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, 2001
Commission File No. 000-20997
SRI/SURGICAL EXPRESS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3252632
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(State of Incorporation) (IRS Employer Identification No.)
12425 Race Track Road, Tampa, Florida 33626
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 891-9550
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
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. [X]
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
February 14, 2002, as reported on the Nasdaq National Market, was approximately
$58,711,812.
The Registrant had outstanding 6,420,177 shares of Common Stock as of
February 27, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders to be held on May 15, 2002 is incorporated by reference in Part III
of this report to the extent stated herein.
SRI/SURGICAL EXPRESS, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2001
Section Page
PART I
Item 1: Business 1
Item 2: Properties 8
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote of Security Holders 9
PART II
Item 5: Market for the Registrant's Common Equity and Related
Shareholder Matters 10
Item 6: Selected Financial Data 11
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 18
Item 8: Financial Statements and Supplementary Data 18
Item 9: Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 37
PART III
Item 10: Directors and Executive Officers of the Registrant 38
Item 11: Executive Compensation 38
Item 12: Security Ownership of Certain Beneficial Owners
and Management 38
Item 13: Certain Relationships and Related Transactions 38
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 38
SIGNATURES 43
PART I
ITEM 1. BUSINESS
SRI/Surgical Express, Inc.(R) ("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, basins, and instruments, and its daily delivery
and retrieval of these products for each customer. To provide its customers a
comprehensive offering for surgical procedures, the Company complements these
reusable products with cost-effective disposable accessory packs and individual
single sterile disposable items. SRI(R) believes its superior quality reusable
products and its service solutions, including direct delivery to its customers'
departments, differentiate SRI from its competitors.
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 that uses two
of the most technologically advanced reusable textiles: (i) a GORE(R) Surgical
Barrier Fabric for gowns and drapes that is breathable yet liquidproof and
provides a viral/bacterial barrier and (ii) an advanced microfiber polyester
surgical fabric for gowns and drapes, which is liquid and bacterial resistant.
In 1998, the Company introduced its Surgical Express(R) program, 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 that the Company expects will reduce hospital and surgery
centers' processing costs and their investment in surgical products. With its
Surgical Express program, the Company supplements its core reusable products
offering with disposable accessory packs containing smaller surgical items that
are not reusable, such as needles, syringes, and tubing. The flexibility the
Company offers its customers by combining reusable surgical gowns, towels,
drapes, and basins with disposable products and instruments is a unique product
and service offering, which the Company believes improves its competitive
position in the marketplace.
In 2000, the Company introduced to its customers its complete
procedure-based service, Surgical Express for Laparoscopy, which combines the
Company's core reusable products offering with disposable products and
laparoscopic instruments required for laparoscopic surgical procedures. The
Company charges customers a single procedure price for the supplies and
instruments required for a laparoscopic procedure. In 2001, the Company
introduced additional instrument procedures and expects to continue developing
new instrument programs on a regular basis. As of December 31, 2001, the Company
was servicing 31 instrument projects from eight of its facilities. The Company
offers the laparoscopy program pursuant to a Joint Marketing Agreement dated
April 28, 2000, between the Company and Aesculap, Inc., one of the oldest and
largest worldwide suppliers of surgical instruments. The agreement term is three
years and renews for additional three-year terms, unless either party provides
notice of non-renewal at least 120 days before its expiration. The agreement
provides for Aesculap to furnish and repair laparoscopic instruments. The
Company delivers, retrieves, and reprocesses the instruments and is responsible
for customer relationships. Aesculap receives an agreed share of the revenues
from each procedure, based on the number and kinds of procedures, and the number
and combination of instruments for each procedure. Because Aesculap furnishes
the instruments, the Company expects its return on capital will be favorably
impacted by this business.
As of December 31, 2001, SRI serves a customer base of approximately 323
hospitals and surgery centers located in 24 states and the District of Columbia,
including Duke University Medical Center (Durham), University of Massachusetts
Medical Center (Worcester), Rex Healthcare (Raleigh), University of Michigan
(Detroit), Jewish Healthcare Systems (Louisville), St. Luke's Episcopal Hospital
(Houston), Jackson Memorial Hospital (Miami), and IHC Hospitals, Inc. (Salt Lake
City). SRI is increasingly focused on large networks of hospitals, and in 2000
and 2001, the Company discontinued service to several small hospitals and
surgery centers because the cost of the service was not commensurate with the
revenue generated by these smaller customers.
The Company maintains agreements to supply several group purchasing
organizations (GPOs), including most significantly Novation and HealthTrust
Purchasing Group (HPG). Novation is the supply company for Voluntary Hospitals
of America (VHA) and University HealthSystem Consortium (UHC). SRI offers
Novation members its Surgical Express program as a unitized delivery system
featuring reusable surgical textiles, reusable instruments, and disposable
accessory packs. HealthTrust Purchasing Group (HPG) is a group purchasing
organization representing over 600 hospitals and surgery centers. The contract
with HPG designates SRI as its primary outsource vendor for reusable surgical
products, including
1
instruments. The HPG contract was signed in May 2001. With its Novation, HPG and
other agreements, Surgical Express is an available contracted alternative for
over 2,000 hospitals and surgery centers across the country. The Company
continues to pursue additional GPO contracts that would allow it to further
penetrate the surgical supply market.
SRI believes that Surgical Express is a superior quality 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, including costly
disposable instruments, 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, and the Company's reusable gowns are made with a breathable surgical
fabric, which is designed for superior comfort during long procedures. Also, the
Company believes hospitals will be attracted by the convenience of its complete
supply management program that is provided and billed on a per-procedure basis.
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 32 million
surgical procedures were performed at hospitals and surgery centers in 2001. 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. SRI estimates that revenue of between $300 and $500
typically can be realized from procedures such as laparoscopies, in which
instruments are provided.
In the 1980's, hospitals began using custom procedure trays because of
their convenience. This trend continued growing throughout the 1990's. A custom
procedure tray typically contains, in disposable form, most of the sterile
products used in a particular surgical or other medical procedure. Industry
sources estimate total annual sales of custom procedure trays in the United
States to be $1.5 billion, which appears to have been stable over the last three
to four years. The Company believes that custom procedure trays suffer
shortcomings in comparison to reusable products, including costs associated with
excessive product content, storage, handling and waste disposal, lost
instruments and the working capital requirements required to carry product
inventory.
Hospitals that use custom procedure trays generally do not have in-house
personnel and equipment used to process reusable surgical products. Furthermore,
hospitals that have 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 market conditions provide continuing opportunities for SRI's
Surgical Express program:
Continued Pressure on Hospitals to Contain Costs and Improve Profitability.
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 from
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
2
advantage to reprocessing systems, 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, including instruments as well as inventory management of complementary
disposable products.
Strategy
The Company's objective is to continue its growth and become the preferred
surgical supply solution. 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 currently operate at approximately
20-25% of their aggregate annual revenue capacity. The Company has increased its
revenue capacity at its facilities by modifying its service to include
instrument processing and adding instrument reprocessing capability at its
facilities. SRI serves several large metropolitan areas through highway
transport and satellite distribution centers supported by a regional facility.
Under its Surgical Express program, the Company operates service 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.
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 provides hospitals an attractive per procedure billing
arrangement that allows them to easily identify that cost component of their
services.
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 smaller networks believe
that they can negotiate and control their product supply more effectively than
large group purchasing organizations. SRI maintains arrangements to supply two
national group purchasing organizations, Novation (the supply company for VHA
and UHC) and HPG (see "Business--Group Purchasing Agreements"). As a key part of
its marketing strategy, management offers its Surgical Express Program to
national and regional hospital groups, as well as the individual hospitals that
have been SRI's customer base.
Utilize Operational Knowledge. The Company's management designed and
developed its 11 facilities and has gained substantial knowledge by operating
them since the Company's inception. The Company continues to supplement that
expertise through processing and engineering experience with instruments and
other products. The Company believes that no other supplier offers comparable
knowledge and experience in the reusable product segment.
Delivery, Retrieval and Reprocessing System
SRI's Surgical Express procedure-based service furnishes hospital customers
the products needed for a particular surgical procedure, including reusable
packs, disposable accessory packs, single sterile items, and instruments.
Following a procedure, the hospital discards the small amount of disposable
products used and places 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 to customers. 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 that hold sterile product
are lockable to maintain security. Carts 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.
3
Upon return to SRI's facility, the contents of the soiled carts are sorted
by product type in a controlled area and transferred to the appropriate area for
processing and decontamination. Soiled linen products are processed through an
automated washing and drying process that delivers clean and decontaminated
products to the pack room floor, where they are carefully inspected, repaired if
necessary, folded, and assembled into packs. Surgical instruments and other
stainless products are segregated and processed through specially designed
processes by trained instrument technicians. SRI processes high quality reusable
instruments designed to be thoroughly cleaned and decontaminated. Following the
cleaning/decontamination process, each instrument is inspected and tested for
functionality prior to being included in a pack/instrument set. Stainless steel
basin components, delivery carts and other reusable products are processed
through automated tunnel washers before reuse. Following assembly, packs are
steam sterilized and combined with complementary disposable packs for delivery
to the customers. All processing is performed in accordance with documented
procedures.
The Company closely monitors its processes to ensure its reusable products'
useful lives are fully realized. To accurately track its amortization expense,
SRI uses a barcoding system, which maintains its reusable surgical products'
status, history, and number of uses.
Customers
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 relationships with hospitals' staffs have
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 and reduces customer contact.
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 SRI retain its existing
customers.
