<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to __________
Commission File Number: 000-20997
STERILE RECOVERIES, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA 59-3252632
(State of incorporation) (I. R. S. Employer
Identification No.)
28100 U.S. HIGHWAY 19 NORTH, SUITE 201
CLEARWATER, FLORIDA 33761
(Address of Principal Executive Offices)
(727) 726-4421
(Registrant's Telephone Number)
Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Number of outstanding shares of each class of Registrant's Common Stock as of
October 30, 1998:
Common Stock, par value $.001 - 5,663,694
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Statements of Earnings for
the three month period and nine month period ended
September 30, 1998 (unaudited) and the three month
period and nine month period ended September 30,
1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets as of September 30,
1998 (unaudited) and December 31, 1997 . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flow for
the nine month period ended September 30, 1998
(unaudited) and nine month period ended September 30,
1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements
(unaudited) . . . .. . . . . . . . . . . . . . . . . . . . . . 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 6
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 12
Item 2 Changes in Securities . . . . . . . . . . . . . . . . . . . . 12
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . . . . 12
Item 4 Submission of Matters to a Vote of Security Holders . . . . . 12
Item 5 Other Information . . . . . . . . . . . . . . . . . . . . . . 12
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 12
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 13,021 $ 10,110 $ 37,036 $ 28,822
Cost of revenues 8,983 6,627 24,851 19,048
-------- -------- -------- --------
Gross profit 4,038 3,483 12,185 9,774
Distribution expenses 940 811 2,687 2,296
Selling and administrative expenses 1,728 1,581 5,192 4,303
-------- -------- -------- --------
Income from operations 1,370 1,091 4,306 3,175
Interest expense (income), net 20 (24) 8 (105)
-------- -------- -------- --------
Income before income tax expense 1,350 1,115 4,298 3,280
Income tax expense 531 429 1,681 1,278
-------- -------- -------- --------
Net income $ 819 $ 686 $ 2,617 $ 2,002
======== ======== ======== ========
Dividends on preferred stock 16 -- 16 --
-------- -------- -------- --------
Net income available for common
shareholders $ 803 $ 686 $ 2,601 $ 2,002
======== ======== ======== ========
Net income per common share - basic $ 0.14 $ 0.12 $ 0.46 $ 0.36
======== ======== ======== ========
Net income per common share - diluted $ 0.14 $ 0.12 $ 0.44 $ 0.34
======== ======== ======== ========
Weighted average common shares
outstanding - basic 5,663 5,658 5,661 5,629
======== ======== ======== ========
Weighted average common shares
outstanding - diluted 5,994 5,865 5,916 5,866
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 1 of 14
<PAGE> 4
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, Dec. 31,
1998 1997
------------- --------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ -- $ 380
Accounts receivable, net 7,264 6,016
Inventories 1,896 1,979
Prepaid expenses and other assets 1,241 1,203
Reusable surgical products, net 13,805 10,034
Property, plant and equipment, net 11,702 7,253
Goodwill, net 5,196 521
Deferred income taxes 160 160
------- -------
Total assets $41,264 $27,546
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 2,515 $ --
Accounts payable 2,673 1,603
Employee related accrued expenses 939 926
Other accrued expenses 1,036 669
------- -------
Total liabilities 7,163 3,198
Commitments and contingencies -- --
Shareholders' equity
Preferred stock 1 --
Common stock 6 6
Additional paid-in capital 27,318 20,167
Retained earnings 6,776 4,175
------- -------
Total shareholders' equity 34,101 24,348
------- -------
Total liabilities and shareholders' equity $41,264 $27,546
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 2 of 14
<PAGE> 5
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net income $ 2,617 $ 2,002
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 691 481
Amortization of reusable surgical products 2,014 1,447
Provision for reusable surgical products shrinkage 921 433
Change in assets and liabilities (net of business combination):
Accounts receivable (562) (214)
Inventories 102 (692)
Prepaid expenses and other assets 26 (262)
Accounts payable 1,458 514
Accrued expenses (2) (674)
------- -------
Net cash provided by operating activities 7,265 3,035
------- -------
Cash flows from investing activities
Purchases of property, plant and equipment (2,639) (2,292)
Purchases of reusable surgical products (5,411) (4,525)
Payment for acquisition of business, net of cash acquired (1,340) 0
------- -------
Net cash used in investing activities (9,390) (6,817)
------- -------
Cash flows from financing activities
Borrowings from line of credit 1,734 (250)
Net proceeds from issuance of common stock 11 (12)
------- -------
Net cash provided by (used in) financing
activities 1,745 (262)
------- -------
Increase (decrease) in cash (380) (4,044)
Cash and cash equivalents at beginning of period 380 5,199
------- -------
Cash and cash equivalents at end of period $ (0) $ 1,155
======= =======
Supplemental cash flow information
Cash paid for interest $ 30 $ 44
======= =======
Cash paid for income taxes $ 1,661 $ 1,577
======= =======
Conversion of Convertible Demand Note into 128,205
shares of Common Stock $ -- $ 750
======= =======
Non-cash activities
During 1998 the Company acquired $9.4 million in assets and assumed $761,000
in liabilities in exchange for cash of $1,510,047 and Series A Preferred
Stock with a value of $7,140,000.
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 3 of 14
<PAGE> 6
STERILE RECOVERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying unaudited condensed
consolidated financial statements of Sterile Recoveries, Inc. (the
"Company") have been prepared in accordance with the Securities and
Exchange Commission's instructions to Form 10-Q and, therefore, omit
or condense footnotes and certain other information normally included
in financial statements prepared in accordance with generally accepted
accounting principles. The accounting policies followed for quarterly
financial reporting conform with generally accepted accounting
principles for interim financial statements and include those
accounting policies disclosed in the Company's Form 10-K for the year
ended December 31, 1997 filed with the Securities and Exchange
Commission. In the opinion of management, all adjustments of a normal
recurring nature that are necessary for a fair presentation of the
financial information for the interim periods reported have been made.
