UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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
May 1, 2000:
Common Stock, par value $.001 - 5,676,794
<PAGE>
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
for the three months ended March 31, 2000
(unaudited) and the three months ended March 31,
1999 (unaudited) ....................................... 1
Condensed Consolidated Balance Sheets as of
March 31, 2000 (unaudited) and December
31, 1999................................................ 2
Condensed Consolidated Statements of Cash
Flows for the three months ended March 31,
2000 (unaudited) and March 31, 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 ................................................................... 12
<PAGE>
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)
Three Months Ended
March 31, March 31,
2000 1999
---------- ---------
Revenues $ 18,332 $ 17,058
Cost of revenues 12,920 11,498
---------- ---------
Gross profit 5,412 5,560
Distribution expenses 1,362 1,266
Selling and administrative expenses 2,829 2,267
--------- ----------
Income from operations 1,221 2,027
Interest expense, net 218 65
--------- ------------
Income before income tax expense 1,003 1,962
Income tax expense 391 756
--------- -----------
Net income $ 612 $ 1,206
======== ==========
Dividends on preferred stock 51 55
--------- ------------
Net income available for common shareholders $ 561 $ 1,151
======== ==========
Net income per common share - basic $ 0.10 $ 0.20
======== ===========
Net income per common share - diluted $ 0.10 $ 0.19
======== ===========
Weighted average common shares
outstanding - basic 5,677 5,674
======== ===========
Weighted average common shares
outstanding - diluted 6,257 6,339
======== ==========
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
STERILE RECOVERIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March. 31, December 31,
2000 1999
------------- ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 61 $ 37
Accounts receivable, net 9,523 8,614
Inventories 5,390 3,311
Prepaid expenses and other assets 1,491 2,052
Reusable surgical products, net 21,848 19,796
Property, plant and equipment, net 18,931 16,664
Goodwill, net 5,626 5,681
---------- --------
Total assets $ 62,870 $ 56,155
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $ 13,241 $ 8,852
Accounts payable 6,703 5,574
Employee related accrued expenses 1,276 1,076
Other accrued expenses 1,232 796
Deferred tax liability 883 883
----------- ---------
Total liabilities 23,335 17,181
Shareholders' equity
Preferred stock 1 1
Common stock 6 6
Additional paid-in capital 27,427 27,427
Retained earnings 12,101 11,540
---------- ---------
Total shareholders' equity 39,535 38,974
---------- ---------
Total liabilities and shareholders' equity $ 62,870 $ 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)
Three Months Ended March 31,
2000 1999
-------- --------
Cash flows from operating activities
Net income $ 612 $ 1,206
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 461 391
Amortization of reusable surgical products 1,111 971
Provision for reusable surgical products shrinkage 500 457
Change in assets and liabilities (net of business
combination):
Accounts receivable, net (908) (223)
Inventories (2,078) 34
Prepaid expenses and other assets 562 (244)
Accounts payable 1,129 (603)
Other accrued and employee related expenses 636 846
-------- --------
Net cash provided by operating activities 2,025 2,835
-------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (2,674) (782)
Purchases of reusable surgical products (3,665) (1,682)
Reimbursable construction costs 0 (1,673)
Payment for acquisition of business 0 (633)
-------- --------
Net cash used in investing activities (6,339) (4,770)
-------- --------
Cash flows from financing activities
Net borrowings on notes payable to bank 4,389 2,115
Net proceeds from issuance of common stock 0 93
Dividends paid (51) (102)
-------- --------
Net cash provided by financing activities 4,338 2,106
-------- --------
Increase in cash 24 171
Cash and cash equivalents at beginning of period 37 172
-------- --------
Cash and cash equivalents at end of period $ 61 $ 343
======== ========
Supplemental cash flow information
Cash paid for interest $ 183 $ 52
======== ========
Cash paid for income taxes $ 212 $ 144
======== ========
Supplemental schedule of non-cash investing activities
Acquisition of business
Fair value of assets acquired 0 $ 633
Cash paid $ 0 $ (633)
-------- --------
Liabilities incurred or assumed $ 0 $ 0
======== ========
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") 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 three months ended March 31, 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 13 weeks and 14 weeks included for the three
month periods ended March 31, 2000 and March 31, 1999, respectively.
2. LINE OF CREDIT
The Company's outstanding balance under its revolving credit
facility with First Union National Bank was approximately $13.2 million and $5.8
million on March 31, 2000 and March 31, 1999, respectively.
