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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 000-20997
STERILE RECOVERIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-3252632
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(State of Incorporation) (IRS Employer Identification No.)
28100 U.S. HIGHWAY19 NORTH, SUITE 201, CLEARWATER, FLORIDA 33761
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (727) 726-4421
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 - 5,676,794
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on
March 3, 2000, as reported on the Nasdaq National Market, was approximately
$13,396,075.
The Registrant had outstanding 5,676,794 shares of Common Stock as of
March 3, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held on May 17, 2000 is incorporated by reference in Part III
of this report to the extent stated herein.
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<PAGE>
STERILE RECOVERIES, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
SECTION PAGE
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PART I
Item 1: Business 1
Item 2: Properties 7
Item 3: Legal Proceedings 8
Item 4: Submission of Matters to a Vote of Security Holders 8
PART II
Item 5: Market for the Registrant's Common Equity and Related
Shareholder Matters 9
Item 6: Selected Financial Data 10
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 16
Item 8: Financial Statements and Supplementary Data 16
Item 9: Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 36
PART III
Item 10: Directors and Executive Officers of the Registrant 36
Item 11: Executive Compensation 36
Item 12: Security Ownership of Certain Beneficial Owners
and Management 36
Item 13: Certain Relationships and Related Transactions 36
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 36
SIGNATURES 41
<PAGE>
PART I
ITEM 1: BUSINESS
Sterile Recoveries, Inc. ("SRI" or the "Company") provides hospitals
and surgery centers with a comprehensive surgical procedure-based daily delivery
service. The foundations of this service are SRI's reusable surgical products,
including gowns, towels, drapes and basins, and its daily delivery and retrieval
of these products for each customer. The Company complements its reusable
products with cost-effective disposable accessory packs and individual single
sterile disposable items to provide a comprehensive offering for surgical
procedures. SRI believes its superior quality reusable products and its service
solutions, including direct delivery to its customers' departments,
differentiate SRI from its competitors.
In 1998, SRI 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.
SRI's efforts to sign new agreements with major hospital networks were
a major focus of its marketing in 1999. The Company has begun to make progress
with these networks as evidenced by its recent agreement with Jewish Hospital
Healthcare Services (a seven hospital healthcare network in Louisville,
Kentucky) to provide members of that hospital network its Surgical Express
program. The Company expects this program will generate $30 million in revenue
over its five year term based on the network's historical purchases of products
covered by the agreement.
At eleven regional facilities, SRI collects, sorts, cleans, inspects,
packages, sterilizes, and delivers its reusable products on a just-in-time
basis. SRI offers an integrated "closed-loop" reprocessing service which uses
two of the most technologically advanced reusable textiles: (i) a GORE(R)
Surgical Barrier Fabric for gowns and drapes that is breathable yet liquidproof
and provides a viral/bacterial barrier and (ii) an advanced microfiber polyester
surgical fabric for gowns and drapes which is liquid and bacterial resistant.
SRI currently serves a customer base of over 400 hospitals and surgery
centers located in 23 states, including Duke University Medical Center (Durham),
Henry Ford Hospital (Detroit), Johns Hopkins Medical Center (Baltimore), St.
Luke's Episcopal Hospital (Houston), Jackson Memorial Hospital (Miami), and IHC
Hospitals, Inc. (Salt Lake City). With the new direction in sales toward the
large networks of hospitals, SRI is discontinuing service with several small
hospitals and surgery centers where the cost of service was not commensurate
with revenue. None of the foregoing customers individually accounts for a
material portion of the Company's revenues. The Company maintains agreements to
supply two group purchasing organizations. SRI's agreement with Hospital
Services Corporation of America ("HSCA") designates the Company as an approved
vendor of reusable surgical products to HSCA's hospital and surgery center
members. In addition, effective March 1, 2000, the Company will have an
opportunity to provide its "Surgical Express" program to Novation member
hospitals. Novation is the supply company for Voluntary Hospitals of America
(VHA) and University HealthSystem Consortium (UHC), which together have
approximately 1,900 members. The arrangement was facilitated by the Company's
relationship with Standard Textile Co., Inc., which has long enjoyed an
exclusive supply arrangement with VHA for all hospital textiles, including the
supply of reusable surgical products. SRI will offer Novation members its
Surgical Express program, a unitized delivery system featuring Standard
Textile's and SRI's reusable surgical textiles, reusable instruments, disposable
accessory packs, and "Nova Plus" brand name surgical products. The Company
expects that individual Novation member hospitals and major networks will sign
independent agreements for these services.
SRI believes that Surgical Express is a superior and competitively
priced alternative to a full disposable program, other procedure-based surgical
supply programs, and operating an in-house reusable program for surgical
products. The Company's delivery service offers savings to hospitals by reducing
or eliminating the following costly steps associated with the disposable or
in-house alternatives: (i) disposing of biohazardous wastes, (ii) carrying an
inventory of disposable surgical products, and (iii) in-house processing of
reusable surgical products. In addition to these cost savings, the Company's
liquidproof and liquid resistant gowns offer surgeons and surgical staff
enhanced protection against transmission of blood-borne pathogens, including the
HIV and hepatitis viruses. Also, the Company's reusable gowns are made with a
breathable surgical fabric, which is designed for superior comfort during long
procedures.
The Company's Surgical Express Program offers its customers disposable
accessory packs containing smaller surgical items that are not reusable, such as
needles, syringes, and tubing. The Company believes the flexibility it offers
its customers by combining reusable surgical gowns, towels, drapes, and basins
with disposable products and laparoscopic instruments has improved the Company's
competitive position in the marketplace.
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THE MARKET
The United States health care system includes approximately 7,400 acute
care hospitals, over 2,750 freestanding surgery centers, and a variety of other
health care facilities. According to industry sources, approximately 33 million
surgical procedures were performed at hospitals and surgery centers in 1999. The
Company believes that between $100-$150 of surgical products service revenues,
including $40-$50 from reusable products, can be realized from a typical
surgical procedure. Where SRI will provide instruments for the procedure, such
as in laparoscopic cases, revenues can be $250-$300 per procedure.
In the 1980's, hospitals began using custom procedure trays because of
their convenience, a trend that continued growing until recently. A custom
procedure tray typically contains, in disposable form, most of the sterile
products used in a particular surgical or other medical procedure. According to
industry sources, total sales of custom procedure trays in the United States
were an estimated $1.5 billion in 1995. The Company believes that custom
procedure trays suffer shortcomings when compared to reusable products,
including costs associated with excessive product content, storage, handling,
and waste disposal, and the working capital requirements required to carry
product inventory.
The hospitals that converted to custom procedure trays generally
eliminated the in-house personnel and equipment used to process reusable
surgical products. Furthermore, the hospitals that retained in-house facilities
are increasingly unwilling to support the personnel and capital needs required
to operate those facilities. Especially with the growth of managed care and
associated decrease in surgical service reimbursements, hospitals are seeking to
significantly reduce their costs. The Company believes that these hospitals will
purchase a service that provides daily delivery of substantially better quality
surgical products, eliminates their capital investment requirements, and reduces
their employee and space demands.
The following developments have created a market opportunity for SRI's
Surgical Express Program:
CONTINUED PRESSURE ON HOSPITALS TO CONTAIN COST AND RAISE PRODUCTIVITY.
With the growth of managed care and a decrease in surgical service
reimbursements, economic constraints continue to require hospitals to become
more efficient by limiting capital investments and reducing staff and costs.
Hospitals are continually seeking to decrease their cost of operations including
supplies and waste disposal. SRI's service eliminates the need for in-house
inventory or processing facilities and the process costs associated with
stocking and discarding disposable products.
CONCERN REGARDING THE TRANSMISSION OF INFECTIOUS DISEASES. The health
care industry must manage risks of transmission of infectious diseases through
cross-infections. These concerns increase the desirability of surgical barrier
fabrics that protect surgeons and surgical staff from patient liquids. SRI's
liquidproof gown prevents liquid and viral strike-through in critical areas
during surgical procedures involving higher risk. The Company's standard gown is
specially designed to resist liquid and bacterial strike-through in most other
surgical procedures.
CONCERN REGARDING THE HANDLING AND DISPOSAL OF BIOHAZARDOUS WASTE. The
disposal of large volumes of infectious and hazardous waste generated by the
health care industry continues to attract increased public awareness. The
increased burdens on hospitals generating biohazardous waste due to restrictions
on incineration and access to dump sites offer an advantage to reprocessing
systems, such as SRI's, which replace disposable surgical products with reusable
surgical products. The SRI reprocessing system substantially reduces
biohazardous waste and its impact on the environment.
INCREASED OUTSOURCING OF HOSPITAL FUNCTIONS THAT DO NOT INVOLVE PATIENT
CARE. Hospitals with significant staff, capital and space dedicated to in-house
processing of reusable surgical products are increasingly outsourcing this
function to more efficient outside providers. This trend is consistent with the
overall industry focus on efficiency and improved patient care. Surgical Express
allows hospitals to outsource to SRI the ownership and reprocessing of surgical
products, and inventory management of complementary disposable products as well.
STRATEGY
The Company's objective is to continue its growth and become the
surgical supply solution, providing reusable surgical products and related
delivery and retrieval services to hospitals and surgery centers. The Company's
principal strategies for achieving this objective are as follows:
LEVERAGE INFRASTRUCTURE WITH INCREASED PENETRATION IN EXISTING MARKETS.
The Company believes its existing facilities, under its traditional business,
currently operate at approximately 55% of their aggregate annual revenue
capacity. Under its Surgical Express Program and, in particular, where SRI
provides instruments, the Company believes it should be able to substantially
increase capacity and reduce the need for significant additional capital
expenditures for equipment or new facilities.
HELP SOLVE HOSPITALS' COST ISSUES. The Company believes that its
service addresses hospitals' needs to reduce operating costs. More importantly,
when fully implemented, SRI's Surgical Express Program offers hospitals more
comprehensive value by reducing product expenditures, supply chain process
costs, biohazardous waste, and instrument costs. Under its Surgical Express
programs, the Company will also provide hospitals an attractive per procedure
billing arrangement that allows them to easily measure that cost component of
their services.
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<PAGE>
EXPAND NATIONAL AND REGIONAL AGREEMENTS. The Company's existing service
agreements are primarily with individual hospitals. To leverage their purchasing
power, many hospitals have joined in large groups and increasingly in recent
years, smaller independent delivery networks. These small regional buying groups
believe that they can negotiate and control their product supply relatively
better than large group purchasing organizations. SRI maintains arrangements to
supply national group purchasing organizations Novation (the supply company for
VHA and UHC) and Health Services Corporation of America (see "Business--Group
Purchasing Agreements"). As a key part of its marketing strategy, management
will offer its Surgical Express Program to national and regional hospital
groups, as well as the individual hospitals that have been SRI's customer base.