The results of operations for the nine months ended September 30, 1998
are not necessarily indicative of the results that can be expected for
the entire year ending December 31, 1998. The unaudited financial
statements should be read in conjunction with the financial statements
and the notes thereto included in the Form 10-K.
2. ACQUISITIONS
On August 31, 1998, the Company acquired all the stock of Repak
Surgical Enterprises, Inc. ("Repak"), a wholly owned subsidiary of
Standard Textile Co., Inc.("Standard Textile"), in exchange for
566,667 shares of its convertible Series A Preferred Stock. From its
facility located in the Cincinnati area, Repak provides reusable
surgical product services similar to the Company's reprocessing
services to the Ohio and Michigan markets. The Series A Preferred
Stock is convertible by its holder at any time into the same number of
shares of the Company's common stock. Under certain conditions,
including the Company's common stock having an average closing trading
price of $18.00 per share for a specified time period, the preferred
stock is mandatorily convertible into the Company's common stock. The
Series A Preferred Stock was valued at $7,140,000 by an independent
business valuation expert.
The Company also purchased the Repak facility's real estate for $1.5
million cash from Standard Textile's affiliates (see Note 3).
The Company has accounted for the acquisition as a purchase and
included Repak's operating results in the Company's operating results
since September 1, 1998. Of the approximately $8.6 million total costs
it incurred to complete the acquisition, the Company allocated
approximately $4.7 million to tangible assets, incurred approximately
$760,000 in liabilities, and allocated approximately $4.7 million to
goodwill. Goodwill will be amortized over
Page 4 of 14
<PAGE> 7
thirty years based upon various factors including historical and
projected operating results.
The following unaudited pro forma information combines the Company's
results of operations with Repak's results of operations as if the
acquisition had occurred at the beginning of each respective period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
--------- --------- ------ -- --------
<S> <C> <C> <C> <C>
Revenues $ 14,580 $ 12,132 $ 42,980 $35,067
========= ========= ========= =======
Net income $ 893 $ 778 $ 2,942 $ 2,231
========= ========= ========= =======
Net income available for common
shareholders $ 846 $ 727 $ 2,789 $ 2,078
========= ========= ========= =======
Net income per common share, basic $ 0.15 $ 0.13 $ 0.49 $ 0.37
========= ========= ========= =======
Net income per common share, diluted $ 0.14 $ 0.12 $ 0.47 $ 0.35
========= ========= ========= =======
</TABLE>
This pro forma financial information does not necessarily reflect the
Company's actual operating results if the transaction had been
effective during the shown periods and does not necessarily reflect
future results.
3. INDEBTEDNESS
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.
Currently total outstanding borrowings are limited to two and one-half
times the Company's earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the previous four quarters. The facility also
requires the Company to maintain a minimum tangible net worth of
$23,745,000. 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 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 (7.28% as of September 30, 1998), and 175 basis points
thereafter until maturity. The facility generally prohibits the Company
from encumbering its assets.
As of September 30, 1998, the Company had borrowings of $1.7 million,
of which approximately $1.5 million was incurred to fund the Company's
purchase of the Repak facility real estate.
Page 5 of 14
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The Company provides hospitals and surgery centers with a
comprehensive surgical procedure-based delivery and retrieval service for
reusable gowns, towels, drapes, and basins and provides other disposable
products necessary for surgery. At nine regional facilities, the Company
collects, sorts, cleans, inspects, packages, sterilizes, and delivers its
reusable products on a just-in-time basis. The Company offers an integrated
"closed-loop" reprocessing service that uses two of the most technologically
advanced reusable textiles: (i)a GORE(R) Surgical Barrier Fabric for gowns and
drapes that is breathable yet liquidproof and provides a viral/bacterial
barrier and (ii) an advanced microfiber polyester surgical fabric for gowns and
drapes that is liquid and bacterial resistant. The Company believes that its
reusable surgical products made from these fabrics provide protection and
comfort that are superior to disposable alternatives.
On August 31, 1998, the Company acquired all the shares of stock of
Repak Surgical Enterprises, Inc. ("Repak"), a wholly-owned subsidiary of
Standard Textile Co., Inc. ("Standard Textile"), in exchange for 566,667 shares
of its convertible Series A Preferred Stock. From a facility in the Cincinnati
area, Repak provides the Ohio and Michigan markets with reusable surgical
product services similar to the Company's reprocessing service. In the twelve
months ended December 31, 1997, Repak had annual revenues of approximately $8.3
million from its reusable surgical products reprocessing service. The Company
also purchased the Repak facility's real estate for $1.5 million cash from
affiliates of Standard Textile.
The newly issued Series A Preferred Stock is convertible by its holder
at any time into the same number of shares of the Company's common stock. Under
certain conditions, including the Company's common stock having an average
closing trading price of $18.00 for a specified time period, the Series A
Preferred Stock is mandatorily convertible into the Company's common stock. The
Series A Preferred Stock accrues a 2% dividend on its liquidation preference of
$18.00 per share, payable quarterly, until the earlier of September 1, 2004 or
the date the shares are converted into shares of common stock.
