UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
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
November 1, 2000:
Common Stock, par value $.001 - 5,676,794
<PAGE>
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
for the three months and nine months ended
September 30, 2000 (unaudited) and the three
months and nine months ended September 30,
1999 (unaudited) ......................................1
Condensed Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and December
31, 1999...............................................2
Condensed Consolidated Statements of Cash
Flows for the nine months ended September
30, 2000 (unaudited) and September 30, 1999
(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 ....................................................................13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $19,493 $17,152 $57,487 $51,380
Cost of revenues 13,269 11,748 39,619 34,642
------- ------- ------- -------
Gross profit 6,224 5,404 17,868 16,738
Distribution expenses 1,266 1,242 3,936 3,800
Selling and administrative expenses 2,594 2,474 8,222 7,090
------- ------- ------- -------
Income from operations 2,364 1,688 5,710 5,848
Interest expense, net 264 67 780 210
------- ------- ------- -------
Income before income tax expense 2,100 1,621 4,930 5,638
Income tax expense 819 632 1,923 2,183
------- ------- ------- -------
Net income $ 1,281 $ 989 $ 3,007 $ 3,455
======= ======= ======= =======
Dividends on preferred stock 51 51 153 157
------- ------- ------- -------
Net income available for common shareholders $ 1,230 $ 938 $ 2,854 $ 3,298
======= ======= ======= =======
Net income per common share - basic $ 0.22 $ 0.17 $ 0.50 $ 0.58
======= ======= ======= =======
Net income per common share - diluted $ 0.20 $ 0.16 $ 0.48 $ 0.55
======= ======= ======= =======
Weighted average common shares
outstanding - basic 5,677 5,677 5,677 5,676
======= ======= ======= =======
Weighted average common shares
outstanding - diluted 6,373 6,330 6,304 6,335
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 86 $ 37
Accounts receivable, net 9,840 8,614
Inventories 4,818 3,311
Prepaid expenses and other assets 1,312 2,052
Reusable surgical products, net 25,335 19,796
Property, plant and equipment, net 19,427 16,664
Goodwill, net 5,517 5,681
------- -------
Total assets $66,335 $56,155
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $14,000 $ 8,852
Accounts payable 6,525 5,574
Employee related accrued expenses 1,621 1,076
Other accrued expenses 1,478 796
Deferred tax liability 883 883
------- -------
Total liabilities 24,507 17,181
Shareholders' equity
Preferred stock 1 1
Common stock 6 6
Additional paid-in capital 27,427 27,427
Retained earnings 14,394 11,540
------- -------
Total shareholders' equity 41,828 38,974
------- -------
Total liabilities and shareholders' equity $66,335 $56,155
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,007 $ 3,455
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,703 1,172
Amortization of reusable surgical products 3,602 2,971
Provision for reusable surgical products shrinkage 1,472 1,409
Change in assets and liabilities (net of business
combination):
Accounts receivable, net (1,226) (1,418)
Inventories (1,507) (466)
Prepaid expenses and other assets 740 340
Accounts payable (2,034) 489
Other accrued and employee related expenses 1,227 585
-------- --------
Net cash provided by operating activities 6,984 8,537
-------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (4,302) (3,541)
Purchases of reusable surgical products (7,628) (6,323)
Reimbursable construction costs -- (176)
Payment for acquisition of business -- (604)
-------- --------
Net cash used in investing activities (11,930) (10,644)
-------- --------
Cash flows from financing activities
Net borrowings on notes payable to bank 5,148 2,080
Net proceeds from issuance of common stock -- 93
Dividends paid (153) (204)
-------- --------
Net cash provided by financing activities 4,995 1,969
-------- --------
Increase (decrease) in cash 49 (138)
Cash and cash equivalents at beginning of period 37 172
-------- --------
Cash and cash equivalents at end of period $ 86 $ 34
======== ========
Supplemental cash flow information
Cash paid for interest $ 825 $ 203
======== ========
Cash paid for income taxes $ 523 $ 2,013
======== ========
Supplemental schedule of non-cash investing activities
Acquisition of business
Fair value of assets acquired -- 604
Cash paid $ -- (604)
-------- --------
Liabilities incurred or assumed $ -- $ 0
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Sterile Recoveries, Inc. ("the Company" or "SRI") 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, 1999 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,
2000 are not necessarily indicative of the results that can be expected for the
entire year ending December 31, 2000. The unaudited financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Form 10-K.
The Company operates on a 52-53 week fiscal year ending the Sunday
nearest December 31. There are 39 weeks and 40 weeks included for the nine month
periods ended September 30, 2000 and September 30, 1999, respectively.