On March 24, 2000, the Company entered into an amendment of its
revolving credit facility in which the revolving committed amount was increased
from $15 million to $20 million. Under the terms of the amendment, the revolving
committed amount will be reduced to $15 million on May 30, 2000. The Company may
elect to utilize a portion of the additional $5 million prior to refinancing the
entire credit facility to fund expenditures for additional surgical products and
equipment; accordingly, the Company may be required to repay the additional
revolver drawn down on or before May 30, 2000. Management anticipates
refinancing its revolving credit facility with market interest rates and a
maturity date beyond January 1, 2001 before May 30, 2000.
Pursuant to amendments effective February 24, 1999, the facility is
secured by substantially all of SRI's assets and has a maturity date of February
28, 2002. The facility's interest rate varies between 100 and 150 basis points
over LIBOR (6.15% as of March 31, 2000), depending on the Company's leverage.
The credit facility requires the Company to maintain (a) consolidated net worth
of $34.9 million plus 75% of cumulative consolidated net income for each fiscal
quarter occurring after February 24, 1999; (b) a consolidated leverage ratio of
not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of not less than
2.8 to 1.0. The credit facility restricts the Company in paying dividends,
engaging in acquisition transactions, incurring additional indebtedness, and
encumbering assets.
4
<PAGE>
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 March 31, 2000, and $2.0 million of those
costs as of March 31, 1999. The Company incurred $75,954 and $65,729 in lease
payments for its Stockton, California and Chattanooga, Tennessee facilities,
respectively, in the three month period ended March 31, 2000.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31,
2000 1999
--------- ---------
(In thousands, except
per share data)
(unaudited)
BASIC
Numerator:
Net income $ 612 $ 1,206
Less effect of dividends of preferred stock (51) (55)
--------- ---------
Net income available for common shareholders $ 561 $ 1,151
========= =========
Denominator:
Weighted average shares outstanding 5,677 5,674
========= ==========
Net income per common share - basic $ 0.10 $ 0.20
========= ==========
DILUTED
Numerator:
Net income $ 612 $ 1,206
======== ========
Denominator:
Weighted average shares outstanding 5,677 5,674
Effect of dilutive securities:
Employee stock options 13 98
Convertible preferred stock 567 567
--------- ---------
6,257 6,339
======== ========
Net income per common share - diluted $ 0.10 $ 0.19
========= ========
Options to purchase 895,000 and 483,500 shares of common stock for the
three month periods ended March 31, 2000 and March 31, 1999, respectively, were
not included for all or a portion of the computation of diluted net income per
common share as the options' exercise prices were greater than the average
market price of the common shares, and therefore the effect 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. 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 its new service, Surgical Express,
which uses daily delivery and retrieval to provide customers an expanded program
of products and services. Surgical Express is an outsourced Surgical Case Cart
Management Program, which the Company expects will reduce hospital and surgery
center processing costs and their investment in surgical products. The Company
expects this direct from manufacturer to surgical suite program will, in the
future, include management of a broad range of reusable and disposable products,
including instruments used in surgery.
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 March 31,
2000 1999
------ ------
Revenues 100.0% 100.0%
Cost of revenues 70.5 67.4
------ ------
Gross profit 29.5 32.6
Distribution expenses 7.4 7.4
Selling and administrative expenses 15.4 13.3
------ ------
Income from operations 6.7 11.9
Interest expense, net 1.2 0.4
------ ------
Income before income taxes 5.5 11.5
Income tax expense 2.2 4.4
------ ------
Net income 3.3 % 7.1%
======== =======
GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
6
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased $1.3 million, or 7.5%, to $18.3 million in
the first quarter of 2000, from $17.0 million in the first quarter of 1999. The
revenue increases were attributable primarily to new customers in the Company's
Surgical Express program.
GROSS PROFIT. Gross profit decreased $148,000, or 2.7%, to $5.4 million
in the first quarter of 2000, from $5.6 million in the first quarter of 1999. As
a percentage of revenues, gross profit decreased by 3.1% to 29.5% in the first
quarter of 2000, from 32.6% in the first quarter of 1999. Gross profit decreases
for the first quarter 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 $96,000, or
7.6%, to $1.4 million in the first quarter of 2000, from $1.3 million in the
first quarter of 1999. As a percentage of revenues, distribution expenses
remained the same at 7.4% in the first quarter of 2000 and in the first quarter
of 1999. The increase in distribution expenses as a percentage of revenues
resulted primarily from new truck routes added for new customers and
significantly higher fuel costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased $562,000, or 24.8%, to $2.8 million in first quarter of 2000,
from $2.3 million in the first quarter of 1999. As a percentage of revenues,
selling and administrative expenses increased 2.1% to 15.4% in the first quarter
of 2000 from 13.3% in the first quarter of 1999. Expenses increased due to the
significant efforts the Company made to expand its product offering with
instruments, to introduce its Surgical Express program, and due to severance
expense.
