UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 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
August 1, 2000:
Common Stock, par value $.001 - 5,676,794
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INDEX
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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 six months ended June 30,
2000 (unaudited) and the three months and six months
ended June 30, 1999 (unaudited) ................................. 1
Condensed Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December
31, 1999......................................................... 2
Condensed Consolidated Statements of Cash
Flows for the three and six months ended
June 30, 2000 (unaudited) and June 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................................................... 11
Item 2 Changes in Securities............................................... 11
Item 3 Defaults Upon Senior Securities .................................... 11
Item 4 Submission of Matters to a Vote of Security Holders................. 11
Item 5 Other Information .................................................. 11
Item 6 Exhibits and Reports on Form 8-K.................................... 11
SIGNATURE ........................................................................... 13
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PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share date)
(unaudited)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------- ------- ------- -------
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Revenues $19,662 $17,170 $37,993 $34,228
Cost of revenues 13,430 11,396 26,349 22,894
------- ------- ------- -------
Gross profit 6,232 5,774 11,644 11,334
Distribution expenses 1,309 1,292 2,671 2,558
Selling and administrative expenses 2,798 2,349 5,627 4,616
------- ------- ------- -------
Income from operations 2,125 2,133 3,346 4,160
Interest expense, net 299 78 516 143
------- ------- ------- -------
Income before income tax expense 1,826 2,055 2,830 4,017
Income tax expense 712 795 1,103 1,551
------- ------- ------- -------
Net income $ 1,114 $ 1,260 $ 1,727 $ 2,466
======= ======= ======= =======
Dividends on preferred stock 51 51 102 106
------- ------- ------- -------
Net income available for common shareholders $ 1,063 $ 1,209 $ 1,625 $ 2,360
======= ======= ======= =======
Net income per common share - basic $ 0.19 $ 0.21 $ 0.29 $ 0.42
======= ======= ======= =======
Net income per common share - diluted $ 0.18 $ 0.20 $ 0.28 $ 0.39
======= ======= ======= =======
Weighted average common shares
outstanding - basic 5,677 5,677 5,677 5,676
======= ======= ======= =======
Weighted average common shares
outstanding - diluted 6,284 6,335 6,270 6,337
======= ======= ======= =======
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The accompanying notes are an integral part of these financial statements.
1
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STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2000 1999
--------- -----------
(unaudited)
ASSETS
Cash and cash equivalents $ 56 $ 37
Accounts receivable, net 9,094 8,614
Inventories 4,962 3,311
Prepaid expenses and other assets 950 2,052
Reusable surgical products, net 20,750 19,796
Property, plant and equipment, net 19,344 16,664
Goodwill, net 5,572 5,681
------- -------
Total assets $60,728 $56,155
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $14,000 $ 8,852
Accounts payable 2,529 5,574
Employee related accrued expenses 1,390 1,076
Other accrued expenses 1,327 796
Deferred tax liability 883 883
------- -------
Total liabilities 20,129 17,181
Shareholders' equity
Preferred stock 1 1
Common stock 6 6
Additional paid-in capital 27,427 27,427
Retained earnings 13,165 11,540
------- -------
Total shareholders' equity 40,599 38,974
------- -------
Total liabilities and shareholders' equity $60,728 $56,155
======= =======
The accompanying notes are an integral part of these financial statements.