ADD FACILITIES IN SELECTED MARKETS. SRI currently services customers in
23 states through eleven regional facilities. SRI serves several large
metropolitan areas through highway transport and satellite depots supported by a
regional facility. To expand geographically, the Company built additional
facilities needed in markets previously served by highway transport, including
Stockton, California and Chattanooga, Tennessee in 1999. From each new facility,
SRI can now serve new metropolitan areas that were previously too distant from
an existing regional facility. Under its Surgical Express program, the Company
will open new distribution centers that enable the Company to service larger
accounts and provide closer customer contact, enabling the Company to move into
selected markets without constructing a new facility.
REDEPLOYMENT TO FOCUS ON SALES OPPORTUNITIES. In 1999, the Company
moved away from decentralized operations at the facility level and redeployed
four vice presidents to focus on sales with specific program responsibilities.
The Company also named vice presidents and directors with direct
responsibilities for reprocessing facilities, distribution, and customer
service. This increased focus on major aspects of the business will allow those
with expertise in certain areas to have a greater influence on making
improvements in Sales, Operations and Service. The Company's incentive
compensation plan provides vice presidents and certain key operations and
service employees compensation awards based upon company and individual
performance. Each vice president also participates in the Company's stock option
plan.
UTILIZE OPERATIONAL KNOWLEDGE. The Company's management has gained
substantial knowledge and expertise through development, implementation and
management of eleven facilities that the Company feels are unique in the
industry. The Company has substantially retained the management personnel
responsible for all the planning and development of each of these operations.
Over the years the Company has continued to add expertise in other areas of
processing and engineering that have given the Company a competitive advantage.
DELIVERY, RETRIEVAL AND REPROCESSING SYSTEM
SRI's Surgical Express procedure-based service can deliver the most
complete product offering required for a surgical procedure, including reusable
packs, disposable accessory packs, single sterile items, and instrumentation.
Following a procedure, the hospital discards the small amount of disposable
products and places the soiled reusable products into SRI's lockable carts.
SRI's closed-loop reprocessing service picks up soiled reusable
surgical products from its customers and sorts, cleans, inspects, packages,
sterilizes, and redelivers the products. In one trip, SRI's trucks deliver clean
carts of sterilized surgical products to the hospital or surgical center and
retrieve carts containing soiled products and return them to its facility for
reprocessing. The specially designed aluminum carts which hold sterile products
are locked to maintain security. They conveniently roll for delivery within the
hospital and convert into hampers to hold soiled or used products after the
procedure. The customer avoids the need to maintain secondary stock locations
and the costs of either reprocessing reusable products or stocking and
discarding disposable products.
Upon return to SRI's facility, the contents of the soiled carts are
sorted in a decontamination area. Soiled fabric products are routed through an
automated washing and drying process that delivers clean, dry, and
decontaminated products to a pack room where they are carefully inspected for
damage, repaired if necessary, folded and assembled into packs. The packs are
steam sterilized, sorted, and combined with complementary disposable products
for delivery to the customer. SRI separately cleans, dries, and decontaminates
its carts, stainless steel basins, and other hard reusable products through
special automatic tunnel washers before redelivery. Processing through the
facility occurs in three to five days.
Because the Company's ability to manage its amortization expense
depends on maintaining its sewn goods' useful lives, SRI closely monitors its
reprocessing to ensure longevity. SRI uses a bar coding system to track its
reusable surgical products' status, history, and number of uses. SRI continues
to improve its operating processes, building on Amsco Sterile's substantial
investments of time and money to initially develop those operations.
The growth of SRI's business reflects its products' appeal, its service
quality, and general customer resistance to change when the SRI system is in
place. SRI also believes its direct relationship with the hospital's staff has
been important in attracting and retaining customers. Many of SRI's competitors
use a distributor system that introduces an intermediary between the competition
and their customers which SRI believes adds costs.
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<PAGE>
The Company's sales process for new customers is typically six to
eighteen months in duration from initial contact to a purchase commitment. The
extended sales process is typically due to the complicated approval process
within hospitals for purchases from new suppliers, the long duration of existing
supply contracts, and implementation delays pending termination of a hospital's
previous supply relationships. Conversely, SRI's high service level, quality
products, and customer resistance to change help it retain existing customers.
SRI believes that its new Surgical Express program for laparoscopy procedures
will have substantially shortened lead times as indicated in an informal market
survey study.
SRI bills its customers weekly for the previous week's deliveries under
service contracts or purchase orders. Consistent with industry custom, these
contracts generally are cancelable by either party with 90 days' notice, and
customers may unilaterally reduce their use of the Company's services under such
contracts without penalty. Surgical Express contracts will have longer terms,
typically three to five years, with more stringent cancellation provisions. The
Company does not have any order backlog because its products are generally
delivered daily in response to customer orders. Surgical Express customers will
be typically billed by the surgical procedure in lieu of the normal SRI billing
of products delivered.
PRODUCTS
SRI's principal reusable surgical products are its liquidproof and
liquid resistant surgical gowns, towels, drapes, and stainless steel basin sets.
SRI offers these products in a variety of packs configured to the hospital's
specific needs. Packs are comprised of various combinations of gowns, absorbent
towels, liquidproof backtable covers, mayo stand covers, and stainless
components.
The Company's liquidproof gown has GORE(R) Surgical Barrier Fabric in
critical areas to provide protection for procedures which present a higher risk
of liquid strike-through and provide more comfort. This protection is critical
to SRI's customers given current concerns of doctors, staff, and regulatory
authorities regarding transmission of blood-borne pathogens, including the HIV
and hepatitis viruses. The Company's liquid resistant gown is made of an
advanced microfiber polyester fabric designed to resist liquid and bacterial
strike-through in most surgical procedures. All of SRI's gowns and drapes offer
the wearer both comfort and breathability, combined with a high level of
protection from liquid penetration that SRI believes is superior to that offered
by disposable products.
SRI contracts with third-party vendors for the weaving of microfiber
fabric and the cutting and sewing of garments, wraps and drapes. The Company in
August 1998 signed a ten-year sales and manufacturing agreement with Standard
Textile Co., Inc., under which Standard Textile will manufacture the bulk of
SRI's reusable textile products with fabric provided by W.L. Gore and other
textile suppliers. The other components of the Company's products are currently
available at reasonable costs from a variety of suppliers. To complement its
reusable surgical products, the Company offers disposable accessory packs
containing smaller surgical products, such as needles, syringes, and tubing. The
Company develops these packs with its customers' cooperation to assure a
desirable and cost effective product mix. SRI purchases the products from major
manufacturers, assembles the products in packs, arranges for ethylene oxide
sterilization by a third party, and delivers them to customers on its carts with
its reusable products.
SRI will in 2000 expand its product offering to include selected
reusable instruments. Initially, SRI will offer laparoscopic instruments through
its Surgical Express service for laparoscopic procedures. The service includes
instruments, reusable textiles, disposable products used in the procedure and,
in some instances, scopes and video equipment. Aesculap, the largest worldwide
supplier of surgical instruments, will provide the new state-of-the-art reusable
laparoscopic instruments, processing protocols, and repair and replacement
services. In addition to daily delivery and retrieval of all products, SRI will
be responsible for decontaminating, cleaning, inspecting, packaging, and
sterilizing instruments. Both SRI and Aesculap will have sales responsibility
for the offering. Hospitals will pay set fees per case, allowing them to better
monitor their costs for this procedure. The Company and Aesculap will share
gross revenues generated from this program.
EMPLOYEES
As of December 31, 1999, SRI employed 1,151 people, consisting of 59
persons in management, administration and finance at its corporate office and
1,092 people in various positions at the Company's facilities. The Company's
employees are not covered by a collective bargaining agreement, and the Company
considers its employee relations to be good.
GROUP PURCHASING AGREEMENTS
The Company maintains separate agreements that will allow members of
Novation (the supply company for VHA and UHC) and Health Services Corporation of
America to choose SRI's reusable surgical products service. SRI's arrangements
with Novation was facilitated by the Company's relationship with Standard
Textile Co., Inc., which has long enjoyed an exclusive supply arrangement with
VHA for all hospital textiles, including the supply of reusable surgical
products. The agreements do not involve purchase commitments, but the Company
expects that its relationships with these purchasing organizations will
facilitate its sales efforts with member hospitals and surgery centers.
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<PAGE>
COMPETITION
SRI competes with sellers of both reusable and disposable gowns,
drapes, utensils, and other products for surgical procedures. The market is
dominated by disposables, especially custom procedure trays. SRI believes it is
the leading provider of high quality reusable surgical gowns and drapes, and
that with its Surgical Express Program, SRI can effectively compete with
suppliers of disposable custom procedure trays.
Unlike SRI, many of SRI's competitors offer full national coverage and
have much greater resources than the Company. The Company's principal
competitors are Allegiance Corporation (a subsidiary of Cardinal Health, Inc.),
which has a substantial market share, Maxxim Medical Inc., and Kimberly-Clark
Corporation.
The Company competes based primarily on price, service, quality,
process improvement, and its ability to save its customers waste disposal costs.
The changing healthcare environment in recent years has led to increasingly
intense competition among health care suppliers based on price, service, and
product performance. Hospitals are seeking cost reductions in response to
pressure from governments, insurance companies, and health maintenance
organizations. The Company believes its high degree of expertise in operations
significantly assists it in offering a superior product at a competitive cost.
In addition, hospitals are increasingly seeking buying leverage by purchasing in
integrated networks. SRI believes that competitive pressure in these areas will
continue.
REGULATION
Substantially all of the Company's products and services are subject to
extensive government regulation in the United States by federal, state and local
governmental agencies, including the Food and Drug Administration (the "FDA"),
the Department of Transportation ("DOT"), and the Occupational Safety and Health
Administration ("OSHA").
The Company's reusable products are subject to regulation as medical
devices by the FDA, which regulates the development, production, distribution,
and promotion of medical devices in the United States. Various states in which
the Company does business also regulate medical devices. Pursuant to the Federal
Food Drug and Cosmetics Act (the "FDA Act"), the Company's medical devices are
subject to general controls regarding FDA inspections of facilities, "Current
Good Manufacturing Practices ("CGMPs")," labeling, maintenance of records, and
filings with the FDA. To the extent required, the Company has obtained FDA
pre-market approval of its devices under Section 510(k) of regulations issued
under the FDA Act, which provides for FDA approval on an expedited basis for
products shown to be substantially equivalent to devices already cleared by the
FDA and currently legally marketable in the United States. Products must be
produced in establishments registered with the FDA and be manufactured in
accordance with CGMPs, as defined under the FDA Act. The CGMP requirements have
been substantially revised and incorporated into what is now known as the
"Quality System Regulation", or QSRs, (21 CFR Part 820). Since the QSRs were
first issued on June 1, 1997, the focus of most routine FDA inspections has been
compliance with these new regulations. In addition, the Company's medical
devices must be initially listed with the FDA, and its labeling and promotional
activities are subject to scrutiny by the FDA and, in certain instances, by the
Federal Trade Commission. The Medical Device Reporting ("MDR") regulation
obligates the Company to provide information to the FDA on injuries or deaths
alleged to have been associated with the use of a product or in connection with
certain product failures which could have caused serious injury or death. If the
Company fails to comply with the applicable provisions of the FDA Act, the FDA
may institute proceedings to detain or seize products, impose fines, enjoin
future company activities, impose product labeling restrictions, or enforce
product recalls or withdrawals from the market.