Page 6 of 14
<PAGE> 9
RESULTS OF EARNINGS
The following table sets forth for the periods shown the percentage of
revenues represented by certain items reflected in the statement of earnings of
the Company.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 69.0 65.5 67.1 66.1
----- ----- ----- -----
Gross profit 31.0 34.5 32.9 33.9
Distribution expense 7.2 8.0 7.3 8.0
Selling and administrative
expenses 13.3 15.7 14.0 14.9
----- ----- ----- -----
Income from operations 10.5 10.8 11.6 11.0
Interest expense (income), net 0.1 (0.2) (0.0) (0.4)
----- ----- ----- -----
Income before income taxes 10.4 11.0 11.6 11.4
Income tax expense 4.1 4.2 4.5 4.5
----- ----- ----- -----
Net income 6.3% 6.8% 7.1% 6.9%
===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. The Company's revenues increased $2.9 million, or 28.8%, to
$13.0 million in the three months ended September 30, 1998 from $10.1 million
in the three months ended September 30, 1997. In the nine months ended
September 30, 1998, the Company's revenues increased $8.2 million, or 28.5%, to
$37.0 million, from $28.8 million in the nine months ended September 30, 1997.
The revenue increases were attributable in roughly equal amounts to new
customers, increased revenues from current customers, and added revenues from
the Repak acquisition.
GROSS PROFIT. Gross profit increased $555,000, or 15.9%, to $4.0
million in the three months ended September 30, 1998 from $3.5 million in the
three months ended September 30, 1997; and $2.4 million, or 24.7%, to $12.2
million in the nine months ended September 30, 1998, from $9.8 million in the
nine months ended September 30, 1997. Gross profit as a percentage of revenues
decreased by 3.5% to 31.0% in the three months ended September 30, 1998, from
34.5% in the three months ended September 30, 1997; and decreased by 1.0% to
32.9% in the nine months ended September 30, 1998, from 33.9% in the nine
months ended September 30, 1997. The Company's gains in labor efficiencies and
its economies of scale from spreading fixed costs over more revenues in the
third quarter of 1998 were not as much as expected, and therefore did not fully
offset increases during that quarter in its amortization expense and shrinkage
of reusable surgical products.
DISTRIBUTION EXPENSES. Distribution expenses increased $129,000, or
15.9%, to $940,000 in the three months ended September 30, 1998, from $811,000
in the three months ended September 30, 1997; and $391,000, or 17.0%, to $2.7
million in the nine months ended September 30, 1998, from $2.3 million in the
nine months ended September 30, 1997.
GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
Page 7 of 14
<PAGE> 10
Distribution expenses as a percentage of revenues decreased by .8% to 7.2% in
the three months ended September 30, 1998 from 8.0% in the three months ended
September 30, 1997; and decreased .7% to 7.3% in the nine months ended
September 30, 1998, from 8.0% in the nine months ended September 30, 1997. The
improvement in distribution expenses as a percentage of revenues resulted
primarily from efficiencies derived from delivering more volume over existing
routes and from adding additional routes and equipment at a slower pace than
revenue growth.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $147,000, or 9.3%, to $1.7 million in the three months ended
September 30, 1998, from $1.6 million in the three months ended September 30,
1997; and increased $889,000, or 20.7%, to $5.2 million in the nine months
ended September 30, 1998, from $4.3 million in the nine months ended September
30, 1997. As a percentage of revenues, selling and administrative expenses
decreased 2.4% to 13.3% in the three months ended September 30, 1998 from 15.7%
in the three months ended September 30, 1997; and decreased .9% to 14.0% in the
nine months ended September 30, 1998, from 14.9% in the nine months ended
September 30, 1997. Improvement in selling and administrative expenses as a
percentage of revenues resulted primarily from the Company's continuing ability
to leverage administrative costs over more revenues.
INTEREST EXPENSE (INCOME), NET. Interest expense increased $44,000 to
interest expense of $20,000 in the three months ended September 30, 1998, from
interest income of $24,000 in the three months ended September 30, 1997, and
increased $113,000 to interest expense of $8,000 in the nine months ended
September 30, 1998, from interest income of $105,000 in the nine months ended
September 30, 1997. The increased interest expense was primarily a consequence
of borrowings under the Company's revolving credit facility to fund the
Company's $1.5 million cash purchase of the Repak facility real estate.
INCOME BEFORE INCOME TAX EXPENSE. As a result of the foregoing, the
Company's income before taxes increased to $1.4 million in the three months
ended September 30, 1998, from income before taxes of $1.1 million in the three
months ended September 30, 1997; and increased to $4.3 million in the nine
months ended September 30, 1998, from an income before taxes of $3.3 million in
the nine months ended September 30, 1997. As a percentage of revenues, income
before taxes in the three months ended September 30, 1998 was 10.4% of
revenues, compared to income before taxes of 11.0% of revenues in the three
months ended September 30, 1997; and income before taxes of 11.6% of revenue in
the nine months ended September 30, 1998, compared to income before taxes of
11.4% of revenues in the nine months ended September 30, 1997.
INCOME TAX EXPENSE. Income tax expense increased $102,000 to $531,000
in the three months ended September 30, 1998, compared to $429,000 in the three
months ended September 30, 1997; and increased $403,000 to $1.7 million in the
nine months ended September 30, 1998, compared to $1.3 million in the nine
months ended September 30, 1997. The Company's effective tax rate is 40.0%.
NET INCOME PER SHARE. The Company recorded a net income per share of
$0.14 on a basic and diluted per share basis for the three months ended
September 30, 1998, compared with $0.12 basic and diluted per share net income
for the three months ended September 30, 1997; and net income per share of
$0.46 on basic per share basis and $0.44 on a diluted per share basis for the
nine months ended September 30, 1998, compared with a net income per share of
$0.36 on a basic per share basis and $0.34 on a diluted per share basis for the
nine months ended September 30, 1997.
