Recoveries, Inc., a Florida corporation.
"DATE OF GRANT" means the date when the Company authorized the grant
of the Stock Option to you, as stated in the heading of this Agreement.
"EXCHANGE ACT" means the United States Securities Exchange Act of
1934, as amended, and includes all rules and regulations of the SEC promulgated
under that act.
"INTERNAL REVENUE CODE" means the United States Internal Revenue Code
of 1986, as amended from time to time, or any United States income tax law
subsequently enacted in substitution for that code.
"OPTION YEAR" means each period of 12 consecutive months beginning on
the Date of Grant or on each anniversary of the Date of Grant.
-2-
<PAGE> 3
"PROPRIETARY PROPERTY" means any and all ideas, plans, methods,
discoveries, inventions, developments, improvements, trade secrets,
intellectual property, and other proprietary data, knowledge, and information
that you solely or jointly know, create, conceive, develop, or reduce to
practice while employed by the Company or any subsidiary of the Company and
that directly or indirectly benefits, relates to, or is connected in any way
with, your employment with the Company or any subsidiary of the Company, or any
process, product, formula, business, facility, research, equipment, machinery,
technique, experiment, computer program, software, source code, or user
interface screen, or other development of the Company or any subsidiary of the
Company.
"SHARES" means shares of the Company's common stock, $.001 par value.
"STOCK OPTION" means the non-qualified stock option to purchase Shares
from the Company that is granted to you pursuant to this Agreement.
"SUBSIDIARY" means a corporation of which 80% of its voting securities
are owned directly or indirectly by the Company.
2. EXPIRATION. Unless extended by the Company, the Stock Option
expires at 5:00 P.M., New York time, on the earlier of (a) the date that is ten
years after the Date of Grant, which is the Expiration Date stated in the
heading of this Agreement, or (b) the 180th day after you die. In no event is
the Stock Option exercisable after the Expiration Date stated in the heading of
this Agreement.
3. EXERCISE OF OPTION. The Stock Option is not exercisable until you
accept this Agreement. Thereafter, the Stock Option is exercisable to the
extent and in the manner described in this Agreement. To the extent that it is
exercisable, you may exercise the Stock Option as a whole, in part, or in
increments at any time and from time to time. You may exercise the Stock Option
as to all or any portion of the full number of Shares for which it is
exercisable at any time, but you must exercise the Stock Option before it
expires, and every exercise must be for at least 500 whole Shares. No
fractional Shares will be issued pursuant to the Stock Option. The Stock Option
will become exercisable after each Option year in serial increments equal to
20% of the Shares subject to the Stock Option as follows:
<TABLE>
<CAPTION>
After Option Year Percent Exercisable
----------------- -------------------
Per Year Cumulatively
-------- ------------
<S> <C> <C>
1 20% 20%
2 20% 40%
3 20% 60%
4 20% 80%
5 20% 100%
</TABLE>
In addition, the Stock Option will become fully and immediately exercisable as
to all of the Shares on the occurrence of a Change of Control.
-3-
<PAGE> 4
4. METHOD OF EXERCISE. To exercise the Stock Option, you must do the
following before the Stock Option expires: (a) deliver to the Company a written
notice of exercise in the form of Appendix "A" to this Agreement (or such other
form as the Company may subsequently prescribe), specifying the number of
Shares to be purchased; (b) tender to the Company full payment for the Shares
to be purchased pursuant to the exercise of the Stock Option; (c) pay to the
Company, or make an arrangement satisfactory to the Company for the payment of,
any tax withholding required in connection with your exercise of the Stock
Option (including FICA, Medicare, and local, state, or federal income taxes);
and (d) comply with any other reasonable requirements of exercise that the
Company has established. You may pay the exercise price and any tax withholding
for the Shares that you purchase pursuant to the Stock Option by any
combination of cash, money order, personal check, or certified or official bank
check or with Shares valued at fair market value on the exercise date. The
exercise date for each exercise of the Stock Option will be the date when (i)
the Company has received notice of exercise and full payment of the exercise
price, (ii) you have paid to the Company or made a satisfactory arrangement for
the payment of any requisite tax withholding, and (iii) you have satisfied any
other requirements of exercise established by the Company.
5. EMPLOYMENT CONDITION. Except as otherwise provided below, you may
exercise the Stock Option only if you have been in the continuous employment of
the Company or a subsidiary of the Company during the period beginning on the
Date of Grant and ending on the 90th day before the exercise date of the Stock
Option. If your employment with the Company or any subsidiary of the Company is
terminated (voluntarily or involuntarily) at a time when the Stock Option is
exercisable, you may exercise the Stock Option within 90 days following the
effective date of termination. If you cease to be an employee because you die
or suffer a total and permanent disability (within the meaning of section
22(e)(3) of the Internal Revenue Code) at a time when the Stock Option is
exercisable, the Stock Option will continue to be exercisable by you or your
heir, estate or guardian for 12 months following the termination of your
employment because of death or disability. Notwithstanding the foregoing, the
Stock Option is never exercisable after the Expiration Date stated in the
heading of this Agreement. The Stock Option will be exercisable after your
death, disability, or termination of employment only to the extent that it was
exercisable on the date when you ceased to be an employee of the Company or any
of its subsidiaries. The Administrative Committee will decide to what extent
bona fide leaves of absence for illness, temporary disability, military or
governmental service, or other reasons will constitute an interruption of
continuous employment that results in your ceasing to be continuously employed
by the Company or any of its subsidiaries for purposes of the Stock Option. The
award of the Stock Option to you does not create or extend any right for you to
continue to serve as an employee of the Company or any of its subsidiaries, to
participate in any other stock option or employee benefit plan of the Company
or any of its subsidiaries, or to receive the same employee benefits as any
other employee. Furthermore, it does not restrict in any way the right of the
Company or any of its subsidiaries to terminate at any time your employment
with it either at will or as provided in any written employment agreement
between it and you.
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<PAGE> 5
6. NONTRANSFERABILITY OF OPTION. You are prohibited from transferring
the Stock Option, any interest in it, or any right under this Agreement by any
means other than by will or the law of descent and distribution. The Stock
Option is exercisable during your lifetime only by you or your guardian. Any
prohibited transfer (whether by gift, sale, pledge, assignment, hypothecation,
or otherwise) will be invalid and ineffective as to the Company. In addition,
the Stock Option and your rights under this Agreement are not subject to any
lien, levy, attachment, execution, or similar process by creditors. The Company
may cancel the Stock Option by notice to you, if you attempt to make a
prohibited transfer, or if the Stock Option, any interest in it, or any right
under this Agreement becomes subject to a lien, levy, attachment, execution, or
similar process against you by creditors.
7. STOCK CERTIFICATES. Promptly after the Stock Option has been
validly exercised in accordance with the terms of this Agreement, the Company
shall issue and deliver to you, against a written receipt in substantially the
form attached as Appendix "B" to this Agreement, a stock certificate evidencing
your ownership of the Shares that were purchased pursuant to the Stock Option,
plus, instead of any fractional Share to which that person otherwise would be
entitled, a cash sum equal to the product of (a) that fraction, multiplied by
(b) the fair market value of a Share on the exercise date of the Stock Option.
You will not have any rights as a shareholder with respect to any Shares
issuable upon exercise of the Stock Option until the Stock Option has been
validly exercised, the Company has issued and delivered to you a certificate
evidencing those Shares, and your name has been entered as a shareholder of
record in the Company's stock records.
8. INVENTIONS. While employed by the Company or any subsidiary of the
Company and within 30 days after the termination date of your employment with
the Company or any subsidiary of the Company, you fully and promptly shall
disclose in writing to the Company, and hold in trust for the sole right and
benefit of the Company, any and all Proprietary Property, whether or not any of
the Proprietary Property is patentable, capable of copyright or trademark
registration or is created, conceived, developed, or reduced to practice during
normal working hours, at the request of the Company or any subsidiary of the
Company, or before or after the execution date of this Agreement. In
furtherance of the foregoing, you shall assign to the Company all of your
right, title, and interest in and to all Proprietary Property. While employed
by the Company or any subsidiary of the Company and at all times thereafter,
you shall do all things, and execute all documents, including applications for
patents, copyrights, and trademarks and for renewals, extensions, and divisions
thereof, as the Company reasonably may request to carry out the intent and
purposes of this section. If the Company is unable for any reason whatsoever to
obtain your signature or assistance, you irrevocably appoint the Company and
each of its duly authorized officers as your agent and attorney-in-fact, with
full power of substitution, to sign, execute, and file in your name and on your
behalf any document required to prosecute or apply for any foreign or United
States patent, copyright, trademark, or other proprietary protection, including
renewals, extensions, and divisions, and to do all other lawful acts and things
to further the issuance or
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<PAGE> 6
prosecution of a patent, copyright, trademark, or other proprietary protection,
all with the same legal force and effect as if done or executed by you.
9. REPRESENTATIONS AND WARRANTIES. By accepting this Agreement, you
represent and warrant to the Company the following:
(a) You are accepting the Stock Option, and will purchase the Shares
subject to your Stock Option, solely for your own account, as principal,
without a view to, and not for resale in connection with, any distribution or
underwriting of the Stock Option or any Shares, and you are not participating,
directly or indirectly, in any distribution or underwriting of the Stock Option
or any Shares. You are not acquiring the Stock Option, and will not purchase
any Shares pursuant to it, as an agent, nominee, or representative for the
account or benefit of another person or entity, and you have not agreed or
arranged to sell, assign, transfer, subdivide, or otherwise dispose of all or
any part of the Stock Option or the Shares subject to it to another person or
entity.
(b) You understand that (i) no state or federal agency has passed upon
the Stock Option or the Shares or made any finding or determination as to the
fairness of the Stock Option or the Shares as an investment, (ii) the Stock
Option and the Shares subject to it have not been, and will not be, registered
under either the Securities Act of 1933, as amended, or any state securities
law, (iii) those Shares can be offered for sale, sold, assigned, foreclosed or
otherwise transferred only if the transaction is registered under those laws or
qualifies for an available exemption from registration under those laws, and
(iv) the Company has not agreed, and is not obligated to register any resale or
other transfer of any Shares acquired pursuant to the Stock Option under the
Securities Act of 1933, as amended, or any state securities law, or to take any
action to enable you to qualify for an exemption from registration under any of
those laws with respect to a resale or other transfer of those Shares.
(c) You understand that, in furtherance of the transfer restrictions
stated above, (i) the Company will issue stop transfer instructions to its
transfer agent to restrict an impermissible resale or other transfer of the
Shares purchased pursuant to your Stock Option, (ii) each certificate
evidencing those Shares will bear a restrictive legend in substantially the
following form:
A transfer of the securities evidenced by this certificate is
restricted by state and federal securities laws. These securities
cannot be offered for sale, sold, assigned, foreclosed, or
otherwise transferred at any time absent either registration of
the transaction under the Securities Act of 1933, as amended, and
every applicable state securities law or delivery to the issuer of
these securities of a written opinion of legal counsel
satisfactory to it that registration of the transaction under
those laws is not required.
and (iii) a legend substantially identical to the one set forth above will be
placed on every new stock certificate that is issued upon a transfer or
exchange of those Shares.
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<PAGE> 7
(d) You will not offer for sale, sell, assign, pledge, hypothecate, or
otherwise transfer the Shares purchased pursuant to your Stock Option at any
time without either (i) registering the transaction under the Securities Act of
1933, as amended, and every applicable state securities law or (ii) delivering
to the Company a satisfactory written opinion of legal counsel to the effect
that registration of the transaction is not required under any of those laws.
(e) You understand that an established trading market does not exist
for the Shares, and none is likely to develop in the absence of a registered
public offering of the Shares.