2. LINE OF CREDIT
The Company recently expanded its revolving credit facility with First
Union National Bank to include two participating institutions, SouthTrust Bank
and The Bankers Bank, and to increase the available amount to $45 million,
subject to terms and conditions in the credit agreement. As of September 30,
2000, the Company's outstanding balance under its revolving credit facility was
approximately $14.0 million.
The revolving facility is secured by substantially all of SRI's assets
and has a maturity date of June 30, 2003. The facility's interest rate varies
between 225 and 275 basis points over LIBOR (6.6175% as of September 30, 2000),
depending on the Company's leverage. The credit facility requires the Company to
maintain (a) minimum consolidated net worth of not less than $37.0 million plus
75% of cumulative consolidated net income for each fiscal quarter beginning with
the fiscal quarter ending March 31, 2000; (b) a consolidated leverage ratio of
not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of 2.25 to 1.0
through December 31, 2002, and 2.35 to 1.0 thereafter. The credit facility
restricts the Company in paying dividends, engaging in acquisition transactions,
incurring additional indebtedness, and encumbering assets.
The revolving credit facility allows the Company to repurchase up to $5
million of its stock from time to time through open market purchases at
prevailing market prices. As of September 30, 2000, the Company had not
repurchased any of its common stock.
4
<PAGE>
3. COMMITMENTS AND CONTINGENCIES
As of February 1, 1999, the Company entered lease arrangements
totalling $10.6 million for two new processing facilities in Stockton,
California and Chattanooga, Tennessee. The lease terms are for three years. The
Company guarantees all lease payments and a substantial residual value for the
facilities when the lease terms end. The lease terms can be extended upon
approval of the Company and the lessor. Each lease agreement includes a purchase
option for the Company at the original cost of each leased facility. The Company
accounts for these leases as operating leases.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
(In thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C>
BASIC
Numerator:
Net income $ 1,281 $ 989 $ 3,007 $ 3,455
Less effect of dividends of preferred stock (51) (51) (153) (157)
------- ------- ------- -------
Net income available for common
shareholders $ 1,230 $ 938 $ 2,854 $ 3,298
======= ======= ======= =======
Denominator:
Weighted average shares outstanding 5,677 5,677 5,677 5,676
======= ======= ======= =======
Net income per common share - basic $ 0.22 $ 0.17 $ 0.50 $ 0.58
======= ======= ======= =======
DILUTED
Numerator:
Net income $ 1,281 $ 989 $ 3,007 $ 3,455
======= ======= ======= =======
Denominator:
Weighted average shares outstanding 5,677 5,677 5,677 5,676
Effect of dilutive securities:
Employee stock options 129 86 60 92
Convertible preferred stock 567 567 567 567
------- ------- ------- -------
6,373 6,330 6,304 6,335
======= ======= ======= =======
Net income per common share - diluted $ 0.20 $ 0.16 $ 0.48 $ 0.55
======= ======= ======= =======
</TABLE>
Options to purchase 620,900 and 518,000 shares of common stock for the
three month periods ended September 30, 2000 and September 30, 1999,
respectively, and options to purchase 643,710 and 518,000 shares of common stock
for the nine month periods ended September 30, 2000 and September 30, 1999,
respectively, were not included for all or a portion of the computation of
diluted net income per common share because the options' exercise prices were
greater than the average market price of the common shares and therefore the
effect of exercise would be anti-dilutive.
5
<PAGE>
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. Through its new "Surgical Express(TM)" programs
discussed below, the Company supplements this service with instruments. At
eleven 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.
During the third quarter of 2000, the Company began furnishing its
Surgical Express service to UMass Memorial Medical Center, Inc. in Worcester,
Massachusetts and Rex Healthcare in Raleigh, North Carolina. Surgical Express is
SRI's comprehensive procedure-based surgical products program, and is designed
to reduce hospitals' processing costs and investment in surgical products. The
agreements with these two independent hospital networks (IHN's) provide for the
exclusive use of SRI's Surgical Express program for their reusable products and
their custom disposable accessory packs for all procedures.
During the third quarter of 2000, the Company began delivering to
hospital customers its new laparoscopy program, Surgical Express for
Laparoscopy. This program combines the state-of-the-art reusable laparoscopic
instruments of Aesculap, Inc. and the Company's Surgical Express products and
services into an integrated program that (a) provides hospital customers with
the reusable and disposable products, including instruments, that are needed for
laparoscopic surgical procedures, and (b) includes arrangements to deliver,
retrieve and reprocess gowns, instruments, and other reusable product
components. The Company charges customers a single per procedure price for the
supplies and instruments required for a laparoscopic surgical procedure.