INCOME FROM OPERATIONS. Income from operations decreased $806,000, or
39.8%, to $1.2 million in the first quarter of 2000, from $2.0 million in the
first quarter of 1999. As a percentage of revenues income from operations
decreased 5.2% to 6.7% for the first quarter of 2000 from 11.9% for the first
quarter of 1999 as a result of the increased costs described above.
INTEREST EXPENSE, NET. Interest expense increased $153,000 to $218,000
in the first quarter of 2000 compared to $65,000 in the first quarter of 1999,
primarily due to higher borrowings under the Company's revolving credit
facility.
INCOME TAX EXPENSE. Income tax expense decreased $365,000 to $391,000
in the first quarter of 2000, compared to $756,000 in the first quarter of 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 debt and 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
$2.0 million during the first quarter of 2000 compared to $2.8 million during
the first quarter of 1999. The decrease in cash from operating activities
resulted primarily from decreased net income before amortization, shrinkage, and
depreciation expense, and increased inventories, and was partially offset by an
increase in accounts payable.
The Company used approximately $1.6 million more net cash in investing
activities in the first quarter of 2000 than in the first quarter of 1999. To
support sales growth, the Company made capital
7
<PAGE>
expenditures in the first quarter of 2000 for equipment of $2.7 million and for
reusable surgical products of $3.7 million, compared to $782,000 for equipment
and $1.7 million for reusable surgical products during the first quarter of
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 $2.5 million in
a continuing project to upgrade its technology software and related hardware, of
which it incurred and capitalized $358,000 in the first quarter of 2000, as it
completed this project. In addition, the Company has spent $3.3 million to
expand and further equip its Cincinnati facility, of which $1.1 million was
spent in the first quarter of 2000. The Company expects to spend $700,000 more
in the balance of 2000 to complete these improvements.
The Company's outstanding balance under its revolving credit facility
with First Union National Bank was approximately $13.2 million on March 31, 2000
and $5.8 on March 31, 1999. On March 24, 2000, the Company entered into an
amendment of its revolving credit facility in which the revolving committed
amount was increased from $15 million to $20 million. Under the terms of the
amendment, the revolving committed amount will be reduced to $15 million on May
30, 2000. The Company may elect to utilize a portion of the additional $5
million prior to refinancing the entire credit facility to fund expenditures for
additional surgical products and equipment; accordingly, the Company may be
required to repay the additional revolver drawn down on or before May 30, 2000.
Management anticipates refinancing its revolving credit facility with market
interest rates and a maturity date beyond January 1, 2001 before May 30, 2000.
Pursuant to amendments effective February 24, 1999, the facility is
secured by substantially all of the Company's assets and has a maturity date of
February 28, 2002. The credit facility's interest rate varies between 100 and
150 basis points over LIBOR (6.15% as of March 31, 2000), depending on the
Company's leverage. The credit facility requires the Company to maintain (a)
consolidated net worth of $34.9 million plus 75% of cumulative consolidated net
income for each fiscal quarter occurring after February 24, 1999; (b) a
consolidated leverage ratio of not more than 2.5 to 1.0; and (c) a fixed charge
coverage ratio of not less than 2.8 to 1.0. The credit facility restricts the
Company's payment of dividends, acquisition transactions, 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 $75,954 and $65,729 in lease payments for
its Stockton, California and Chattanooga, Tennessee facilities, respectively, in
the first quarter of 2000.
As of March 31, 2000, the Company had cash of approximately $61,000.
The Company believes that its cash flows from operating activities and funds
available under its credit facility as
8
<PAGE>
anticipated to be expanded 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 first quarter of 2000, Columbia/HCA Healthcare Corporation ("Columbia") and
Premier, Inc. ("Premier") hospitals, with which the Company currently does
business, accounted for approximately 11% and 22% of the Company's revenues
respectively, compared to 12% and 23% respectively in the first quarter of 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 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.