10. ANTIDILUTION. If the Company does any of the following (a
"Dilutive Event") at any time before the exercise or expiration of the Stock
Option: (a) splits or subdivides its then-outstanding Shares into a greater or
different number of Shares; (b) reduces the then-outstanding number of Shares
by a reverse stock-split or by otherwise combining those Shares into a smaller
number of Shares; (c) effects any other capital adjustment, recapitalization,
reorganization, or reclassification that has the effect of increasing or
decreasing proportionately the number of outstanding Shares then held by each
shareholder; (d) distributes any of its assets to its shareholders pro rata as
a partial liquidation or return of capital; or (e) declares, issues, or
distributes to the holders of its Common Stock, without separate payment
therefor, (i) a noncash dividend payable in any property or securities of the
Company, including additional Shares, or (ii) any cash, property, or securities
in connection with a spin-off, split-up, reclassification, recapitalization,
combination of shares, or similar rearrangement of the Company's capital stock;
then, upon the subsequent exercise of a Stock Option after the record date for,
or the occurrence of, each Dilutive Event, you will be entitled to receive, in
exchange for the exercise price specified in the Stock Option, and in addition
to (or in substitution for in the case of a reduced number of Shares), the
Shares otherwise issuable upon exercise of the Stock Option, the additional (or
reduced) amount of Shares and other securities and property (including cash)
resulting from the Dilutive Event that you would have been entitled to receive
if (A) you had exercised the Stock Option on the Date of Grant (even if the
Stock Option was not exercisable then) and had been the record owner of the
number of Shares resulting from the exercise during the period beginning on
that date and ending on the actual exercise date of the Stock Option, and (B)
you had retained all Shares and other securities and property (including cash)
receivable by you during that period, after giving effect to all the Dilutive
Events that occurred during that period.
11. CHANGE IN CONTROL. The Stock Option will be subject to the
provisions governing a "Change of Control" of the Company described in Section
5.2 of the Company's 1995 Stock Option Plan.
12. RESERVATION, LISTING, AND DELIVERY OF SHARES. The Company shall
reserve from its authorized but unissued shares of Common Stock and keep
available until the expiration of the Stock Option, solely for issuance upon
the exercise of the Stock Option, the number of Shares issuable at any time
pursuant to the exercise of the Stock Option granted under this Agreement. In
addition, the Company shall take all requisite action to assure that it
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<PAGE> 8
validly and legally may issue fully-paid, nonassessable Shares upon the
exercise of the Stock Option. Also, the Company, at its sole expense, shall
reserve for listing on the National Association of Securities Dealers Automated
Quotation System or any national securities exchange on which the Shares are
listed for trading, upon official notice of issuance pursuant to the exercise
of the Stock Option, the number of Shares issuable at any time upon the
exercise of the Stock Option, and the Company shall maintain that listing until
expiration of the Stock Option.
13. LEGAL PROCEEDINGS. If any dispute arises between you (or your
successors in interest) and the Company with respect to this Agreement or the
Stock Option, the parties shall submit the dispute to mandatory arbitration
before a panel of arbitrators in accordance with the Florida Arbitration Code.
Arbitration will be the sole and exclusive method of resolving the dispute, and
each party will be barred from filing a lawsuit concerning the subject matter
of the arbitration, except to obtain an equitable remedy. The Federal Rules of
Evidence and the discovery provisions of the Federal Rules of Civil Procedure
will apply to the arbitration proceeding.
The arbitration panel will consist of three arbitrators, with one
arbitrator selected by the Company, the second selected by you, and the third,
neutral arbitrator selected by agreement of the first two arbitrators. Each
party shall select an arbitrator and notify the other party of the selection
within 15 days after the effective date of the notice of arbitration and the
two arbitrators selected by the parties shall select the third arbitrator
within 30 days after the effective date of the notice of arbitration. A party
who fails to select an arbitrator within the prescribed 15-day period waives
the right to select an arbitrator or to have an additional, neutral arbitrator
selected by the arbitrator selected by the other party, and the arbitrator
chosen by the other party will constitute the "arbitration panel" for purposes
of this Agreement.
Every arbitrator must be (a) independent (not a relative of yours or
an officer, director, employee, or shareholder of the Company or any subsidiary
of the Company), (b) a corporate attorney who is rated "AV" by
Martindale-Hubbell Law Directory or listed in the current edition of The Best
Lawyers in America, and (c) not have any economic or financial interest of any
kind in the outcome of the arbitration. Each arbitrator's conduct will be
governed by the Code of Ethics for Arbitrators in Commercial Disputes (1986)
that has been approved and recommended by the American Bar Association and the
American Arbitration Association.
Within 120 days after the effective date of the selection of the
arbitrators, the arbitration panel shall convene a hearing for the dispute to
be held on such date and at such time and place in Tampa, Florida, as the
arbitration panel designates upon 60 days' advance notice to you and the
Company. The arbitration panel shall render its decision within 30 days after
the conclusion of the hearing. The decision of the arbitration panel will be
binding and conclusive as to you and the Company and, upon the pleading of
either party, any court having jurisdiction may enter a judgment of any award
rendered in the arbitration, which may include an award of damages. The
arbitration panel shall hear and decide the dispute based on the evi-
-8-
<PAGE> 9
dence produced, notwithstanding the failure or refusal to appear by a party
who has been duly notified of the date, time, and place of the hearing.
You and the Company (a) consent to the personal jurisdiction of the
state and federal courts having jurisdiction over Hillsborough County, Florida,
(b) stipulate that the proper, exclusive, and convenient venue for any legal
proceeding arising out of this Agreement or the Stock Option is Hillsborough
County, Florida, and (c) waive any defense, whether asserted by a motion or
pleading, that Hillsborough County, Florida, is an improper or inconvenient
venue. YOU KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE YOUR RIGHT TO A JURY
TRIAL IN ANY LAWSUIT BETWEEN YOU AND THE COMPANY WITH RESPECT TO THIS AGREEMENT
OR THE STOCK OPTION.
The Company shall pay to you, on demand, interest on any amount owed
to you under this Agreement that is not paid to you when due, from the date
when due until paid in full, at the annual rate then provided by Florida law
for the payment of interest on judgments generally.
14. NOTICES. Every notice, demand, consent, approval, and other
communication required or permitted under this Agreement will be valid only if
it is in writing and delivered personally or by telex, telecopy, telegram,
commercial courier, or first class, postage prepaid, United States mail
(whether or not certified or registered and regardless of whether a return
receipt is received or requested by the sender) and addressed, if to you, at
your address set forth below and, if to the Company, at 28100 U.S. Highway 19
North, Suite 201, Clearwater, Florida 34621, Attention: President, or at any
other address that either party has previously designated by notice given to
the other party in accordance with this provision. A validly given notice,
demand, consent, approval, or other communication will be effective on the
earlier of its receipt, if delivered personally or by telex, telecopy,
telegram, or commercial courier, or the third day after it is postmarked by the
United States Postal Service, if it is delivered by first class, postage
prepaid, United States mail. You shall notify the Company of any change in your
mailing address that is listed in this Agreement.
15. LEGAL PROCEEDINGS. If any dispute arises between you and the
Company with respect to this Agreement or the Stock Option, either party may
elect (but is not obligated) to submit the dispute to arbitration before a
panel of arbitrators in accordance with the Florida Arbitration Code by giving
the other party a notice of arbitration in accordance with this Agreement. If a
party elects to arbitrate a dispute before a lawsuit is filed with respect to
the subject matter of the dispute, arbitration will be the sole and exclusive
method of resolving the dispute, the other party must arbitrate the dispute,
and each party will be barred from filing a lawsuit concerning the subject
matter of the arbitration, except to obtain an equitable remedy. A party's
right to submit a dispute to arbitration does not restrict its right to
institute litigation to obtain any legal or equitable remedy. The filing of a
lawsuit by either party before the other party has elected that a dispute be
submitted to arbitration will bar and preclude both you and the Company from
submitting the subject matter of the lawsuit to arbitration while the lawsuit
is pending.
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<PAGE> 10
The arbitration panel will consist of three arbitrators, with one
arbitrator selected by the Company, the second selected by you, and the third,
neutral arbitrator selected by agreement of the first two arbitrators. Each
party shall select an arbitrator and notify the other party of the selection
within 15 days after the effective date of the notice of arbitration and the
two arbitrators selected by the parties shall select the third arbitrator
within 30 days after the effective date of the notice of arbitration. A party
who fails to select an arbitrator within the prescribed 15-day period waives
the right to select an arbitrator or to have an additional, neutral arbitrator
selected by the arbitrator selected by the other party, and the arbitrator
chosen by the other party will constitute the "arbitration panel" for purposes
of this Agreement.
Every arbitrator must be independent (not a relative of yours or an
officer, director, employee, or shareholder of the Company or any Subsidiary)
without any economic or financial interest of any kind in the outcome of the
arbitration. Each arbitrator's conduct will be governed by the Code of Ethics
for Arbitrators in Commercial Disputes (1986) that has been approved and
recommended by the American Bar Association and the American Arbitration
Association.
Within 120 days after the effective date of the notice of arbitration,
the arbitration panel shall convene a hearing for the dispute to be held on
such date and at such time and place in Tampa, Florida, as the arbitration
panel designates upon 60 days' advance notice to you and the Company. The
arbitration panel shall render its decision within 30 days after the conclusion
of the hearing. The decision of the arbitration panel will be binding and
conclusive as to you and the Company and, upon the pleading of either party,
any court having jurisdiction may enter a judgment of any award rendered in the
arbitration, which may include an award of damages. The arbitration panel shall
hear and decide the dispute based on the evidence produced, notwithstanding the
failure or refusal to appear by a party who has been duly notified of the date,
time, and place of the hearing.
You and the Company (a) consent to the personal jurisdiction of the
state and federal courts having jurisdiction over Hillsborough County, Florida,
(b) stipulate that the proper, exclusive, and convenient venue for any legal
proceeding arising out of this Agreement or the Stock Option is Hillsborough
County, Florida, and (c) waive any defense, whether asserted by a motion or
pleading, that Hillsborough County, Florida, is an improper or inconvenient
venue. YOU KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE YOUR RIGHT TO A JURY
TRIAL IN ANY LAWSUIT BETWEEN YOU AND THE COMPANY WITH RESPECT TO THIS AGREEMENT
OR THE STOCK OPTION.
In any mediation, arbitration, or legal proceeding arising out of this
Agreement, the losing party shall reimburse the prevailing party, on demand,
for all costs incurred by the prevailing party in enforcing, defending, or
prosecuting any claim arising out of this Agreement, including all fees, costs,
and expenses of agents, experts, attorneys, witnesses, arbitrators, and
supersedes bonds, whether incurred before or after demand or commencement of
legal or arbitration proceedings, and whether incurred pursuant to trial,
appellate, mediation,
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<PAGE> 11
arbitration, bankruptcy, administrative, or judgment-execution proceedings.
The Company shall pay to you, on demand, interest on any amount owed to you
under this Agreement that is not paid to you when due, from the date when due
until paid in full, at the annual rate then provided by Florida law for the
payment of interest on judgments generally (the current annual rate of interest
on judgments prescribed by section 55.03, Florida Statutes, is 12%).
16. MISCELLANEOUS. The validity, construction, enforcement, and
interpretation of this Agreement are governed by the laws of the State of
Florida and the federal laws of the United States of America, excluding the
laws of those jurisdictions pertaining to resolution of conflicts with the laws
of other jurisdictions. A waiver, amendment, modification, or cancellation of
this Agreement will be valid and effective only if it is in writing and
executed by you and the Company. By signing this Agreement, you accept the
grant of the Stock Option, and warrant that you are free to enter into this
Agreement and do not have any legal obligations that are inconsistent with this
Agreement. This Agreement records the final, complete, and exclusive
understanding between you and the Company with respect to the Stock Option and
supersedes any prior or contemporaneous agreement, representation, or
understanding, oral or written, by you or the Company. This Agreement is
binding on your heirs, guardian, and personal representative and is binding on,
inures to the benefit of, the Company's assignees and successors. Time is of
the essence with respect to your exercise of the Stock Option.
STERILE RECOVERIES, INC.
WITNESSES: By:/s/ James T. Boosales (SEAL)
-------------------------
James T. Boosales
Executive Vice President
- -----------------------------
(As to Mr. Boosales)
ACCEPTANCE OF STOCK OPTION
I have carefully read the foregoing Stock Option Agreement. Before
exercising the Stock Option, I will review the additional disclosure documents
furnished to me by the Company. I accept the Stock Option granted to me
pursuant to the Agreement and agree to be bound by all the terms and conditions
of the Agreement.
EXECUTED AS OF: November 21, 1997
----------------------------------
BERTRAM T. MARTIN, JR.