Page 8 of 14
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company's positive cash flow from operating activities was $6.5
million during the nine months ended September 30, 1998, compared to $3.0
million during the nine months ended September 30, 1997. The increase in cash
from operating activities resulted primarily from increased net income before
amortization and depreciation expense and a decrease in prepaid expenses and
inventories, offset by an increase in accounts receivable. The Company's
positive cash flow covered the required purchases of reusable surgical products
during the first nine months of this year.
The Company used approximately $2.6 million more net cash in investing
activities in the nine months ended September 30, 1998 than in the nine months
ended September 30, 1997. The Company has made capital expenditures in the nine
months ended September 30, 1998 for equipment of $2.6 million and for reusable
surgical products of $5.4 million compared to $2.3 million for equipment and
$4.5 million for reusable surgical products during the nine months ended
September 30, 1997. The Company also used $1.3 million, net of cash acquired,
for the purchase of real estate in connection with the acquisition of Repak
Surgical Enterprises, Inc. on August 31, 1998. These expenditures were funded
primarily by cash provided by operating activities and from borrowings under
the Company's revolving credit facility.
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 $500,000 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. The Company
plans to add facilities in Stockton, California and Chattanooga, Tennessee in
the first half of 1999, at an estimated cost of approximately $4.5 and $4.3
million, respectively, for each facility.
As of September 30, 1998 the Company had borrowings of $1.7 million
from its $15.0 million unsecured credit facility with First Union National
Bank, of which approximately $1.5 million was incurred by the Company to fund
its acquisition of the Repak facility real estate.
As of September 30, 1998, the Company had a zero cash balance, but
believes 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 to fund additional capital expenditures from a combination of internal
cash flow, its credit facility, and other new capital sources.
CERTAIN CONSIDERATIONS
This report, other documents that are publicly disseminated by the
Company, and oral statements that are made on behalf of the Company contain or
might contain both
Page 9 of 14
<PAGE> 12
statements of historical fact and forward-looking statements. Examples of
forward-looking statements include: (i) projections of revenue, earnings,
capital structure, and other financial items, (ii) statements of the plans and
objectives of the Company and its management, (iii) statements of future
economic performance, and (iv) assumptions underlying statements regarding the
Company or its business. The cautionary statements set forth below discuss
important factors that could cause actual results to differ materially from any
forward-looking statements.
Sales Process and Market Acceptance of Products and Services. The
Company's future performance depends on its ability to increase revenues to new
and existing customers. The Company's sales process for new customers is
typically between six and twelve months in duration from initial contact to
purchase commitment. The extended sales process is typically due to the
complicated approval process within hospitals for purchases from new suppliers,
the long duration of existing supply contracts, and implementation delays
pending termination of a hospital's previous supply relationships. 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. The Company's inability to gain wider market acceptance of
its reusable products and reprocessing services would have a material adverse
effect on the Company's operating and expansion plans.
Need for Capital. The Company's business is capital intensive and will
require substantial capital expenditures for additional surgical products and
equipment during the next several years to achieve its operating and expansion
plans. In the longer term, the Company expects that its needs for capital
expenditures will be substantial and will depend on its growth and
opportunities. The Company's inability to obtain adequate capital could have a
material adverse effect on the Company. See -- "Liquidity and Capital
Resources."
Dependence on a Significant Customer and Market Consolidation. During
the third quarter of 1998, Columbia/HCA Healthcare Corporation ("Columbia")
hospitals, with which the Company currently does business, accounted for
approximately 15% of SRI's revenues, compared to 17% in the third quarter of
1997. Although each Columbia hospital currently makes its purchasing decisions
on an individual basis, and no single hospital accounted for more than 3.5% of
the Company's revenues, the Company believes the executive management of
Columbia has the ability to influence the selection of particular vendors. The
loss of a substantial portion of the Columbia hospitals' business would have a
material adverse effect on the Company. Additionally, hospitals are
increasingly buying products and services in groups to improve efficiency and
lower costs. Although SRI is increasingly targeting these groups for its sales
efforts, a change of its customers' purchasing patterns could have a material
adverse effect on the Company.
Competition. The Company's business is highly competitive. The
Company's competitors include a number of distributors and manufacturers, as
well as the in-house reprocessing operations of hospitals. Certain of the
Company's existing and potential competitors possess substantially greater
resources than the Company, and the Company's market is dominated by their
disposable products. Some of the Company's competitors, including the
Convertors division of Allegiance Corporation, serve as the sole supplier of a
wide assortment of products to a significant number of hospitals. The Company
does not provide an array of products as complete as those provided by some of
its competitors, which in some instances is a competitive disadvantage. There
is no assurance that the Company will be able to compete effectively with
existing or potential competitors.
Dependence on Key Executives. The Company is largely dependent upon
the management expertise and experience of Richard T. Isel, Bertram T. Martin,
Jr., Wayne
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<PAGE> 13
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.
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.
Recent Acquisition and Implementation of Acquisition Strategy. The
Company acquired Repak Surgical Enterprises, Inc., a surgical products
reprocessing company located in the Cincinnati, Ohio area, on August 31, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview". The Company might make other acquisitions in the
future. Acquisitions involve risks to the Company, including (a) diversion of
management's attention to identifying and negotiating the acquisitions and
integrating the acquired businesses; (b) costs incurred in integrating the
acquired company's financial, operating, and other systems; (c) unforeseen
liabilities or operating difficulties of the acquired businesses; (d) the
adverse earnings impact of amortizing goodwill and other acquired intangible
assets; and (e) the potentially dilutive effect on per share earnings of any
new issuance of equity securities to the seller.