The Company and its hospital customers also must comply with
regulations of OSHA, including the blood-borne pathogen rule requiring that
"universal precautions" be observed to minimize exposure to blood and other
bodily fluids. To comply with these requirements, the Company's employees wear
protective gear in handling soiled linens in the facility's decontamination
area. Properly used, the Company's products allow its hospital customers to
protect their employees in compliance with these regulations. The Company must
comply with local regulations governing the discharge of water used in its
operations. The Company uses local licensed contractors to dispose of any
biohazardous waste generated by the hospital and received by the Company and
therefore does not need to obtain permits for biohazardous waste disposal. The
Company must comply with DOT and OSHA regulations governing the transportation
of hazardous materials, which affect, among other things, labeling, marketing,
placarding, using proper containers, and reporting discharges. The Company
complies with these regulations by confining soiled products in marked
liquidproof bags and locked, marked transfer carts. Sterilization of the
Company's disposable accessory packs is provided under contract by a
third-party. The use of ethylene oxide by that third-party in the sterilization
of the Company's disposable accessory packs is subject to regulation by OSHA and
the Environmental Protection Agency.
In addition to the foregoing, other federal, state and local regulatory
authorities, including those enforcing laws which relate to the environment,
fire hazard control, and working conditions, have jurisdiction to take actions
which could have a material adverse effect on the Company. The Company makes
expenditures from time to time to comply with environmental regulations, but
does not expect any material capital expenditures for environmental compliance
in 2000 or 2001.
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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: (I) PROJECTIONS OF REVENUE, EARNINGS, CAPITAL STRUCTURE, AND
OTHER FINANCIAL ITEMS, (II) STATEMENTS OF THE PLANS AND OBJECTIVES OF
THE COMPANY AND ITS MANAGEMENT, (III) STATEMENTS OF FUTURE ECONOMIC
PERFORMANCE, AND (IV) ASSUMPTIONS UNDERLYING STATEMENTS REGARDING THE
COMPANY OR ITS BUSINESS. THE CAUTIONARY STATEMENTS SET FORTH BELOW
DISCUSS IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS.
SALES PROCESS AND MARKET ACCEPTANCE OF PRODUCTS AND SERVICES. The
Company's future performance depends on its ability to increase revenues to new
and existing customers. The Company's sales process for new customers is
typically between six and 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. SRI's future performance
will also depend on market acceptance of its combination of reusable surgical
products, disposable accessory packs, and direct delivery and retrieval service.
See "Business--The Market."
NEED FOR CAPITAL. The Company's business is capital intensive and will
require substantial capital expenditures for additional surgical products and
equipment during the next several years to achieve its operating and expansion
plans. To adequately service a new customer, SRI typically makes an investment
in new reusable surgical products and carts of approximately 45% of the
projected new annual revenue from the customer. The Company spent $2.2 million
in 1999 and expects to spend $1.8 million more in 2000 to expand and further
equip its Cincinnati facility. The Company's inability to obtain adequate
capital could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Note G of Notes to Consolidated Financial
Statements."
DEPENDENCE ON A SIGNIFICANT CUSTOMER AND MARKET CONSOLIDATION. During
1999, Premier Hospitals and Columbia/HCA Healthcare Corporation ("Columbia")
hospitals accounted for approximately 23% and 11% of SRI's sales, compared to
27% and 12% in 1998, respectively. The Company has in each of its last five
years continued to grow its business with Premier and Columbia member hospital
although each Premier and Columbia hospital currently makes its purchasing
decisions on an individual basis, and no single hospital accounted for more than
4% of the Company's sales, the loss of a substantial portion of the Premier or
Columbia hospitals' business could have a material adverse effect on the
Company.
COMPETITION. The Company's business is highly competitive. 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. While the Company has 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. There is no assurance that the Company will be able to
compete effectively with existing or potential competitors. See
"Business--Competition."
GOVERNMENT REGULATION. Significant aspects of the Company's businesses
are subject to state and federal statutes and regulations governing, among other
things, medical waste-disposal and workplace health and safety. In addition,
most of the products furnished or sold by the Company are subject to regulation
as medical devices by the U.S. Food and Drug Administration, as well as by other
federal and state agencies. The Company's facilities are subject to regular
inspections by FDA officials. The FDA has the power to enjoin future violations,
seize adulterated or misbranded devices, require the manufacturer to remove
products from the market, and publicize relevant facts. Federal or state
governments might impose additional restrictions or adopt interpretations of
existing laws that could materially adversely affect the Company.
-6-
<PAGE>
ITEM 2: PROPERTIES
SRI operates eleven processing facilities of approximately 20,000 to
57,000 square feet each in Baltimore, Chattanooga, Cincinnati, Dallas, Detroit,
Houston, Los Angeles, Raleigh, Salt Lake City, Stockton, and Tampa. Each
facility contains a uniform set of computerized and fully automated heavy duty
washers, dryers, and sterilizers to achieve consistent cleaning and
sterilization cycles for reusable surgical products. The Company uses standard
operating procedures at each facility, and regularly implements at all
facilities efficiencies that have been developed and tested at one location.
The Company's properties and the major markets that they serve are
summarized below. All the properties are leased, except for the Cincinnati and
Houston processing facilities. SRI also leases its Disposable Accessory Pack
facility in Plant City, Florida, at which it acquires, stores and packages
medical items ordered by its customers. SRI transports these finished products
to a third party facility for sterilization. SRI believes its existing
facilities adequately serve its current requirements.
<TABLE>
<CAPTION>
SQUARE FEET
FACILITY AND LOCATION (APPROX.) LEASE EXPIRATION(1) SELECTED MARKETS SERVED
- --------------------- ----------- ------------------- -----------------------
<S> <C> <C> <C>
Processing facilities:
Baltimore, Maryland 57,400 January 31, 2005 Baltimore, Philadelphia, Richmond,
Washington, D.C., New Jersey,
Massachusetts
Chattanooga, Tennessee 50,000 September 14, 2002 Louisville, Lexington
Cincinnati, Ohio 50,000 Owned Columbus, Akron, Cincinnati
Dallas, Texas 31,000 March 31, 2002 Dallas, Oklahoma City, Tulsa,
Detroit, Michigan 23,000 September 30, 2002 Chicago, Detroit, Milwaukee, Toledo, Flint,
Ann Arbor, Champaign
Houston, Texas 30,000 Owned Houston, San Antonio, Austin, Alabama,
Louisiana
Los Angeles, California 30,400 November 30, 2002 San Diego, Los Angeles, Arizona
Raleigh, North Carolina 31,500 April 30, 2002 Atlanta, South Carolina, North Carolina
Salt Lake City, Utah 24,000 November 30, 2003 Utah, Idaho
Stockton, California 57,000 August 31, 2002 Sacramento, San Francisco, Oakland
Tampa, Florida 29,000 January 25, 2002 Tampa, Miami, Orlando, Jacksonville,
Gainesville, Ocala, Ft. Myers
Service centers:
Atlanta, Georgia 2,500 June 30, 2000 -
Chicago, Illinois 3,200 November 30, 2001 -
Louisville, Kentucky 10,000 (2) -
Miami, Florida 4,000 January 31, 2000 -
San Marcos, Texas 3,600 September 30, 2000 -
Warehouses:
Cincinnati, Ohio 18,500 April 30, 2001 -
Detroit, Michigan 11,500 April 15, 2002 -
Long Beach, California 3,300 July 31, 2000 -
Salt Lake City, Utah 5,500 Month to Month -
Disposable products facility:
Plant City, Florida 40,800 November 1, 2004 -
Corporate office:
Clearwater, Florida 11,200 October 31, 2001 -
</TABLE>
(1) Excludes renewal options in the leases which range from one to 10 years.
(2) Service center provided by hospital
-7-
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any
litigation or other legal proceeding expected to have a material effect on the
Company or its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
-8-
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock trades publicly on The Nasdaq National
Market tier of the Nasdaq Stock Market under the symbol "STRC." The table below
sets forth the high and low bid quotations for the Company's Common Stock from
January 1, 1998 through December 31, 1999. These bid prices represent prices
between dealers without adjustment for retail mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
COMMON STOCK PRICE RANGE
1998
----
First Quarter $17.500 $ 14.375
Second Quarter $19.750 $ 17.000
Third Quarter $17.000 $ 8.750
Fourth Quarter $12.875 $ 7.875
1999
----
First Quarter $12.250 $ 9.500
Second Quarter $12.000 $ 6.875
Third Quarter $12.250 $ 7.625
Fourth Quarter $ 8.250 $ 6.813
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently expects that its earnings will be retained for
development and expansion, and does not anticipate paying dividends on its
Common Stock in the foreseeable future. Financial covenants in the Company's
credit facility prohibit the payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Notes to Consolidated
Financial Statements." On March 8, 2000, there were approximately 57 holders of
record of the Common Stock.
On August 31, 1998, the Company acquired from Standard Textile Co.,
Inc. all the stock of Repak Surgical Enterprises, Inc. ("Repak") in exchange for
566,667 shares of its convertible Series A Preferred Stock. The Series A
Preferred Stock is convertible by its holder at any time into the same number of
shares of the Company's Common Stock. Under certain conditions, including the
Company's Common Stock having an average closing trading price of $18.00 per
share for a specified time period, the Preferred Stock is mandatorily
convertible into the Company's Common Stock. The Company's issuance of the
Series A Preferred Stock to Standard Textile Co., Inc. was exempt from
registration requirements under Section 4(2) of the Securities Act of 1933.
-9-
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following table contains certain selected financial data and is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this report. The selected financial data have been
derived from the Company's audited financial statements. The following
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
STERILE RECOVERIES, INC.