2805 Parkland Boulevard
Tampa, Florida 33609
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<PAGE> 12
APPENDIX "A"
STERILE RECOVERIES, INC.
STOCK OPTION
NOTICE OF EXERCISE
TO: Sterile Recoveries, Inc.
Attention: Chief Financial Officer
This notifies you that I exercise my option to purchase _______ shares
(the "Shares") of common stock of Sterile Recoveries, Inc. (the "Company")
pursuant to the stock option that the Company granted to me on November 21,
1997, pursuant to the Stock Option Agreement that was accepted by me as of
November 21, 1997 (the "Agreement").
In connection with my purchase of the Shares, I represent and warrant
to the Company the following:
(a) I am in full compliance with all conditions to exercise of the
Stock Option set forth in
the Agreement.
(b) I am purchasing the Shares solely for my own account, as
principal, without a view to, and not for resale in connection with, any
distribution or underwriting of any Shares, and I am not participating,
directly or indirectly, in any distribution or underwriting of any shares. I am
not investing in the Shares as an agent, nominee, or representative for the
account or benefit of any person or entity, and I have not agreed or arranged
to sell, assign, transfer, subdivide, or otherwise dispose of all or any part
of the Shares to another person or entity.
(c) I understand that (i) no state or federal agency has passed upon
the Shares or made any finding or determination as to the fairness of the
Shares as an investment, (ii) the Shares have not been, and will not be,
registered under either the Securities Act of 1933, as amended, or any state
securities law, and they can be offered for sale, sold, assigned, pledged,
hypothecated, or otherwise transferred or encumbered only if the transaction is
registered under those laws or qualifies for an available exemption from
registration under those laws, and (iii) the Company has not agreed, and is not
obligated, to register any resale or other transfer of the Shares under the
Securities Act of 1933, as amended, or any state securities law, or to take any
action to enable me to qualify for an exemption from registration under any of
those laws with respect to a resale or other transfer of the Shares.
(d) I understand that, in furtherance of the transfer restrictions
stated above, (i) the Company will issue stop transfer instructions to its
transfer agent to restrict an impermissible resale or other transfer of the
Shares, (ii) each certificate evidencing the Shares will bear a restrictive
legend in substantially the following form:
The shares evidenced by this certificate have not been registered
under either the Securities Act of 1933, as amended, or the
securities laws of any state. These shares cannot be offered for
sale, sold, assigned, pledged,
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<PAGE> 13
hypothecated, or otherwise transferred or encumbered at any time,
as a whole or in part, absent registration of the transaction
under the Securities Act of 1933, as amended, and every
applicable state securities law or delivery to the Company of a
satisfactory written opinion of legal counsel to the effect that
registration of the transaction is not required under those laws.
and (iii) a legend substantially identical to the one described above will be
placed on every new stock certificate that is issued upon a transfer or
exchange of the Shares.
(e) I will not offer for sale, sell, assign, pledge, hypothecate, or
otherwise transfer or encumber the Shares at any time without registered the
transaction under the Securities Act of 1933, as amended, and every applicable
state securities law or delivering to the Company a satisfactory written
opinion of legal counsel to the effect that registration of the transaction is
not required under any of those laws.
(f) I understand that (i) routine public sales of the Shares in
reliance on Rule 144 under the Securities Act of 1933, as amended, will be
possible only in limited amounts in accordance with the terms and conditions of
that Rule, including the applicable holding period, and (ii) in accordance with
the position of the Securities and Exchange Commission, persons who publicly
offer or sell "restricted securities" without complying with Rule 144 have a
substantial burden of proof in establishing that a registration exemption is
available for the offer or sale.
(g) I have received from the Company and carefully read [add
description of disclosure document], pertaining to the Shares and all the
documents incorporated by reference in it (the "Disclosure Documents").
(h) I have been given adequate opportunity to evaluate this
investment, including opportunities to (i) question officers of the Company,
(ii) obtain any additional information necessary to evaluate the investment or
to verify any information or representation contained in the Disclosure
Documents, and (iii) make such other investigation as I considered appropriate
or necessary to evaluate the business and financial affairs and condition of
the Company.
(i) Management of the Company has answered all questions asked by me,
and they have either furnished to me, or given me full and unrestricted access
to, all records, contracts, documents, and other information requested by me,
with respect to the Shares, the Company, the Disclosure Documents, and the
business and financial affairs and condition of the Company.
(j) I am an officer or managerial employee of the Company, and
therefore, knowledgeable concerning the business of the Company, and I have
carefully considered and understand the risks and other factors affecting the
suitability of the Shares as an investment for me.
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<PAGE> 14
(k) I understand that neither the Company, any officer or director of
the Company, nor any professional advisor of the Company, makes any
representation or warranty to me with respect to, or assumes any responsibility
for, the federal income tax consequences to me of an investment in the Shares.
(l) Because of my knowledge and experience in financial and business
matters, and the Company's business in particular, I am able to evaluate the
merits, risks, and other factors bearing upon the suitability of the Shares as
an investment for me, and I have been afforded adequate opportunity to evaluate
this proposed investment in light of those factors, my financial condition, and
my investment knowledge and experience.
(m) I have adequate net worth and annual income to provide for my
current needs and possible future contingencies and do not have an existing or
foreseeable future need for liquidity of my investment in the Shares. Also, I
am otherwise able to bear the economic risk of an investment in the Shares, and
have sufficient net worth and annual income to sustain a loss of all or part of
my investment in the Shares if that were to occur and to withstand the probably
inability to publicly sell, transfer, or otherwise dispose of the Shares for an
indefinite period of time.
Please issue in my name, as printed below my signature to this notice
of exercise, a stock certificate evidencing my ownership of the Shares. Also,
please issue to me in the same manner a balance certificate for any of the
Shares evidenced by an enclosed stock certificate that are not required to
satisfy the purchase price of the Shares.
EXECUTED: /s/ Bertram T. Martin
----------------,----- ------------------------------
Signature of Participant
----------------------------------
Name of Participant
----------------------------------
Street Address
Amount Enclosed: $
---------- ----------------------------------
City State Zip Code
Shares Enclosed:
---------- -----------------------------------
Social Security Number
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<PAGE> 15
APPENDIX "B"
STERILE RECOVERIES, INC.
STOCK OPTION
STOCK CERTIFICATE RECEIPT
I acknowledge receipt from Sterile Recoveries, Inc. on ______________,
____, of stock certificate number _____ for ________ shares of common stock of
Sterile Recoveries, Inc., purchased by me pursuant to the exercise of the stock
option granted to me under the Stock Option Agreement that was accepted by me
on[ ].
---------------
----------------------------------
Signature of Employee
----------------------------------
Name of Participant
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<PAGE> 1
EXHIBIT 10.26
October 21, 1997
Norman Frankel, Vice President Sales/Marketing
Standard Textile Co., Inc.
P.O. Box 371805
Cincinnati, Ohio 45222-1805
Dear Norman:
This confirms the terms under which Sterile Recoveries, Inc. ("SRI")
and Standard Textile Co., Inc. ("Standard") will engage in certain transactions
with each other and sales efforts on each other's behalf.
Background
Standard manufactures and distributes reusable products to hospitals
and their vendors, including gowns, drapes, and towels. Standard enjoys
long-standing contractual relationships with VHA, which represents hospitals in
purchasing products and services. Standard's relationship with VHA makes it a
preferred vendor to VHA's member hospitals. Standard's relationship with VHA is
evidenced by a Purchase Agreement dated September 25, 1995, and letter
agreement of the same date directed by William J. Elliott of VHA to Gary Heiman
of Standard (collectively, the "Purchase Agreement").
SRI provides daily delivery and retrieval of its reusable surgical
products to hospitals and surgery centers located throughout most of the United
States. Its reusable surgical products include gowns, towels, drapes, stainless
steel basins, and boots. SRI owns its products and supplies them to hospitals
on a per use basis. SRI's hospital customers can offer their staff the comfort
and protection of reusable surgical products, without the substantial product
and facility investments typically required to use them.
SRI and Standard desire to establish mutually beneficial arrangements
for the following:
<PAGE> 2
Standard Textile Co., Inc.
October 21, 1997
Page 2
1. Beginning October 1, 1997, SRI will contract with Standard to
manufacture a portion of SRI's liquid resistant gowns, using fabric
provided by SRI's selected suppliers.
2. Standard will initiate efforts to develop a substitute fabric for
SRI's liquid resistant gowns that compares favorably with SRI's existing
fabric in cost, quality, and performance.
3. Standard will develop additional high quality reusable surgical
products.
4. SRI will contract with Standard to purchase its draping system and
patented drape products, as necessary to support a portion of its customer
needs, subject to further discussions regarding implementation of the
program.
5. SRI and Standard plan to continue offering competitive reusable
surgical product services in those markets in which they currently offer
those services.
The parties also desire to establish the other elements of their relationship
set forth in this letter agreement.
Agreements
Gown supply. SRI will purchase liquid resistant reusable surgical
gowns from Standard in minimum quantities that roughly correspond to SRI's new
gown needs generated by the parties' joint sales efforts with VHA as described
below. Standard will assemble the gowns according to SRI's specifications from
fabric provided by SRI's suppliers under arrangements made by SRI. SRI will
order gowns through periodic purchase orders that specify size, quantity, and
other product attributes and provide for price and payment terms (net 30 days
proposed) that are market competitive. The purchased gowns need not be
dedicated to VHA hospitals.
New Product Development. The parties contemplate that Standard will
devote resources to developing reusable surgical products that look, act, feel,
and test at least comparably in quality to the products that SRI has available
from time to time from other suppliers. Although it makes no minimum purchase
commitment, SRI expects to purchase these products, provided they satisfy SRI's
cost and quality tests.
<PAGE> 3
Standard Textile Co., Inc.
October 21, 1997
Page 3
Additional Products. SRI may purchase from Standard additional
reusable surgical products, including some of Standard's patented products such
as drapes, to fulfill a portion of its needs for reusable surgical product
service. SRI will order drapes through periodic purchase orders that specify
size, quantity, and other product attributes and provide for price and payment
terms that are competitive in the market.
Joint Sales Efforts. Beginning October 1, 1997, Standard will
facilitate SRI's direct sale of its reusable surgical product service to
targeted VHA member hospitals. Standard will confirm that VHA will include SRI
services as products offered under the Purchasing Agreement currently in effect
between Standard and VHA. SRI and Standard will jointly develop a sales plan
for VHA and coordinate their respective sales forces' efforts to effectively
introduce and implement SRI's program at each targeted hospital. Nothing in
this Agreement precludes each party from continuing to offer competitive
reusable surgical product services in the markets that they currently service.
VHA Administrative Fees. SRI will deliver to Standard each month a
report listing SRI's VHA accounts originated since October 1, 1997, the amounts
that SRI billed to those accounts during the previous month, and a computation
of the administrative fees due VHA under the Purchase Agreement. These monthly
reports will be based on successive four week, four week, and five week periods
in each quarter. SRI will provide the reports and remit the associated
administrative fees to Standard within ten days following the close of each
reporting period. For purposes of this calculation, only those VHA hospital
accounts initiating service or executing a new agreement after October 1, 1997
will be listed in the reports and included in the VHA administrative fees.
Standard will promptly pay to VHA the gross amount of SRI's payments, and
provide the corresponding hospital accounts listing and sales totals.
Term. This Agreement will be for an initial term of two years. After
this initial two-year term, this Agreement is terminable by either party with
90 days prior written notice to the other party. On any termination of this
Agreement, Standard will return to SRI any unused fabric, but the parties will
not otherwise have any further obligations under this Agreement.
Relationship of the Parties. Neither party to this Agreement is an
agent, partner, or legal representative of the other for any purpose, and
neither party is authorized to assume or create, in writing or otherwise, an
obligation of any kind in the name or on behalf of the other party. This
Agreement is not to be construed to create a financial
<PAGE> 4
Standard Textile Co., Inc.
October 21, 1997
Page 4
interest in the other party's business or to constitute a partnership or joint
venture between the parties.
VHA Approval. Standard has confirmed with VHA that it will include SRI
services as products offered under the Purchase Agreement and otherwise secured
from VHA any requisite approvals for SRI to perform the services contemplated
by this Agreement. The Purchase Agreement is Standard's entire agreement with
VHA with respect to Standard's provision of reusable surgical products to VHA
member hospitals.