The Company is offering the laparocopy program pursuant to a Joint
Marketing Agreement dated April 28, 2000, between the Company and Aesculap,
Inc., one of the oldest and largest worldwide suppliers of surgical instruments.
The agreement term is three years and renews for additional three-year terms,
unless either party provides notice of non-renewal at least 120 days before its
expiration. The agreement provides for Aesculap to furnish and repair
laparoscopic instruments. The Company delivers, retrieves and reprocesses the
instruments and is responsible for customer relationships. Aesculap receives an
agreed share of the revenues from each procedure, based on the number and kinds
of procedures, and the number and combination of instruments for each procedure.
Because Aesculap furnishes the instruments, the Company expects its return on
capital will be favorably impacted by this new business.
GORE(R)Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
6
<PAGE>
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 income of
the Company.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 68.1 68.5 68.9 67.4
----- ----- ----- -----
Gross profit 31.9 31.5 31.1 32.6
Distribution expenses 6.5 7.3 6.9 7.4
Selling and administrative expenses 13.3 14.4 14.3 13.8
----- ----- ----- -----
Income from operations 12.1 9.8 9.9 11.4
Interest expense, net 1.3 0.3 1.3 0.4
----- ----- ----- -----
Income before income taxes 10.8 9.5 8.6 11.0
Income tax expense 4.2 3.7 3.4 4.3
----- ----- ----- -----
Net income 6.6% 5.8% 5.2% 6.7%
===== ===== ===== =====
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. Revenues increased $2.3 million, or 13.6%, to $19.5 million
in the three months ended September 30, 2000, from $17.2 million in the three
months ended September 30, 1999. In the nine months ended September 30, 2000,
the Company's revenues increased $6.1 million, or 11.9%, to $57.5 million, from
$51.4 million in the nine months ended September 30, 1999. The revenue increases
were attributable primarily to new customers in the Company's Surgical Express
program, and were partially offset by the adverse impacts of seasonal product
demand changes and the Company's elimination of relatively low margin customers.
GROSS PROFIT. Gross profit increased $820,000, or 15.2%, to $6.2
million in the three months ended September 30, 2000, from $5.4 million in the
three months ended September 30, 1999; and $1.1 million, or 6.8%, to $17.9
million in the nine months ended September 30, 2000, from $16.7 million in the
nine months ended September 30, 1999. As a percentage of revenues, gross profit
increased by 0.4% to 31.9% in the three months ended September 30, 2000, from
31.5% in the three months ended September 30, 1999; and decreased 1.5% to 31.1%
in the nine months ended September 30, 2000, from 32.6% in the nine months ended
September 30, 1999. The gross profit increase as a percentage of revenues for
the three months ended September 30, 2000 reflects positive leverage of
increased revenues. Gross profit decreases as a percentage of revenues for the
nine months ended September 30, 2000 were primarily due to additional costs
associated with the new reusable facilities in Stockton, California and
Chattanooga, Tennessee, the new disposable products facility in Plant City,
Florida, and expansion of the Company's Mason, Ohio facility.
DISTRIBUTION EXPENSES. Distribution expenses increased $24,000, or
1.9%, to $1.3 million in the three months ended September 30, 2000, from $1.2
million in the three months ended September 30, 1999; and $136,000, or 3.6%, to
$3.9 million in the nine months ended September 30, 2000, from $3.8 million in
the nine months ended September 30, 1999. As a percentage of revenues,
distribution expenses decreased by 0.8% to 6.5% in the three months ended
September 30, 2000, from 7.3% in the three months ended September 30, 1999; and
decreased 0.5% to 6.9% in the nine months ended September 30, 2000, from 7.4% in
the nine months ended September 30, 1999. The decrease in
7
<PAGE>
distribution expenses as a percentage of revenues resulted primarily from the
Company's realignment and consolidation of its truck routes made possible by its
opening of two new facilities, and was partially offset by increased fuel costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $120,000, or 4.9%, to $2.6 million in the three months ended
September 30, 2000, from $2.5 million in the three months ended September 30,
1999; and increased $1.1 million, or 16.0%, to $8.2 million in the nine months
ended September 30, 2000, from $7.1 million in the nine months ended September
30, 1999. As a percentage of revenues, selling and administrative expenses
decreased 1.1% to 13.3% in the three months ended September 30, 2000 from 14.4%
in the three months ended September 30, 1999; and increased 0.5% to 14.3% in the
nine months ended September 30, 2000, from 13.8% in the nine months ended
September 30, 1999. The Company's sales and administrative expenses increased
due to the sales and marketing expenses the Company is incurring to expand its
product offering to include instruments and introduce its Surgical Express
program, and due to expenses associated with the Company's new computer system.