--------------------------------------------------------
YEARS ENDED
--------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 68,596 $ 52,318 $ 39,854 $ 32,168 $ 25,320
Cost of revenues 47,011 35,334 26,286 21,764 17,659
-------- -------- -------- -------- --------
Gross profit 21,585 16,984 13,568 10,404 7,661
Distribution expenses 5,121 3,788 3,150 3,000 2,801
Selling and administrative expenses 9,700 7,065 5,924 4,734 3,975
-------- -------- -------- -------- --------
Income from operations 6,764 6,131 4,494 2,670 885
Interest expense (income), net 307 52 (142) 648 1,489
-------- -------- -------- -------- --------
Income (loss) before income taxes 6,457 6,079 4,636 2,022 (604)
Income tax expense(1) 2,503 2,393 1,835 190 --
-------- -------- -------- -------- --------
Net income (loss) $ 3,954 $ 3,686 $ 2,801 $ 1,832 $ (604)
======== ======== ======== ======== ========
Dividends on preferred stock 208 67
-------- --------
Net income available to common shareholders $ 3,746 $ 3,619
======== ========
UNAUDITED PRO FORMA INFORMATION (1):
Historical income (loss) before income taxes $ 2,022 $ (604)
Pro forma income tax expense 778 --
-------- --------
Pro forma net income (loss) $ 1,244 $ (604)
======== ========
Historical and pro forma (1996 and 1995 only)
net income (loss) per common share, basic $ 0.66 $ 0.64 $ 0.50 $ 0.29 $ (0.20)
======== ======== ======== ======== ========
Historical and pro forma (1996 and 1995 only)
net income (loss) per common share, diluted $ 0.63 $ 0.61 $ 0.48 $ 0.28 $ (0.20)
======== ======== ======== ======== ========
Weighted average common shares outstanding,
basic 5,676 5,662 5,637 4,300 3,094
======== ======== ======== ======== ========
Weighted average common shares outstanding,
diluted 6,322 6,019 5,862 4,491 3,094
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Reusable surgical products, net $ 20,167 $ 14,705 $ 10,034 $ 6,915 $ 4,924
Total assets 56,155 43,620 27,546 25,006 13,493
Total indebtedness 8,852 2,408 -- 1,000 10,891
Shareholders' equity 38,974 35,122 24,348 20,756 214
</TABLE>
(1) As an S Corporation for federal income tax purposes, the Company had not
been subject to income tax until the date of its initial public offering,
at which time the Company became a C Corporation. On a pro forma basis,
assuming the Company had been subject to income tax for all periods
presented, the Company would not have recognized any corporate income tax
expense prior to 1996. See "Notes B and H of Notes to Consolidated
Financial Statements".
-10-
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this report. This discussion and analysis contains trend
analysis and might contain forward-looking statements. These statements are
based on current expectations and actual results might differ materially. Among
the factors that could cause actual results to vary are those described in this
"Overview" section and in "Business - Certain Considerations."
OVERVIEW
The Company's revenues are derived from providing hospitals and surgery
centers with reusable gowns, towels, drapes, and basins for use in surgical
procedures through a daily comprehensive surgical procedure-based delivery and
retrieval system, and also from the sale of disposable surgical products that
supplement its reusable surgical product service. The Company's revenue growth
is primarily affected by the number of customers, the number and type of
surgical procedures it services for each customer, and the pricing by type of
surgical pack.
As of December 31, 1999, the Company believes its facilities operated
at approximately 55% of their estimated annual revenue capacity, which can vary
depending upon product mix and location of its customers.
On August 31, 1998, the Company acquired all the shares of stock of
RePak, a wholly owned subsidiary of Standard Textile Co., Inc., in exchange for
566,667 shares of its convertible Series A Preferred Stock. From a facility in
the Cincinnati area, RePak provides the Ohio and Michigan markets with reusable
surgical product services similar to the Company's reprocessing service. The
Company also purchased the RePak facility's real estate for $1.5 million cash
from affiliates of Standard Textile. See "Note C of Notes to Consolidated
Financial Statements."
On February 26, 1999, the Company acquired NPAC, the reusable surgical
product business of the textile rental segment of National Service Industries,
Inc. The Company purchased the NPAC customer relationships and certain other
assets of the business exclusive of property, plant and equipment for cash
consideration of approximately $604,000. See "Note C of Notes to Consolidated
Financial Statements."
Before the Offering, the Company was an S Corporation for state and
federal income tax purposes and not subject to corporate income taxes. Upon
completion of the Offering, the Company's S Corporation status terminated and
the Company became subject to corporate income taxes. See "Notes B and H of
Notes to Consolidated Financial Statements."
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of revenues represented by certain items reflected in the statements of income
of the Company.
YEARS ENDED
DECEMBER 31,
-----------------------------
1999 1998 1997
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 68.5 67.5 66.0
------ ------ ------
Gross profit 31.5 32.5 34.0
Distribution expenses 7.5 7.2 7.8
Selling and administrative expenses 14.1 13.6 14.9
------ ------ ------
Income from operations 9.9 11.7 11.3
Interest expense (income), net 0.5 0.1 (0.3)
------ ------ ------
Income before income taxes 9.4 11.6 11.6
Income tax expense 3.6 4.6 4.6
------ ------ ------
Net income 5.8% 7.0% 7.0%
====== ====== ======
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues increased $16.3 million, or 31.1%, to $68.6 million in 1999
from $52.3 million in 1998. The revenue increases were attributable in roughly
equal amounts to new customers and increased revenues from current customers,
and added revenues from the RePak and NPAC acquisitions.
GROSS PROFIT
Gross profit increased $4.6 million, or 27.1%, to $21.6 million in 1999
from $17.0 million in 1998. As a percentage of revenues, gross profit decreased
to 31.5% in 1999 from 32.5% in 1998. The decline in gross profit percentage
resulted from the Company's failure to grow revenues as expected in its third
and fourth quarters, and from expenses incurred in opening and initiating
operation of two new reprocessing facilities and a new disposable product
facility, along with continued implementation costs of the Company's new
information systems.
DISTRIBUTION EXPENSES
Distribution expenses increased $1.3 million or 35.2%, to $5.1 million
in 1999 from $3.8 million in 1998. As a percentage of revenues, distribution
expenses increased to 7.5% in 1999 from 7.2% in 1998. The increase in
distribution expenses as a percentage of revenues resulted primarily from new
truck routes added to serve new customers as the Company expanded its geographic
reach, and higher fuel costs.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $2.6 million, or 37.3%,
to $9.7 million in 1999 from $7.1 million in 1998. As a percentage of revenues,
selling and administrative expenses increased to 14.1% in 1999 from 13.6% in
1998. Expenses increased due to the significant efforts the Company made in 1999
to expand its product offering with instruments and to introduce its Surgical
Express program. The increase in selling and administrative expenses as a
percentage of revenues resulted primarily from expenses incurred by the Company
in adding sales representatives and implementing its new information systems.
INTEREST EXPENSE, NET
Interest expense increased $255,000, or 490.4% in 1999 from $52,000 in
1998, primarily due to borrowings under the Company's revolving credit facility.
INCOME BEFORE INCOME TAX EXPENSE
As a result of the foregoing, the Company's income before income taxes
increased to $6.5 million in 1999, from $6.1 million in 1998. As a percentage of
revenues, income before income taxes was 9.4% of revenues in 1999 and 11.6% of
revenues in 1998.
INCOME TAX EXPENSE
Income tax expense increased $110,000 to $2.5 million in 1999 from $2.4
million in 1998. The Company's effective tax rate is 38.8% for 1999 and 39.4%
for 1998.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
NET INCOME PER COMMON SHARE
The Company recorded net income per common share of $0.63 on a diluted
per share basis, and $0.66 on a basic per share basis for 1999, compared with
$0.61 on a diluted per share basis and $0.64 on a basic per share basis in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues increased $12.5 million, or 31.3%, to $52.3 million in 1998
from $39.9 million in 1997. The revenue increases were attributable in roughly
equal amounts to new customers and increased revenues from current customers in
addition to the RePak acquisition.
GROSS PROFIT
Gross profit increased $3.4 million, or 25.2%, to $17.0 million in 1998
from $13.6 million in 1997. As a percentage of revenues, gross profit decreased
to 32.5% in 1998 from 34.0% in 1997. The decline in gross profit percentage is
largely attributable to higher amortization and shrinkage expense of reusable
surgical products.
DISTRIBUTION EXPENSES
Distribution expenses increased $638,000 or 20.3%, to $3.8 million in
1998 from $3.2 million in 1997. As a percentage of revenues, distribution
expenses decreased to 7.2% in 1998 from 7.8% in 1997. The improvement in
distribution expenses as a percentage of revenues resulted primarily from
efficiencies derived from delivering more volume over existing routes and from
adding routes and equipment at a slower pace than revenue growth.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $1.1 million, or 19.3%,
to $7.0 million in 1998 from $5.9 million in 1997. As a percentage of revenues,
selling and administrative expenses decreased to 13.6% in 1998 from 14.9% in
1997. Expenses increased in support of increased revenues and the acquisition of
RePak. Improvement in selling and administrative expenses as a percentage of
revenues resulted primarily from the Company's continuing ability to leverage
administrative costs over more revenues.
INTEREST EXPENSE (INCOME), NET
Interest income changed from $142,000 in 1997 to interest expense of
$52,000 in 1998, primarily due to borrowings under the Company's revolving
credit facility.
INCOME BEFORE INCOME TAX EXPENSE
As a result of the foregoing, the Company's income before income taxes
increased to $6.1 million in 1998 from $4.6 million in 1997. As a percentage of
revenues, income before income taxes was 11.6% of revenues in both 1998 and
1997.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
INCOME TAX EXPENSE
Income tax expense increased $558,000 to $2.4 million in 1998 from $1.8
million in 1997. The Company's effective tax rate is 39.4% for 1998 and 39.6%
for 1997.
NET INCOME PER COMMON SHARE
The Company recorded net income per common share of $0.61 on a diluted
per share basis, and $0.64 on a basic per share basis for 1998, compared with
$0.48 on a diluted per share basis and $0.50 on a basic per share basis in 1997.
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 from operating activities was $11.4
million in 1999, compared to $9.9 million in 1998. The increase in cash from
operating activities from 1998 to 1999 resulted primarily from increased net
income before amortization, shrinkage, and depreciation expense, and was
partially offset by an increase in prepaid expenses and other assets and a
decrease in accounts payable. The Company's positive cash flow from operating
activities exceeded its purchases of reusable surgical products in 1999.
The Company used approximately $5.3 million more net cash in investing
activities in 1999 than in 1998. To support sales growth, the Company in 1999
made capital expenditures for equipment of $6.3 million and for reusable
surgical products of $11.2 million compared to $3.3 million for equipment and
$7.8 million for reusable surgical products in 1998. These expenditures were
funded 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 $1.5 million per
month for the next 12 months, although the amount will fluctuate with the growth
of its business. The Company also expects to make additional expenditures of
approximately $2.5 million in 2000 for equipment upgrades including the addition
of instrument reprocessing equipment and equipment to increase its facilities'
aggregate capacity. The Company has in recent years spent $2.1 million in a
continuing project to upgrade its technology software and related hardware, of
which it incurred $900,000 in 1999, and expects to spend an additional $335,000
in 2000, as it substantially completes this project.
In the third quarter of 1999, the Company began operating two new
reprocessing facilities in Stockton, California and Chattanooga, Tennessee. The
Company's cost of between $5.0 and $5.5 million for each of these facilities was
financed through the lease financing agreement described below. In addition, the
Company spent $2.2 million in 1999 and expects to spend $1.8 million more in
2000 to expand and further equip its Cincinnati facility, which was financed
from its line of credit. See "Note G of Notes to Consolidated Financial
Statements."