SRI bills its customers weekly for the previous week's deliveries under
service contracts or purchase orders. Confirmation of deliveries is evidenced by
a signed and dated packing slip and a randomly generated delivery confirmation
number. Consistent with industry custom, customer service contracts generally
are cancelable by either party with 90 days notice, and customers may, without
penalty, unilaterally reduce their use of the Company's services under these
contracts. Surgical Express contracts have longer terms, typically three to five
years, with more stringent cancellation provisions.
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 that present a higher risk
of liquid strike-through. This protection is critical to SRI's customers given
continuing concerns of doctors, staff, and regulatory authorities regarding
transmission of blood-borne pathogens, including the HIV and hepatitis viruses.
The Gore Surgical Barrier fabric is a liquidproof, breathable material providing
additional protection for the surgical staff while allowing for continued
comfort during longer procedures. 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. In August 1998, the
Company 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
4
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. The Company's product offering also includes
selected reusable instruments. SRI offers laparoscopic instruments through its
Surgical Express service for laparoscopic procedures. The service includes
instruments, reusable textiles, and disposable products.
Employees
As of December 31, 2001, SRI employed 1,079 people, consisting of 71
persons in management, administration and finance at its corporate office and
1,008 people in various positions at the Company's facilities. The Company's
employees are not covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
Competition
SRI competes with sellers of both reusable and disposable gowns, drapes,
basins, and other products for surgical procedures. This product 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 effectively competes with suppliers
of disposable custom procedure trays.
Unlike SRI, many of SRI's competitors offer full national coverage. Some of
these competitors 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 level of operating expertise significantly benefits it
in offering a superior product at a competitive cost. Hospitals increasingly
seek 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 regulated 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 ("cGMP's")," labeling, maintenance of records, and
medical device reporting 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
manufactured in accordance with cGMP's, 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 QSR, (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
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 that 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.
5
The Company and its hospital customers also must comply with regulations of
OSHA, including the bloodborne pathogen rule requiring standard "universal"
precautions be observed to minimize exposure to blood and other bodily fluids.
To comply with these requirements, the Company's employees wear personal
protective equipment when 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 biohazardous materials, which include containing and labeling waste as well
as reporting various discharges. The Company complies with these regulations by
confining soiled products inside marked liquidproof bags for transport within
locked, marked transfer carts. Sterilization of the Company's disposable
accessory packs is provided by a third-party contractor. The use of ethylene
oxide by the contractor in the sterilization of the Company's disposable
accessory packs is subject to regulation by FDA, 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
that 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 expenditure for environmental compliance in
2002.
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 from new and
existing customers. The Company's sales process for new customers is typically
between six and eighteen months in duration from initial contact to purchase
commitment. The extended sales process is typically due to the complicated
approval process within hospitals for purchases from new suppliers, the long
duration of existing supply contracts, and implementation delays pending
termination of a hospital's previous supply relationships. The long sales
process inhibits the ability of the Company to quickly increase revenues from
new and existing customers or enter new markets. 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 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 40% of the projected new
annual revenue from the customer. The Company's inability to obtain adequate
debt or equity capital would 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 D of Notes to Financial
Statements."
New Product Offering; Dependence on a Supplier. The Company is regularly
developing new instrument processing programs. While these programs are in their
initial implementation stages, the Company is subject to a risk that the market
will not broadly accept them. Further, the Company relies on Aesculap, Inc. as
its major source of supply of laparoscopic instruments for its Surgical Express
for Laparoscopy program. The Joint Marketing Agreement between SRI and Aesculap
provides for Aesculap to furnish instruments to the Company for at least three
years, subject to terms and conditions stated in the agreement. Any failure of
Aesculap to furnish instruments for any reason would materially and adversely
affect the Company's ability to service this program.
Dependence on Significant Customers. During 2001, Novation, Premier, Inc.,
and HPG hospitals accounted for approximately 31%, 16%, and 13% of the Company's
sales, compared to 23%, 20%, and 13% in 2000, respectively. Although each
Novation, Premier, and HPG hospital currently makes decisions on an individual
basis, and no single
6
hospital accounted for more than 6% of the Company's sales, the loss of a
substantial portion of the Novation, Premier, or HPG hospitals' business would
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.
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 for the Company. 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 quality
systems 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 and adversely affect the Company.
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ITEM 2. PROPERTIES
The Company operates eleven processing facilities that range in size
between 23,000 and 63,500 square feet in Baltimore, Chattanooga, Cincinnati,
Dallas, Detroit, Houston, Los Angeles, Raleigh, Salt Lake City, Stockton, and
Tampa. Each facility has standardized processes and equipment including
computerized and fully automated heavy duty washers, dryers, and sterilizers to
achieve consistent decontamination and sterilization for reusable surgical
products and instruments. The Company uses Good Manufacturing Practices 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 of the properties are leased, except for the Cincinnati
and Houston processing facilities. The Company also leases its Disposable
Accessory Pack facility in Plant City, Florida, where it assembles and packages
surgical products into customer specific disposable accessory packs. The Company
transports these disposable accessory packs to a third party facility for
sterilization. The Company believes its existing facilities adequately serve its
current requirements.
Square Feet
Facility and Location (Approx.) Lease Expiration Selected Markets Served
--------------------- --------- ---------------- -----------------------
Processing facilities:
Baltimore, Maryland 58,700 February 28, 2007 Baltimore, Philadelphia, Rich-
(Options to 2012) mond, New Jersey,
Washington D.C., Massachusetts
Chattanooga, Tennessee 50,000 February 24, 2003 Atlanta, Birmingham, Nashville
Cincinnati, Ohio 50,000 Owned Columbus, Akron, Cincinnati
Louisville, Lexington
Dallas, Texas 49,700 March 31, 2005 Dallas, Oklahoma City, Tulsa
(Options to 2010)
Detroit, Michigan 23,000 September 30, 2002 Chicago, Detroit, Milwaukee,
(Options to 2012) Toledo, Flint, Cleveland,
Ann Arbor
Houston, Texas 30,000 Owned Houston, San Antonio, Austin
Los Angeles, California 30,400 November 30, 2002 San Diego, Los Angeles, Arizona
(Options to 2012)
Raleigh, North Carolina 63,500 April 30, 2007 South Carolina, North Carolina
(Options to 2012)
Salt Lake City, Utah 31,800 July 5, 2006 Utah, Idaho
(Options to 2018)
Stockton, California 57,000 February 1, 2003 Sacramento, San Francisco, Oakland
Tampa, Florida 63,000 January 23, 2012 Tampa, Miami, Orlando,
(Options to 2032) Jacksonville, Gainesville, Ocala, Ft. Myers, Ft.
Lauderdale
Service centers:
Chicago, Illinois 3,200 November 30, 2003 --
Louisville, Kentucky 10,000 /(1)/ --
Miami, Florida 4,000 January 31, 2005 --
Oklahoma City, Oklahoma 3,600 September 1, 2002 --
Southborough, Massachusetts 13,600 June 30, 2005 --
Warehouses:
Detroit, Michigan 11,000 November 30, 2003 --
Houston, Texas 5,000 Month to Month
Long Beach, California 3,300 July 31, 2002 --
Disposable products facility:
Plant City, Florida 40,800 November 1, 2004 --
(Options to 2009)
Corporate office:
Tampa, Florida 42,000 April 3, 2021 --
/(1)/ Service center provided by hospital
8
ITEM 3. LEGAL PROCEEDINGS
Class Action Litigation. Beginning on November 30, 2001, a series of
substantially identical Class Action Complaints were filed in the United States
District Court for the Middle District of Florida against the Company and
certain of its officers and directors. The plaintiffs purport to assert claims
on behalf of a class of purchasers of the Company's common stock during the
period from July 23, 2001 through November 27, 2001. The actions claim
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under that act. Among other things, the actions
allege that during the class period, the Company and the individual defendants
made materially false statements concerning the Company's financial condition
and its future prospects. The actions seek compensatory and other damages, and
costs and expenses associated with the litigation.
The Company believes that it has substantial defenses to this matter and
intends to assert them vigorously. Management of the Company is unable to
determine the impact, if any, that the resolution of this matter will have on
the financial position or results of operations of the Company. No accruals for
damages have been recorded for this matter as of December 31, 2001.
SEC Investigation. On February 21, 2002, the Securities and Exchange
Commission issued a Formal Order of Private Investigation with respect to the
Company. The investigation concerns the transactions underlying the Company's
restatement of its financial results announced during its fourth quarter of
2001. The Company is cooperating with the investigation. Management of the
Company is unable to determine the impact, if any, that the resolution of this
matter will have on the financial position or results of operations of the
Company.
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 2001.
9
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, 2000 through December 31, 2001. 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
2000 HIGH LOW
---- ------- -------
First Quarter $ 7.250 $ 3.875
Second Quarter $ 8.000 $ 4.266
Third Quarter $13.875 $ 7.625
Fourth Quarter $15.500 $12.188
2001
----
First Quarter $20.375 $12.500
Second Quarter $36.500 $18.625
Third Quarter $41.910 $26.000
Fourth Quarter $36.560 $11.650
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 Financial Statements." On March 1, 2001, there were
approximately 38 holders of record of the Common Stock.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected financial data and is
qualified by the more detailed 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 Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
SRI/Surgical Express, Inc.