INCOME FROM OPERATIONS. Income from operations increased $676,000, or
40.0%, to $2.4 million in the three months ended September 30, 2000, from $1.7
million in the three months ended September 30, 1999; and decreased $138,000, or
2.4%, to $5.7 million in the nine months ended September 30, 2000, from $5.8
million in the nine months ended September 30, 1999. As a percentage of
revenues, income from operations increased 2.3% to 12.1% for the three months
ended September 30, 2000 from 9.8% for the three months ended September 30,
1999; and decreased 1.5% to 9.9% for the nine months ended September 30, 2000,
from 11.4% for the nine months ended September 30, 1999.
INTEREST EXPENSE, NET. Interest expense increased $197,000 to $264,000
in the three months ended September 30, 2000, from $67,000 in the three months
ended September 30, 1999; and increased $570,000 to $780,000 in the nine months
ended September 30, 2000, from $210,000 in the nine months ended September 30,
1999, primarily due to higher borrowings under the Company's revolving credit
facility.
INCOME TAX EXPENSE. Income tax expense increased $187,000 to $819,000
in the three months ended September 30, 2000, from $632,000 in the three months
ended September 30, 1999; and decreased $260,000 to $1.9 million in the nine
months ended September 30, 2000, from $2.2 million in the nine months ended
September 30, 1999. The Company's effective tax rate is 39.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from
operations, operating leases for facilities and distribution vehicles, and
borrowings under its working capital loan facility.
The Company's positive cash flow provided by operating activities was
$7.0 million during the first nine months of 2000 compared to $8.5 million
during the first nine months of 1999. The decrease in cash from operating
activities resulted primarily from decreased net income before amortization,
shrinkage and depreciation expense, increased inventories, and a decrease in
accounts payable, and was partially offset by a decrease in prepaid and other
accrued expenses.
The Company used approximately $1.3 million more net cash in investing
activities in the nine months ended September 30, 2000 than in the nine months
ended September 30, 1999. To support sales growth, the Company made capital
expenditures in the nine months ended September 30, 2000 for equipment of $4.3
million and for reusable surgical products of $7.6 million, compared to $3.5
million for equipment and $6.3 million for reusable surgical products during the
nine months ended September 30, 1999. These expenditures were funded primarily
from cash provided by operating activities and borrowings under the Company's
revolving credit facility.
8
<PAGE>
The Company continues to invest in more 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 40% of the projected first year
revenue from the customer. The Company estimates capital expenditures for new
carts and reusable surgical products will be approximately $1.0 million per
month for the next 12 months, although the amount will fluctuate with the growth
of its reusable business. The Company has in recent years spent $2.4 million in
a continuing project to upgrade its technology software and related hardware, of
which it incurred and capitalized $344,000 in the first nine months of 2000 as
it completed this project. In addition, the Company has spent $3.9 million to
expand and further equip its Cincinnati facility, of which $1.6 million was
spent in the first nine months of 2000 as it completed this project.
The Company recently expanded its revolving credit facility with First
Union National Bank to include two participating institutions, SouthTrust Bank
and The Bankers Bank, and to increase the available amount to $45 million,
subject to terms and conditions in the credit agreement. As of September 30,
2000, the Company's outstanding balance under its revolving credit facility was
approximately $14.0 million.
The revolving facility is secured by substantially all of SRI's assets
and has a maturity date of June 30, 2003. The facility's interest rate varies
between 225 and 275 basis points over LIBOR (6.6175% as of September 30, 2000),
depending on the Company's leverage. The credit facility requires the Company to
maintain (a) minimum consolidated net worth of not less than $37.0 million plus
75% of cumulative consolidated net income for each fiscal quarter beginning with
the fiscal quarter ending March 31, 2000; (b) a consolidated leverage ratio of
not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of 2.25 to 1.0
through December 31, 2002, and 2.35 to 1.0 thereafter. The credit facility
restricts the Company in paying dividends, engaging in acquisition transactions,
incurring additional indebtedness, and encumbering assets.
The revolving credit facility allows the Company to repurchase up to $5
million of its stock from time to time through open market purchases at
prevailing market prices. As of September 30, 2000, the Company had not
repurchased any of its common stock.