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
The Company's outstanding balance under its revolving credit facility
with First Union National Bank was approximately $8.9 million and $2.4 million
on December 31, 1999 and December 31, 1998, 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 (6.34% as of December 31, 1999), 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 of assets.
As of February 1, 1999, the Company secured a $10.0 million lease
financing agreement 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 $105,000 and $86,000 in lease payments
for its Stockton, California and Chattanooga, Tennessee facilities,
respectively, for the twelve months ended December 31, 1999.
As of December 31, 1999, the Company had cash of approximately $37,000.
The Company believes that its cash flows from operating activities and funds
available under its credit facility as anticipated to be expanded will be
sufficient to fund its growth and anticipated capital requirements for the next
twelve months. See "Business - Certain Considerations--Need for Capital."
YEAR 2000 COMPLIANCE
The Company developed and implemented a comprehensive program to
address year 2000 issues pertaining to both information technology and
non-information technology systems. The program consisted of identification,
compliance, and post-implementation phases, and considered the effect of the
year 2000 on the Company's internal systems, customers, products and services,
as well as on its suppliers and other critical business partners.
During those years, the Company replaced its financial and operational
systems with enterprise-wide systems that were year 2000 compliant and that the
Company expects will facilitate its growth. The Company has not been adversely
affected by year 2000 problems or issues.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk sensitive financial
instruments.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-16-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Sterile Recoveries, Inc.
We have audited the accompanying consolidated balance sheet of Sterile
Recoveries, Inc. as of December 31, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
index at Item 14(a) for the year ended December 31, 1999. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sterile
Recoveries, Inc. at December 31, 1999, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Tampa, Florida
February 14, 2000, except for paragraph 2
of Note E, as to which the date is
March 24, 2000
-17-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Sterile Recoveries, Inc.
We have audited the accompanying consolidated balance sheet of Sterile
Recoveries, Inc. as of December 31, 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1998. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates make by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sterile
Recoveries, Inc. as of December 31, 1998, and the results of their consolidated
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ GRANT THORNTON LLP
Tampa, Florida
February 26, 1999
-18-
<PAGE>
STERILE RECOVERIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Revenues $ 68,596 $ 52,318 $ 39,854
Cost of revenues 47,011 35,334 26,286
-------- -------- --------
Gross profit 21,585 16,984 13,568
Distribution expenses 5,121 3,788 3,150
Selling and administrative expenses 9,700 7,065 5,924
-------- -------- --------
Income from operations 6,764 6,131 4,494
Interest expense (income), net 307 52 (142)
-------- -------- --------
Income before income taxes 6,457 6,079 4,636
Income tax expense 2,503 2,393 1,835
-------- -------- --------
Net income $ 3,954 $ 3,686 $ 2,801
======== ======== ========
Dividends on preferred stock 208 67 --
-------- -------- --------
Net income available for
common shareholders $ 3,746 $ 3,619 $ 2,801
======== ======== ========
Net income per common share -
basic $ 0.66 $ 0.64 $ 0.50
======== ======== ========
Net income per common share -
diluted $ 0.63 $ 0.61 $ 0.48
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-19-
<PAGE>
STERILE RECOVERIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------
1999 1998
------- -------
ASSETS
Cash $ 37 $ 172
Accounts receivable, net 8,614 7,580
Inventories 2,940 2,324
Prepaid expenses and other assets 2,052 1,670
Reusable surgical products 20,167 14,705
Property, plant and equipment, net 16,664 12,042
Goodwill, net 5,681 5,127
------- -------
Total assets $56,155 $43,620
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $ 8,852 $ 2,408
Accounts payable 5,574 4,188
Employee related accrued expenses 1,076 974
Other accrued expenses 796 786
Deferred tax liability 883 142
------- -------
Total liabilities 17,181 8,498
Shareholders' equity
Preferred stock-authorized 5,000,000 shares of
$.001 par value; 566,667 shares issued
and outstanding at December 31, 1999 and 1998 1 1
Common stock-authorized 30,000,000 shares
of $.001 par value; issued and outstanding
5,676,794 and 5,664,794 shares, respectively 6 6
Additional paid-in capital 27,427 27,321
Retained earnings 11,540 7,794
------- -------
Total shareholders' equity 38,974 35,122
------- -------
Total liabilities and shareholders' equity $56,155 $43,620
======= =======
The accompanying notes are an integral part of these financial statements.
-20-
<PAGE>
<TABLE>
<CAPTION>
STERILE RECOVERIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------------------ ------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 5,521,189 $ 6 -- $ -- $ 19,376 $ 1,374 $ 20,756
Conversion of note payable 128,205 -- -- -- 750 -- 750
Exercise of stock options 10,500 -- -- -- 41 -- 41
Net income -- -- -- -- -- 2,801 2,801
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 5,659,894 6 -- -- 20,167 4,175 24,348
Exercise of stock options 4,900 -- -- -- 15 -- 15
Acquisition of RePak Surgical
Enterprises, Inc. -- -- 566,667 1 7,139 -- 7,140
Dividend on preferred stock -- -- -- -- -- (67) (67)
Net income -- -- -- -- -- 3,686 3,686
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 5,664,794 6 566,667 $ 1 27,321 7,794 35,122
Exercise of stock options 12,000 -- -- -- 106 -- 106
Dividend on preferred stock -- -- -- -- -- (208) (208)
Net income -- -- -- -- -- 3,954 3,954
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1999 5,676,794 $ 6 566,667 $ 1 $ 27,427 $ 11,540 $ 38,974
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-21-
<PAGE>
STERILE RECOVERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,954 $ 3,686 $ 2,801
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,677 1,067 689
Amortization of reusable surgical products 4,036 2,910 2,015
Provision for reusable surgical products shrinkage 1,742 1,523 606
Deferred income taxes 741 409 57
Change in assets and liabilities (net of business
combinations)
Accounts receivable (866) (878) (763)
Inventories (616) (326) (739)
Prepaid expenses and other assets (871) (404) (673)
Accounts payable 1,425 2,142 243
Other accrued expenses 139 (219) (295)
-------- -------- --------
Net cash provided by operating activities 11,361 9,910 3,941
-------- -------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (6,278) (3,303) (2,811)
Purchases of reusable surgical products (11,238) (7,810) (5,740)
Reimbursable construction costs 330 -- --
Payment for acquisition of business (604) (1,428) --
-------- -------- --------
Net cash used in investing activities (17,790) (12,541) (8,551)
-------- -------- --------
Cash flows from financing activities
Net borrowings on notes payable to bank 6,443 2,408 --
Payments on related party debt -- -- (250)
Net proceeds from issuance of common stock 106 15 41
Dividends paid (255) -- --
-------- -------- --------
Net cash provided by (used in) financing activities 6,294 2,423 (209)
-------- -------- --------
Decrease in cash (135) (208) (4,819)
Cash and cash equivalents at beginning of year 172 380 5,199
Cash and cash equivalents at end of year $ 37 $ 172 $ 380
======== ======== ========
Supplemental cash flow information
Cash paid for interest $ 294 $ 69 $ 67
Cash paid for income taxes ======== ======== ========
$ 2,700 $ 2,202 $ 1,870
======== ======== ========
Conversion of Convertible Demand Note into 128,205
shares of common stock $ -- $ -- $ 750
======== ======== ========
Supplemental schedule of non-cash investing activities
Acquisition of businesses
Fair value of assets acquired $ 604 $ 9,330 $ --
Cash paid (604) (1,428) --
Preferred stock issued -- 7,140 --
-------- -------- --------
Liabilities incurred or assumed $ -- $ 762 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-22-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF ORGANIZATION AND BUSINESS
Sterile Recoveries, Inc. ("SRI" or the "Company") was incorporated in
June 1994 in Florida to acquire all of the assets of its predecessor, AMSCO
Sterile Recoveries, Inc. on July 31, 1994. The Company's corporate office is
located in Clearwater, Florida.
SRI provides hospitals and surgery centers in 23 states with a
comprehensive surgical procedure-based delivery and retrieval service for
reusable gowns, towels, drapes and basins, and additionally, provides disposable
products necessary for surgery. At eleven regional facilities, SRI collects,
sorts, cleans, inspects, packages, sterilizes, and delivers its reusable
products on a just-in-time basis.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
The Company operates on a 52-53 week fiscal year ending the Sunday
nearest December 31. The financial statements reflect the Company's year-end as
December 31 for presentation purposes. There are 53 weeks in 1999 and 52 weeks
in 1998 and 1997.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of the consolidated financial statements conform to
accounting principles generally accepted in the United States, and require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from those estimates and assumptions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
The Company grants credit to customers who meet pre-established credit
requirements. The Company does not require collateral when trade credit is
granted to customers. Credit losses have been less than $35,000 for each period
presented herein. The allowance for doubtful accounts at December 31, 1999 and
1998 is $90,000 and $50,000, respectively.
-23-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INVENTORIES
Inventories consisting principally of consumables, supplies, and
disposable surgical products are valued at the lower of cost or market, with
cost being determined on the first-in, first-out method.
REUSABLE SURGICAL PRODUCTS
Reusable surgical products are stated at historical cost, net of
amortization. The products are amortized on a basis similar to the units of
production method. Estimated useful lives are based on the estimated total
number of available uses for each product. The expected total available usage
for its products using the three principal fabrics (accounting for 85% of its
products) are 75, 100, and 125 uses based on several factors including studies
performed by management. Based on current reusable product turnover, the
expected total available usage equates to a time period of approximately three
to seven years. The estimates, however, are subject to revision if actual
experience differs from the estimated available uses. Accumulated amortization
at December 31, 1999 and 1998 approximates $8.5 million and $6.3 million,
respectively.
As of December 31, 1999 and 1998, the Company has a reserve for
shrinkage of approximately $694,000 and $450,000 respectively, to account for
the estimated amount of product at customer locations which will not be returned
to the Company. The Company will continue to evaluate, at least quarterly, the
actual shrinkage experience and product obsolescence and will review the
provisions if deemed necessary. As of December 31, 1999 and 1998, the Company
has a reserve for obsolescence of approximately $105,000 and $3,000,
respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is provided using
the straight-line method over the estimated useful lives of the assets, or the
term of the related leases for leasehold improvements, if less than the useful
lives.
GOODWILL
Goodwill from the acquisitions of Surgipro, RePak and NPAC is stated at
cost less accumulated amortization using the straight-line method over 20 years
for Surgipro and over 30 years for RePak and NPAC. During 1999, 1998 and 1997,
goodwill amortization totaled approximately $202,000, $83,000 and $29,000,
respectively. Accumulated amortization at December 31, 1999 and 1998 was
approximately $338,000 and $136,000, respectively.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
On a quarterly basis, the Company evaluates the projected undiscounted
cash flows of each business unit to determine, when indicators of impairment are
present, whether or not there has been permanent impairment of its long-lived
assets, and accrues expenses for the amount, if any, determined to be
permanently impaired. No impairment exists for all years presented.