Government Regulation. Significant aspects of the Company's businesses
are subject to state and federal statutes and regulations governing, among
other things, medical waste-disposal and workplace health and safety. In
addition, most of the products furnished or sold by the Company are subject to
regulation as medical devices by the U.S. Food and Drug Administration, as well
as by other federal and state agencies. The Company's facilities are subject to
regular inspections by FDA officials. The FDA has the power to enjoin future
violations, seize adulterated or misbranded devices, require the manufacturer
to remove products from the market, and publicize relevant facts. Federal or
state governments might impose additional restrictions or adopt interpretations
of existing laws that could materially adversely affect the Company.
Page 11 of 14
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not subject to any litigation or other legal proceeding
that it expects will materially affect the Company.
Item 2. Changes in Securities
On August 31, 1998, in connection with its acquisition of Repak
Surgical Enterprises, Inc., the Company authorized and issued to
Standard Textile 566,667 shares of its convertible Series A Preferred
Stock. The Series A Preferred Stock is convertible by its holder at any
time into the same number of shares of the Company's common stock. The
Series A Preferred Stock is mandatorily convertible into common stock
on certain conditions, including when the average trading price of the
Company's common stock measured over 20 consecutive days has been $18
or more. The Series A Preferred Stock votes together with the common
shareholders as one class on an as-converted basis, and does not have
any special voting rights as a class, except as provided by law. The
Series A Preferred Stock accrues a 2% dividend on its liquidation
preference of $18.00 per share, payable quarterly, until the earlier of
September 1, 2004, or the date that it is converted into common stock.
The Company granted to Standard Textile incidental and, under limited
circumstances, demand registration rights with respect to the common
stock issuable on conversion of the Series A Preferred Stock.
No person acted as an underwriter with respect to this transaction. The
Company relied on Section 4(2) of the Securities Act of 1933 for its
exemption from the registration requirements of that Act. The
transaction did not involve a public offering.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In connection with the Company's acquisition of Repak Surgical
Enterprises, Inc. Gary Heiman, President and Chief Executive Officer
of Standard Textile Co., Inc. became a director of the Company on
August 31, 1998.
Page 12 of 14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
Exhibit 10.30 Procurement Agreement dated August 31, 1998, between
the Company and Standard Textile Co., Inc.
Exhibit 27 Financial Data Schedule
REPORTS ON FORM 8-K
The Company filed a Form 8-K with the Securities and Exchange
Commission on September 8, 1998, reporting its acquisition of Repak
Surgical Enterprises, Inc., which closed on August 31, 1998. On
November 10, 1998, the Company filed a Form 8-K/A, amending the initial
filing to include required financial statements and pro forma financial
information for this acquisition.
Page 13 of 14
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERILE RECOVERIES, INC.
Date: November 11, 1998 By: /s/ James T. Boosales
-----------------------
Executive Vice President and
Chief Financial Officer
Page 14 of 14
<PAGE> 1
EXHIBIT 10.30
as of August 31, 1998
Standard Textile Co., Inc.
One Knollcrest Drive
Cincinnati, Ohio 45327
Attention: Norman Frankel
Dear Norman:
This letter agreement confirms the terms under which Sterile Recoveries,
Inc. ("Buyer") and Standard Textile Co., Inc. ("Seller") will engage in certain
transactions with each other.
Background
Seller manufactures and distributes reusable textile products to
hospitals, laundries, surgery centers, extended care facilities, and other
health care textile purchasers. Seller's textile products include surgical
products such as gowns, drapes, wrappers and cotton absorbent towels. To
support its relationships with its customers, Seller also enjoys relationships
with health care group purchasing organizations ("GPOs") that make it a
preferred vendor to the organization's members.
Buyer provides daily delivery, retrieval, and reprocessing of its
reusable surgical products to hospitals and surgery centers located throughout
most of the United States. Its reusable surgical products include gowns,
drapes, towels, wrappers, and stainless steel products. Buyer owns its products
and supplies them to hospitals and surgery centers on a per use basis. Buyer
purchases gowns, towels, drapes, and wrappers from Seller and other vendors.
Buyer also provides disposable surgical products in its service. The continuous
and recurring nature of Buyer's reusable product reprocessing service makes it
an attractive customer for textile manufacturers such as Seller. Seller
recognizes that Buyer's purchases of new reusable products are based
substantially on the rate at which Buyer adds customers and associated
revenues. The parties anticipate that Seller's significant product knowledge
and development capability will support the quality and cost effectiveness of
Buyer's reusable surgical products and their continued improvement.
<PAGE> 2
Standard Textile Co., Inc.
as of August 31, 1998
Pursuant to a letter agreement dated October 21, 1997 (which continues
concurrently with this Agreement), Buyer and Seller agreed on arrangements to
jointly market their products and services to VHA, a national group purchasing
organization that has combined with University Healthsystem Consortium and is
now known as Novation. Buyer and Seller desire to establish additional mutually
beneficial arrangements for the following:
1. Pursuant to this Agreement, Buyer will contract with Seller to
purchase a significant portion of Buyer's gowns, drapes, towels, and
wrappers.
2. Seller shall use Buyer as its primary method of distributing
reusable surgical products to the hospital and surgery center markets.
Seller will create a commission pool to compensate its sales force for
sales of Products to support Buyer's surgical product service.
3. Seller will negotiate with GPOs to include Buyer's surgical product
delivery services under its group purchasing agreements.
The parties also desire to establish the other elements of their relationship
set forth in this letter agreement.