As of February 1, 1999, the Company entered lease arrangements
totalling $10.6 million for two new processing facilities in Stockton,
California and Chattanooga, Tennessee. The lease terms are for three years. The
Company guarantees all lease payments and a substantial residual value for the
facilities when the lease terms end. The lease terms can be extended upon
approval of the Company and the lessor. Each lease agreement includes a purchase
option for the Company at the original cost of each leased facility. The Company
accounts for these leases as operating leases.
As of September 30, 2000, the Company had cash of approximately
$86,000. The Company believes that its cash flows 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.
CERTAIN CONSIDERATIONS
THIS REPORT, OTHER DOCUMENTS THAT ARE PUBLICLY DISSEMINATED BY THE
COMPANY, AND ORAL STATEMENTS THAT ARE MADE ON BEHALF OF THE COMPANY CONTAIN OR
MIGHT CONTAIN BOTH STATEMENTS OF HISTORICAL FACT AND FORWARD-LOOKING STATEMENTS.
EXAMPLES OF FORWARD-LOOKING STATEMENTS INCLUDE: (a) PROJECTIONS OF REVENUE,
EARNINGS, CAPITAL STRUCTURE, AND OTHER FINANCIAL ITEMS, (b) STATEMENTS OF THE
PLANS AND OBJECTIVES OF THE COMPANY AND ITS MANAGEMENT, (c) STATEMENTS OF FUTURE
ECONOMIC PERFORMANCE, AND (d) ASSUMPTIONS UNDERLYING STATEMENTS REGARDING THE
COMPANY OR ITS BUSINESS. THE CAUTIONARY
9
<PAGE>
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 from
new and existing customers. The Company's sales process for new customers is
typically between six and eighteen 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. The Company'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.
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 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."
NEW PRODUCT OFFERING; DEPENDENCE ON A SUPPLIER. Surgical Express for
Laparoscopy is a new product offering for the Company. The Company is in its
initial stages of implementing the program and remains subject to a risk that
the market will not broadly accept it. Further, the Company is relying on
Aesculap, Inc. as its major source of supply of laparoscopic instruments for the
program. The Joint Marketing Agreement between SRI and Aesculap provides for
Aesculap to furnish instruments to the Company for at least three years, subject
to terms and conditions stated in the agreement. Any failure of Aesculap to
furnish instruments for any reason would materially adversely affect the
Company's ability to implement this program.
DEPENDENCE ON SIGNIFICANT CUSTOMERS. During the nine months ended
September 30, 2000, Premier, Inc. and HCA - The Healthcare Company hospitals
accounted for approximately 21% and 12% of the Company's revenues, respectively,
compared to 18% and 12%, respectively, in the nine months ended September 30,
1999. The Company has in each of its last five years continued to grow its
business with Premier and HCA member hospitals. Although each Premier and HCA
hospital currently makes its purchasing decisions on an individual basis, and no
single hospital accounted for more than 6% of the Company's sales, the loss of a
substantial portion of the Premier or HCA hospitals' business would 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 Allegiance
Corporation, serve as the sole supplier of a wide assortment of products to a
significant number of hospitals. Although the Company offers a substantial array
of surgical products, many of its competitors have a greater number of products
for the entire hospital, which in some instances is a competitive disadvantage
for the Company. There is no assurance that the Company will be able to compete
effectively with existing or potential competitors.
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 (FDA), as well as by
other federal and state agencies. The Company's facilities are subject to
regular inspections by FDA
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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 the results of investigations. Federal or state
governments might impose additional restrictions or adopt interpretations of
existing laws that could materially adversely affect the Company.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Neither the Company nor any of its property is subject to any
litigation or other legal proceeding that is expected to have a material effect
on the Company or its business.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.41 Amendment No. 5 to Existing Credit Agreement dated as of July 24, 2000,
among the Company, First Union National Bank, and SouthTrust Bank, N.A.
10.42 Amendment No. 6 to Existing Credit Agreement dated as of September 22,
2000, between the Company and First Union National Bank.
10.43 New Commitment Agreement dated as of October 4, 2000, among the
Company, First Union National Bank, Bankers Bank, and SouthTrust Bank,
N.A.
27 Financial Data Schedule (for SEC use only)
REPORTS ON FORM 8-K
On October 24, 2000, the Company filed a current report on Form 8-K to
report its signing of major contracts and its new business initiative involving
Surgical Express for Laparoscopy.
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SIGNATURE
Pursuant to the requirements 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.
Date: November 8, 2000 By: /s/ JAMES T. BOOSALES
----------------------------
Executive Vice President
Chief Financial Officer
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