----------------------------------------------------
Years Ended
-----------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of operations data:
Revenues $86,426 $77,817 $68,596 $52,318 $39,854
Cost of revenues 58,296 53,043 47,011 35,334 26,286
------- ------- ------- ------- -------
Gross profit 28,130 24,774 21,585 16,984 13,568
Distribution expenses 5,557 5,293 5,121 3,788 3,150
Selling and administrative expenses 12,512 11,224 9,700 7,065 5,924
------- ------- ------- ------- -------
Income from operations 10,061 8,257 6,764 6,131 4,494
Unrealized loss on derivative instruments 407 -- -- -- --
Interest expense (income), net 1,381 1,174 307 52 (142)
------- ------- ------- ------- -------
Income before income taxes 8,273 7,083 6,457 6,079 4,636
Income tax expense 3,103 2,463 2,503 2,393 1,835
------- ------- ------- ------- -------
Income before cumulative effect
of change in accounting policy 5,170 4,620 3,954 3,686 2,801
Cumulative effect of change in accounting
policy, net of tax 113 -- -- -- --
------- ------- ------- ------- -------
Net income $ 5,057 $ 4,620 $ 3,954 $ 3,686 $ 2,801
======= ======= ======= ======= =======
Dividends on preferred stock 56 204 208 67 --
------- ------- ------- ------- -------
Net income available for common
shareholders $ 5,001 $ 4,416 $ 3,746 $ 3,619 $ 2,801
======= ======= ======= ======= =======
Income per common share, basic:
Income available for common shareholders before
cumulative effect of change in accounting principle $ 0.85 $ 0.78 $ 0.66 $ 0.64 $ 0.50
Cumulative effect of change in accounting
principle 0.02 -- -- -- --
------- ------- ------- ------- -------
Net income available for common shareholders, basic $ 0.83 $ 0.78 $ 0.66 $ 0.64 $ 0.50
======= ======= ======= ======= =======
Income per common share, diluted:
Income before cumulative effect of change
in accounting principle $ 0.78 $ 0.73 $ 0.63 $ 0.61 $ 0.48
Cumulative effect of change in accounting
principle 0.02 -- -- -- --
------- ------- ------- ------- -------
Net income per common share, diluted $ 0.76 $ 0.73 $ 0.63 $ 0.61 $ 0.48
======= ======= ======= ======= =======
Weighted average common shares outstanding,
basic 6,037 5,673 5,676 5,662 5,637
======= ======= ======= ======= =======
Weighted average common shares outstanding,
diluted 6,591 6,360 6,322 6,019 5,862
======= ======= ======= ======= =======
Balance sheet data (at end of period):
Reusable surgical products, net $25,554 $24,168 $19,796 $14,705 $10,034
Total assets 82,685 66,516 56,155 43,620 27,546
Notes payable to bank 17,612 15,593 8,852 2,408 --
Shareholders' equity 49,904 42,852 38,974 35,122 24,348
11
The following selected unaudited quarterly information is being disclosed in
accordance with Regulation S-K (Item 302):
Quarters Ended
--------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001 2001 2001 2001 2001
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
For the year ended December 31, 2001 As originally reported Adjusted (A)
----------------------------------------- -----------------------------------------
Revenues $21,298 $22,469 $21,340 $21,319 $21,298 $22,469 $21,340 $21,319
Gross Profit 6,750 7,454 7,090 6,836 6,750 7,454 7,090 6,836
Income before cumulative effect of
change in accounting principle 1,406 1,585 1,493 941 1,267 1,616 1,276 1,011
Cumulative effect of change in
accounting principle -- -- -- -- 113 -- -- --
Net income 1,406 1,585 1,493 941 1,154 1,616 1,276 1,011
Net income available for common
shareholders 1,355 1,580 1,493 941 1,103 1,611 1,276 1,011
Basic earnings per share 0.24 0.26 0.24 0.15 0.20 0.26 0.21 0.16
Basic earnings per share before effect
of change in accounting principle 0.22 0.26 0.21 0.16
Diluted earnings per share 0.22 0.24 0.22 0.14 0.18 0.24 0.19 0.15
Diluted earnings per share before
cumulative effect of change in
accounting principle 0.20 0.24 0.19 0.15
(A) Adjustments to adopt Statement of Financial Accounting Standards No. 133-
See "Notes B and E of Notes to the Financial Statements."
For the year ended December 31, 2000 Quarters Ended
--------------
March 31, 2000 June 30, 2000 Sept 30, 2000 Dec 30, 2000
-------------- ------------- ------------- ------------
Revenues $18,332 $19,662 $19,493 $20,330
Gross profit 5,412 6,232 6,224 6,906
Net income 612 1,114 1,281 1,613
Net income available for common
Shareholders 561 1,063 1,230 1,562
Basic earnings per share 0.10 0.19 0.22 0.27
Diluted earnings per share 0.10 0.18 0.20 0.25
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion and analysis should be read in conjunction with
the Company's 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."
The Company's revenues are derived from providing hospitals and surgery
centers with reusable gowns, towels, drapes, basins, and instruments 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 pricing for its
various types of surgical packs.
The Company in 2001 made investments in staff, facility expansions, and
additional reusable surgical products in anticipation of revenue growth. The
Company has endured a period in which its rate of revenue growth has been
affected by the competitive market for its products and services, as well as
delays and obstacles in securing new customers and the continuing impact of lost
customers. As reported in its press releases, the Company's revenues for its
fourth quarter of 2001 and first quarter of 2002 have fallen below management's
expectations. Because of these delays in revenue growth, management is
undertaking cost and overhead reduction initiatives to bring expenses in line
with anticipated revenues for this year.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions, and estimates that affect
the amounts reported in the Company's financial statements and accompanying
notes. Note B to the Company's financial statements describes the significant
accounting policies and methods that the Company uses in preparing its financial
statements. Estimates are used for, but not limited to, the accounting for the
allowance for doubtful accounts, amortization of reusable products, shrinkage
and obsolescence, goodwill impairments, and loss contingencies. Actual results
could differ from these estimates. The following critical accounting policies
are impacted significantly by judgments, assumptions and estimates used in the
preparation of the financial statements.
The allowance for doubtful accounts is based on SRI's assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customer's creditworthiness
or actual defaults are higher than historical experience, the Company's
estimates of the recoverability of amounts due could be adversely affected.
The Company states its reusable surgical products at cost and computes
amortization on a basis similar to the units of production method. SRI's
estimates of the useful lives of these products are based on the estimated total
number of available uses for each product. The expected total available usage
for the Company's products using the three principal fabrics (accounting for 85%
of its products) is 75, 100, and 125 uses based on several factors, including
the Company's actual experience with these products over the past ten years. If
its actual use experience with these products is shorter than these assumptions,
the Company's amortization rates for reusable products could increase.
SRI determines its reserves for shrinkage and obsolescence of its reusable
products by tracking those products with its bar-coding system. The Company
presumes that any products not scanned by the system for a 210 day period have
been lost. If actual losses exceed these estimates, the Company's shrinkage
reserve would increase.
The Company will adopt Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, beginning in the first quarter of 2002.
The Company will test goodwill for impairment using the two-step process
prescribed in Statement 142. Any impairment charge resulting from these
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle in 2002. The Company does not expect the adoption
of Statement 142 to have a material impact on the results of operations or
financial position of the Company.
13
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,
-----------------------
2001 2000 1999
----- ----- -----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 67.5 68.2 68.5
----- ----- -----
Gross profit 32.5 31.8 31.5
Distribution expenses 6.4 6.8 7.5
Selling and administrative expenses 14.5 14.4 14.1
----- ----- -----
Income from operations 11.6 10.6 9.9
Unrealized loss on derivative instruments 0.4 -- --
Interest expense, net 1.6 1.5 0.5
----- ----- -----
Income before income taxes 9.6 9.1 9.4
Income tax expense 3.6 3.2 3.6
----- ----- -----
Income before cumulative effect
of change in accounting policy 6.0 5.9 5.8
----- ----- -----
Cumulative effect of change in accounting
policy, net of tax 0.1 -- --
----- ----- -----
Net income 5.9% 5.9% 5.8%
===== ===== =====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Revenues increased $8.6 million, or 11.1%, to $86.4 million in 2001, from
$77.8 million in 2000. Revenue increases over last year were due to increased
Surgical Express business, the expansion of the Company's instrument program
(including Surgical Express for Laparoscopy), and modest growth in its core
reusable and disposable business. The growth in new and existing core business
was partially offset by the unanticipated loss of several customers, the
continuing effect of planned reductions in the Company's base of smaller, less
profitable accounts, and the pricing impact of new group purchasing organization
arrangements on existing hospital customers.
Gross Profit
Gross profit increased $3.3 million, or 13.5%, to $28.1 million in 2001,
from $24.8 million in 2000. As a percentage of revenues, gross profit increased
to 32.5% in 2001, from 31.8% in 2000. The increase in gross profit percentage
reflects improved productivity, coupled with the Company's elimination of less
profitable customers.
Distribution Expenses
Distribution expenses increased $264,000, or 5.0%, to $5.6 million in 2001,
from $5.3 million in 2000. As a percentage of revenues, distribution expenses
decreased to 6.4% in 2001, from 6.8% in 2000. The decrease in distribution
expenses as a percentage of revenues resulted primarily from the use of more
efficient truck routes and increased volume per shipment.
14
Selling and Administrative Expenses
Selling and administrative expenses increased $1.3 million, or 11.5%, to
$12.5 million in 2001, from $11.2 million in 2000. As a percentage of revenues,
selling and administrative expenses increased to 14.5% in 2001, from 14.4% in
2000. The Company's sales and administrative expenses increased due to marketing
and administrative fees for GPO accounts and growth in its sales and marketing
personnel.
Unrealized Loss on Derivative Instruments
Pursuant to Statement of Financial Accounting Standards No. 133, the
Company in 2001 recognized a current unrealized loss of $407,000 on two interest
rate swaps. See "Notes B and E of Notes to the Financial Statements."