REVENUE RECOGNITION
Revenues are recognized as the agreed upon services are delivered,
generally daily. The Company's revenues are principally generated from service
agreements with varying terms of one to three years, which are cancelable by
either party, generally with a 90-day notice. All reusable surgical products
provided to a customer under these agreements are used by the customer, but
remain the Company's property.
-24-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues from two hospital groups accounted for approximately 23% and
11% of the Company's revenues in 1999, compared to 27% and 12% in 1998,
respectively. No single hospital, however, accounted for more than 4% and 3% of
the Company's revenues for the years ended December 31, 1999 and 1998,
respectively.
INCOME TAXES
The Company has applied the provisions of Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109), which
requires an asset and liability approach for financial accounting and reporting.
Deferred income tax assets and liabilities are determined based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and lives that will be in effect when the
differences are expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, payables, accrued expenses
and notes payable approximate fair value because of the short-term nature of
these items. The fair value of the Company's long-term debt approximates its
carrying amount as the interest rates change with market interest rates.
NET INCOME PER COMMON SHARE
During 1997, the Company adopted Financial Accounting Standards Board
Statement No. 128, Earnings Per Share, (SFAS 128). SFAS 128 requires the
presentation of both basic and diluted earnings per share. Basic net income per
share is calculated by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted net income per share is
calculated by dividing net income by the weighted average number of common and
potential common shares outstanding during the period. Potential common shares
consist of the dilutive effect of outstanding options calculated using the
treasury stock method.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES (APB 25). In 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). Under SFAS 123, the Company may elect to
recognize stock-based compensation expense based on the fair value of the awards
or continue to account for stock-based compensation under APB 25, and disclose
in the consolidated financial statements the effects of SFAS 123 as if the
recognition provisions were adopted.
The Company accounts for any stock-based compensation arrangements not
specifically addressed by APB 25 under the fair value provisions of SFAS 123,
including options issued to non-employees. The pro forma disclosures required by
SFAS 123 are provided for all stock-based compensation which are accounted for
under APB 25.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted in 1998 Statement of Position 98-1, (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP segments an internal use software project into stages
and accounts for the project's costs based on the stage in which the costs are
incurred. Specified costs for each application development stage are capitalized
if the preliminary project stage is complete, management authorized the project,
and completion of the project is probable. Capitalizable costs of internal-use
software projects consist of (1) external direct costs of materials and services
used to develop or purchase internal-use software, (2) payroll and payroll-
related costs for time spent directly on the project by employees directly
associated with the internal-use software project, and (3) interest costs
incurred during the development of internal use software. The Company's adoption
of this pronouncement did not materially impact its financial statements. The
Company's policy was to capitalize internal-use software costs, accordingly, the
Company capitalized approximately $1.2 million in 1998, which is included in
property, plant and equipment. The Company capitalized an additional $300,000 in
1999 for its internal-use software project. On its completion of this project,
the Company will amortize these costs over five years.
-25-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, was issued, and was required to be adopted in years
beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, deferring
the effective date of SFAS No. 133 for one year. This statement requires all
derivatives to be recorded on the balance sheet at fair market value. This
results in the offsetting changes in fair value or cash flows of both the hedge
and the hedged item being recognized in earnings in the same period. Changes in
fair value of derivatives not meeting the Statement's hedge criteria are
included in income. The Company currently does not have any derivative
instruments and is not involved in hedging activities and therefore does not
expect the Statement to have an impact on its results of operations or financial
position.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to conform
to the 1999 presentation.
NOTE C--BUSINESS COMBINATIONS
On February 26, 1999, the Company acquired NPAC, the reusable surgical
product business of the textile rental segment of National Service Industries,
Inc. The Company purchased the NPAC customer relationships and certain other
assets of the business exclusive of property, plant and equipment for cash
consideration of approximately $604,000, of which $449,000 has been allocated to
goodwill. Goodwill is amortized over 30 years. The Company has accounted for the
acquisition as a purchase and NPAC's operating results are included in the
Company's operating results since the date of acquisition. Pro forma results are
not materially different from historical results and therefore are not
presented.
On August 31, 1998, the Company acquired all the stock of RePak
Surgical Enterprises, Inc. ("RePak"), a wholly owned subsidiary of Standard
Textile Co., Inc.("Standard Textile"), in exchange for 566,667 shares of its
convertible Series A Preferred Stock. The Company also purchased the RePak
facility's real estate for $1.5 million cash from Standard Textile's affiliates.
The Company has accounted for the acquisition as a purchase and RePak's
operating results are included in the Company's operating results since the date
of acquisition. Of the approximately $8.6 million total costs it incurred to
complete the acquisition, the Company allocated approximately $4.7 million to
tangible assets, assumed approximately $760,000 in liabilities, and allocated
approximately $4.7 million to goodwill.
The following unaudited pro forma results of operations for the years
ended December 31, 1998 and 1997 assume the RePak acquisition described above
had occurred at the beginning of the year prior to its acquisition, and do not
purport to be indicative of the results that actually would have occurred if the
acquisition had been made as of that date or of results which may occur in the
future.
YEARS ENDED
--------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Revenues $58,262 $48,145
Net income $ 4,017 $ 3,151
Net income available for common shareholders $ 3,809 $ 2,943
Net income per common share - basic $ 0.67 $ 0.52
Net income per common share - diluted $ 0.63 $ 0.49
-26-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE D--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIVES --------------------------
IN YEARS 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Land -- $ 429,460 $ 429,460
Buildings 40 1,503,377 1,457,772
Leasehold improvements & signs 2-18 3,956,879 1,852,780
Machinery and equipment 3-12 10,718,283 8,486,522
Office furniture, equipment & computers 3-10 4,220,319 2,537,910
----------- -----------
20,828,318 14,764,444
Less: Accumulated depreciation and
amortization 4,164,303 2,722,608
----------- -----------
$16,664,015 $12,041,836
=========== ===========
</TABLE>
During 1999, 1998 and 1997, depreciation expense totaled approximately
$1.5 million, $984,000, and $660,000, respectively.
NOTE E- NOTES PAYABLE TO BANK
The Company's outstanding balance under its revolving credit facility
with First Union National Bank was approximately $8.9 million and $2.4 million
on December 31, 1999 and December 31, 1998, 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 (6.34% as of December 31, 1999), 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 of assets.
Total interest expense and related fees for 1999, 1998 and 1997 was
approximately $320,000, $100,000, and $67,000, respectively.
NOTE F-NOTE PAYABLE CONVERSION
In March 1996, the Company borrowed $1,000,000 from a director pursuant
to an 8.5% Convertible Demand Promissory Note, of which $750,000 was convertible
to Common Stock at $5.85 per share. The holder converted the convertible portion
of this note on February 24, 1997 into 128,205 shares of common stock. The
Company concurrently repaid the remaining $250,000 balance of the note. The
Company incurred interest expense related to the demand note of $13,000 for the
year ended December 31, 1997.
-27-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases offices, facilities, office equipment, and
distribution vehicles under non-cancellable operating leases with terms ranging
from one year to nine years. The office and processing facility leases contain
various renewal options and escalating payments. At present, the Company intends
to exercise certain aspects of these renewal options when the initial term
expires. The vehicle leases contain contingent rentals based on mileage.
Future minimum lease payments as of December 31, 1999 under leases in
excess of one year are as follows:
YEAR ENDING
-----------
2000 $ 2,698,000
2001 2,228,000
2002 1,832,000
2003 1,176,000
2004 1,047,000
Thereafter 3,520,000
-----------
Total $12,501,000
===========
Rental expense for the years ended December 31, 1999, 1998 and 1997
totaled $3,047,000, $1,701,000, and $1,571,000, (including contingent rentals of
approximately $293,000, $237,000, and $211,000), respectively.
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 has recently
been increased by an additional $573,000. 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 to the lessor 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 December 31, 1999. The Company incurred
$105,000 and $86,000 in lease payments for its Stockton, California and
Chattanooga, Tennessee facilities, respectively, in the twelve month period
ended December 31, 1999.
PURCHASE AGREEMENT WITH STANDARD TEXTILE
In conjunction with the RePak acquisition, the Company signed a
procurement agreement with Standard Textile under which the Company agreed to
purchase 80% of its reusable surgical products from Standard Textile. The
Company's management believes that Standard Textile's prices are and will be
comparable to prices available from other vendors. A significant percentage of
the Company's business is dependent on its ability to obtain a key component of
its liquid-proof surgical products from one principal vendor. Standard Textile's
President and Chief Executive Officer became a director of the Company on August
31, 1998.
-28-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any
litigation or other legal proceedings expected to have a material effect on the
Company or its business.
MANAGEMENT INCENTIVE PLAN
The Company has a Management Incentive Plan, the incentives of which
are based on various performance factors and are adjusted to reflect the
Company's overall performance as determined by the Board of Directors. Payment
of the cash incentives is made at the end of the second month after the end of
the incentive year. The participant must still be an employee of the Company at
that time. Approximately $200,000, $212,000,and $295,000 of estimated incentives
were recognized during the years ended December 31, 1999, 1998 and 1997,
respectively.
MANAGEMENT EMPLOYMENT AGREEMENTS
The Company has approved employment agreements with three executives in
which each person would receive severance pay equal to two years of base salary
in the event that the executive or employee is terminated following a change in
control of the Company.
NOTE H--INCOME TAX
The provision for income taxes for the years ended December 31 is as
follows:
1999 1998 1997
---------- ---------- ----------
Current $1,762,000 $1,984,000 $1,778,000
Deferred 741,000 409,000 57,000
---------- ---------- ----------
Total $2,503,000 $2,393,000 $1,835,000
========== ========== ==========
Reconciliation of the federal statutory income tax rate of 34.0% to the
effective income tax rate for the years ended December 31 is as follows:
1999 1998 1997
------ ------ ------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal 5.2 4.6 4.5
Other, net (.4) .8 1.1
------ ------ ------
38.8% 39.4% 39.6%
====== ====== ======
Significant components of the Company's deferred tax assets and
liabilities are as follows:
1999 1998
----------- -----------
Deferred tax assets:
Inventory $ 467,000 $ 367,000
Health insurance reserve 10,000 60,000
Vacation pay accrual 76,000 88,000
Other 96,000 57,000
----------- -----------
649,000 572,000
Deferred tax liabilities:
Depreciation (1,025,000) (463,000)
Software development costs (502,000) (251,000)
Other (5,000) --
----------- -----------
Net deferred income tax liability $ (883,000) $ (142,000)
=========== ===========
During 1998, the Company acquired RePak which included a deferred tax
asset of approximately $107,000.
-29-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE I--SHAREHOLDERS' EQUITY
COMMON STOCK
Subject to preferences which might be applicable to the Company's
outstanding Preferred Stock, the holders of the Common Stock are entitled to
receive dividends when, as, and if declared from time to time by the Board of
Directors out of funds legally available. In the event of liquidation,
dissolution, or winding-up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
subject to prior distribution rights of any Preferred Stock then outstanding.