2
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STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
2000 1999
------- -------
Cash flows from operating activities
Net income $ 1,727 $ 2,466
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,051 767
Amortization of reusable surgical products 2,357 1,965
Provision for reusable surgical products shrinkage 1,084 944
Change in assets and liabilities (net of business
combination):
Accounts receivable, net (480) (1,004)
Inventories (1,651) (248)
Prepaid expenses and other assets 1,102 587
Accounts payable (3,045) 420
Other accrued and employee related expenses 845 636
------- -------
Net cash provided by operating activities 2,990 6,533
------- -------
Cash flows from investing activities
Purchases of property, plant and equipment (3,622) (1,690)
Purchases of reusable surgical products (4,395) (3,172)
Reimbursable construction costs -- (2,712)
Payment for acquisition of business -- (641)
------- -------
Net cash used in investing activities (8,017) (8,215)
------- -------
Cash flows from financing activities
Net borrowings on notes payable to bank 5,148 1,651
Net proceeds from issuance of common stock -- 93
Dividends paid (102) (153)
------- -------
Net cash provided by financing activities 5,046 1,591
------- -------
Increase (decrease) in cash 19 (91)
Cash and cash equivalents at beginning of period 37 172
------- -------
Cash and cash equivalents at end of period $ 56 $ 81
======= =======
Supplemental cash flow information
Cash paid for interest $ 481 $ 134
======= =======
Cash paid for income taxes $ 34 $ 1,304
======= =======
Supplemental schedule of non-cash investing activities
Acquisition of business
Fair value of assets acquired -- 633
Cash paid $ -- (633)
------- -------
Liabilities incurred or assumed $ -- $ 0
======= =======
The accompanying notes are an integral part of these financial statements.
3
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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 six months ended June 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 26 weeks and 27 weeks included for the six month
periods ended June 30, 2000 and June 30, 1999, respectively.
2. LINE OF CREDIT
The Company's outstanding balance under its revolving credit facility
with First Union National Bank was approximately $14.0 million on June 30, 2000.
On March 24, 2000, the Company and First Union amended the revolving
credit facility to increase the revolving committed amount from $15 million to
$20 million through May 30, 2000. The Company used a portion of this additional
$5 million to fund expenditures for additional surgical products and equipment.
The Company and First Union extended the additional financing to June 30, 2000
and then on June 27, 2000, permanently increased the revolving committed amount
to $30 million with market interest rates and a maturity date of June 30, 2003.
Pursuant to amendments effective June 27, 1999, the 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
(6.64% as of June 30, 2000), depending on the Company's leverage. The credit
facility requires the Company to maintain (a) consolidated net worth of $37.0
million plus 75% of cumulative consolidated net income for each fiscal quarter
occurring after December 31, 1999; (b) a consolidated leverage ratio of not more
than 2.5 to 1.0; and (c) a fixed charge coverage ratio of at least 2.25 or
greater 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.
4
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3. COMMITMENTS AND CONTINGENCIES
As of February 1, 1999, the Company secured a $10.0 million lease
financing agreement to provide financing for land, building and equipment for
new processing facilities. The principal amount of this facility was increased
by an additional $573,000 in the third quarter of 1999. The lease financing
margins are substantially the same as under the Company's revolving line of
credit. Under the agreement, the lessor purchases land, reimburses the Company
for the facility's construction and equipment costs, and leases the completed
facility to the Company for three years. The Company guarantees all lease
payments and a substantial residual value for the facility when the lease term
ends. Each lease agreement includes a purchase option for the Company at the
original cost of the leased facility. The Company accounts for these leases as
operating leases. Construction of two facilities that were financed under this
agreement were completed in the third quarter of 1999 at a cost of approximately
$5.5 million and $5.0 million for the Stockton, California and Chattanooga,
Tennessee facilities, respectively. The Company had no outstanding construction
costs reimbursable by the lessor as of June 30, 2000, and $3.0 million of those
costs as of June 30, 1999. The Company incurred $159,545 and $138,068 in lease
payments for its Stockton, California and Chattanooga, Tennessee facilities,
respectively, in the six month period ended June 30, 2000.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------- ------- ------- -------
(In thousands, except per share data)
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BASIC (unaudited)
Numerator:
Net income $ 1,114 $ 1,260 $ 1,727 $ 2,466
Less effect of dividends of preferred stock (51) (51) (102) (106)
------- ------- ------- -------
Net income available for common
shareholders $ 1,063 $ 1,209 $ 1,625 $ 2,360
======= ======= ======= =======
Denominator:
Weighted average shares outstanding 5,677 5,677 5,677 5,676
======= ======= ======= =======
Net income per common share - basic $ 0.19 $ 0.21 $ 0.29 $ 0.42
======= ======= ======= =======
DILUTED
Numerator:
Net income $ 1,114 $ 1,260 $ 1,727 $ 2,466
======= ======= ======= =======
Denominator:
Weighted average shares outstanding 5,677 5,677 5,677 5,676
Effect of dilutive securities:
Employee stock options 40 91 27 94
Convertible preferred stock 567 567 567 567
------- ------- ------- -------
6,284 6,335 6,270 6,337
======= ======= ======= =======
Net income per common share - diluted $ 0.18 $ 0.20 $ 0.28 $ 0.39
======= ======= ======= =======
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Options to purchase 655,400 and 506,000 shares of common stock for
the three month periods ended June 30, 2000 and June 30, 1999, respectively, and
options to purchase 670,826 and 506,000 shares of common stock for the six month
periods ended June 30, 2000 and June 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
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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 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.