Interest Expense, Net
Interest expense increased $207,000, or 17.6%, to $1.4 million in 2001,
from $1.2 million in 2000, primarily due to additional 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 $8.3 million in 2001, from $7.1 million in 2000. As a percentage of
revenues, income before income taxes was 9.6% of revenues in 2001 and 9.1% of
revenues in 2000.
Income Tax Expense
Income tax expense increased $640,000 to $3.1 million in 2001, from $2.5
million in 2000. The Company's effective tax rate is 37.5% for 2001 and 34.8%
for 2000.
Cumulative Effect of Change in Accounting Policy
The Company in 2001 accrued a cumulative effect of change in accounting
principle of $113,000, which is net of tax of $69,000, from the initial adoption
of Statement 133. See "Notes B and E of Notes to the Financial Statements."
Net Income Per Common Share
The Company recorded net income per common share of $0.76 on a diluted per
share basis after effect of change in accounting principle and $0.83 on a basic
per share basis after cumulative effect of change in accounting principle for
2001, compared with $0.73 on a diluted per share basis and $0.78 on a basic per
share basis in 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues increased $9.2 million, or 13.4%, to $77.8 million in 2000, from
$68.6 million in 1999. The revenue increases were attributable primarily to new
customers in the Company's Surgical Express program, and were partially offset
by the Company's elimination of relatively low margin business.
Gross Profit
Gross profit increased $3.2 million, or 14.8%, to $24.8 million in 2000,
from $21.6 million in 1999. As a percentage of revenues, gross profit increased
to 31.8% in 2000, from 31.5% in 1999. The increase in gross profit percentage
reflects positive leverage of increased revenues.
15
Distribution Expenses
Distribution expenses increased $172,000, or 3.4%, to $5.3 million in 2000,
from $5.1 million in 1999. As a percentage of revenues, distribution expenses
decreased to 6.8% in 2000, from 7.5% in 1999. The decrease in distribution
expenses as a percentage of revenues resulted primarily from the Company's
realignment and consolidation of its truck routes made possible by its opening
of two new facilities, and was partially offset by increased fuel costs.
Selling and Administrative Expenses
Selling and administrative expenses increased $1.5 million, or 15.7%, to
$11.2 million in 2000, from $9.7 million in 1999. As a percentage of revenues,
selling and administrative expenses increased to 14.4% in 2000, from 14.1% in
1999. The Company's sales and administrative expenses increased due to the sales
and marketing expenses the Company incurred to expand its product offering to
include instruments and introduce its Surgical Express program, and due to
expenses associated with the Company's new computer system.
Interest Expense, Net
Interest expense increased $867,000, or 282.4%, to $1.2 million in 2000,
from $307,000 in 1999, primarily due to additional 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 $7.1 million in 2000, from $6.5 million in 1999. As a percentage of
revenues, income before income taxes was 9.1% of revenues in 2000 and 9.4% of
revenues in 1999.
Income Tax Expense
Income tax expense remained the same at $2.5 million for 2000 and 1999. The
Company's effective tax rate is 34.8% for 2000 and 38.8% for 1999. The reduction
of the Company's effective tax rate was due to state income tax credits that
will not recur in 2001.
Net Income Per Common Share
The Company recorded net income per common share of $0.73 on a diluted per
share basis and $0.78 on a basic per share basis for 2000, compared with $0.63
on a diluted per share basis and $0.66 on a basic per share basis in 1999.
Liquidity and Capital Resources
The Company's principal sources of capital have been cash flows from
operations and borrowings under its working capital loan facility.
The Company's positive cash flow provided by operating activities was
approximately $13.6 million in 2001, compared to approximately $9.4 million in
2000. The increase in cash from operating activities in 2001 resulted primarily
from increased net income before amortization, shrinkage and depreciation
expense, and increased accounts payable, and was partially offset by increased
accounts receivable, inventories, and prepaid expenses and other assets.
The Company's net cash used in investing activities was approximately $16.0
million in 2001, compared to approximately $15.3 million in 2000. These
expenditures were funded from cash provided by operating activities and
borrowings under the Company's revolving credit facility.
The Company continues to make substantial expenditures to improve its
facilities and to purchase reusable surgical products to support anticipated
increases in business. The Company made equipment expenditures of $8.3 million
in 2001,
16
compared to $5.6 million in 2000, primarily for leasehold improvements,
furniture and equipment at its new corporate offices and facility equipment and
expansion, including upgrading its facilities for instrument processing. The
Company has spent $1.5 million, $1.4 million, and $681,000 in 2001 for facility
equipment and expansions to its Tampa, Florida, Baltimore, Maryland, and
Raleigh, North Carolina facilities, respectively, and expects to spend an
additional $2.5 million in 2002 to complete these projects. The Company's
expenditures of $7.7 million for reusable surgical products in 2001 were
substantially lower than 2000 expenditures of $9.6 million. The Company's level
of reusable surgical products exceeded its needs at the close of 2000, and
management accordingly adjusted its new product expenditures in 2001.
The Company's business is capital intensive and will require substantial
expenditures for additional surgical products and equipment during the next
several years to achieve operating and expansion plans. To adequately service a
new customer, the Company estimates that it makes an investment in new reusable
surgical products and carts equal to approximately 40% of the projected first
year revenue from the customer. The Company estimates expenditures for new carts
and reusable surgical products will be approximately $600,000 per month for the
next twelve months, although the amount will fluctuate with the growth of its
business.
The Company accounts for the lease of its Tampa, Florida corporate office
as a capital lease. This resulted in recognizing an asset and obligation under
capital lease of approximately $4.6 million as of December 31, 2001. The term of
the lease is 20 years commencing March 24, 2001. In addition, the Company
incurred and capitalized approximately $2.4 million in 2001 for leasehold
improvements, furniture, and equipment for its corporate offices.
The Company's outstanding balance under its $45.0 million revolving credit
facility was approximately $17.6 million and $15.6 million as of December 31,
2001 and 2000, respectively. The credit facility is secured by substantially all
of SRI's assets and has a maturity date of June 30, 2003. The credit facility's
interest rate varies between 225 and 275 basis points over LIBOR (1.876% as of
December 31, 2001), depending on the Company's leverage. The credit facility
requires the Company to maintain (a) minimum consolidated net worth of not less
than $37.0 million plus 75% of cumulative consolidated net income for each
fiscal quarter beginning with the fiscal quarter ending March 31, 2000; (b) a
consolidated leverage ratio of not more than 2.5 to 1.0; and (c) a fixed charge
coverage ratio of 2.25 to 1.0 through December 31, 2002, and 2.35 to 1.0
thereafter. The credit facility restricts the Company in paying dividends,
engaging in acquisition transactions, incurring additional indebtedness, and
encumbering its assets.
The credit facility allows the Company to repurchase up to $5 million of
its stock from time to time through open market purchases at prevailing market
prices. As of December 31, 2001, the Company had repurchased 75,400 shares of
its common stock, valued at approximately $1.1 million. The Company has not
repurchased shares since the first quarter of 2001, and does not anticipate
repurchasing any additional shares at this time.
As of February 1, 1999, the Company entered into three-year lease
agreements for the buildings and equipment at two new processing facilities in
Stockton, California and Chattanooga, Tennessee. The three-year lease is
commonly referred to as a synthetic lease because it represents a form of
off-balance sheet financing under which a third-party purchases the property and
leases the asset to the Company as lessee. Lease payments are based on the
approximately $10.6 million aggregate cost of the facilities and are adjusted as
the LIBOR rate fluctuates. The lessor has entered into interest rate swaps,
which the Company guaranteed, on May 28, 1999 and July 1, 1999, to reduce the
impact of interest rates on the floating rate operating leases for its
facilities. The Company's obligations under the leases are secured by a letter
of credit issued by First Union National Bank. The Company accounts for these
leases as operating leases.
In January 2002, the lease agreements were extended for another year to
February 2003. When the lease terms end in February 2003, the Company has the
option to extend the lease terms, replace these leases with other leasing
structures, or purchase the facilities for their cost (approximately $10.6
million). At December 31, 2001, the Company had not made a decision with respect
to the option it will pursue at the end of the lease term. Management believes
that the contingent liability relating to the residual value guarantee will not
have a material adverse effect on its financial condition or results of
operations.
If the leases were terminated, and the Company purchased the land and
buildings, the Company would show the costs as assets on its balance sheet.
Currently the Company reflects rent payments as an expense on its statement of
income. In the event that the Company purchased the land and buildings, its rent
expense would cease and the Company would subsequently record depreciation
expense for the buildings over their estimated useful lives.
17
As of December 31, 2001, the Company had cash and cash equivalents of
approximately $538,000. The Company believes that its cash flows from operating
activities and funds available under its credit facility will be sufficient to
fund its growth and anticipated capital requirements for the next twelve months.
See "Business - Certain Considerations--Need for Capital."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's outstanding balance under its $45.0 million revolving credit
facility was approximately $17.6 million and $15.6 million as of December 31,
2001 and 2000, respectively. The credit facility's interest rate varies between
225 and 275 basis points over LIBOR (1.876% as of December 31, 2001), depending
on the Company's leverage. The Company is subject to changes in its interest
expense on this facility based on fluctuations in interest rates.
The lessor of the Company's Stockton and Chattanooga facilities has entered
into interest rate swaps with a notional amount of $9.7 million, that
effectively changed the interest rate exposure on the operating lease payments
from a floating rate to a fixed rate. The Company guarantees the interest rate
swaps. See "Notes B and E of Notes to the Financial Statements."
The Company does not have any other material market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SRI/Surgical Express, Inc.
We have audited the accompanying balance sheets of SRI/Surgical Express,
Inc. as of December 31, 2001 and 2000, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. Our audits 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 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SRI/Surgical Express, Inc.
at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, 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.