The Common Stock has no preemptive or conversion rights and is not subject to
call or assessment by the Company. There are no redemption or sinking fund
provisions applicable to the Common Stock.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$.001 par value per share. The Board of Directors has the authority, without any
further vote or action by the Company's shareholders, to issue Preferred Stock
in one or more series and to fix the number of shares, designations, relative
rights (including voting rights), preferences, and limitations of those series
to the full extent now or hereafter permitted by Florida law.
On August 31, 1998, the Company acquired from Standard Textile all the
stock of Repak. Standard Textile received in this transaction 566,667 shares of
the Company's Series A Preferred Stock, which is convertible by its holder at
any time into the same number of shares of the Company's Common Stock. Under
certain conditions, including the Company's Common Stock having an average
closing trading price of $18.00 per share for a specified time period, the
Series A Preferred Stock is mandatorily convertible into the Company's Common
Stock. The Series A Preferred Stock accrues a 2% dividend, payable quarterly,
until the earlier of September 2004 or the date that it is converted into Common
Stock.
NOTE J--STOCK OPTIONS
The Company maintains three stock option plans, the 1995 Stock Option
Plan, the 1996 Non-Employee Director Plan, and the 1998 Stock Option Plan.
THE 1995 STOCK OPTION PLAN
The 1995 Stock Option Plan provides employees with incentive or
non-qualified options to purchase up to 700,000 shares of Common Stock. On
December 21, 1995, the Company granted non-qualified stock options covering a
total of 94,000 shares of Common Stock to various employees at an exercise price
of $5.85 per share. The exercise price represented the estimated fair value of
the Company's Common Stock at the time of the grant, as approved by the Board of
Directors based upon various factors including an independent third-party firm's
valuation. None of the options vested until completion of the Company's initial
public offering, and are then vested ratably over the four-year period following
the completed offering. Since the offering, the Company has granted 700,000
options under this Plan. The options vest ratably over five years from the date
of the grant. All outstanding options vest upon a change in control of the
company. Options granted under the Employee Plan expire no later than ten years
after the date granted or sooner in the event of death, disability, retirement
or termination of employment. Included in these options are options to purchase
140,000 shares issued to an employee who is also a director and an officer of
the Company.
THE 1998 STOCK OPTION PLAN
The 1998 Stock Option Plan provides employees with incentive or
non-qualified options to purchase up to 300,000 shares of Common Stock. The
terms of the options granted under the 1998 plan may not exceed ten (10) years
beyond the grant date or sooner in the event of death, disability, retirement or
termination of employment.
-30-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THE NON-EMPLOYEE PLAN
The Non-Employee Plan provides for the grant of non-qualified stock
options to purchase up to 100,000 shares of Common Stock to members of the Board
of Directors who are not employees of the Company. At the completion of its
initial public offering, each non-employee director was granted options to
purchase 4,000 shares of Common Stock for each full remaining year of the
director's term. Thereafter, on the date on which a new non-employee director is
first elected or appointed, he will automatically be granted options to purchase
4,000 shares of Common Stock for each year of his initial term, and will be
granted options to purchase 4,000 shares of Common Stock for each year of any
subsequent term to which he is elected. All options become exercisable ratably
over the director's term and have an exercise price equal to the fair market
value of the Common Stock on the date of grant.
OTHER STOCK OPTIONS
In October 1995, in conjunction with a financial consulting arrangement
with an individual who became a director and an officer of the Company, the
Company granted the individual a non-qualified stock option for 66,000 shares of
its Common Stock at an exercise price of $4.43 a share which were exercisable as
follows: (1) 22,000 shares upon the completion of an interim financing
(completed in March 1996); and (2) 44,000 at the completion of an initial public
offering. The exercise price was determined by the Board of Directors to
approximate the estimated fair value of the Company's Common Stock at the date
of grant based on various factors, including the Company's history of operating
losses.
On May 2, 1996, the Company issued to a recently appointed director an
option to purchase 7,500 shares of the Company's Common Stock for $8.00 per
share, which vested one-third on completion of the Company's initial public
offering, one-third at the 1997 annual meeting of shareholders, and one-third at
the 1998 annual meeting of shareholders.
On November 21, 1997, the Company issued to an officer and director an
option to purchase 20,000 shares of the Company's Common Stock for $15.06 per
share, which vests ratably over five years.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under these plans consistent with
the methodology prescribed by SFAS 123, the Company's net income and earnings
per share would be reduced to the pro forma amounts indicated below:
1999 1998 1997
------ ------ ------
Net income As reported $3,954 $3,686 $2,801
Pro forma $2,973 $2,991 $2,390
Basic net income per share As reported $ 0.66 $ 0.64 $ 0.50
Pro forma $ 0.49 $ 0.52 $ 0.43
Diluted net income per share As reported $ 0.63 $ 0.61 $ 0.48
Pro forma $ 0.47 $ 0.50 $ 0.41
The fair value of each option grant is estimated on the date of grant using the
Binomial options-pricing model with the following weighted-average assumptions
used for grants in 1999, 1998 and 1997, respectively, no dividend yield for all
years, expected volatility of 61, 53, and 48 percent; risk-free interest rates
of 7.5, 6.0, and 6.5 percent, and expected lives of 4.0, 4.0, and 4.1 years. The
weighted average fair value of options granted during the years ended December
31, 1999, 1998 and 1997 are $5.91, $7.89, and $7.09, respectively.
-31-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of December
31, 1999, 1998 and 1997, and changes during the years ended on those dates is
presented below:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------- ----------
Outstanding as of December 31, 1996 424,000 $ 7.83
Granted 252,500 $ 16.45
Exercised (10,500) $ 3.94
Forfeited (34,800) $ 10.96
-------- ---------
Outstanding as of December 31, 1997 631,200 $ 11.17
Granted 132,500 $ 17.26
Exercised (4,900) $ 2.98
Forfeited (55,800) $ 13.26
-------- ---------
Outstanding as of December 31, 1998 703,000 $ 12.21
Granted 216,000 $ 11.18
Exercised (12,000) $ 7.68
Forfeited (14,500) $ 14.86
-------- ---------
Outstanding as of December 31, 1999 892,500 $ 11.98
======== =========
The following table summarizes information concerning currently
outstanding and exercisable stock options:
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
--------------- ----------- ---------------- ----------------
$ 4.43 - 5.85 134,000 5.9 $ 5.15
$ 5.86 - 9.50 219,000 6.6 $ 9.33
$ 9.51 - 17.50 440,000 8.3 $14.01
$17.51 - 19.00 99,500 8.3 $18.00
------- ------
892,500 $11.98
======= ======
EXERCISABLE SHARES
- -------------------
$ 4.43 - 5.85 120,400 $ 5.07
$ 5.86 - 9.50 132,400 $ 9.42
$ 9.51 - 17.50 95,599 $16.30
$17.51 - 19.00 19,900 $18.00
------- ------
368,299 $10.25
======= ======
At December 31, 1998 and 1997, exercisable options totaled 263,400 and
156,400 at weighted average exercise prices of $8.85 and $6.46, respectively.
-32-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE K-EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
BASIC
Numerator:
Net income $ 3,954,310 $ 3,686,000 $ 2,801,000
Less effect of dividends of preferred stock (207,923) (67,000) --
----------- ----------- -----------
Net income available for common
shareholders $ 3,746,387 $ 3,619,000 $ 2,801,000
=========== =========== ===========
Denominator:
Weighted average shares outstanding 5,676,160 5,662,000 5,637,007
=========== =========== ===========
Net income per common share - basic $ 0.66 $ 0.64 $ 0.50
=========== =========== ===========
DILUTED
Numerator:
Net income $ 3,954,310 $ 3,686,000 $ 2,801,000
=========== =========== ===========
Denominator:
Weighted average shares outstanding 5,676,160 5,662,000 5,637,000
Effect of dilutive securities:
Employee stock options 79,276 172,000 212,000
Convertible preferred stock 566,667 185,000 --
Convertible notes -- -- 13,000
----------- ----------- -----------
6,322,103 6,019,000 5,862,000
=========== =========== ===========
Net income per common share - diluted $ 0.63 $ 0.61 $ 0.48
=========== =========== ===========
</TABLE>
Options to purchase 538,870, 371,000 and 186,500 shares of common stock
were not included for all or a portion of the 1999, 1998 and 1997 computation of
diluted net income per common share, respectively, as the options' exercise
prices were greater than the average market price of the common shares and
therefore the effect would be anti-dilutive.
-33-
<PAGE>
STERILE RECOVERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE L - 1999 EMPLOYEE BENEFIT PLAN
Effective February 1, 1999, the Company sponsors the Sterile
Recoveries, Inc. 401(k) Plan (the "Plan"), a defined contribution plan
established under Section 401(k) of the U.S. Internal Revenue Code. Employees
are eligible to contribute voluntarily to the Plan after one year of continued
service, satisfying 1,000 hours of service, and attaining age 21. At its
discretion, the Company may contribute 25% of the first 4% of the employee's
contribution. The Plan allows for employee elective contributions up to an
amount equivalent to 15% of salary. Employees are always vested in their
contributed balance and vest ratably in the Company's contribution over six
years. For the year ended December 31, 1999, the expense related to the Plan was
approximately $89,000.
NOTE M - RELATED PARTY TRANSACTIONS
SRI paid $394,000, $24,000, and $76,000 in 1999, 1998 and 1997 to a
company to design and supply the components for water reclamation systems for
SRI facilities. A director and shareholder of SRI owns the company providing
these services to SRI.
During 1999, 1998 and 1997, the Company paid approximately $73,000,
$76,000, and $20,000 respectively, to corporate law firms. A member of each law
firm was a shareholder of the Company when these services were rendered.
During 1999 and 1998, the Company paid approximately $7,400,000 and
$127,000 respectively, to a company for the purchase of reusable surgical
products. This company is owned and managed by a shareholder and outside
director of SRI.