Confidentiality. During the term of this Agreement, each party might
furnish or make available to the other party proprietary or confidential
information pertaining to their products, services, customers, and business
operations that is designated by name, trademark, or other appropriate text to
be proprietary or confidential in nature ("Restricted Information"). All
Restricted Information furnished or made available to the other party during
the term of this Agreement, however and whenever acquired, will remain the
property of the party furnishing the information. Each party shall treat this
information as strictly confidential, shall use it solely for the purposes
contemplated by this Agreement, and shall not reveal, divulge, disclose, or
duplicate any Restricted Information without the other party's written consent,
except for the party's employees who need to know the information for purposes
of carrying out the purposes of this Agreement. However, the party receiving
the Restricted Information shall direct its employees who have access to the
Restricted Information to treat it as strictly confidential, and shall
indemnify the other party and hold it harmless from, any damage resulting from
a breach of confidentiality caused by any of its employees.
Legal Provisions. The parties may execute this Agreement in
counterparts. Each executed counterpart to this Agreement will constitute an
original document, and all executed counterparts, together, will constitute the
same agreement.
Notices. Except for oral requests and notices expressly authorized by
this Agreement, every notice, request, demand, consent, approval, and other
communication required or permitted under this Agreement will be valid only if
it is given in writing (or sent by telecopy and promptly confirmed in writing),
conspicuously marked "FOR IMMEDIATE ATTENTION," and addressed by the sender to
the appropriate party in the manner set forth below:
<PAGE> 5
Standard Textile Co., Inc.
October 21, 1997
Page 5
(a) If to Standard:
Standard Textile Co., Inc.
P.O. Box 371805
Cincinnati, Ohio 45222-1805
Attention: Norman Frankel
Vice President Sales/Marketing
Telecopier: (513) 761-0379
(b) If to SRI:
Sterile Recoveries, Inc.
28100 U.S. Highway 19 North, State 201
Clearwater, FL 34621
Attention: Bertram T. Martin, Jr.
Executive Vice President
Telecopier: (813) 725-8037
or to such other address as a party designates by notice to the other party. A
validly given notice, request, demand, consent, approval, or other
communication will be effective on its receipt.
Very truly yours,
STERILE RECOVERIES, INC.
By: /s/ Bertram T. Martin, Jr.
-------------------------------
Bertram T. Martin, Jr.
Executive Vice President
<PAGE> 6
Standard Textile Co., Inc.
October 21, 1997
Page 6
ACCEPTED AND AGREED this 21st day of October, 1997.
STANDARD TEXTILE CO., INC.
By: /s/ Norman Frankel
---------------------
Norman Frankel
Vice President Sales/Marketing
<PAGE> 1
EXHIBIT 10.27
CORPORATE SERVICE AGREEMENT
This is a Corporate Service Agreement (this "Agreement") between
Sterile Recoveries, Inc. ("Sterile Recoveries"), a Florida corporation, 28100
U.S. Highway 19 North, Suite 201, Clearwater, Florida 34621 and Health Services
Corporation of America ("HSCA"), a Missouri corporation, 280 South Mount Auburn
Road, Cape Girardeau, Missouri 63701.
BACKGROUND
Sterile Recoveries' service currently provides daily delivery and
retrieval of its reusable surgical products. Its reusable surgical products
include gowns, towels, drapes, stainless steel basins, and boots. Sterile
Recoveries' service offers the following benefits for HSCA's members:
- Sterile Recoveries' surgical products are among the most protective
and comfortable in the industry and are popular with HSCA's medical
staff. Because of the surgical products' quality, usage is often less
than with competing disposable products.
- Sterile Recoveries' drivers deliver its reusable products on carts
to a designated efficient delivery point within the hospital,
typically the central supply or surgical suite. Its delivery service
is designed to be "just-in-time," helping the hospital avoid
unnecessary warehousing, personnel, and processing costs and assure
availability of surgical products as needed.
- Sterile Recoveries retrieves its reusable products for reprocessing
in its facilities. The use of reusable surgical products instead of
disposable products reduces biomedical waste costs.
- Sterile Recoveries owns the reusable surgical products and
supplies them to the members on a per use basis, helping members
avoid capital investment and inventory carrying costs.
Sterile Recoveries also provides disposable accessory packs to complement its
reusable offering.
HSCA desires to further encourage its members to use Sterile
Recoveries' service. This Agreement confirms Sterile Recoveries as an approved
vendor of reusable surgical products to hospitals and surgery centers which
HSCA serves as a group purchasing agent.
<PAGE> 2
OPERATIVE TERMS
1. VENDOR RELATIONSHIP; GEOGRAPHIC SCOPE. Subject to the terms and
conditions of this Agreement, HSCA approves Sterile Recoveries as a vendor for
hospitals and surgery centers that it serves as a group purchasing agent from
time to time that are within its service area as specified in Exhibit "A" (the
"Service Area"), including without limitation the HSCA members that are listed
on the attached Exhibit "B". Sterile Recoveries' relationship with each member
will be governed by a Service Agreement in substantially the form attached as
Exhibit "C" (the "Service Agreement"), which will specify in Schedule 1 the
products to be delivered. Sterile Recoveries may by notice to HSCA amend
Exhibit "A" from time to time to change the Service Area to reflect development
of additional facilities, depots, and delivery routes .
2. TERM. The term of this Agreement will be five years, from November
1, 1997 through October 31, 2002. After the first two (2) years, either party
may terminate this Agreement, with or without cause, by giving three months'
advance notice of termination to the other party. This term will be
automatically extended in increments of one year each unless a party notifies
the other of its desire not to extend at least 90 days before the scheduled
expiration date.
3. PRODUCTS. Sterile Recoveries shall provide the reusable surgical
products, including without limitation gowns, towels, drapes, stainless steel
basins, boots, and disposable accessory packs (the "Products") that are
specified by the HSCA member and identified on Schedule 1 to the HSCA member's
Service Agreement. As it adds new Products to its service relationship with an
HSCA member, Sterile Recoveries shall update Schedule 1 to the HSCA member's
Service Agreement.
4. PRICING. From the date of this Agreement through December 31, 1998,
Sterile Recoveries' unit prices for the Products (including those supplied on a
trial basis) will be those set forth on the price schedule furnished to each
HSCA member as Schedule 1 to the Service Agreement, plus any applicable sales
or use tax. After December 31, 1998, Sterile Recoveries may adjust the
Products' per unit price schedule, subject to a maximum unit price change
limitation of 5% in any one calendar year. Price increases will be effective on
notice to HSCA and each affected member. HSCA and Sterile Recoveries
acknowledge that multiple combinations of gowns, towels, drapes, basins, and
stainless steel products may be assembled to service the varied mix of
surgeries required among the members. Sterile Recoveries shall assemble these
combinations in cost effective packages for HSCA members while working to
standardize its product offering among all of the members.
5. TRIALS. If requested by a member prospect, Sterile Recoveries may
supply on a paid trial basis services for up to 45 days without execution of a
service agreement. A member must sign a service agreement for service beyond a
trial period.
2
<PAGE> 3
6. COST SAVINGS. Sterile Recoveries has designed its price schedule to
generate savings for the members as compared to their "Current Total Cost." The
"Current Total Cost" is the average cost incurred by a member, on an arm's
length basis, for use of substantially equivalent competitive disposable
products as of November 1, 1997, plus the additional costs as delineated on the
Cost to Hospital sheet attached as Exhibit "D." Sterile Recoveries will provide
an initial assessment of savings based upon Exhibit "D" assumptions, which
should indicate savings of at least 10% as compared to current products and
processes. Sterile Recoveries will provide the members with an analysis of
these cost savings on at least a quarterly basis.
7. GROUP PURCHASING AGENT FEE. Sterile Recoveries shall pay to HSCA a
group purchasing agent fee in consideration of HSCA's administration of the
group purchasing program. The fee shall be calculated as two percent (2%) of
the value of reusable surgical products and services purchases made by members
pursuant to this Agreement, two percent (2%) of the value of reusable surgical
product and service purchases made by non-hospital affiliated surgery centers,
and three percent (3%) of the value of purchases of disposable accessory packs.
Sterile Recoveries shall each month furnish to HSCA a list of the members that
purchased the Products from Sterile Recoveries during the previous month and
the net amount of the Products purchased by each member during that month for
purposes of determining the fee owed under this section. The fee will be
payable monthly by the tenth day of each month based on sales during the
previous month. HSCA's fee for reusable surgical products and services may be
increased by one percent (1%) for a particular HSCA member if an HSCA nurse
consultant has performed all of the product analysis specified by Sterile
Recoveries and HSCA for conversion of the member to SRI reusable surgical
products and is involved in the clinical implementation of SRI's products and
services into the HSCA member. To sustain payment of this fee beyond the first
year, the HSCA nurse must be available to SRI and the HSCA member to continue
implementing the cost saving benefits of Sterile Recoveries reusable products
and services.
8. LIABILITY FOR CHARGES; ORDERING METHODS. Sterile Recoveries shall
bill each HSCA member directly for any payments due under the Service
Agreement. Sterile Recoveries acknowledges that HSCA is not liable for any
charges, claims, or expenses arising under any Service Agreement between
Sterile Recoveries and a member. Each HSCA member shall be responsible for
placing its orders directly with Sterile Recoveries. Sterile Recoveries shall
retain responsibility for obtaining payment from participating members. All
disputes and controversies concerning services and products or any purchases,
order or invoice, goods, materials, shipment, performance, scheduling and
delivery of performance date shall be handled by Sterile Recoveries on a direct
basis with the participating member.
9. FILL RATE. Sterile Recoveries shall maintain a first delivery fill
rate of at least ninety-five percent (95%) for members based on mutually
agreed-upon benchmarks. Fill rate shall be monitored by HSCA and the member.
Should Sterile Recoveries' fill rates fall below ninety-five percent (95%),
Sterile Recoveries will be notified by HSCA
3
<PAGE> 4
and given thirty (30) days to remedy the deficiency. Failure to remedy may
result in cancellation of this contract by HSCA.
10. WARRANTY. All commodities and services supplied by Sterile
Recoveries shall be warranted to be free from material defects and
imperfections in design, material and workmanship to be in material conformity
with all product specifications, labeling and product brochures, to be
merchantable and, if intended for a particular rational purpose, to be fit in
all material respects for such purpose.
11. SUSPENSION OF SERVICE. Service may not be suspended to a member
unless the Director of Purchasing, the Chief Financial Officer of the member
and the Vice President, Corporate Negotiations for HSCA have been notified in
writing ten (10) days prior to the proposed action. A suspended member shall be
reinstated when the cause for suspension has been rectified and notification
has been given to all parties.
12. NON-SOLICITATION. During the term of this Agreement, Sterile
Recoveries shall not solicit directly or indirectly any HSCA member or HSCA
affiliated member facilities or contract for any of the services set forth in
this Agreement on terms different from those set forth in this Agreement,
without the written approval of HSCA or notification to HSCA and/or SRI by the
HSCA member or surgery center that another group purchasing organization will
represent them for these products.
13. MEMBERSHIP LISTS AND UPDATES. HSCA shall provide Sterile
Recoveries with a list of its members and update this list on a monthly basis.
Each member (including any new member added pursuant to an update) will be
entitled to purchase products and services under this Agreement. Any member
deleted from the foregoing list will not be entitled to make further purchases
under this Agreement from the effective date of notice. Sterile Recoveries
shall pay to HSCA all administrative fees earned with respect to purchases made
by a deleted member through the termination date, irrespective of when the
underlying payment is received by Sterile Recoveries.
14. HOLD HARMLESS. Sterile Recoveries shall defend, indemnify, and
hold harmless HSCA and its participating members against any and all suits,
claims, and expenses arising from the member's use or sale of Sterile
Recoveries' articles, products, or programs, to the extent that the suit or
claim establishes (a) a defect in the article, product or program supplied by
Sterile Recoveries when the item was supplied or (b) a violation by a Sterile
Recoveries product of another person's rights under a patent, trademark,
copyright or service mark.