9
<PAGE>
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
<PAGE>
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
- ------ -------------------
10.35 Amendment No. 2 to Credit Agreement dated as of March 24, 2000 between
the Company and First Union National Bank
10.36 Replacement Revolving Note dated as of March 24, 2000, executed by the
Company in favor of First Union National Bank
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 first quarter of 2000.
11
<PAGE>
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: May 12, 2000 By: /s/ James T. Boosales
----------------------------
Executive Vice President
Chief Financial Officer
12
AMENDMENT NO. 2
THIS AMENDMENT NO. 2 (this "Amendment"), dated as of March 24, 2000, is
by and among STERILE RECOVERIES, INC., a Florida corporation (the "Borrower"),
certain Subsidiaries of the Borrower identified on the signature pages hereto
(each a "Guarantor", and collectively, the "Guarantors"), the Lenders identified
on the signature pages hereto (the "Lenders") and FIRST UNION NATIONAL BANK, as
Agent for the Lenders (the "Agent").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement dated as of February 24,
1999, as amended from time to time prior to the date hereof (the "Existing
Credit Agreement") among the Borrower, the Guarantors, the Lenders and the
Agent, the Lenders have extended commitments to make certain credit facilities
available to the Borrower;
WHEREAS, the parties hereto have agreed to amend the Existing Credit
Agreement as set forth herein;
NOW, THEREFORE, in consideration of the agreements herein contained,
the parties hereby agree as follows:
PART I
DEFINITIONS
SUBPART 1.1. Certain Definitions. Unless otherwise defined
herein or the context otherwise requires, the following terms used in
this Amendment No. 2, including its preamble and recitals, have the
following meanings:
"Amended Credit Agreement" means the Existing Credit
Agreement as amended hereby.
"Amendment No. 2 Effective Date" is defined in
Subpart 3.1.
SUBPART 1.2. Other Definitions. Unless otherwise defined
herein or the context otherwise requires, terms used in this Amendment,
including its preamble and recitals, have the meanings provided in the
Amended Credit Agreement.
<PAGE>
PART II
AMENDMENTS TO EXISTING CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Amendment No. 2
Effective Date, the Existing Credit Agreement is hereby amended in accordance
with this Part II. Except as so amended, the Existing Credit Agreement shall
continue in full force and effect.
SUBPART 2.1. Revolving Committed Amount. The definition of
Revolving Committed Amount in Section 1.1 of the Existing Credit
Agreement is amended and restated in its entirety to read as follows:
"Revolving Committed Amount" means the aggregate
revolving credit line extended by the Lenders to the Borrower
for Revolving Loans pursuant to and in accordance with the
terms of this Credit Agreement, in an amount up to
$20,000,000, as such revolving credit line may be reduced from
time to time in accordance with Sections 2.10.
SUBPART 2.2. Swingline Committed Amount. The definition of
Swingline Committed Amount in Section 1.1 of the Existing Credit
Agreement is amended and restated in its entirety to read as follows:
"Swingline Committed Amount" means $3,000,000.
SUBPART 2.3. Section 2.10. Section 2.10 of the Existing Credit
Agreement is amended and restated in its entirety to read as follows:
SECTION 2.10 TERMINATION AND REDUCTION OF REVOLVING
COMMITMENTS.
(a) Voluntary Reductions. The Revolving Commitments
may be terminated or permanently reduced in whole or in part
by the Borrower upon five (5) Business Days' prior written
notice to the Agent, provided that (i) after giving effect to
any voluntary reduction, the aggregate amount of outstanding
Revolving Loans shall not exceed the aggregate Revolving
Committed Amount, as reduced, and (ii) partial reductions
shall be in a minimum principal amount of $2,500,000, and in
integral multiples thereof. The Agent shall promptly notify
each affected Lender of receipt by the Agent of any notice
from the Borrower pursuant to this Section.
(b) Mandatory Reductions. On May 30, 2000, the
Revolving Committed Amount automatically shall be permanently
reduced to $15,000,000.
(c) General. The Borrower shall pay to the Agent for
the account of the Lenders in accordance with the terms of
Section 3.3(b), on the date of each termination or reduction
of the Revolving Committed Amount, the
2
<PAGE>
Commitment Fee accrued through the date of such termination or
reduction on the amount of the Revolving Committed Amount so
terminated or reduced.
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1. Amendment No. 2 Effective Date. This Amendment
shall be and become effective as of the date hereof (the "Amendment No.