-34-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
STERILE RECOVERIES, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------ ------------ ------------ -------------- ------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) OF PERIOD
- -------------------------------- ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997: $ 35,000 $ 36,000 $ (32,000)(1) $ 39,000
Year ended December 31, 1998: $ 39,000 $ 11,607 $ (607)(1) $ 50,000
Year ended December 31, 1999: $ 50,000 $ 39,322 $ 678(2) $ 90,000
Reserve for shrinkage:
Year ended December 31, 1997: $ 135,000 $ 606,000 $ (546,000)(3) $ 195,000
Year ended December 31, 1998: $ 195,000 $ 1,523,000 $(1,268,000)(3) $ 450,000
Year ended December 31, 1999: $ 450,000 $ 1,742,000 $(1,498,000)(3) $ 694,000
Reserve for obsolescence:
Year ended December 31, 1997: $ 4,000 $ -- $ -- $ 4,000
Year ended December 31, 1998: $ 4,000 $ -- $ (1,000)(3) $ 3,000
Year ended December 31, 1999: $ 3,000 $ 102,000 $ -- $ 105,000
</TABLE>
(1) Write-offs of uncollectible accounts
(2) Write-off recoveries were greater than write-offs of uncollectible accounts
(3) Write-offs of reusable products
-35-
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had experienced a change in its accountants in fiscal year
1999, which was previously reported pursuant to Form 8-K filed with the
Commission on April 9, 1999.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
executive officers and directors is incorporated by reference to the information
set forth under the captions "Proposal No. 1: Election of Directors" and "Other
Information" in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information set forth under the caption "Executive Officer Compensation" in
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to
the information set forth under the caption "Other Information" in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information set forth under the caption "Certain Relationships" in the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. The following Financial Statements of the Registrant are included in
Part II, Item 8, Page 16
Reports of Independent Certified Public Accountants .................17
Consolidated Statements of Income for Years Ended
December 31, 1999, 1998 and 1997 .................................20
Consolidated Balance Sheets at December 31, 1999 and 1998 ...........19
Consolidated Statements of Shareholders' Equity for Years Ended
December 31, 1999, 1998 and 1997 .................................21
Consolidated Statements of Cash Flow for Years Ended
December 31, 1999, 1998 and 1997 .................................22
Notes to Consolidated Financial Statements ..........................23
2. Financial Statement Schedules of the Registrant: See (d) below.
(b) Reports on Form 8-K: The Company did not file a report on Form 8-K
during the last quarter of 1999.
(c) Exhibits: See Exhibit Index.
(d) Financial Statements Schedule: The valuation and qualifying accounts
schedule is provided and all other financial statement schedules are
omitted because of the absence of the conditions under which they are
required.
-36-
<PAGE>
EXHIBITS INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
2.1(1) Asset Purchase Agreement dated July 31, 1994, between the Company
and Amsco Sterile Recoveries, Inc.
2.2(1) Agreement and Plan of Merger dated as of February 26, 1996, between
Surgipro, Inc. and the Company.
2.3(1) Articles of Merger dated as of February 26, 1996, between Surgipro,
Inc. and the Company.
2.4(6) Acquisition Agreement dated as of August 31, 1998, among the
Company, Standard Textile Co., Inc., and Repak Surgical Enterprises,
Inc.
3.1(1) Restated Articles of Incorporation of the Company.
3.2(1) Bylaws of the Company.
3.3(6) First Amendment to Restated Articles of Incorporation dated as of
August 31, 1998, of the Company (for Series A Preferred Stock).
4.1(1) Specimen certificate for Common Stock of the Company.
4.2(8) Trust Indenture dated as of February 1, 1999, between First Union
National Bank and the Industrial Development Board of Hamilton
County, Tennessee.
4.3(9) Trust Indenture dated as of June 1, 1999, between First Union
National Bank and First Security Bank, National Association.
10.1(1) 1995 Stock Option Plan, as amended, of the Company.
10.2(1) Form of Stock Option Agreement between the Company and participants
under the 1995 Stock Option Plan.
10.3(1) Form of Indemnity Agreement between the Company and each of its
executive officers.
10.4(1) Form of Registration Rights Agreement executed in connection with
the private placement of Common Stock.
10.5(3) Employment Agreement between the Company and each of Messrs. Isel,
Peterson and Boosales:
(a) Isel
(b) Peterson
(c) Boosales
-37-
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
10.6(1) Lease Agreement dated August 16, 1991, between Coastal 2920
Corporation and Amsco Sterile Recoveries, Inc., as amended and
assigned to the Company.
10.7(1) Lease dated August 28, 1992, among Winchester Homes, Inc. and
Weyerhaeuser Real Estate Company and Amsco Sterile Recoveries, Inc.,
as assigned to the Company.
10.8(1) Texas Industrial Net Lease dated March 19, 1992, between the
Trustees of the Estate of James Campbell, Deceased, and Amsco
Sterile Recoveries, Inc., as assigned to the Company.
10.9(1) Lease dated March 30, 1992, between Walter D'Aloisio and Amsco
Sterile Recoveries, Inc., as assigned to the Company.
10.10(1) Standard Industrial Lease -- Multi-Tenant (American Industrial Real
Estate Association) dated February 24, 1992, between Borstein
Enterprises and Amsco Sterile Recoveries, Inc., as assigned to the
Company.
10.11(1) Carolina Central Industrial Center Lease dated April 22, 1992,
between Industrial Development Associates and Amsco Sterile
Recoveries, Inc., as assigned to the Company.
10.12(1) Lease Agreement dated September 2, 1993, between Price Pioneer
Company, Ltd., and Amsco Sterile Recoveries, Inc., as assigned to
the Company.
10.13(1) Service Center Lease dated December 4, 1991, between QP One
Corporation and Amsco Sterile Recoveries, Inc., as assigned to the
Company.
10.14(1) Lease Agreement dated January 31, 1996, between Florida Conference
Association of Seventh-Day Adventists and Surgipro, Inc., as
assigned to the Company.
10.15(1) Stock Option Agreement dated as of October 18, 1996, between Bertram
T. Martin, Jr. and the Company.
10.16(3) Stock Option Agreement dated as of May 2, 1996, between James M.
Emanuel and the Company.
10.17(1) 1996 Non-Employee Director Stock Option Plan of the Company.
10.18(3) Retention Agreements between the Company and each of Messrs. Isel,
Peterson and Boosales:
(a) Isel
(b) Peterson
(c) Boosales
10.19(4) Amendments No. 2 and 3 to the 1995 Stock Option Plan of the Company.
10.20(5) Stock Option Agreement dated November 21, 1997, between Bertram T.
Martin, Jr. and the Company.
10.21(5) Corporate Service Agreement dated October 21, 1997, between Standard
Textile Co., Inc. and the Company.
-38-
<PAGE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
10.22(5) Corporate Service Agreement dated October 31, 1997, between Health
Services Corporation of America and the Company.
10.23(5) 1998 Stock Option Plan of the Company.
10.24(6) Registration Rights Agreement dated August 31, 1998, between the
Company and Standard Textile Co., Inc.
10.25(7) Procurement Agreement dated August 31, 1998, between the Company and
Standard Textile Co., Inc.
10.26(8) Promissory Note dated as of February 24, 1999, executed by the
Company in favor of First Union National Bank.
10.27(8) Credit Agreement dated as of February 24, 1999, between the Company
and First Union National Bank (Revolving Line of Credit).
10.28(8) Security Agreement dated as of February 1, 1999, between the Company
and First Union National Bank (Revolving Line of Credit).
10.29(8) Participation Agreement dated as of February 1, 1999, among the
Company, First Union National Bank, and First Security Bank,
National Association (lease facility).
10.30(8) Credit Agreement dated as of February 1, 1999, between First
Security Bank, National Association and First Union National Bank
(lease facility).
10.31(8) Lease Agreement dated as of February 1, 1999, between the Company
and First Security Bank, National Association.
10.32(9) Lease Agreement dated as of June 15, 1999, between the Company and
ProLogis Limited Partnership IV.
10.33 Lease Agreement dated as of June 10, 1999, between the Company and
Riggs & Company, a division of Riggs Bank, N.A., as Trustee of the
Multi-Employer Property Trust, a trust organized under 12 C.F.R.
Section 9.18.
10.34 Lease Agreement dated as of March 22, 1999, between the Company and
Aldo Abate (lease facility)
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedules (for SEC use only).
- -------
(1) Incorporated by reference to the Registration Statement on Form S-1 filed
by the Registrant on May 15, 1996.
-39-
<PAGE>
(2) Incorporated by reference to Amendment No. 2 to the Registration Statement
on Form S-1 filed by the Registrant on July 15, 1996.
(3) Incorporated by reference to Amendment No. 3 to the Registration Statement
on Form S-1 filed by the Registrant on July 18, 1996.
(4) Incorporated by reference to the Annual Report on Form 10-K for the 1996
year filed by the Registrant on March 24, 1997.
(5) Incorporated by reference to the Annual Report on Form 10-K for the 1997
year filed by the Registrant on March 30, 1998.
(6) Incorporated by reference to the Current Report on Form 8-K dated August
31, 1998, and filed by the Registrant on September 8, 1998.
(7) Incorporated by reference to the Quarterly Report on Form 10-Q for the
third quarter of 1998 filed by the Registrant on November 13, 1998.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q for the 1998
third quarter filed by the Registrant on March 23, 1999.
(9) Incorporated by reference to the Quarterly Report on Form 10-Q for the 1999
third quarter filed by the Registrant on November 11, 1999.
-40-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
STERILE RECOVERIES, INC.
BY: /s/ RICHARD T. ISEL
----------------------
Richard T. Isel
Chairman, President
and CEO
Dated: March 28, 2000
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF
1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD T. ISEL Chairman, President and March 28, 2000
- ------------------------- Chief Executive Officer
Richard T. Isel and Director
/s/ WAYNE R. PETERSON Executive Vice President and March 28, 2000
- ------------------------- Director
Wayne R. Peterson
/s/ JAMES T. BOOSALES Executive Vice President, March 28, 2000
- ------------------------- Chief Financial Officer and
James T. Boosales Director
/s/ JAMES M. EMANUEL Director March 20, 2000
- -------------------------
James M. Emanuel
/s/ LEE R. KEMBERLING Director March 20, 2000
- -------------------------
Lee R. Kemberling
/s/ GARY L. HEIMAN Director March 21, 2000
- -------------------------
Gary L. Heiman
-41-
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 26, 1999 accompanying the financial
statements and financial schedule of Sterile Recoveries, Inc. as of December 31,
1998 and for each of the two years in the period ended December 31, 1998, that
is included in the Company's Form 10-K for the year ended December 31, 1999. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Sterile Recoveries, Inc. on Form S-8 (File No.
333-31911, effective July 23, 1997).
/s/ GRANT THORNTON LLP
Tampa, Florida
March 27, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-31911) pertaining to the 1995 Stock Option Plan of Sterile
Recoveries, Inc. of our report dated February 14, 2000, with respect to the
consolidated financial statements and schedule of Sterile Recoveries, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Tampa, Florida
February 14, 2000, except for paragraph 2
of Note E, as to which
the date is March 24, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 8,704
<ALLOWANCES> 90
<INVENTORY> 2,940
<CURRENT-ASSETS> 0
<PP&E> 20,828
<DEPRECIATION> 4,164
<TOTAL-ASSETS> 56,155
<CURRENT-LIABILITIES> 0
<BONDS> 0
1
0
<COMMON> 6
<OTHER-SE> 38,967
<TOTAL-LIABILITY-AND-EQUITY> 56,155
<SALES> 68,596
<TOTAL-REVENUES> 68,596
<CGS> 47,011
<TOTAL-COSTS> 47,011
<OTHER-EXPENSES> 14,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> 6,457
<INCOME-TAX> 2,503
<INCOME-CONTINUING> 3,954
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,954
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.63
</TABLE>