In 1998, the Company introduced Surgical Express, which uses its
established daily delivery and retrieval service to provide customers with an
expanded program of products and services. Surgical Express is an outsourced
Surgical Case Cart Management Program designed to reduce hospitals' processing
costs and investment in surgical products. The Company expects this program will
eventually include management of a broad range of reusable and disposable
products, including instruments used in surgery.
During the second quarter of 2000, the Company completed its design of
its "Surgical Express for Laparoscopy" program. This program combines state of
the art reusable laparoscopic instruments with the Company's reusable and
disposable products necessary for laparoscopic procedures. The Company will bill
hospitals using this program on a per procedure basis.
The Company opened two new reprocessing facilities in Stockton,
California and Chattanooga, Tennessee in the third quarter of 1999. These new
facilities now serve a portion of the customers previously served by the Long
Beach, California and Raleigh, North Carolina facilities.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 68.3 66.4 69.4 66.9
----- ----- ----- -----
Gross profit 31.7 33.6 30.6 33.1
Distribution expenses 6.7 7.5 7.0 7.4
Selling and administrative expenses 14.2 13.7 14.8 13.5
----- ----- ----- -----
Income from operations 10.8 12.4 8.8 12.2
Interest expense, net 1.5 0.4 1.4 0.5
----- ----- ----- -----
Income before income taxes 9.3 12.0 7.4 11.7
Income tax expense 3.6 4.7 2.9 4.5
----- ----- ----- -----
Net income 5.7% 7.3% 4.5% 7.2%
===== ===== ===== =====
GORE(R)Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
6
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THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased $2.5 million, or 14.5%, to $19.7 million
in the three months ended June 30, 2000, from $17.2 million in the three months
ended 1999. In the six months ended June 30, 2000, the Company's revenues
increased $3.8 million, or 11.0%, to $38.0 million, from $34.2 million in the
six months ended June 30, 1999. The revenue increases were attributable
primarily to new customers in the Company's Surgical Express program.
GROSS PROFIT. Gross profit increased $458,000, or 7.9%, to $6.2 million
in the three months ended June 30, 2000, from $5.8 million in the three months
ended June 30, 1999; and $310,000, or 2.7%, to $11.6 million in the six months
ended June 30, 2000, from $11.3 million in the six months ended June 30, 1999.
As a percentage of revenues, gross profit decreased by 1.9% to 31.7% in the
three months ended June 30, 2000, from 33.6% in the three months ended June 30,
1999; and decreased 2.5% to 30.6% in the six months ended June 30, 2000, from
33.1% in the six months ended June 30, 1999. Gross profit decreases as a
percentage of revenues for the first six months of 2000 were primarily due to
additional costs associated with the new reusable facilities in Stockton,
California and Chattanooga, Tennessee, and the new disposable products facility
in Plant City, Florida.