2 Effective Date") when all of the conditions set forth in this Part
III shall have been satisfied, and thereafter this Amendment shall be
known, and may be referred to, as "Amendment No. 2."
SUBPART 3.2. Execution of Counterparts of Amendment. The Agent
shall have received counterparts (or other evidence of execution,
including telephonic message, satisfactory to the Agent) of this
Amendment, which collectively shall have been duly executed on behalf
of each of the Borrower, the Guarantors, the Agent and the Lenders.
SUBPART 3.3. Replacement Notes. The Agent shall have received
a replacement Revolving Note and a replacement Swingline Note which
shall each have been duly executed on behalf of the Borrower.
SUBPART 3.4. Certificates of Secretary or Assistant Secretary
of the Credit Parties. The Agent shall have received a certificate of
the secretary or an assistant secretary of each Credit Party certifying
(A) that attached thereto is a true and complete copy of resolutions
duly adopted by the Board of Directors of such Credit Party authorizing
the execution, delivery and performance of this Amendment and the Notes
contemplated hereby and (B) as to the incumbency and genuineness of the
signature of each officer of such Credit Party executing the Amendment
and the Notes contemplated hereby.
SUBPART 3.5. Opinion of Counsel. The Agent shall have received
favorable opinion of counsel to the Credit Parties with respect to this
Amendment and such other matters as the Agent and its counsel shall
request.
SUBPART 3.6. Fees and Expenses. There shall have been paid by
the Borrower to the Agent, any accrued and unpaid fees due under the
Credit Agreement (including, without limitation, legal fees and
expenses).
3
<PAGE>
PART IV
MISCELLANEOUS
SUBPART 4.1. Cross-References. References in this Amendment to
any Part or Subpart are, unless otherwise specified, to such Part or
Subpart of this Amendment.
SUBPART 4.2. Instrument Pursuant to Existing Credit Agreement.
This Amendment is a Credit Document executed pursuant to the Existing
Credit Agreement and shall (unless otherwise expressly indicated
therein) be construed, administered and applied in accordance with the
terms and provisions of the Existing Credit Agreement.
SUBPART 4.3. References in Other Credit Documents. At such
time as this Amendment No. 2 shall become effective pursuant to the
terms of Subpart 3.1, all references in the Existing Credit Agreement
to the "Agreement" and all references in the other Credit Documents to
the "Credit Agreement" shall be deemed to refer to the Existing Credit
Agreement as amended by this Amendment.
SUBPART 4.4. Affirmation of Liens. The Borrower and the
Guarantors, as applicable, affirm the liens and security interests
created and granted in the Existing Credit Agreement and the Credit
Documents and agree that this Amendment shall in no manner adversely
affect or impair such liens and security interests.
SUBPART 4.5. Representations and Warranties. The Borrower and
the Guarantors hereby represent and warrant as follows:
(i) Each Credit Party has taken all necessary action
to authorize the execution, delivery and performance of this
Amendment.
(ii) This Amendment has been duly executed and
delivered by the Credit Parties and constitutes each of the
Credit Parties' legal, valid and binding obligations,
enforceable in accordance with its terms, except as such
enforceability may be subject to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium
or similar laws affecting creditors' rights generally and (ii)
general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in
equity).
(iii) No consent, approval, authorization or order
of, or filing, registration or qualification with, any court
or Governmental Authority or
4
<PAGE>
third party is required in connection with the execution,
delivery or performance by any Credit Party of this Amendment.
(iv) The representations and warranties of the Credit
Parties set forth in Article VI of the Amended Credit
Agreement are true and correct in all material respects as of
the date hereof.
(v) No Default or Event of Default exists under the
Existing Credit Agreement on and as of the date hereof after
giving effect to the amendments contained herein.
(vi) No Credit Party, to the best of its knowledge,
has any counterclaims, offsets, credits or defenses to the
Credit Documents and the performance of its obligations
thereunder.
SUBPART 4.6. Acknowledgment. The Guarantors (i) acknowledge
and consent to all of the terms and conditions of this Amendment, (ii)
affirm all of their obligations under the Credit Documents and (iii)
agree that this Amendment and all documents executed in connection
herewith do not operate to reduce or discharge the Guarantors'
obligations under the Amended Credit Agreement or the other Credit
Documents.