As discussed in Note B to the financial statements, in 2001 the Company
adopted Statement of Financial Accounting Standards No. 133, Accounting for
Derivatives Instruments and Hedging Activities.
/s/ ERNST & YOUNG LLP
Tampa, Florida
February 8, 2002, except for Note M,
as to which the date is February 21, 2002.
19
SRI/SURGICAL EXPRESS, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Revenues $86,426 $77,817 $68,596
Cost of revenues 58,296 53,043 47,011
------- ------- -------
Gross profit 28,130 24,774 21,585
Distribution expenses 5,557 5,293 5,121
Selling and administrative expenses 12,512 11,224 9,700
------- ------- -------
Income from operations 10,061 8,257 6,764
Unrealized loss on derivative instruments 407 -- --
Interest expense, net 1,381 1,174 307
------- ------- -------
Income before income taxes 8,273 7,083 6,457
Income tax expense 3,103 2,463 2,503
------- ------- -------
Income before cumulative effect
of change in accounting policy 5,170 4,620 3,954
Cumulative effect of change in accounting
policy, net of tax 113 -- --
------- ------- -------
Net income $ 5,057 $ 4,620 $ 3,954
------- ------- -------
Dividends on preferred stock 56 204 208
------- ------- -------
Net income available for
common shareholders $ 5,001 $ 4,416 $ 3,746
------- ------- -------
Income per common share, basic:
Income available for common shareholders
before cumulative effect of change in
accounting principle $ 0.85 $ 0.78 $ 0.66
Cumulative effect of change in accounting
principle 0.02 -- --
------- ------- -------
Net income available for common shareholders $ 0.83 $ 0.78 $ 0.66
======= ======= =======
Income per common share, diluted:
Income before cumulative effect of change
in accounting principle $ 0.78 $ 0.73 $ 0.63
Cumulative effect of change in accounting
principle 0.02 -- --
------- ------- -------
Net income $ 0.76 $ 0.73 $ 0.63
======= ======= =======
Weighted average common shares
outstanding, basic 6,037 5,673 5,676
------- ------- -------
Weighted average common shares
outstanding, diluted 6,591 6,360 6,322
------- ------- -------
The accompanying notes are an integral part of these financial statements.
20
SRI/SURGICAL EXPRESS, INC.
BALANCE SHEETS
(in thousands, except share data)
December 31,
-----------------
2001 2000
------- -------
ASSETS
Cash and cash equivalents $ 538 $ 132
Accounts receivable, net 11,896 9,825
Inventories, net 6,737 5,569
Prepaid expenses and other assets 2,631 1,381
Reusable surgical products, net 25,554 24,168
Property, plant and equipment, net 30,085 19,979
Goodwill, net 5,244 5,462
------- -------
Total assets $82,685 $66,516
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $17,612 $15,593
Accounts payable 6,479 4,325
Employee related accrued expenses 943 1,402
Other accrued expenses 1,532 1,462
Obligation under capital lease 4,562 --
Deferred tax liability, net 1,064 882
Unrealized loss on derivative instruments 589 --
------- -------
Total liabilities 32,781 23,664
Shareholders' equity
Preferred Stock-authorized 5,000,000 shares
of $.001 par value; 0 and 566,667 shares issued and
outstanding at December 31, 2001 and 2000, respectively -- 1
Common Stock-authorized 30,000,000 shares of $.001 par value; issued and
outstanding 6,318,177 and 5,641,894 shares at December 31,
2001 and 2000, respectively 6 6
Additional paid-in capital 28,941 26,889
Retained earnings 20,957 15,956
------- -------
Total shareholders' equity $49,904 $42,852
------- -------
Total liabilities and shareholders' equity $82,685 $66,516
======= =======
The accompanying notes are an integral part of these financial statements.
21
SRI/SURGICAL EXPRESS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Convertible
Common Stock Preferred Stock Additional
------------------ ----------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
--------- ------ -------- ------ ---------- -------- -------
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
Exercise of stock options 1,000 -- -- -- 11 -- 11
Repurchase and retirement of
treasury stock (35,900) -- -- -- (549) -- (549)
Dividend on preferred stock -- -- -- -- -- (204) (204)
Net income -- -- -- -- -- 4,620 4,620
--------- --- -------- --- ------- ------- --------
Balance at December 31, 2000 5,641,894 6 566,667 1 26,889 15,956 42,852
Exercise of stock options 149,116 -- -- -- 1,508 -- 1,508
Repurchase and retirement of
treasury stock (39,500) -- -- -- (569) -- (569)
Income tax benefit from exercise
of stock options -- -- -- -- 1,113 -- 1,113
Dividend on preferred stock -- -- -- -- -- (56) (56)
Conversion of preferred to common stock 566,667 -- (566,667) (1) -- -- (1)
Net income -- -- -- -- -- 5,057 5,057
--------- --- -------- --- ------- ------- -------
Balance at December 31, 2001 6,318,177 $ 6 -- $-- $28,941 $20,957 $49,904
========= === ======== === ======= ======= =======
The accompanying notes are an integral part of these financial statements.
22
SRI/SURGICAL EXPRESS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities
Net income $ 5,057 $ 4,620 $ 3,954
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,081 2,535 1,677
Amortization of reusable surgical products 3,716 4,066 4,036
Provision for reusable surgical products' shrinkage 1,601 2,145 1,742
Deferred income taxes 182 (1) 741
Cumulative effect of change in accounting principle 182 -- --
Unrealized loss on derivative instruments 407 -- --
Change in assets and liabilities (net of business
combinations)
Accounts receivable (2,071) (1,211) (866)
Inventories (1,168) (2,258) (987)
Prepaid expenses and other assets (1,250) 671 (871)
Accounts payable 3,132 (2,206) 1,425
Employee related and other accrued expenses 698 992 139
-------- -------- --------
Net cash provided by operating activities 13,567 9,353 10,990
-------- -------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (8,299) (5,631) (6,278)
Purchases of reusable surgical products (7,661) (9,626) (10,867)
Reimbursable construction costs -- -- 330
Payment for acquisition of business -- -- (604)
-------- -------- --------
Net cash used in investing activities (15,960) (15,257) (17,419)
-------- -------- --------
Cash flows from financing activities
Net borrowings on notes payable to bank 2,019 6,741 6,443
Payments on obligation under capital lease (108) -- --
Net proceeds from issuance (repurchase) of common stock 964 (538) 106
Dividends paid (76) (204) (255)
-------- -------- --------
Net cash provided by financing activities 2,799 5,999 6,294
-------- -------- --------
Increase (decrease) in cash 406 95 (135)
Cash and cash equivalents at beginning of year 132 37 172
-------- -------- ---------
Cash and cash equivalents at end of year $ 538 $ 132 $ 37
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 1,212 $ 1,246 $ 294
======== ======== ========
Cash paid for income taxes $ 2,443 $ 1,325 $ 2,700
======== ======== ========
Supplemental schedule of non-cash investing activities:
Acquisition of businesses
Fair value of assets acquired $ -- $ -- $ 604
Cash paid -- -- (604)
Convertible preferred stock issued -- -- --
======== ======== ========
Liabilities incurred or assumed $ -- $ -- $ --
======== ======== ========
Assets acquired under capital lease $ 4,670 $ -- $ --
======== ======== ========
Income tax benefit of stock options exercised $ 1,087 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
23
NOTES TO FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
SRI/Surgical Express, Inc. ("SRI" or the "Company") provides hospitals and
surgery centers in 24 states and the District of Columbia with a comprehensive
surgical procedure-based delivery and retrieval service for reusable gowns,
towels, drapes, basins, and instruments, 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. The Company operates in a single industry segment.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 were 52 weeks in 2001, 52 weeks in 2000, and
53 weeks in 1999.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Concentration of credit risk
The Company has accounts receivable from hospitals and surgery centers. The
Company does not believe that there are substantial credit risks associated with
those receivables. The Company does not require any form of collateral from the
hospitals and surgery centers. The allowance for doubtful accounts as of
December 31, 2001 and 2000 was approximately $132,000 and $106,000,
respectively.
For the years ended December 31, 2001, 2000, and 1999, revenues from three
hospital groups (Novation, Premier Inc. and HPG) collectively accounted for
approximately 60%, 56%, and 44% of the Company's revenues, respectively. No
single hospital or surgery center accounted for more than 7% of the Company's
revenues for the years ended December 31, 2001, 2000, and 1999, respectively.
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. As of December 31, 2001
and 2000, the Company had a reserve for slow-moving inventory and obsolescence
of approximately $200,000 and $284,000, respectively.
24
NOTES TO FINANCIAL STATEMENTS (Continued)
Reusable surgical products
Reusable surgical products are stated at cost. Amortization is computed 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) is 75, 100, and 125 uses based on
several factors. Accumulated amortization as of December 31, 2001 and 2000 was
approximately $11.9 million and $10.2 million, respectively.
As of December 31, 2001 and 2000, respectively, the Company had reserves
for shrinkage and obsolescence of approximately $1.2 million.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed by the straight-line method over the estimated useful
lives of the assets, or for leasehold improvements for the term of the related
leases.
Goodwill
Goodwill from acquisitions is stated at cost. Amortization is computed
using the straight-line method over a period of 20 to 30 years. For the years
ended December 31, 2001, 2000 and 1999, amortization of goodwill was
approximately $218,000, $218,000 and $202,000, respectively. Accumulated
amortization as of December 31, 2001 and 2000 was approximately $774,000 and
$556,000, respectively.
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 has been recognized for any of the years
presented.
Revenue recognition
Revenues are recognized as the agreed upon products and services are
delivered, generally daily. Confirmation of deliveries is evidenced by a signed
and dated packing slip and a randomly generated delivery confirmation number.