DISTRIBUTION EXPENSES. Distribution expenses increased $17,000, or
1.3%, to $1.3 million in the three months ended June 30, 2000, from $1.3 million
in the three months ended June 30, 1999; and $113,000, or 4.4%, to $2.7 million
in the six months ended June 30, 2000, from $2.6 million in the six months ended
June 30, 1999. As a percentage of revenues, distribution expenses decreased by
0.8% to 6.7% in the three months ended June 30, 2000, from 7.5% in the three
months ended June 30, 1999; and decreased 0.4% to 7.0% in the six months ended
June 30, 2000, from 7.4% in the six months ended June 30, 1999. The decrease in
distribution expenses as a percentage of revenues resulted primarily from
realignment and consolidation of truck routes made possible by the opening of
the new facilities, and was partially offset by increased fuel costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $449,000, or 19.1%, to $2.8 million in the three months ended
June 30, 2000, from $2.3 million in the three months ended June 30, 1999; and
increased $1.0 million, or 21.9%, to $5.6 million in the six months ended June
30, 2000, from $4.6 million in the six months ended June 30, 1999. As a
percentage of revenues, selling and administrative expenses increased 0.5% to
14.2% in the three months ended June 30, 2000 from 13.7% in the three months
ended June 30, 1999; and increased 1.3% to 14.8% in the six months ended June
30, 2000, from 13.5% in the six months ended June 30, 1999. Expenses increased
due to the continuing sales and marketing expenses to expand its product
offering with instruments, to introduce its Surgical Express program, and
expenses associated with the Company's new computer system.
INCOME FROM OPERATIONS. Income from operations decreased $8,000, or
0.4%, to $2.1 million in the three months ended June 30, 2000, from $2.1 million
in the three months ended June 30, 1999; and decreased $814,000, or 19.6%, to
$3.3 million in the six months ended June 30, 2000, from $4.2 million in the six
months ended June 30, 1999. As a percentage of revenues, income from operations
decreased 1.6% to 10.8% for the three months ended June 30, 2000 from 12.4% for
the three months ended June 30, 1999; and decreased 3.4% to 8.8% for the six
months ended June 30, 2000, from 12.2% for the six months ended June 30, 1999.
INTEREST EXPENSE, NET. Interest expense increased $221,000 to $299,000
in the three months ended June 30, 2000 from $78,000 in the three months ended
June 30, 1999; and increased $373,000 to $516,000 in the six months ended June
30, 2000, from $143,000 in the six months ended June 30, 1999, primarily due to
higher borrowings under the Company's revolving credit facility.
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INCOME TAX EXPENSE. Income tax expense decreased $83,000 to $712,000 in
the three months ended June 30, 2000, from $795,000 in the three months ended
June 30, 1999; and decreased $448,000 to $1.1 million in the six months ended
June 30, 2000, from $1.6 million in the six months ended June 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, sales of its equity securities, including the offering, operating
leases for facilities and distribution vehicles, and borrowings under its
working capital loan and lease financing facilities.
The Company's positive cash flow provided by operating activities was
$3.0 million during the first six months of 2000 compared to $6.5 million during
the first six 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 an increase in accounts receivable.
The Company used approximately $198,000 less net cash in investing
activities in the six months ended June 30, 2000 than in the six months ended
June 30, 1999. To support sales growth, the Company made capital expenditures in
the six months ended June 30, 2000 for equipment of $3.6 million and for
reusable surgical products of $4.4 million, compared to $1.7 million for
equipment and $3.2 million for reusable surgical products during the six months
ended June 30, 1999. These expenditures were funded primarily from cash provided
by operating activities and borrowings under the Company's revolving credit
facility.
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 45% of the projected first year
revenue from the customer. The Company estimates capital expenditures for new
carts and reusable surgical products will be approximately $1.2 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 $2.3 million in
a continuing project to upgrade its technology software and related hardware, of
which it incurred and capitalized $245,000 in the first six months of 2000 as it
completed this project. In addition, the Company has spent $3.6 million to
expand and further equip its Cincinnati facility, of which $1.3 million was
spent in the first six months of 2000 as it completed this project.
On March 24, 2000, the Company and First Union National Bank
amended the Company's revolving credit facility to increase the revolving
committed amount from $15 million to $20 million through May 30, 2000. The
Company used a portion of this additional $5 million to fund expenditures for
additional surgical products and equipment. The Company and First Union extended
the additional financing to June 30, 2000 and then on June 27, 2000, permanently
increased the revolving committed amount to $30 million with market interest
rates and a maturity date of June 30, 2003.