As conditions precedent to this indemnification obligation:
(a) HSCA and/or the member must promptly notify Sterile Recoveries of
the suit or claim;
4
<PAGE> 5
(b) Sterile Recoveries must be allowed to control and defend the
litigation, if it elects to do so; and
(c) The liability must not have been caused by the negligent or
willful conduct of the party seeking to be indemnified.
15. PERSONAL LIABILITY. No director, officer, agent or employee of
HSCA or Sterile Recoveries shall be charged personally or held contractually
liable by or to the other party under any term of provision to this Agreement
or because of the execution, approval or attempted execution of this Agreement.
16. FORCE MAJEURE. If either of the parties hereto is delayed or
prevented from fulfilling any of the obligations under this Agreement by force
majeure, said parties shall not be liable under this Agreement for said delay
or failure. Force majeure means any cause beyond the reasonable control of a
party including, but not limited to, war, fire, flood, storm, strike, labor,
transportation delays or embargoes, failure or shortage of materials, supplies,
machinery, or shipping facilities, acts of God, and acts, regulations,
directives, or priorities of any government authority. Sterile Recoveries may
prorate available products and services among its customers. If a force majeure
event occurs, Sterile Recoveries shall notify the HSCA member of the event, the
reason for the delay, the length of time that the product or services may be
delayed and alternate proposals, if any, which Sterile Recoveries wishes to
make to alleviate any difficulties or hardships which may be suffered by HSCA
and affect its member organizations as a result of that delay. Methods of
notification shall be by telephonic communications, confirmed by letter,
facsimile transmission or telegraph. Neither party of this Agreement shall be
deemed in default by reason of delay or failure due to force majeure.
17. NO JOINT VENTURE. It is understood and agreed that nothing herein
contained is intended or shall be construed to, in any respect, create or
establish the relationship between Sterile Recoveries and HSCA of copartners,
independent contractor, joint venturer, general representative or general agent
of any purpose whatsoever under this Agreement.
18. COMPLETE AGREEMENT. The Agreement and any other supporting
documents and schedules which have been so identified and dated by the
signatories to this Agreement shall constitute the complete understanding of
the parties and supersede any and all other agreements, either oral or in
writing, between the parties hereto with respect of the subject matter hereof,
and no other agreement, statement or promise relating to the subject matter of
this Agreement which is not contained herein shall be valid or binding.
19. TERMINATION OF EXISTING CONTRACTS. Any member that has an existing
agreement with Sterile Recoveries for the purchase of the Products may
terminate that Agreement and enter into a Service Agreement with the Company.
5
<PAGE> 6
20. EXCLUSIVE RELATIONSHIP IN SERVICE AREA. Sterile Recoveries shall
from time to time provide to HSCA information regarding the names of members
that are within the Service Area. During the term of this Agreement, HSCA shall
not enter into an agreement within the Service Area with any other vendor of
reusable products and services. HSCA reserves the right to enter into
agreements with other vendors of competitive products in markets outside of the
Service Area, provided HSCA first consults with Sterile Recoveries regarding
its plans to construct additional facilities or depots in those areas.
21. HSCA'S RESPONSIBILITIES. HSCA shall:
(a) Provide liaisons (name and contact point) for Sterile Recoveries'
communications with HSCA and the members on a regional, divisional, and
individual member basis.
(b) Provide exposure for Sterile Recoveries and its Products and
services by notifying members of this Agreement's existence and HSCA's
exclusive relationship with Sterile Recoveries (including compliance vendor
number).
(c) Encourage the members to increase their use of Sterile Recoveries'
Products and services through regular communications with O.R. directors,
material managers, vice presidents of surgical services, and chief financial
officers at member divisional and regional levels.
(d) Update the list of members attached as Exhibit "B" before June 1
of each year.
(e) Include the Products in the compliance calculation for appropriate
HSCA member and employee compliance evaluations.
22. STERILE RECOVERIES' RESPONSIBILITIES. Sterile Recoveries shall:
(a) Extend the terms of this Agreement from HSCA headquarters to each
of the members.
(b) Provide a National Account Representative as the primary Sterile
Recoveries contact with HSCA headquarters, as follows:
Bertram T. Martin, Jr.
Sterile Recoveries, Inc.
28100 U.S. Highway 19 North, Suite 201
Clearwater, FL 34621
(813) 726-4421
6
<PAGE> 7
(c) Provide and review with HSCA headquarters quarterly member
activity reports, to include a quarterly cost reporting on an individual member
basis to demonstrate progress in cost savings.
(d) Provide to HSCA headquarters written notice of special offerings
and/or promotions, stating which offerings are supplemental to this Agreement.
(e) Provide sales and customer service representative coverage
under the direction of the facility general managers listed in Schedule "E" to
be furnished separately to HSCA.
23. PUBLICITY. The parties to this Agreement may announce the
existence of this Agreement and the relationship between HSCA and Sterile
Recoveries that this Agreement evidences. The parties shall not disclose the
price terms without the other party's consent. HSCA acknowledges that Sterile
Recoveries might be required by law to file a copy of this Agreement with the
Securities and Exchange Commission.
24. NOTICES. Except for oral requests and notices expressly authorized
by this Agreement, every notice, request, demand, consent, approval, and other
communication required or permitted under this Agreement will be valid only if
it is given in writing (or sent by telecopy and promptly confirmed in writing),
conspicuously marked "FOR IMMEDIATE ATTENTION," and addressed by the sender to
the appropriate party in the manner set forth below:
(a) If to HSCA:
Health Services Corporation of America
280 South Mount Auburn Road
Cape Girardeau, Missouri 63701
Attention: Thomas Jamieson
Telecopy: (573) 335-4453
(b) If to Sterile Recoveries:
Sterile Recoveries, Inc.
28100 U.S. Highway 19 North, Suite 201
Clearwater, FL 34621
Attention: Bertram T. Martin, Jr.
Telecopier: (813) 725-8037
or to such other address as a party designates by notice to the other party. A
validly given notice, request, demand, consent, approval, or other
communication will be effective on its receipt.
7
<PAGE> 8
25. MISCELLANEOUS.
(A) SEVERABILITY. Each provision of this Agreement should be
construed and interpreted so that it is valid and enforceable under applicable
law. Except as otherwise provided below, if a provision of this Agreement, or
the application of it, is held by a court to be invalid or unenforceable, that
provision will be deemed separable from the remaining provisions of this
Agreement and will not affect the validity, interpretation, or effect of the
other provisions of this Agreement or the application of that provision to a
person or circumstance to which it is valid and enforceable.
(B) RIGHTS OF THIRD PARTIES. Nothing in this Agreement, whether
express or implied, is intended or should be construed to confer upon, or to
grant to, any person (other than the parties and their respective assignees and
successors) any claim, right, or remedy under or because of this Agreement.
(C) AMENDMENT AND ASSIGNMENT. An amendment or modification of
this Agreement or any provision of it will be valid and effective only if it is
in writing and signed by each party to this Agreement. This Agreement is not
assignable by either party without the prior consent of the other party. Except
as otherwise provided, any attempted assignment by a party without the prior
consent of the other party will be invalid and unenforceable against the other
party. This Agreement inures to the benefit of, and is binding on, the
respective successors and assignees of the parties to it.
(D) EXECUTION. The parties may execute this Agreement in
counterparts. Each executed counterpart will constitute an original document,
and all of them, together, will constitute the same document.
EXECUTED: as of October , 1997
---
STERILE RECOVERIES, INC.
By: /s/ Bertram T. Martin, Jr.
--------------------------------
Bertram T. Martin, Jr.
Executive Vice President and
Chief Operating Officer
HEALTH SERVICES CORPORATION
OF AMERICA
By: /s/ Thomas Jamieson
-------------------------------
Thomas Jamieson
President and Chief Operating
Officer
8
<PAGE> 1
Exhibit 10.28
STERILE RECOVERIES, INC.
1998 STOCK OPTION PLAN
Sterile Recoveries, Inc. establishes the following 1998 Stock Option
Plan for the exclusive benefit of its eligible employees:
ARTICLE I
PURPOSE AND INTERPRETATION
1.1 PURPOSE. The purpose of this Plan is to further the interests
of the Company, its Subsidiaries (if any), and its shareholders by providing
incentives in the form of Stock Options to key employees who contribute
materially to the success and profitability of the Company. The Plan will
enable the Company to attract and retain key employees, to reward outstanding
individual contributions, and to give selected key employees an interest in the
Company parallel to that of its shareholders, thus enhancing their proprietary
interest in the Company's continued success and progress.
1.2 DEFINITIONS. As used in this Plan, the following capitalized
terms have the respective definitions attributed to them:
"ADMINISTRATIVE COMMITTEE" means the Board of Directors or any
Board Committee to whom the Board of Directors has delegated the
administration of this Plan pursuant to section 2.1.
"AFFILIATE" means a Subsidiary of the Company, a corporation
that directly or indirectly owns 80% or more of the voting securities
of the Company, or a corporation of which 80% or more of the
voting securities is owned directly or indirectly by the same
corporation that directly or indirectly by a parent corporation of
the Company.
"BOARD OF DIRECTORS" means the Board of Directors of the
Company.
"CHANGE IN CONTROL" means any of the following: (a) the
shareholders of the Company approve a liquidation of all or
substantially all the consolidated assets of the Company and its
Subsidiaries, other than a liquidation of a Subsidiary into the Company
or another Subsidiary (unless the transaction is subsequently abandoned
or otherwise fails to occur); (b) the shareholders of the Company
approve a sale, lease, exchange, or other transfer to any person other
than the Company or a Subsidiary (in a single transaction or related
series of transactions) of all or substantially all of consolidated
<PAGE> 2
assets of the Company and its Subsidiaries, excluding the creation (but
not the foreclosure) of a lien, mortgage, or security interest (unless
the transaction is subsequently abandoned or otherwise fails to occur);
(c) the shareholders of the Company approve a merger, consolidation,
reorganization, tender offer, exchange offer, or share exchange in which
the Company will not be the surviving corporation or will become a
majority-owned subsidiary of a person other than a Subsidiary (unless
the transaction is subsequently abandoned or otherwise fails to occur);
or (d) the occurrence of any event, transaction, or arrangement that
results in any person or group becoming a beneficial owner of (i) a
majority of the outstanding Common Stock of the Company or any
Subsidiary that contributed more than 50% of the Company's consolidated
revenues for its last fiscal year, (ii) securities of the Company
representing a majority of the combined voting power of all the
outstanding securities of the Company that are entitled to vote
generally in the election of its directors, or (iii) with respect to any
Subsidiary that contributed more than 50% of the Company's consolidated
revenues for its last fiscal year, securities of that Subsidiary
representing a majority of the combined voting power of all the
outstanding securities of that Subsidiary that are entitled to vote
generally in the election of its directors, unless in each case
enumerated in this clause (d) the beneficial owner is the Company, a
Subsidiary, an employee benefit plan sponsored by the Company, a person
or group who is a record or beneficial owner of 25% or more of the
outstanding Shares on the Date of Grant, or a person who becomes a
beneficial owner of 25% or more of the outstanding Shares solely by
becoming a trustee of an inter vivos trust created by a person who is
the record or beneficial owner of 25% or more of the outstanding Shares
on the Date of Grant.
"COMMON STOCK" means the common stock, $.001 par value, of the
Company.
"COMPANY" means Sterile Recoveries, Inc., a Florida corporation and
the sponsor of this Plan.
"DATE OF GRANT" means, with respect to a Stock Option, the date as of
when it is granted to a Participant.
"EMPLOYEE" means a person who is employed by the Company or a
Subsidiary on a full-time, salaried basis for at least 30 hours each week.
"EXCHANGE ACT" means the United States Securities Exchange Act of
1934, as amended, and includes all rules and regulations of the Securities and
Exchange Commission promulgated under that act.
-2-
<PAGE> 3
"INCENTIVE OPTION" means a Stock Option granted under this Plan that
is intended to qualify as an "incentive stock option," as defined in section
422 of the Internal Revenue Code, as in effect on the Date of Grant of the
Stock Option.
"INTERNAL REVENUE CODE" means the United States Internal Revenue Code
of 1986, as amended from time to time, or any United States income tax law
subsequently enacted in substitution for that code.