The Company's contractual relationships with its customers primarily are
evidenced in purchase orders or service agreements with varying terms of one to
five years, which are cancelable by either party, generally with a 90-day
notice.
Substantially all of the reusable surgical products provided to a customer
are owned by the Company. Certain reusable instruments that are included in the
comprehensive surgical procedure-based delivery and retrieval service are
provided to the Company by a third party agent for a fee. In accordance with
Emerging Issues Task Force Abstract No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, management has concluded that the Company is
acting as a principal in this arrangement and has reported the revenue gross for
the comprehensive surgical procedure-based delivery and retrieval service. The
fee charged by the third party agent to the Company is included in cost of
revenues in the Company's statements of income.
25
NOTES TO FINANCIAL STATEMENTS (Continued)
Income taxes
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
Fair value of financial instruments
The carrying amounts of cash, cash equivalents, accounts payable, and
accrued expenses 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.
Derivative Instruments
The Company's derivative instruments are reported at fair market value in
the balance sheet at December 31, 2001. Changes in the fair value are recorded
each period in the statements of income, and are classified as unrealized gain
or loss from derivative instruments.
Net income per common share
Basic net income per share is calculated by dividing net income available
for common shareholders 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, and convertible preferred stock, calculated using the if-converted
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. Under Statement 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 financial statements the effects of Statement 123 as if the recognition
provisions were adopted.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. Statement 133 requires all
derivatives to be recorded on the balance sheet at fair market value and
established new accounting rules for hedging instruments, and was effective for
fiscal years beginning after June 15, 2000. The Company currently has two
interest rate swaps (derivative instruments), which were entered into in
connection with certain of its operating leases (see Note E). The Company
adopted Statement 133 on January 1, 2001. The cumulative effect of this change
in accounting principle related to the derivative instruments was an unrealized
loss of $113,000, which is net of tax of $69,000, on net income.
In June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets. Statement 141 requires that the purchase method of
26
NOTES TO FINANCIAL STATEMENTS (Continued)
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also includes guidance on the initial recognition and measurement
of goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. Statement 142 prohibits the amortization of
goodwill and intangible assets with indefinite useful lives. Statement 142
requires that these assets be reviewed for impairment at least annually.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives.
The Company will adopt Statement 142 beginning in the first quarter of
2002. Application of the non-amortization provisions of Statement 142 is
expected to result in an increase in net income of approximately $136,000 in
2002. The Company will test goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of impairment, if any. By
June 30, 2002, the Company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002.
Any impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle in 2002.
The Company does not expect the adoption of Statement 142 to have a material
impact on the results of operations or financial position of the Company.
Issued in October 2001 by the FASB, Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The accounting
model for long-lived assets to be disposed of by sale applies to all long-lived
assets, including discontinued operations, and replaces the provisions of APB
Opinion No. 30, Reporting Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, for the disposal of segments of a business.
SFAS No. 144 requires that those long-lived assets be measured at the lower of
the carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and, generally, are to be
applied prospectively. Early application is encouraged. The Company believes
that the adoption of SFAS No. 144 will not have a material impact on its
financial position or results of operations.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that total
comprehensive income and comprehensive income per share be disclosed with equal
prominence as net income and earnings per share. Comprehensive income is defined
as changes in stockholders' equity exclusive of transactions with owners such as
capital contributions and dividends and specifically excluded items such as
deferred compensation. The Company adopted this Standard in 1998. The Company
did not have any items of other comprehensive income on which to report in any
of the years presented.
Reclassifications
Certain prior year amounts have been reclassified in order to conform to
the 2001 presentation.
27
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
Useful Lives -------------------------
in Years 2001 2000
------------ ----------- -----------
Land -- $ 429,460 $ 429,460
Buildings and improvements 40 8,810,674 4,000,317
Leasehold improvements 2-18 6,543,600 2,677,069
Machinery and equipment 3-12 16,988,515 13,975,433
Office furniture, equipment and computers 1.5-10 6,480,458 5,378,253
----------- -----------
39,252,707 26,460,532
Less: Accumulated depreciation and amortization 9,167,851 6,481,275
----------- -----------
$30,084,856 $19,979,257
=========== ===========
For the years ended December 31, 2001, 2000 and 1999, depreciation and
amortization expense was approximately $2.9 million, $2.3 million, and $1.5
million, respectively.
NOTE D - NOTES PAYABLE TO BANK
The Company's outstanding balance under its $45.0 million revolving credit
facility was approximately $17.6 million and $15.6 million as of December 31,
2001 and 2000, respectively. The credit facility is secured by substantially all
of SRI's assets and has a maturity date of June 30, 2003. The credit facility's
interest rate varies between 225 and 275 basis points over LIBOR (1.876% as of
December 31, 2001), depending on the Company's leverage. The credit facility
requires the Company to maintain (a) minimum consolidated net worth of not less
than $37.0 million plus 75% of cumulative consolidated net income for each
fiscal quarter beginning with the fiscal quarter ending March 31, 2000; (b) a
consolidated leverage ratio of not more than 2.5 to 1.0; and (c) a fixed charge
coverage ratio of 2.25 to 1.0 through December 31, 2002, and 2.35 to 1.0
thereafter. The credit facility restricts the Company in paying dividends,
engaging in acquisition transactions, incurring additional indebtedness, and
encumbering its assets. The Company was in compliance with all requirements of
the credit facility at December 31, 2001.
The credit facility allows the Company to repurchase up to $5 million of
its stock from time to time through open market purchases at prevailing market
prices. As of December 31, 2001, the Company had repurchased 75,400 shares of
its common stock, valued at approximately $1.1 million. The Company has not
repurchased shares since the first quarter of 2001 and does not anticipate
repurchasing any additional shares at this time.
For the years ended December 31, 2001, 2000, and 1999, interest expense was
approximately $1.4 million, $1.3 million, and $320,000, respectively. Interest
expense in 2001 included approximately $247,000 of interest related to a capital
lease.
NOTE E - OPERATING LEASES
The Company leases offices, facilities, office equipment, and distribution
vehicles under non-cancellable operating leases with terms ranging from one year
to eleven 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 terms expire.
The vehicle leases contain contingent rentals based on mileage.
28
NOTES TO FINANCIAL STATEMENTS (Continued)
Future minimum lease payments as of December 31, 2001 are as follows:
Year ending December 31,
------------------------
2002 $ 3,598,000
2003 3,429,000
2004 3,316,000
2005 3,249,000
2006 3,123,000
Thereafter 2,301,000
-----------
Total $19,016,000
===========
Rental expense for the years ended December 31, 2001, 2000 and 1999 totaled
approximately $4.4 million, $4.1 million, and $3.0 million (including contingent
rentals of approximately $287,000, $267,000, and $293,000), respectively.
As of February 1, 1999, the Company entered into three year lease
agreements for the buildings and equipment at two new processing facilities in
Stockton, California and Chattanooga, Tennessee. This three-year lease is
commonly referred to as a synthetic lease because it represents a form of
off-balance sheet financing under which a third-party purchases the property and
leases the asset to the Company as lessee. The Company's obligations under the
leases are secured by a letter of credit issued by First Union National Bank.
The Company accounts for these leases as operating leases.
Lease payments are based on the approximately $10.6 million aggregate cost
of the facilities, and are adjusted as the LIBOR rate fluctuates. To minimize
the fluctuations in the lease payments from variable interest rates, the lessor
entered into two interest rate swaps with a national financial institution in
May and June, 1999. The Company guaranteed the lessor's performance under the
interest rate swaps. Since the lessor passes the net settlement of the interest
rate swaps onto the Company, the Company has effectively changed the lease
payments under these swaps from variable to fixed. The fair value of the
interest rate swaps was an unrealized loss of $589,000 as of December 31, 2001.
Because it adopted SFAS 133 in 2001, the Company recognized the entire $589,000
change in fair market value in 2001. This amount represents a cumulative effect
of change in accounting principle of $113,000, which is net of tax of $69,000,
from the initial adoption of SFAS 133, and a current year unrealized loss of
$407,000.
In January 2002, the lease agreements were extended for an additional year
to February 2003. When the lease terms end in February 2003, the Company has the
option to extend the lease terms for an additional year, replace these leases
with other leasing structures, or purchase the facilities for original cost
(approximately $10.6 million). At December 31, 2001, the Company had not made a
decision with respect to the option it will pursue at the end of the lease term.
Management believes that the contingent liability relating to the residual value
guarantee will not have a material adverse effect on its financial condition or
results of operations.
If the leases were terminated and the Company purchased the land and
buildings, the Company would show the costs as assets on its balance sheet.
Currently, the Company reflects rent payments as an expense on its statement of
income. In the event that the Company purchased the land and buildings, its rent
expense would cease and the Company would subsequently record depreciation
expense for the buildings over their estimated useful lives.
29
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE F - COMMITMENTS AND CONTINGENCIES
Capital Lease
The Company accounts for the lease of its Tampa, Florida corporate office
as a capital lease. This resulted in recognizing an asset and obligation under
capital lease of approximately $4.6 million as of December 31, 2001. The term of
the lease is 20 years commencing March 24, 2001. In addition, the Company
incurred and capitalized approximately $2.4 million in 2001 for leasehold
improvements, furniture, and equipment for its corporate offices. As of December
31, 2001, accumulated depreciation related to this capital lease was
approximately $117,000.