SUBPART 4.7. Counterparts. This Amendment may be executed by
the parties hereto in several counterparts, each of which shall be
deemed to be an original and all of which shall constitute together but
one and the same agreement.
SUBPART 4.8. Governing Law. THIS AMENDMENT SHALL BE DEEMED TO
BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE
OF FLORIDA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SUBPART 4.9. Successors and Assigns. This Amendment shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
[Remainder of page intentionally left blank]
5
<PAGE>
Each of the parties hereto has caused a counterpart of this Amendment to be duly
executed and delivered as of the date first above written.
BORROWER: STERILE RECOVERIES, INC.,
- -------- a Florida corporation
By: s/ James T. Boosales
____________________________________
Name: James T. Boosales
__________________________________
Title: Executive Vice President
_________________________________
GUARANTOR: REPAK SURGICAL ENTERPRISES, INC.,
- --------- an Ohio corporation
By: s/ James T. Boosales
____________________________________
Name: James T. Boosales
__________________________________
Title: Executive Vice President
_________________________________
LENDER: FIRST UNION NATIONAL BANK
- ------ individually in its capacity as
a Lender and in its
capacity as Agent
By: s/ Authorized Officer
____________________________________
Name: Authorized Officer
__________________________________
Title:_________________________________
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF_______________________________
The foregoing instrument was acknowledged before me this _____ day of
___________, 2000 by _______________________________, as an officer of the
companies set forth on the signature pages attached hereto. He personally
appeared before me and is personally known to me or produced ___________________
as identification.
Notary:__________________________________
[NOTARIAL SEAL] Print Name:______________________________
Notary Public, State of North Carolina
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF MECKLENBURG
The foregoing instrument was acknowledged before me this _____ day of
__________, 2000 by _______________________________, _________________ of First
Union National Bank, a national banking association. He/she personally appeared
before me and is personally known to me or produced ___________________ as
identification.
Notary:_____________________________
[NOTARIAL SEAL] Print Name:_________________________
Notary Public, State of Mecklenburg
REPLACEMENT REVOLVING NOTE
--------------------------
$20,000,000.00 March 24, 2000
FOR VALUE RECEIVED, the undersigned, STERILE RECOVERIES, INC., a
Florida corporation (the "Borrower"), hereby promises to pay to the order of
FIRST UNION NATIONAL BANK (the "Lender"), at the times, at the place and in the
manner provided in the Credit Agreement hereinafter referred to, the principal
sum of up to Twenty Million and 00/100 Dollars ($20,000,000.00), or, if less,
the aggregate unpaid principal amount of all Revolving Loans disbursed by the
Lender under the Credit Agreement referred to below, together with interest at
the rates as in effect from time to time with respect to each portion of the
principal amount hereof, determined and payable as provided in the Credit
Agreement.
This Revolving Note is one of the Revolving Notes referred to in, and
is entitled to the benefits of, the Credit Agreement of dated as of February 24,
1999 (as amended, modified or otherwise supplemented from time to time, the
"Credit Agreement"), by and between the Borrower, the Guarantors party thereto,
the Lender and the other financial institutions party thereto and First Union
National Bank as Agent and the other Credit Documents referenced therein. This
Revolving Note is given in amendment to, restatement of and substitution for the
Revolving Note dated February 24, 1999 in favor of the Lender under the Credit
Agreement (the "Replaced Note") and evidences the same indebtedness as the
Replaced Note. The Credit Agreement contains, among other things, provisions for
the time, place and manner of payment of this Revolving Note, the determination
of the interest rate borne by and fees payable in respect of this Revolving
Note, acceleration of the payment of this Revolving Note upon the happening of
certain stated events and the mandatory repayment of this Revolving Note under
certain circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys, fees, if any part of this Revolving Note, principal or
interest, is collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of
protest are hereby waived.
THIS REVOLVING CREDIT NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH
CAROLINA AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF FLORIDA.
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Revolving Note to be
executed under seal by its duly authorized officers as of the day and year first
above written.
STERILE RECOVERIES, INC.
By: James T. Boosales
________________________
Name: James T. Boosales
______________________
Title: Executive Vice President
________________________
2
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF________________________
The foregoing instrument was acknowledged before me this _____ day of
___________, 2000 by _______________________________, as an officer of Sterile
Recoveries, Inc. He personally appeared before me and is personally known to me
or produced ___________________ as identification.
Notary:____________________________________
[NOTARIAL SEAL] Print Name:________________________________
Notary Public, State of North Carolina
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