"MARKET VALUE" means, as of any particular date, the mean average of
the high bid and low asked prices of the Shares that were quoted on the
National Association of Securities Dealers Automated Quotation System on that
date, or the weighted mean average of the high and low sales prices of the
Shares on the American Stock Exchange or the New York Stock Exchange, if the
Shares become listed for trading on either of those securities exchanges.
"NONQUALIFIED OPTION" means a Stock Option granted under this Plan
that is not designated as an Incentive Option.
"OPTION AGREEMENT" means an agreement between the Company and a
Participant that sets forth the terms, conditions, limitations, and
restrictions applicable to the Participant's performance requirements, and
limitations applicable to a Stock Option.
"OPTION YEAR" means, with respect to a Stock Option granted under this
Plan, a period of 12 consecutive months beginning on its Date of Grant or an
anniversary of its Date of Grant.
"PARTICIPANT" means an Employee who is selected by the Administrative
Committee to receive a Stock Option pursuant to this Plan, in the person's
capacity as a participant under the Plan.
"PLAN" means this 1998 Stock Option Plan of Sterile Recoveries, Inc.,
as originally adopted and as subsequently amended, modified, or supplemented in
accordance with its terms.
"PROPRIETARY PROPERTY" means all ideas, plans, methods, discoveries,
inventions, developments, improvements, trade secrets, intellectual property,
and other proprietary data, knowledge, and information that a Participant
solely or jointly knows, creates, conceives, develops, or reduces to practice
while employed by the Company or any Subsidiary and that directly or indirectly
benefits, relates to, or is connected in any way with, the Participant's
employment with the Company or a Subsidiary, or any process, product, formula,
business, facility, research, equipment, machinery, technique, experiment,
computer program, software, source code, or user interface screen or other
development of the Company or any Subsidiary.
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"SECURITIES ACT" means the United States Securities Act of 1933, as
amended, and includes all rules and regulations of the Securities and Exchange
Commission promulgated under that Act.
"SHARES" means shares of the Common Stock or any securities issued in
exchange or substitution for those shares pursuant to a transaction described
in section 5.1.
"STOCK OPTION" means an option to purchase Shares from the Company
that is granted to a Participant pursuant to this Plan, whether as an Incentive
Option or a Nonqualified Option.
"SUBSIDIARY" means a corporation of which 80% of its voting securities
are owned directly or indirectly by the Company and includes any corporation
that qualifies as a "subsidiary corporation" as defined in section 424(f) of
the Internal Revenue Code.
1.3 OTHER WORDS. As used in this Plan, (a) the word "or" is not
exclusive, (b) the words "consent" and "approval" are synonymous, (c) the word
"including" is always without limitation, (d) words in the singular number
include words in the plural number and vice versa, and (e) the following
uncapitalized words and terms have the respective meanings ascribed to them:
"AFFILIATE" has the meaning attributed to it in Rule 12b-2
under the Exchange Act.
"BENEFICIAL OWNER" has the meaning attributed to it under Rule
13d-3 under the Exchange Act, and the terms "BENEFICIALLY OWNED" and
"BENEFICIAL OWNERSHIP" have the same meaning as "BENEFICIAL OWNER."
"BUSINESS DAY" has the meaning attributed to it in Rule
14d-1(c)(6) under the Exchange Act.
"DISABILITY" means a total and permanent disability as defined
in section 22(e)(3) of the Internal Revenue Code.
"GROUP" has the meaning attributed to that term in Rule
13d-5(b)(1) under the Exchange Act and includes two or more persons
who agree to act in concert for the purpose of voting, acquiring, or
holding any securities of the Company or any Subsidiary.
"PARENT CORPORATION" has the meaning attributed to that term
in section 424(e) of the Internal Revenue Code.
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1.4 HEADINGS AND REFERENCES. The titles and headings preceding
the text of the articles and sections of this Plan are solely for convenient
reference and neither constitute a part of this Plan nor affect its meaning,
interpretation, or effect. Unless otherwise expressly stated, a reference in
this Plan to a section refers to a section of this Plan.
1.5 LIMITATION OF RIGHTS. Nothing in this Plan, whether express
or implied, is intended or should be construed to confer upon, or to grant to,
any person (other than the Participants and their respective heirs, guardians,
and personal representatives) any claim, right, remedy, or privilege under or
because of this Plan or any provision of it, except that every member of the
Administrative Committee is a third-party beneficiary of the provisions of
sections 2.2 and 2.4. An employee of the Company or any Subsidiary does not
have any claim or right to participate in this Plan, and the grant of a Stock
Option to a Participant does not create or extend any right of the Participant
to continue to serve as an employee of the Company or any Subsidiary, to
participate in any other stock option or employee benefit plan of the Company or
any Subsidiary, or to receive the same employee benefits as any other employee
of the Company or any Subsidiary. Furthermore, an employee's selection as a
Participant does not restrict in any way the right of the Company or a
Subsidiary to terminate at any time the Participant's employment with it either
at will or as provided in any written employment agreement between it and the
Participant.
1.6 GOVERNING LAW. The validity, construction, enforcement, and
interpretation of this Plan are governed by the laws of the United States of
America and the State of Florida, excluding the laws of those jurisdictions
relating to resolution of conflicts with laws of other jurisdictions.
ARTICLE II
PLAN ADMINISTRATION
2.1 ADMINISTRATIVE COMMITTEE. This Plan will be administered by
the Board of Directors, or, at its election, the Board of Directors may delegate
administration of this Plan to an Administrative Committee consisting of two or
more directors who are appointed by the Board of Directors and satisfy the
criteria described below. The members of the Administrative Committee will
serve for unspecified terms at the discretion of the Board of Directors. The
Board of Directors has the exclusive power to increase or decrease the size of
the Administrative Committee, appoint additional members of the Administrative
Committee, remove a member of the Administrative Committee (as such) at any
time, with or without cause, and appoint a successor to fill any vacancy on the
Administrative Committee. The Board of Directors shall not appoint as a member
of the Administrative Committee any director who (a) is an officer or employee
of the Company, any Subsidiary, or any parent corporation of the Company or who
does not qualify as an "outside director" for purposes of section 162(m) of the
Internal Revenue Code, (b) receives directly or
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indirectly from the Company, and Subsidiary, or any parent corporation of the
Company a dollar amount of compensation for services rendered as a consultant
or in any capacity other than as a director for which disclosure would be
required pursuant to Item 404(a) of Regulation S-K under the Exchange Act and
the Securities Act, (c) possesses an interest in any other transaction to which
the Company or any Subsidiary was or will be a party and for which disclosure
would be required pursuant to Item 404(a) of Regulation S-K under the Exchange
Act and the Securities Act, or (d) has a business relationship for which
disclosure would be required pursuant to Item 404(b) of Regulation S-K under
the Exchange Act and the Securities Act. If the Board of Directors is unable
to appoint an Administrative Committee comprising two or more directors who
satisfy the foregoing criteria, or if the Administrative Committee ceases at
any time to comprise directors who satisfy those criteria, the Board of
Directors shall serve as the Administrative Committee for this Plan, and all
grants of Stock Options under this Plan must be approved by the Board of
Directors.
2.2 POWER AND AUTHORITY. Subject to compliance with all
applicable rules and regulations of any relevant authorities, including stock
exchanges and the Securities and Exchange Commission, the Administrative
Committee has the exclusive power and authority, and the sole and absolute
discretion, to do the following: (a) construe and interpret this Plan; (b)
select the Employees who will be Participants in this Plan; (c) adopt, amend,
and rescind forms, rules, procedures, and regulations relating to this Plan
(all of which must be approved by the Board of Directors if a Board Committee
serves as the Administrative Committee); (d) grant Stock Options under the
Plan, either conditionally or unconditionally; (e) determine when Stock Options
will be granted under the Plan; (f) determine the number of Shares subject to
each Stock Option; (g) determine the Market Value of a Share in accordance with
the provisions of this Plan; (h) determine the terms and conditions of each
Stock Option, including the exercise price (which must comply with section
3.4), the methods of exercising the Stock Option, the methods for payment of
the exercise price, the time or times when the Stock Option will become
exercisable and the duration of the exercise period (which must not exceed the
limitations specified in section 3.4), the conditions under which the Stock
Option will vest and become exercisable, and any limitations, restrictions,
performance criteria, or forfeiture conditions applicable to the Stock Option
or any Shares purchased pursuant to it; (i) determine the consideration for the
grant of each Stock Option and the consideration to be paid for Shares
purchased pursuant to a Stock Option, which may consist of cash, other Shares,
or any combination of the foregoing; (j) to approve and recommend amendments to
the Plan for adoption by the Board of Directors and (if necessary or desirable)
the shareholders of the Company; (k) authorize any officer or director of the
Company to execute in the name and on behalf of the Company any agreement,
certificate, instrument, or other document required to carry out the purposes
of this Plan; (l) engage the services of any agent, expert, or professional
advisor in furtherance of the Plan's purposes; (m) amend any outstanding Option
Agreement, subject to complying with applicable legal restrictions and
obtaining the approval of the Participant who is a party to the Option
Agreement; and (n) take all other actions, and make all other determinations,
that are advisable or necessary for the Plan's
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administration. In the absence of fraud or mistake, any action, decision,
interpretation, or determination by the Administrative Committee will be final
and binding on all persons.
The Board of Directors may reserve to itself any of the power and
authority conferred on the Administrative Committee, and it may exercise all
the power and authority of the Administrative Committee at any time to the
exclusion of any Board Committee. All references in this Plan to the
Administrative Committee include the Board of Directors whenever it is
exercising the power and authority of the Administrative Committee.
2.3 APPROVAL PROCEDURES. All actions and determinations of the
Administrative Committee must be unanimous, unless the Board of Directors is
exercising the power and authority of the Administrative Committee. All
actions and determinations of the Board of Directors with respect to this Plan
must be approved in the manner provided by the Company's Bylaws and applicable
corporate law. Every action or determination of the Administrative Committee
that is expressly required or permitted under this Plan will be valid only if
undertaken pursuant to a vote, consent, or approval that is evidenced by either
(a) a resolution adopted by the affirmative vote of the requisite number of
members of the Administrative Committee at a meeting, or (b) a written consent
signed by the requisite number of members of the Administrative Committee. The
members of the Administrative Committee may execute a written consent in
counterparts. Each executed counterpart will constitute an original document,
and all of them, together, will constitute the same document. A properly
executed written consent will be effective as of the date specified in it or,
if an effective date is not so specified, on the date when it is signed by the
last director whose signature is necessary to validate it, and will be valid if
it is executed before, after, or concurrently with the action or determination
to which it applies.
2.4 INDEMNIFICATION. A member of the Administrative Committee is
not liable for, and the Company releases each member of the Administrative
Committee from all liability for, any punitive, incidental, compensatory,
consequential, or other damages or obligation to the Company or any Employee,
Participant, or other person for any act or omission by the member of the
Administrative Committee (including the person's own negligence), or by any
agent, employee, professional advisor, or other expert used or engaged by the
Administrative Committee, if the act or omission does not constitute gross
negligence or willful misconduct and is done or omitted in good faith, on
behalf of the Company, and in a manner reasonably believed by the member of the
Administrative Committee to be both in the best interests of the Company and
within the scope of the authority granted to the Administrative Committee by
this Plan. The Company shall indemnify each member of the Administrative
Committee, and shall reimburse the member from the Company's assets, for any
cost, loss, damage, expense, or liability (including fines, amounts paid in
settlement, and legal fees and expenses) incurred by the member by reason of
any act or omission for which the member is released from liability pursuant to
this section.
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ARTICLE III
STOCK OPTIONS AND PARTICIPANTS
3.1 STOCK OPTIONS. Benefits under this Plan will consist of
Stock Options. The Administrative Committee may designate any Stock Option as
an Incentive Option, in which case the Stock Option must comply with the
requirements of section 3.5. If no designation is made, a Stock Option will
constitute a Nonqualified Option. The Administrative Committee may grant a
Participant both Incentive Options and Nonqualified Options, at the same time
or at different times.