Agreements
Gown, drape, towel, and wrapper supply. Buyer shall purchase from Seller
and Seller shall supply, sell, and deliver to Buyer at least 80% of Buyer's
annual requirements for cotton absorbent towels, liquid proof reusable surgical
gowns, liquid resistant reusable surgical gowns, drapes, and wrappers (the
"Products"), increasing to 90% for 2000 and ensuing years. Liquid proof gowns
will not be considered part of the Products subject to Buyer's requirements
commitment for 1998 and 1999 and will be governed by a separate 80% threshold
in the year ended December 31, 2000. After December 31, 2000, liquid proof
gowns will be considered part of the Products subject to the general 90% of
requirements commitment. The applicable percentage will be measured based on a
comparison of (a) Buyer's aggregate calendar year dollar volume purchases of
the Products from Seller (including Buyer's purchases under the Supply
Agreement dated the same date of this Agreement) to (b) Buyer's aggregate
calendar year dollar volume of purchases of the Products from all suppliers.
Buyer has separately furnished to Seller a current dollar estimate of Buyer's
current requirements for reusable surgical products for its facilities,
excluding the requirements of its newly acquired facility in Mason, Ohio and
excluding the benefits of anticipated sales increases from the efforts of
Seller's sales force. Seller acknowledges this schedule is a prediction that is
subject to variation based on actual sales, usage experience, and Buyer's
continuing evaluation of its procurement program. Buyer acknowledges that
Seller's consistency in supplying Products and its cost incurred in
manufacturing them are affected by variations in the volume and predictability
of Buyer's Product purchases. Buyer's
2
<PAGE> 3
actual requirements and purchases will depend on its revenue increases and will
vary from year to year with changes in the rate of Buyer's actual and
anticipated revenue growth.
Seller shall manufacture the Products to Buyer's specifications
(including fabric and construction specifications) and quality requirements
using fabric provided by Seller. Buyer and Seller will cooperate in the initial
transition from use of Buyer's fabric to use of fabric ordered by Seller. The
fabric specifications may limit Seller to using a particular fabric
manufacturer. Buyer will order products through periodic purchase orders that
specify size, quantity, construction, and other product attributes. Buyer shall
on or before the fifth day of each month furnish to Seller a purchase order for
its product requirements (other than towels) for the next full month and a
non-binding estimate of its product requirements for the subsequent three
months. Buyer will provide Seller with an annual estimate of towel purchases,
broken down by month, and will assume that Seller will have a two months supply
of towels on hand in readily available inventory, two months supply of towels
in transit, and two months supply in manufacturing.
Pricing of Products. Schedule A furnished separately to Seller is a
schedule of sales prices for the Products that are available to Buyer from its
existing suppliers on the date of this Agreement. Schedule B furnished
separately to Buyer is a schedule of sales prices for the Products (including
an allowance to establish the commission pool for Seller's sales
representatives that is described below) that will be charged to Buyer by
Seller as of the effective date of this Agreement. Schedule B will be subject
to price adjustments in Schedule B. Any new Products will be added to Schedule
B based on prices agreed upon by the parties.
The sales price listed on each price schedule furnished to Buyer by
Seller will constitute the entire amount payable by Buyer for the Products,
excluding sales and use taxes. Terms are F.O.B. destination (freight paid by
Seller), which typically will be one of Buyer's reprocessing facilities.
If at any time Seller issues a contract price list to a GPO that lists a
particular Product for a price (with same delivery terms) less than the price
listed on the then-current price schedule, the price for that particular
Product will be adjusted to that new price without any further action on the
part of either Buyer or Seller. Seller shall promptly notify Buyer of the price
adjustment, and the price adjustment will be effective for all Products ordered
by Buyer after the sale or offer to sell that resulted in the price adjustment.
If Buyer can purchase a substantial amount of its Products on a regular
basis from another domestic supplier for less than the prices listed on the
then-current prices on Schedule "B" under circumstances that Buyer believes
reflect market conditions, Buyer shall notify Seller of the price difference
and Buyer and Seller will negotiate regarding an adjustment to the applicable
price.
3
<PAGE> 4
Purchase Orders; Packaging and Packing Slips. Buyer shall place orders
for the Products by telefax, telephone, electronically, or its written purchase
order form. Each Product shipment delivered to Buyer shall contain a packing
slip and be packaged in accordance with Buyer's reasonable requirements. A
packing slip must be visible and securely attached to the container or
packaging for the Product and set forth the following: (a) Buyer's name; (b)
Seller's name; (c) the shipping date; (d) the purchase order number; and (e)
the Product description and identification number. If Seller delivers to Buyer
a Product without a packing slip that complies with the foregoing requirements,
Buyer shall so notify Seller and Seller shall provide said packing slip within
five (5) calendar days.
Delivery; Risk of Loss. Seller shall manufacture or supply and timely
ship within the Continental United States the full quantity of all Products
ordered by Buyer on each purchase order to the place designated on the purchase
order. Title and risk of loss or damage to the Products pass to the Buyer when
the Products are unloaded at Buyer's place of delivery. Unless agreed to by
Buyer in advance, Seller shall not deliver any partial orders. In addition,
Buyer may refuse to accept, and may return to Seller, freight collect, at
Seller's risk, any Products that are not ordered by Buyer. Seller shall use
expedited shipping methods or other special packaging methods at Buyer's
reasonable request and expense.
Force Majeure. Neither party will be responsible for any delay, failure,
or omission due to any cause that is beyond its reasonable control, is not due
to its own negligence, and cannot be overcome with the exercise of due
diligence, including, without limitation, war, riots, fires, floods, storms,
lightning, epidemics, earthquakes, hostilities, labor disturbances,
expropriation or confiscation of properties, interference by civil or military
authorities, or acts of God.