Pursuant to amendments effective June 27, 1999, the 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
(6.64% as of June 30, 2000), depending on the Company's leverage. The credit
facility requires the Company to maintain (a) consolidated net worth of $37.0
million plus 75% of cumulative consolidated net income for each fiscal quarter
occurring after December 31, 1999; (b) a consolidated leverage ratio of not more
than 2.5 to 1.0; and (c) a fixed charge coverage ratio of at least 2.25 or
greater through December 31, 2002, and 2.35 to 1.0 thereafter. The credit
facility restricts the
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Company in paying dividends, engaging in acquisition transactions, incurring
additional indebtedness, and encumbering assets.
As of February 1, 1999, the Company secured a $10.0 million lease
financing arrangement to acquire land, building, and equipment for its two new
reprocessing facilities in Stockton, California and Chattanooga, Tennessee. The
principal amount of the facility was increased by an additional $573,000 in the
third quarter of 1999. The lease financing margins are substantially the same as
under the Company's credit facility. Under the agreement, the lessor purchases
land, reimburses the Company for the facility's construction and equipment
costs, and leases the completed facility to the Company for three years. The
Company guarantees all lease payments and a substantial residual value for the
facility when the lease term ends. The Company receives a purchase option at the
original cost of the leased facility. The Company accounts for these leases as
operating leases. The Company incurred $159,545 and $138,068 in lease payments
for its Stockton, California and Chattanooga, Tennessee facilities,
respectively, in the six months ended June 30, 2000.
As of June 30, 2000, the Company had cash of approximately $56,000. 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 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 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 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 SIGNIFICANT CUSTOMERS AND MARKET CONSOLIDATION. During
the six months ended June 30, 2000, Columbia/HCA Healthcare Corporation
("Columbia") and Premier, Inc. ("Premier") hospitals, with which the Company
currently does business, accounted for approximately 12% and 21% of the
Company's revenues, respectively, compared to 12% and 23%, respectively, in the
six months ended June 30, 1999. The Company has in each of its last five years
continued to grow its business with Columbia and Premier member hospitals.
Although each Columbia and Premier hospital currently
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makes its purchasing decisions on an individual basis, and no single hospital
accounted for more than 2% of the Company's sales, the loss of a substantial
portion of the Columbia or Premier 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 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 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.
10
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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
At the annual meeting of the Company's shareholders on May 17, 2000,
the shareholders voted on a proposal to elect James T. Boosales and Lee R.
Kemberling as directors of the Company to serve until the 2003 annual meeting.
The holders of the Company's Common Stock and Series A Preferred Stock vote
together as a class in the election of directors. The following sets forth the
votes in this election:
VOTES FOR VOTES AGAINST
--------- -------------
DIRECTOR COMMON SERIES A OR WITHHELD
-------- ------ -------- -----------
PREFERRED
---------
James T. Boosales 5,002,847 566,667 21,650
Lee R. Kemberling 5,002,847 566,667 21,650
Richard T. Isel, Wayne R. Peterson, James M. Emanuel, and Gary Heiman
continue to serve as directors. The shareholders also approved the appointment
of Ernst & Young LLP as the Company's independent certified public accountants
for the 2000 year.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
-------- -------------------
10.37 Syndication Amendment and Assignment dated as of June 27, 2000, among
the Company, First Union National Bank, and SouthTrust Bank, N.A.
10.38 First Amendment to Pledge Agreement and Security Agreement dated as of
June 27, 2000, between the Company and First Union National Bank.
10.39 Revolving Note dated as of June 27, 2000, issued by the Company to
SouthTrust Bank.
10.40 Replacement Swingline Note dated as of June 27, 2000, issued by the
Company to First Union National Bank.
11
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27 Financial Data Schedule (for SEC use only)
REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the three months ended June
30, 2000.
12
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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: August 11, 2000 By: /s/ JAMES T. BOOSALES
----------------------------
Executive Vice President
Chief Financial Officer