3.2 PARTICIPANTS. Every Employee is eligible to be selected by
the Administrative Committee to participate in this Plan. The Administrative
Committee's designation of an Employee as a Participant at any particular time
does not require the Administrative Committee to designate that Employee to
receive any Stock Options at any other time or to receive the same Stock
Options as any other Participant at any time. The Administrative Committee may
consider factors that it considers pertinent in selecting Participants and in
determining the terms and conditions of Stock Options awarded to them,
including the following: (a) the consolidated financial condition of the
Company; (b) the expected net income of the Company for the current or future
years; (c) the contributions of an Employee to the success and profitability of
the Company; and (d) the adequacy of the Employee's other compensation. The
Administrative Committee may award Stock Options to an Employee even if Stock
Options previously were granted to the Employee under this or another plan of
the Company or an Affiliate, and whether or not the previously granted benefits
have been fully exercised. An Employee who participates in another benefit
plan of the Company or an Affiliate also may participate in this Plan.
3.3 BENEFIT LIMITATIONS. The total number of Shares that are
authorized to be issued pursuant to the exercise of Stock Options granted under
this Plan is limited to 300,000 Shares. This amount will be adjusted
automatically in accordance with section 5.1. If a Stock Option lapses,
expires, or is cancelled, forfeited, or terminated as a whole or in part for
any reason other than its exercise, or if Shares issued pursuant to the
exercise of a Stock Option are forfeited pursuant to section 4.5, the forfeited
Shares or the Shares subject to the unexercised portion of that Stock Option
(or the part of it so cancelled, forfeited, or terminated) will be available
for the future grant of Stock Options under this Plan. If a Participant pays
the exercise price for Shares purchased pursuant to the exercise of a Stock
Option by delivering to the Company previously acquired Shares, the number of
Shares available for future grants of Stock Options under this Plan will be
reduced only by the net amount of Shares issued in connection with the exercise
of the Stock Option (that is the number of Shares issuable pursuant to the
exercise of the Stock Option, less the number of Shares retained by, or
delivered to, the Company in payment of the exercise price).
3.4 EXERCISE PRICE AND DATES. The purchase price for each Share
issuable pursuant to the exercise of a Stock Option must be not less than the
Market Value of a
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Share on the Date of Grant of the Stock Option. Every Stock Option must expire
not later than ten years after its Date of Grant, and, except as otherwise
provided in sections 4.4 and 5.2 or in the Option Agreement, it will expire on
the 90th day following the date when the Participant ceases to be an Employee.
However, if a Participant owns (within the meaning of section 422(b)(6) of the
Internal Revenue Code) at the time when an Incentive Option is granted to the
Participant stock representing more than 10% of the total combined voting power
of all classes of outstanding stock of the Company, any Subsidiary, or any
parent corporation of the Company, then: (a) the Incentive Option must expire
not later than five years after its Date of Grant; and (b) the exercise price
of the Incentive Option must be not less than 110% of the Market Value of a
Share on the Date of Grant of the Incentive Option. Stock Options are not
exercisable until they have been accepted by the Participant. An award of a
Stock Option to a Participant will be cancelled automatically if the
Participant does not accept the award within 30 calendar days following the
date when the Participant is given written notice of the award. Unless a
Participant's Option Agreement expressly provides otherwise, every Stock Option
will be exercisable in serial increments after each Option Year as follows:
Percentage Exercisable
After Option Year Per Option Year Cumulatively
1 20% 20%
2 20% 40%
3 20% 60%
4 20% 80%
5 20% 100%
In no event, however, is any Stock Option permitted to be exercisable during
the first six months after its Date of Grant. Subject to the foregoing
limitations, the Administrative Committee may impose on an award of a Stock
Option any terms and conditions that it determines to be desirable, including
performance criteria, forfeiture provisions, and additional or different
vesting conditions. Extension of the expiration date of a Stock Option is not
permitted. In calculating the stock ownership of any person for purposes of
the foregoing, the attribution rules of section 424(d) of the Internal Revenue
Code will apply.
3.5 INCENTIVE OPTIONS. Notwithstanding anything in this Plan to
the contrary, an Incentive Option must satisfy the following additional
requirements:
(a) The Incentive Option must be designated as an "incentive stock
option" by the Administrative Committee when it is granted;
(b) This Plan must be approved by the shareholders of the Company
within 12 months before or after its effective date;
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<PAGE> 10
(c) The maximum number of Shares subject to any Stock Options
granted to a Participant must not result in the Participant having the right to
exercise for the first time during any one calendar year, under all incentive
stock options granted to the Participant under all benefit plans of the
Company, its Subsidiaries, and any parent corporation of the Company, options
to purchase Shares having a Market Value in excess of $100,000 (determined as
of the date of grant of each incentive stock option); and
(d) The Incentive Option must satisfy all conditions and
requirements imposed by the Internal Revenue Code for incentive stock options
and any policies adopted by the Administrative Committee with respect to
incentive stock options.
If an Incentive Option is granted for a number of Shares having an
aggregate Market Value on the Date of Grant in excess of $100,000, then,
notwithstanding anything in this or the relevant Option Agreement to the
contrary, the Incentive Option will be exercisable in each calendar year as to
only that number of Shares having a Market Value on the Date of Grant of not
more than $100,000. However, the number of Shares as to which an Incentive
Option is exercisable in any one calendar year is cumulative, so, if the
Incentive Option is not exercised to the fullest extent allowed in any one
calendar year, the unexercised portion will accumulate and carry forward to
ensuing years. For example, if in 1998, the Company were to grant an Employee
an Incentive Option to purchase 100,000 Shares at an exercise price of $5.00
per share (which was the then current Market Value), the Incentive Option would
be exercisable with respect to only 20,000 Shares during 1998, and the
Incentive Option would become exercisable with respect to 20,000 additional
Shares in each successive year (1999 through 2002). If the Participant elected
to purchase only 10,000 Shares pursuant to the Incentive Option during 1998,
the Participant could purchase up to 30,000 Shares in 1999, and, if no
additional purchases were made in 1999, the Participant could purchase up to
50,000 Shares in 2000 (carry forward of 10,000 Shares from 1998 and 20,000
Shares from 1999; plus 20,000 Shares in 2000).
3.6.NONTRANSFERABILITY OF STOCK OPTIONS. EXCEPT TO THE EXTENT PROVIDED
IN THE OPTION AGREEMENT, A Participant is prohibited from transferring a Stock
Option, any interest in it, or any right under an Option Agreement by any means
other than by will or the law of descent and distribution. Any prohibited
transfer (whether by gift, sale, pledge, assignment, hypothecation, or
otherwise) will be invalid and ineffective as to the Company. In addition, a
Stock Option and the Participant's rights under it and the related Option
Agreement are not subject to any lien, levy, attachment, execution, or similar
process by creditors. The Company may cancel any Stock Option by notice to the
Participant to whom it was granted, if the Participant attempts to make a
prohibited transfer, or if the Stock Option, any interest in it, or any right
under the related Option Agreement becomes subject to a lien, levy, attachment,
execution, or similar process by any creditor.
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ARTICLE IV
EXERCISE OF STOCK OPTIONS
4.1 EXERCISE METHOD. Subject to limitations imposed by this Plan
and the Option Agreement, a Participant may exercise a Stock Option as a whole
or in part in increments of at least 100 shares at any time and from time to
time before it expires. A partial exercise of a Stock Option will not affect a
Participant's subsequent right to exercise the Stock Option as to the
remaining Shares subject to the Stock Option. A Stock Option must be exercised
for a number of whole Shares and is not exercisable for a fraction of a Share.
To exercise a Stock Option, a Participant must do the following: (a) deliver
to the Company a written notice of exercise in such form as prescribed by the
Administrative Committee; (b) tender to the Company full payment for the Shares
to be purchased pursuant to the exercise of the Stock Option; (c) pay to the
Company, or make an arrangement satisfactory to the Administrative Committee
for the payment of, any tax withholding required in connection with the
exercise of the Stock Option (including FICA, Medicare, and local, state, or
federal income taxes); and (d) comply with any and all other reasonable
requirements established by the Administrative Committee for the exercise of
Stock Options. The exercise date of a Stock Option will be the date when (i)
the Company has received the written notice of exercise and full payment of the
exercise price, (ii) the Participant has paid to the Company or made a
satisfactory arrangement for the payment of any requisite tax withholding, and
(iii) any and all other requirements of exercise established by the
Administrative Committee have been satisfied.
4.2 PAYMENT OF EXERCISE PRICE. A Participant may pay all or any
part of the exercise price and any applicable tax withholding for any Shares to
be purchased pursuant to exercise of a Stock Option by any combination of the
following methods:
(a) By bank draft, money order, or personal check payable
to the order of the Company; or
(b) By delivering to the Company the Participant's
written election for the Company to withhold a portion of the Shares
otherwise issuable to the Participant pursuant to the exercise of the
Stock Option;
(c) By transferring to the Company outstanding Shares
that have been owned by the Participant for more than six months on
the exercise date of the Stock Option; or
(d) To the extent approved in advance by the
Administrative Committee, by delivering to the Company a copy of
irrevocable instructions that have been provided by the Participant to
a financial institution or a securities broker-dealer to pay promptly
to the Company all or a portion of the proceeds from either a sale of
the Shares to be purchased pursuant to the
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exercise of the Stock Option or a loan to be secured by a pledge of
all or a portion of those Shares.
Shares that are transferred to, or withheld by, the Company in payment of the
exercise price or any tax withholding will be valued for purposes of payment at
their Market Value on the exercise date of the Stock Option, as determined
pursuant to section 4.1. The foregoing provision does not preclude the
exercise of a Stock Option by any other proper legal method specifically
approved in advance by the Administrative Committee. The Administrative
Committee shall determine the acceptable methods for tendering or withholding
Shares as payment of the exercise price of a Stock Option and may impose
limitations and prohibitions on the use of Shares to pay the exercise price of
a Stock Option as it considers appropriate for tax, legal, business, or
accounting reasons. No one has the rights of a shareholder with respect to
Shares subject to a Stock Option until a certificate representing those Shares
has been delivered to the person exercising the Stock Option.
4.3 TAX WITHHOLDING. The Administrative Committee, in its sole
discretion, may require a Participant to pay to the Company when the
Participant exercises a Stock Option the amount (if any) that the Company
considers necessary to satisfy its legal obligation to withhold any local,
state, or federal taxes (including FICA, income, and Medicare taxes) imposed by
any governmental authority as a result of the exercise of the Stock Option, and
the Company may defer delivery of any Shares purchased pursuant to the Stock
Option until it has been paid or indemnified to its satisfaction for those
taxes. A Participant may pay to the Company any requisite tax withholding by
any of the methods of payment authorized for payment of the exercise price for
Shares purchased pursuant to the Stock Option. If an exercise of a Stock
Option does not give rise to any tax withholding obligation on the date of
exercise but is reasonably expected to do so at a future time, the
Administrative Committee (in its sole discretion) may require the Participant
to place the Shares purchased pursuant to the Stock Option in escrow for the
benefit of the Company until tax withholding is required for the amounts
included in the Participant's gross income as a result of the Participant's
exercise of the Stock Option. At that time, the Administrative Committee (in
its discretion) may require the Participant to pay to it an amount that it
considers sufficient to satisfy the tax withholding obligation incurred by it
as a result of the Participant's exercise of the Stock Option, in which case
the Company shall promptly release to the Participant the escrowed Shares.
4.4 EXERCISE CONDITIONS. A Stock Option expires and ceases to be
exercisable on the 90th day after the Participant to whom it was granted ceases
to be an Employee, except as otherwise provided in this Plan and in the Option
Agreement. If a Participant's employment with the Company or a Subsidiary is
terminated (voluntarily or involuntarily), the Participant may exercise her or
his Stock Option within 90 calendar days following the date of termination of
employment. If a Participant dies or ceases to be an Employee because of a
disability at a time when the Participant is entitled to exercise a Stock
Option, the Stock Option will continue to be exercisable for one year after the
Participant's death or
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disability by the Participant or the Participant's guardian (in the case of
disability) or the Participant's heir or personal representative (in the case
of death). Notwithstanding the foregoing, a Stock Option is never exercisable
later than its stated expiration date. After the death, disability, or
termination of employment of a Participant, a Stock Option of the Participant
will be exercisable only with respect to the number of Shares (if any) that
could have been exercised as of the date when the Participant ceased to be an
Employee (subject to any adjustment required by section 5.1). A Stock Option
will terminate to the extent that it ceases to be exercisable for any of the
Shares subject to it.