Nonconforming Products. Buyer may reject at any time after delivery any
Products that it orders from Seller up to six (6) months after delivery, if
they are nonconforming. If Buyer properly rejects any Products as
nonconforming, Seller, at its sole cost and expense, as soon as practicable
after the effective date of Buyer's notice of rejection, shall either (a) cause
the rejected Products to conform or (b) deliver to Buyer new Products that
conform to the order. If Buyer pays for any nonconforming Products or an order
that contains any nonconforming Products and Seller does not cure to Buyer's
satisfaction every defect in the nonconforming Products within a reasonable
time period after Buyer notifies Seller of its rejection of the nonconforming
Products or order, Seller, at Buyer's option, promptly shall either refund the
full amount paid by Buyer for the nonconforming Products (and any amount paid
for fabric) or credit that amount to Buyer's account. Buyer shall purchase
Products that slightly deviate from specifications, but otherwise are suitable
for Buyer's purposes, that constitute up to 1% of the total volume of a Product
category for an agreed discount to full price that is based on a mutual
evaluation of the extent to which the Product is defective.
4
<PAGE> 5
Inspection. Seller shall permit Buyer or its agents or representatives to
inspect and observe finished Products in the process of manufacture, at any
reasonable time during Seller's normal business hours, and shall provide
adequate space and facilities necessary for Buyer's agents, personnel, or
representatives to conduct an inspection or observation upon reasonable advance
notice to Seller.
Seller's Warranties. Buyer will purchase the products from the Seller for
use in its reusable surgical products processing service business. Accordingly,
Seller warrants and represents to Buyer that:
(a) All Products delivered to Buyer will conform to agreed
specifications;
(b) All Products delivered to Buyer will be of merchantable quality,
will not be adulterated, and will be free from all defects in material
and workmanship;
(c) Buyer will acquire good and valid title to all Products free and
clear of any security interest or other lien or encumbrance; and
(d) All Products supplied to Buyer by Seller pursuant to this
Agreement will be manufactured in compliance with applicable local, state
and federal laws, except to extent non-compliance is attributable to
Buyer's specifications.
Product Development. Seller shall devote resources to developing reusable
surgical products of improved quality and reduced cost and support Buyer's
strategy of delivering the highest quality products to its customers.
Joint Sales Efforts. Since October 1, 1997, Seller has facilitated
Buyer's direct sale of its reusable surgical product service to targeted
Novation members pursuant to the letter agreement between the parties dated
October 21, 1997. Buyer and Seller shall jointly develop a plan to expand
Seller's sales force's efforts to effectively introduce and implement Buyer's
reusable surgical products program for additional hospitals and surgery centers
and other GPOs with which Seller enjoys a relationship. Seller and Buyers'
officers and key managers will meet frequently and on request to discuss the
progress and results of those efforts. Buyer's representatives shall introduce
Seller's representatives to Buyer's customers who do not use Seller's products.
Buyer shall permit Seller to conduct tours of its facilities for the benefit of
Seller and Seller's customers on reasonable advance notice to Buyer. The
parties anticipate that the joint efforts of Buyer and Seller's sales forces
will result in increased sales of all Seller's products and increased revenues
for Buyer's service.
5
<PAGE> 6
Seller's Primary Distribution Method. Seller shall use Buyer's reusable
surgical product service as its primary method of distributing reusable
surgical products to the hospital and surgery center markets. Seller shall
cause its sales force to offer Buyer's service as their primary choice for
reusable surgical products to its customers and prospects in any region that
Buyer services or reasonably plans to service within the next 12 month period.
Nothing in this section precludes Seller from (a) continuing to service and
sell its PrePak service to its existing PrePak customers, (b) selling its
PrePak service to customers that have rejected SRI's service, or (c) selling
its products to other customers outside of its PrePak service, provided Seller
uses reasonable efforts to sell SRI's service to these customers.
Commission Pool. Seller shall set aside in a separate commission pool the
amount of revenues it receives from sale of the Products to Buyer that is
further described on Schedule B. Seller shall use the pool exclusively to pay
commissions to its sales persons for their assistance in selling Buyer's
surgical product services to hospitals and surgery centers.
Buyer shall facilitate commission payments by regularly reporting to
Seller its new accounts for which Seller provided assistance, the Seller sales
person who assisted with the account, and the product amount expected to be
placed in service for new accounts. Buyer shall subsequently report additional
product purchases required to service revenue increases from those accounts
(including replacement Product) and Seller shall pay the salespersons
responsible for the account commissions for these later new product purchases.
Seller shall pay all earned commissions promptly after receiving a reported
sale.
Seller shall furnish Buyer each calendar quarter a report showing the
current commission pool balance, amounts disbursed during the prior month and
year to date, and the sales persons who received the commissions. At each
fiscal year end and on any termination of this Agreement, Seller shall disburse
any remaining commission pool as described on Schedule B.
Accounts of GPO Relationships. Buyer shall deliver to Seller each month a
report listing agreed information regarding Buyer's relationship with Novation
and other group purchasing organization accounts, including revenues from those
accounts and associated administrative fees.
Term. This Agreement will be for an initial term of ten years or until
earlier terminated by a party in accordance with this section, provided that
all rights and obligations accrued by the expiration or termination date will
survive the expiration or termination of this Agreement. This Agreement may be
terminated by either party immediately on notice if:
(a) A party fails to make payments when due to the terminating party
within 10 days after written notice or neglects or fails to perform or
observe any of its other material obligations
6
<PAGE> 7
under this Agreement, unless the condition is remedied within 30 days
after written notice has been given to the party.
(b) The other party breaches in a material respect a warranty or
representation under this Agreement.
(c) The other party makes an assignment for the benefit of creditors
or a petition under the Bankruptcy Code is filed by or against the other
party (if an involuntary petition, the petition is not dismissed within
60 days after it is filed) or a receiver is appointed for the business of
the other party.
(d) The other party ceases doing business as a going concern or
attempts to transfer or assign this Agreement in a manner that is not
permitted.