Future minimum lease payments related to this capital lease as of December
31, 2001 are as follows:
Year ending December 31,
------------------------
2002 $ 459,600
2003 459,600
2004 459,600
2005 459,600
2006 459,600
Thereafter 6,511,000
-----------
Total $ 8,809,000
Less: amount representing interest (4,246,518)
-----------
Obligation under capital lease $ 4,562,482
===========
Purchase Agreement with Standard Textile
The Company has a procurement agreement through August 2008 with Standard
Textile under which the Company agrees to purchase 90% 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. Standard Textile's President and Chief Executive Officer was a director
of the Company from August 1998 until May 2001. If Standard Textile was unable
to perform under this procurement agreement, the Company would have to obtain
alternate sources for its reusable surgical products.
Legal Proceeding
Class Action Litigation. Beginning on November 30, 2001, a series of
substantially identical Class Action Complaints were filed in the United States
District Court for the Middle District of Florida against the Company and
certain of its officers and directors. The plaintiffs purport to assert claims
on behalf of a class of purchasers of the Company's common stock during the
period from July 23, 2001 through November 27, 2001. The actions claim
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under that act. Among other things, the actions
allege that during the class period, the Company and the individual defendants
made materially false statements concerning the Company's financial condition
and its future prospects. The actions seek compensatory and other damages, and
costs and expenses associated with the litigation.
The Company believes that it has substantial defenses to this matter and
intends to assert them vigorously. Management of the Company is unable to
determine the impact, if any, that the resolution of this matter will have on
the financial position or results of operations of the Company. No accruals for
damages have been recorded for this matter as of December 31, 2001.
30
NOTES TO FINANCIAL STATEMENTS (Continued)
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 middle of the third month after the end of the
incentive year. The participant must still be an employee of the Company at that
time. Approximately $193,000, $483,000, and $200,000 of incentives were
recognized during the years ended December 31, 2001, 2000, and 1999,
respectively.
Management Employment Agreements
The Company has employment agreements with three executives that provide
for each person to receive severance pay equal to two years of base salary if
the executive is terminated following a change in control of the Company.
NOTE G - INCOME TAX
The provisions for income taxes for the years ended December 31 were as
follows:
2001 2000 1999
---------- ---------- ----------
Current $2,921,000 $2,464,000 $1,762,000
Deferred 182,000 (1,000) 741,000
---------- ---------- ----------
Total $3,103,000 $2,463,000 $2,503,000
========== ========== ==========
Reconciliation of the federal statutory income tax rate of 34.0% to the
effective income tax rate for the years ended December 31 were as follows:
2001 2000 1999
---- ---- ----
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal 3.9 5.2 5.2
Non-deductible items 1.1 1.3 1.4
Benefit of state tax credits (3.2) (3.0) --
Other, net 1.7 (2.7) (1.8)
---- ---- ----
37.5% 34.8% 38.8%
==== ==== ====
Significant components of the Company's deferred tax assets and liabilities
were as follows:
December 31,
--------------------------
2001 2000
----------- -----------
Deferred tax assets:
Inventory $ 541,000 $ 694,000
Accounts receivable 50,000 41,000
Accrued expenses 180,000 234,000
State tax credits 332,000 136,000
Other 221,000 4,000
----------- -----------
1,324,000 1,109,000
Deferred tax liabilities:
Depreciation (1,904,000) (1,459,000)
Software development costs (465,000) (519,000)
Other (19,000) (13,000)
----------- -----------
Net deferred income tax liability $(1,064,000) $ (882,000)
=========== ===========
31
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE H - 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
outstanding common stock of Repak. Standard Textile received in this transaction
566,667 shares of the Company's Series A Preferred Stock, which was 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 was mandatorily convertible into the Company's
Common Stock. The Series A Preferred Stock accrued a 2% dividend, payable
quarterly, until the earlier of September 2004 or the date that it was converted
into Common Stock. The 566,667 preferred shares were converted into the same
number of shares of Common Stock in April 2001.
NOTE I - 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 was designed to provide employees with incentive
or non-qualified options to purchase up to 700,000 shares of Common Stock. The
options vest ratably over four to five years from the date of the grant. All
outstanding options vest upon a change in control of the Company. Options
granted under this Plan expire no later than ten years after the date granted or
sooner in the event of death, disability, retirement or termination of
employment. As of December 31, 2001, options to purchase 514,400 shares were
outstanding, and 30,400 options were available to be granted under this Plan.
The 1998 Stock Option Plan
As amended on May 16, 2001, the 1998 Stock Option Plan was designed to
provide employees with incentive or non-qualified options to purchase up to
600,000 shares of Common Stock. The options vest ratably over four to five years
from the date of the grant. All outstanding options vest upon a change in
control of the Company. Options granted under this Plan expire no later than ten
years after the date granted or sooner in the event of death, disability,
retirement or termination of employment. As of December 31, 2001, options to
purchase 176,984 shares were outstanding, and 409,100 options were available to
be granted under this Plan.
32
NOTES TO FINANCIAL STATEMENTS (Continued)
The Non-Employee Plan
As amended on May 16, 2001, the Non-Employee Plan was designed to provide
for the grant of non-qualified stock options to purchase up to 200,000 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 or she is
automatically granted options to purchase 4,000 shares of Common Stock for each
year of his or her 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 or she
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. As of December 31, 2001, options to purchase 117,500 shares were
outstanding, and 82,500 options were available to be granted under this Plan.
Other Stock Options
In October 1995, 66,000 non-qualified stock options were granted to a
former officer and former director of the Company. The options are fully vested,
and have an exercise price of $4.43 per share.
In November 1997, 20,000 non-qualified stock options were granted to a
former officer and former director of the Company, of which 8,000 shares were
forfeited, leaving 12,000 shares fully vested at an exercise price of $15.06 per
share.
In December 2001, 10,000 non-qualified stock options were granted to each
of the Company's three outside directors. The options vest ratably over three
years and have an exercise price of $15.37 per share.
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:
Years ended December 31,
------------------------
2001 2000 1999
------ ------ ------
Income before cumulative As reported $5,170 $4,620 $3,954
effect of change in accounting Pro forma $4,497 $3,932 $2,973
policy
Basic income per share available As reported $ 0.85 $ 0.78 $ 0.66
for common shareholders before Pro forma $ 0.74 $ 0.66 $ 0.49
cumulative effect of change in
accounting policy
Diluted income per share before As reported $ 0.78 $ 0.73 $ 0.63
cumulative effect of change Pro forma $ 0.68 $ 0.62 $ 0.47
in accounting policy
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 the years ended December 31, 2001, 2000 and 1999,
respectively, no dividend yield for all years, expected volatility of 85%, 69%
and 61%; risk-free interest rates of 6.8%, 7.0%, and 7.5%, and expected lives of
4.6, 4.1, and 4.0 years. The weighted average fair value of options granted
during the years ended December 31, 2001, 2000 and 1999 were $13.40, $4.46, and
$5.91, respectively.
33
NOTES TO FINANCIAL STATEMENTS (Continued)
A summary of the status of the Company's fixed stock option plan as of
December 31, 2001, 2000 and 1999 and changes during the years ended on those
dates is presented below:
Weighted
Average
Exercise
Options Price
-------- --------
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
Granted 229,000 $ 7.69
Exercised (1,000) $11.44
Forfeited (128,900) $12.10
-------- ------
Outstanding as of December, 31, 2000 991,600 $10.97
Granted 82,500 $19.23
Exercised (149,116) $10.12
Forfeited (38,100) $ 8.01
-------- ------
Outstanding as of December 31, 2001 886,884 $12.01
======== ======
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2001:
Weighted Average
Remaining
Range of Number Contractual Life Weighted Average
Exercise Prices Outstanding (years) Exercise Price
----------------------- ----------- ---------------- ----------------
All Outstanding Options
-----------------------
$4.43 - 5.85 188,000 6.3 $ 5.30
$5.86 - 9.50 201,000 4.0 $ 8.86
$9.51 - 17.50 377,084 5.8 $14.59
$17.51 - 25.00 108,800 6.9 $18.34
$25.01 - 32.00 12,000 9.4 $31.78
------- ------
886,884 $12.01
======= ======
Exercisable Options
-------------------
$4.43 - 5.85 97,600 $ 4.87
$5.86 - 9.50 167,400 $ 9.27
$9.51 - 17.50 210,884 $15.01
$17.51 - 25.00 45,900 $18.00
------- ------
521,784 $11.54
======= ======
34
NOTES TO FINANCIAL STATEMENTS (Continued)
At December 31, 2000 and 1999, exercisable options totaled 524,799 and
368,299 at weighted average exercise prices of $10.99 and $10.25, respectively.
NOTE J - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Years Ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Basic
-----
Numerator:
Income before cumulative effect of change
in accounting policy $5,170,153 $4,619,616 $3,954,310
Less effect of dividends of preferred stock (56,604) (204,000) (207,923)
---------- ---------- ----------
Income available for common
shareholders before cumulative effect of
change in accounting policy $5,113,549 $4,415,616 $3,746,387
========== ========== ==========
Denominator:
Weighted average shares outstanding 6,037,116 5,673,396 5,676,160
========== ========== ==========
Income per common share before cumulative
effect of change in accounting policy - basic $ 0.85 $ 0.78 $ 0.66
========== ========== ==========
Diluted
-------
Numerator:
Income before cumulative effect of change
in accounting policy $5,170,153 $4,619,616 $3,954,310
========== ========== ==========
Denominator:
Weighted average shares outstanding 6,037,116 5,673,396 5,676,160
Effect of dilutive securities:
Employee stock options 398,776 119,750 79,276
Convertible preferred stock 155,251 566,667 566,667
---------- ---------- ----------
6,591,143 6,359,814 6,322,103
========== ========== ==========
Income per common share before
cumulative effect of change in
accounting policy - diluted $ 0.78 $ 0.73 $ 0.63
========== ========== ==========
Options to purchase 12,000, 666,600 and 538,870 shares of common stock were
not included for all or a portion of the years ended December 31, 2001, 2000 and
1999 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.