4.5 CANCELLATION AND RESCISSION OF STOCK OPTIONS. Unless the
Stock Option Agreement specifies otherwise, the Administrative Committee may
cancel any Stock Options at any time if the Participant is not in compliance
with all applicable provisions of the Plan, the Stock Option Agreement, and
with the following conditions:
(a) A Participant shall not render services for any
organization or engage directly or indirectly in any business which, in the
judgment of the chief executive officer of the Company or other senior officer
designated by the Administrative Committee, is or becomes competitive with the
Company, or which organization or business, or the rendering of services to
such organization or business is or becomes otherwise prejudicial to or in
conflict with the interests of the Company. For a Participant whose employment
has terminated, the judgment of the chief executive officer shall be based on
the Participant's position and responsibilities while employed by the Company,
the Participant's post-employment responsibilities and position with the other
organization or business, the extent of past, current, and potential
competition or conflict between the Company and the other organization or
business, the effect on the Company's customers, suppliers, and competitors of
the Participant's assuming the post-employment position, guidelines for
business conduct established by the Company, and such other considerations as
are deemed relevant given the applicable facts and circumstances. A
Participant who has retired shall be free, however, to purchase as an
investment or otherwise, stock or other securities of such organization or
business so long as they are listed upon a recognized securities exchange or
traded over-the-counter, and such investment does not represent a substantial
investment to the Participant or a greater than 10 percent equity interest in
the organization or business.
(b) A Participant shall not, without prior written
authorization from the Company, disclose to anyone outside the Company, or use
in other than the Company's business, any confidential information or material
relating to the business of the Company, acquired by the Participant either
during or after employment with the Company.
(c) A Participant shall disclose promptly and assign to
the Company all right, title, and interest in any invention or idea, patentable
or not, made or conceived by the Participant during employment by the Company,
relating in any manner to the actual or anticipated business, research or
development work of the Company and shall do anything
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reasonably necessary to enable the Company to secure a patent where appropriate
in the United States and in other countries.
(d) Upon exercise pursuant to a Stock Option, the
Participant shall certify in the notice of exercise that he or she is in
compliance with the terms and conditions of the Plan. Failure to comply with
the provisions of paragraph (a), (b), or (c) of this section 4.5 prior to, or
during the six months after, any exercise pursuant to a Stock Option shall
cause such exercise to be rescinded. The Company shall notify the Participant
in writing of any such rescission within two years after such exercise. Within
ten days after receiving such a notice from the Company, the Participant shall
pay to the Company the amount of any gain realized as a result of the rescinded
exercise, pursuant to a Stock Option. Such payment shall be made either in
cash or by returning to the Company the number of Shares that the Participant
received in connection with the rescinded exercise.
4.6 RESERVATION, LISTING, AND DELIVERY OF SHARES. The Company
shall reserve from its authorized but unissued Shares and keep available until
the termination of this Plan, solely for issuance upon the exercise of Stock
Options, the number of Shares issuable at any time pursuant to the exercise of
Stock Options granted or available for grant under this Plan. In addition, the
Company shall take all requisite action to assure that it validly and legally
may issue fully-paid, nonassessable Shares upon the exercise of each Stock
Option. Also, if the Shares are traded in the Nasdaq Stock Market or on any
United States national securities exchange, the Company, at its sole expense,
shall reserve for quotation or listing on that market or exchange, upon
official notice of issuance pursuant to the exercise of Stock Options, the
number of Shares issuable at any time upon the exercise of Stock Options
granted or available for grant under this Plan, and the Company shall maintain
that listing until this Plan terminates. Promptly after a Stock Option is
validly exercised, the Company shall issue and deliver to the order of the
person who exercised the Stock Option a stock certificate representing that
number of fully-paid and nonassessable Shares that were purchased pursuant to
the exercise of the Stock Option, plus, instead of any fractional Share to
which that person otherwise would be entitled, a cash sum equal to the product
of (a) that fraction, multiplied by (b) the Market Value of one full Share as
of the exercise date of the Stock Option. The Company shall pay all costs and
excise taxes associated with the original issuance of stock certificates
representing Shares purchased pursuant to the exercise of Stock Options.
4.7 LEGAL COMPLIANCE. Stock Options are exercisable, and Shares
are issuable under this Plan, only in compliance with all applicable state and
federal laws and regulations (including securities laws) and the rules of all
stock markets or exchanges on which the Shares are quoted or listed for
trading. Any certificate representing Shares issued under the Plan will bear
such legends and statements as the Administrative Committee considers advisable
to assure compliance with those laws, rules, and regulations. In addition, the
Administrative Committee may require a Participant, as a condition to the grant
or exercise of a Stock Option, to provide to the Company any agreements,
representations, and
-14-
<PAGE> 15
warranties that, in the opinion of counsel for the Company, are desirable or
necessary to comply with applicable laws and all rules and regulations of any
stock market or exchange on which the Shares are traded or quoted, including a
representation that the Shares issuable pursuant to exercise of the Stock
Option are or will be acquired for investment purposes without a view to
distribute them to others. A Stock Option is not exercisable, and the Company
shall not issue any Shares under this Plan, until the Company has obtained any
consent or approval required from any state or federal regulatory body having
jurisdiction. Upon the exercise of a Stock Option by an heir, guardian, or
personal representative of a Participant, the Administrative Committee may
require reasonable evidence of the person's legal ownership of the Stock Option
and any consents and releases of governmental authorities as it determines are
advisable.
ARTICLE V
ADDITIONAL PROVISIONS
5.1 ANTIDILUTION. If the Company does any of the following (a
"Dilutive Event") at any time before the exercise or expiration of a Stock
Option: (a) splits or subdivides its then-outstanding Shares into a greater or
different number of Shares; (b) reduces the then-outstanding number of Shares
by a reverse stock-split or by otherwise combining those Shares into a smaller
number of Shares; (c) effects any other capital adjustment, recapitalization,
reorganization, or reclassification that has the effect of increasing or
decreasing proportionately the number of outstanding Shares then held by each
shareholder; (d) distributes any of its assets to its shareholders pro rata as
a partial liquidation or return of capital; or (e) declares, issues, or
distributes to the holders of its Common Stock, without separate payment
therefor, (i) a noncash dividend payable in any property or securities of the
Company, including additional Shares, or (ii) any cash, property, or securities
in connection with a spin-off, split-up, reclassification, recapitalization,
combination of shares, or similar rearrangement of the Company's capital stock;
then, upon the subsequent exercise of a Stock Option after the record date for,
or the occurrence of, each Dilutive Event, the Participant will be entitled to
receive, in exchange for the exercise price specified in the Stock Option, and
in addition to (or in substitution for in the case of a reduced number of
Shares), the Shares otherwise issuable upon exercise of the Stock Option, the
additional (or reduced) amount of Shares and other securities and property
(including cash) resulting from the Dilutive Event that he would have been
entitled to receive if (A) he had exercised the Stock Option on the Date of
Grant (even if the Stock Option was not exercisable then) and had been the
record owner of the number of Shares resulting from the exercise during the
period beginning on that date and ending on the actual exercise date of the
Stock Option, and (B) he had retained all Shares and other securities and
property (including cash) receivable by him during that period, after giving
effect to all the Dilutive Events that occurred during that period.
-15-
<PAGE> 16
5.2 CHANGE IN CONTROL.
(a) Generally. If a Change in Control occurs, all
outstanding Stock Options will become fully vested and exercisable as of the
earlier of the effective date of the shareholder approval or the effective date
of any of the Change in Control transaction (the "Effective Date") and, at the
election of the Board of Directors, the Company may terminate the Plan, in
which case the holder of each outstanding Stock Option will be entitled to
payment of the amount by which the Market Value of all Shares subject to the
Stock Option on the Effective Date exceeds the Market Value of all those Shares
as of the Date of Grant of the Stock Option, in full settlement of all the
holder's rights and interests in the Stock Option.
(b) Special Rules Governing Mergers and Stock Exchanges.
In the case of a merger, share exchange, or other transaction in which the
shareholders of the Company receive securities of the acquirer, at the election
of the Board of Directors, the Company may (but is not obligated to) elect to
continue this Plan and each Stock Option granted under the Plan will be
converted into an option to purchase securities of the acquirer being issued in
the transaction. In such case, the exercise price and number of Shares subject
to the Stock Option will be adjusted based on the exchange or conversion ratio
(the "Ratio") used to convert Shares into securities of the acquirer. The
adjusted exercise price will be the exercise price per Share, divided by the
Ratio. The adjusted number of Shares subject to the Stock Option will be the
product of the Ratio multiplied by the number of Shares subject to the Stock
Option before the transaction.
(c) Special Rules in Case of Cash Acquisition. In the
case of a Change in Control transaction in which the Shareholders will receive
consideration for their Shares (such as cash or debt) other than common stock
of the acquirer and the Company has elected pursuant to (a) above to terminate
the Plan and pay the spread of the Market Value on the Effective Date over the
Market Value on the Date of Grant, each holder of a stock option may elect to
defer the payment and settlement following termination of the Plan by up to six
months and one day after the Effective Date.
5.3 AMENDMENT, AND TERMINATION. The Board of Directors may alter,
amend, suspend, or terminate this Plan at any time without approval of the
Company's shareholders, unless the approval of the Company's shareholders is
required to comply with applicable law or any rule or regulation of a stock
market or exchange on which the Shares are traded or quoted. An amendment or
termination of this Plan, whether with or without the approval of the Company's
shareholders, that would adversely affect any right or obligation of a
Participant under an outstanding Stock Option will not be valid or effective as
to that Stock Option without that Participant's written consent.
-16-
<PAGE> 17
5.4 EXPENSES AND PROCEEDS. The Company shall pay all expenses of
the Plan. The Company may use the cash proceeds received from Participants
upon the exercise of Stock Options for general corporate purposes.
5.5 MARKET VALUE DETERMINATIONS. If trading in the Shares, or a
price quotation for the Shares, does not occur on a date when the Market Value
is required to be determined under either this Plan or an Option Agreement, the
next preceding date when Shares were traded or a price was quoted will control
the determination of the Market Value.
5.6 SECTION 16(b) EXEMPTIONS. With respect to Participants
subject to section 16 of the Exchange Act, transactions under this Plan are
intended to comply with all applicable conditions of SEC Rules 16b-3 and 16b-6
and any rule promulgated by the Securities and Exchange Commission under the
Exchange Act in substitution for either of those rules. To the extent any
provision of this Plan or action by the Administrative Committee fails to so
comply, it shall be null and void to the extent permitted by law and determined
by the Administrative Committee. In furtherance of the foregoing objective,
the Administrative Committee may include in an Option Agreement with a
Participant who is subject to section 16 of the Exchange Act any additional
conditions or restrictions that are required to qualify the grant and exercise
of the Stock Option for exemption under Rules 16b-3 and 16b-6 or any future
rule providing an exemption for the award, grant, and exercise of stock
options.
5.7 DURATION AND EFFECTIVE DATE. This Plan will become effective
as of February ____, 1998, subject to approval by the Company's shareholders
within 12 months after that date, and will terminate on the tenth anniversary
of its effective date. The Company is not authorized to award any Stock
Options after the termination date of this Plan.
EFFECTIVE DATE: FEBRUARY ___, 1998
ADOPTED BY BOARD OF DIRECTORS ADOPTED BY SHAREHOLDERS ON
ON FEBRUARY ____, 1998 MAY ___, 1998
STERILE RECOVERIES, INC.
By:___________________________
Bertram T. Martin, Jr.
President
ATTEST: [CORPORATE SEAL]
_____________________________
James T. Boosales, Secretary
-17-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors
Sterile Recoveries, Inc.
We have issued our reports dated February 16, 1998 accompanying the
financial statements and schedule of Sterile Recoveries, Inc. that are included
in the Company's Form 10-K for the year ended December 31, 1997. We hereby
consent to the incorporation by reference of said reports in the Registration
Statement of Sterile Recoveries, Inc. on Form S-8 (File No. 333-31911,
effective July 23, 1997).
GRANT THORNTON LLP
Tampa, Florida
March 24, 1998
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