(e) The other party or its officer commits any acts that are dishonest
or fraudulent with respect to the parties' relationship under this
Agreement or that materially adversely affect the ability to perform of
the terminating party. The terminating party shall give 30 days' advance
notice of any condition that materially adversely affects the other
party's ability to perform.
On any expiration or termination of this Agreement, Seller shall return
to Buyer any unused fabric ordered at Buyer's request, Buyer shall reimburse
Seller for its out of pocket cost incurred in purchasing the fabric, Seller may
complete any work in process and deliver it to Buyer for payment, and Buyer
shall purchase any remaining finished goods made specifically for Buyer.
Indemnification. Each party shall indemnify the other party and hold it
harmless from all costs, loss, claims, damage, expense, liabilities, and
judgments (including premiums for bonds, fees for experts and investigators,
and all legal fees, costs, and expenses incurred before a lawsuit is filed in
regulatory or trial, appellate, bankruptcy and judgment execution proceeding)
incurred by the other party because of the indemnifying party's failure to
comply with this Agreement, willful misconduct, or negligent acts or omissions.
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 interest in the other party's business or
to constitute a partnership or joint venture between the parties. This
agreement is for the benefit of its parties only, and no third party is a
beneficiary of it.
Confidentiality. During the term of this agreement and for five years
after its expiration or termination, each party might furnish or make available
to the other party proprietary or
7
<PAGE> 8
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. Each party shall
return to the other party at the expiration of this Agreement all Restricted
Information that it received from the other party.
Buyer's specifications for the Products are the exclusive property of
Buyer, and Seller shall not sell Products manufactured to those specifications
to any person that will use them for business operations in North America.
Buyer grants to Seller a non-exclusive license to manufacture the Products for
sale to Buyer, using Buyer's trademarks and specifications for the Products.
Execution. 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.
Legal. The validity, interpretation, construction and enforcement of this
Agreement are governed by the laws of the State of Florida, excluding the laws
of that State pertaining to the resolution of conflicts with laws of other
jurisdictions.
Arbitration. If any dispute between Buyer and Seller arises under this
Agreement, the parties shall use reasonable efforts to settle the dispute for
at least 30 days. After that period, the dispute may be submitted for
arbitration, and the arbitration will be conducted before an arbitration panel
in accordance with the North Carolina Arbitration Code. The arbitrator panel
will consist of three arbitrators, with one arbitrator selected by Buyer, the
second arbitrator selected by Seller, and the third arbitrator selected by
agreement of the first two arbitrators. Every arbitrator must be independent
(not an officer, director, employee, affiliate, or shareholder of Buyer or
Seller) without any economic or financial interest of any kind in the outcome
of the arbitration or in Buyer, Seller, or any of their affiliates. The
arbitration hearing will be held on such dates and at such times and place in
Raleigh, North Carolina as the arbitration panel designates on 30 calendar
days' advance notice to the parties. The decision of the arbitration
8
<PAGE> 9
panel will be binding and conclusive as to Buyer and Seller, and on the
pleading of any party, any court having jurisdiction may enter a judgment of
any award rendered in arbitration, which may include an award of damages.
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 Seller:
Standard Textile Co., Inc.
Knollcrest Drive
Cincinnati, Ohio 45327
ATTENTION: Norman Frankel
(b) If to BUYER:
Sterile Recoveries, Inc.
28100 U.S. Highway 19 North
Suite 201
Clearwater, FL 33761
ATTENTION: Bertram T. Martin, Jr.
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.
Assignment; Subcontracting. This Agreement is not assignable by either
party without the other party's consent, which it may withhold at its sole
discretion, and any unapproved assignment will be invalid and ineffective
against the other party, except that, if a party sells, merges, or exchanges
all or substantially all of its assets or outstanding stock, the party may
assign this Agreement without the other party's written consent, so long as (a)
the acquiring entity executes an agreement agreeing to be bound by the same,
(b) the acquiring entity is not a competitor of the other party, and (c) the
other party reasonably and in good faith believes the acquiring entity will
perform all of the predecessor's material obligations under this Agreement with
similar diligence, responsibility, and capability. Seller shall not subcontract
any manufacturing to another person without Buyer's prior approval.
9
<PAGE> 10
Miscellaneous. Time is of the essence in this Agreement. This Agreement
is binding on and inures to the benefit of, the respective assignees and the
successors of Seller and Buyer, and all references to Seller or Buyer in this
Agreement include their respective permitted assignees or successors. A delay,
omission or course of dealing on the part of Buyer or Seller in exercising any
right, power or remedy under this Agreement will not operate as a waiver of it
in a single or partial exercise of any right, waiver or remedy under this
Agreement does not preclude any further exercise of it or the exercise of any
other right, power or remedy. A waiver, amendment, or modification of this
Agreement would be valid and effective only if it is in writing and signed by
both Seller and Buyer. This Agreement and the Schedules record the final,
complete and exclusive understanding of the parties to it with respect to the
sale and purchase of Products contemplated by this Agreement (except for
implied warranties arising under Florida's Uniform Commercial Code) and
supersede any prior or contemporaneous agreement, understanding or
representation, oral or written, by either of them. This Agreement will be
effective as of September 1, 1998 when executed by Seller and Buyer.
Very truly yours,
STERILE RECOVERIES, INC.
By: /s/ Bertram T. Martin, Jr.
----------------------------------
Bertram T. Martin, Jr.
President
ACCEPTED AND AGREED
this 31st day of August, 1998.
STANDARD TEXTILE CO., INC.
By: /s/ Edward M. Frankel
----------------------------------
Name: Edward M. Frankel
Title: Vice President
10
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<PERIOD-START> JAN-01-1998
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