NOTE K - 1999 EMPLOYEE BENEFIT PLAN
The Company sponsors the SRI/Surgical Express, 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
35
NOTES TO FINANCIAL STATEMENTS (Continued)
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 years ended December 31, 2001,
2000, and 1999, the Company's expense related to the Plan was approximately
$106,000, $96,000, and $89,000, respectively.
NOTE L - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2001, 2000 and 1999, the Company paid
$187,000, $33,000, and $394,000, respectively, to a company to design and supply
the components for water reclamation systems for SRI facilities. A director and
shareholder of the Company owns the business providing these services to SRI.
During the years ended December 31, 2001, 2000, and 1999, the Company paid
approximately $153,000, $42,000, and $73,000, respectively, to a law firm. A
member of the law firm was a shareholder of the Company when these services were
rendered.
During the years ended December 31, 2001, 2000, and 1999, the Company paid
approximately $5.5 million, $10.9 million, and $7.4 million, respectively, to a
company for the purchase of reusable surgical products. This company is owned
and managed by a former director and current shareholder of the Company. As of
December 31, 2001 and 2000, the Company had accounts payable to that company of
approximately $86,000 and $1.0 million, respectively.
NOTE M - SUBSEQUENT EVENT
On February 21, 2002, the Securities and Exchange Commission issued a
Formal Order of Private Investigation with respect to the Company. The
investigation concerns the transactions underlying the Company's restatement of
its financial results announced during its fourth quarter of 2001. The Company
is cooperating with the investigation. Management of the Company is unable to
determine the impact, if any, that the resolution of this matter will have on
the financial position or results of operations of the Company.
36
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
SRI/SURGICAL EXPRESS, 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
-------------------------------------- ---------- ---------- ----------- ----------
Allowance for doubtful accounts:
Year ended December 31, 1999: $ 50,000 $ 39,322 $ 678/(1)/ $ 90,000
Year ended December 31, 2000: $ 90,000 $ 41,362 $ (25,362)/(2)/ $ 106,000
Year ended December 31, 2001: $ 106,000 $ 24,000 $ 2,000/(1)/ $ 132,000
Reserve for shrinkage and obsolescence, reusables:
Year ended December 31, 1999: $ 453,000 $1,844,000 $(1,498,000)/(3)/ $ 799,000
Year ended December, 31, 2000: $ 799,000 $2,166,000 $(1,777,000)/(3)/ $1,188,000
Year ended December 31, 2001: $1,188,000 $1,601,000 $(1,625,000)/(3)/ $1,164,000
Reserve for shrinkage, disposables:
Year ended December 31, 1999: $ 68,000 $ 61,000 $ (22,000)/(4)/ $ 107,000
Year ended December 31, 2000: $ 107,000 $ 481,000 $ (304,000)/(4)/ $ 284,000
Year ended December 31, 2001: $ 284,000 $ (5,000) $ (79,000)/(4)/ $ 200,000
/(1)/ Recoveries were greater than write-offs of uncollectible accounts
/(2)/ Write-offs of uncollectible accounts
/(3)/ Write-offs of reusable products
/(4)/ Write-offs of disposable products
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
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 2002 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 2002 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 2002 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 2002 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
Report of Independent Certified Public Accountants ..................................... 19
Statements of Income for Years Ended December 31, 2001, 2000 and 1999 .................. 20
Balance Sheets at December 31, 2001 and 2000 ........................................... 21
Statements of Shareholders' Equity for Years Ended December 31, 2001, 2000 and 1999 .... 22
Statements of Cash Flow for Years Ended December 31, 2001, 2000 and 1999 ............... 23
Notes to Financial Statements .......................................................... 24
2. Financial Statement Schedules of the Registrant: See (d) below.
(b) Reports on Form 8-K: On November 27, 2001, the Company filed a report on
Form 8-K announcing its third quarter restatement.
(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.
38
EXHIBITS INDEX
Exhibit
Number Exhibit Description
------ -------------------
2.1(1) Asset Purchase Agreement dated July 31, 1994, between the Company
and Amsco SRI/Surgical Express, 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.
2.5(15) Articles of Merger dated as of January 3, 2001, between the Company
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 Agreements between the Company and each of Messrs. Isel,
Peterson and Boosales:
(a) Isel
(b) Peterson
(c) Boosales
10.6(1) Lease Agreement dated August 16, 1991, between Coastal 2920
Corporation and Amsco SRI/Surgical Express, 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 SRI/Surgical Express,
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
SRI/Surgical Express, Inc., as assigned to the Company.
39
Exhibit
Number Exhibit Description
------ -------------------
10.9(1) Lease dated March 30, 1992, between Walter D'Aloisio and Amsco
SRI/Surgical Express, Inc., as assigned to the Company.
10.10(1) Standard Industrial Lease -- Multi-Tenant (American Industrial Real
Estate Association) dated Inc., as February 24, 1992, between
Borstein Enterprises and Amsco SRI/Surgical Express, assigned to the
Company.
10.11(1) Carolina Central Industrial Center Lease dated April 22, 1992,
between Industrial Development Associates and Amsco SRI/Surgical
Express, Inc., as assigned to the Company.
10.12(1) Lease Agreement dated September 2, 1993, between Price Pioneer
Company, Ltd., and Amsco SRI/Surgical Express, Inc., as assigned to
the Company.
10.13(1) Service Center Lease dated December 4, 1991, between QP One
Corporation and Amsco SRI/Surgical Express, 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.
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).
40
Exhibit
Number Exhibit Description
------ -------------------
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, amongthe
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(10) 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(10) Lease Agreement dated as of March 22, 1999, between the Company and
Aldo Abate (lease facility)
10.35(11) Amendment No. 2 to Credit Agreement dated as of March 24, 2000
between the Company and First Union National Bank
10.36(11) Replacement Revolving Note dated as of March 24, 2000, executed by
the Company in favor of First Union National Bank
10.37(13) Joint Marketing Agreement dated as of April 28, 2000, between
Aesculap, Inc. and the Company.
10.38(12) Syndication Amendment and Assignment dated as of June 27, 2000,
among the Company, First Union National Bank, and SouthTrust Bank,
N.A.
10.39(12) First Amendment to Pledge Agreement and Security Agreement dated as
of June 27, 2000, between the Company and First Union National Bank.
10.40(12) Revolving Note dated as of June 27, 2000, issued by the Company to
SouthTrust Bank.
10.41(12) Replacement Swingline Note dated as of June 27, 2000, issued by the
Company to SouthTrust Bank.
10.42(14) Amendment No. 5 to Existing Credit Agreement dated as of June 24,
2000, among the Company, First Union National Bank, and SouthTrust
Bank, N.A.
10.43(14) Amendment No. 6 to Existing Credit Agreement dated as of September
22, 2000, between the Company and First Union National Bank.
10.44(14) New Commitment Agreement dated as of October 4, 2000, among the
Company, First Union National Bank, The Bankers Bank, and SouthTrust
Bank, N.A.
10.45(15) Lease Agreement dated as of February 25, 2000, between the Company
and Coastal Hillsborough Partners, L.L.P.; Confirmation of Lease
Commencement dated as of March 24, 2001, between the Company and
Coastal Hillsborough Partners, L.L.P.
41
Exhibit
Number Exhibit Description
------ -------------------
10.46(16) Purchasing Agreement dated as of May 1, 2001, between the Company
and HealthTrust Purchasing Group, L.P.
10.47 Form of stock option agreement between the Company and outside
directors.
23.1 Consent of Ernst & Young LLP.
(1) Incorporated by reference to the Registration Statement on Form S-1 filed
by the Registrant on May 15, 1996.
(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.
(10) Incorporated by reference to the Annual Report on Form 10-K for the 1999
year filed by the Registrant on March 28, 2000.
(11) Incorporated by reference to the Quarterly Report on Form 10-Q for the 2000
first quarter filed by the Registrant on May 12, 2000.
(12) Incorporated by reference to the Quarterly Report on Form 10-Q for the 2000
second quarter filed by the Registrant on August 11, 2000.
(13) Incorporated by reference to the Current Report on Form 8-K dated October
24, 2000, and filed by the Registrant on October 24, 2000.
(14) Incorporated by reference to the Quarterly Report on Form 10-Q for the 2000
third quarter filed by the Registrant on November 8, 2000.
(15) Incorporated by reference to the Quarterly Report on Form 10-Q for the 2001
first quarter filed by the Registrant on May 15, 2001.
(16) Incorporated by reference to the Quarterly Report on Form 10-Q for the 2001
second quarter filed by the Registrant on July 26, 2001.
42
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.
SRI/SURGICAL EXPRESS, INC.
BY: /s/ Richard T. Isel
--------------------------------
Richard T. Isel
Chairman and CEO
Dated: April 1, 2002
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, Chief Executive April 1, 2002
------------------------------ Officer and Director
Richard T. Isel
/s/ Wayne R. Peterson Executive Vice President, April 1, 2002
------------------------------ Chief Operating Officer and
Wayne R. Peterson Director
/s/ James T. Boosales Executive Vice President, April 1, 2002
------------------------------ Chief Financial Officer and
James T. Boosales Director
/s/ James M. Emanuel Director April 1, 2002
------------------------------
James M. Emanuel
/s/ Lee R. Kemberling Director April 1, 2002
------------------------------
Lee R. Kemberling
/s/ N. John Simmons, Jr. Director April 1, 2002
------------------------------
N. John Simmons, Jr.
43