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, 2000
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 RACETRACK ROAD, TAMPA, FLORIDA 33626
(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on
February 27, 2001, as reported on the Nasdaq National Market, was approximately
$47,223,597.
The Registrant had outstanding 5,670,894 shares of Common Stock as of
February 27, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Proxy Statement for the 2001 Annual Meeting of
Shareholders to be held on May 16, 2001 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, 2000
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 12
Item 7A: Quantitative and Qualitative Disclosures About Market Ris 17
Item 8: Financial Statements and Supplementary Data 17
Item 9: Changes In and Disagreements With Accountants On
Accounting and Financial Disclosure 36
PART III
Item 10: Directors and Executive Officers of the Registrant 37
Item 11: Executive Compensation 37
Item 12: Security Ownership of Certain Beneficial Owners
and Management 37
Item 13: Certain Relationships and Related Transactions 37
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 37
SIGNATURES 42
PART I
ITEM 1. BUSINESS
SRI/Surgical Express, Inc. ("SRI" or the "Company"), formerly Sterile
Recoveries, Inc.(R), 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 which uses
two of the most technologically advanced reusable textiles: (i) a GORE(R)
Surgical Barrier Fabric for gowns and drapes that is breathable yet liquidproof
and provides a viral/bacterial barrier and (ii) an advanced microfiber polyester
surgical fabric for gowns and drapes, which is liquid and bacterial resistant.
In 1998, SRI introduced its new service, Surgical Express(R), which
uses daily delivery and retrieval to provide customers an expanded program of
products and services. Surgical Express is an outsourced Surgical Case Cart
Management Program, which the Company expects will reduce hospital and surgery
center processing costs and those customers' investment in surgical products.
The Company's Surgical Express program offers its customers disposable accessory
packs containing smaller surgical items that are not reusable, such as needles,
syringes, and tubing. The flexibility the Company offers its customers by
combining reusable surgical gowns, towels, drapes, and basins with disposable
products and laparoscopic instruments is a unique product and service offering,
which the Company believes improves its competitive position in the marketplace.
During the third quarter of 2000, the Company began furnishing its
Surgical Express service to two independent hospital networks (IHNs). The
agreements with these two IHNs provide for the exclusive use of SRI's Surgical
Express program for their reusable products and their custom disposable
accessory packs for all procedures.
Also during the third quarter of 2000, the Company began delivering to
hospital customers its new laparoscopy program, Surgical Express for
Laparoscopy. This program combines the state-of-the-art reusable laparoscopic
instruments from Aesculap, Inc. and the Company's Surgical Express products and
services into an integrated program that (a) provides hospital customers with
the reusable and disposable products, including reusable instruments, needed for
laparoscopic surgical procedures, and (b) includes arrangements to deliver and
retrieve the instruments and other reusable products. The Company charges
customers a single per procedure price for the supplies and instruments required
for a laparoscopic surgical procedure.
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 new business.
SRI currently serves a customer base of over 400 hospitals and surgery
centers located in 25 states, including Duke University Medical Center (Durham),
Johns Hopkins Medical Center (Baltimore), 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 discontinued service to several small
hospitals and surgery centers because the cost of service was not commensurate
with revenue. None of these customers accounted for a material portion of the
Company's revenues.
1
The Company maintains agreements to supply two group purchasing
organizations. SRI's agreement with Hospital Services Corporation of America
("HSCA") designates the Company as an approved vendor of reusable surgical
products to HSCA's hospital and surgery center members. In addition, the Company
has an agreement to provide its "Surgical Express" program to Novation member
hospitals. Novation is the supply company for Voluntary Hospitals of America
(VHA) and University HealthSystem Consortium (UHC). SRI will offer Novation
members its Surgical Express program as a unitized delivery system featuring
reusable surgical textiles, reusable instruments, and disposable accessory
packs.
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 33 million
surgical procedures were performed at hospitals and surgery centers in 1999. The
Company believes that between $100-$150 of surgical products service revenues,
including $40-$50 from reusable products, can be realized from a typical
surgical procedure. Where SRI will provide instruments for the procedure, such
as in laparoscopic cases, revenues can be $500 per procedure depending upon the
product mix.
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. 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.
The hospitals that converted to custom procedure trays generally
eliminated the in-house personnel and equipment used to process reusable
surgical products. Furthermore, the hospitals that retained in-house facilities
are increasingly unwilling to support the personnel and capital needs required
to operate those facilities. Especially with the growth of managed care and
associated decrease in surgical service reimbursements, hospitals are seeking to
significantly reduce their costs. The Company believes that these hospitals will
purchase a service that provides daily delivery of substantially better quality
surgical products, eliminates their capital investment requirements, and reduces
their employee and space demands.
The following developments have created a market opportunity for SRI's
Surgical Express program:
CONTINUED PRESSURE ON HOSPITALS TO CONTAIN COST AND RAISE PRODUCTIVITY.
With the growth of managed care and a decrease in surgical service
reimbursements, economic constraints continue to require hospitals to become
more efficient by limiting capital investments and reducing staff and costs.
Hospitals are continually seeking to decrease their cost of operations,
including supplies and waste disposal. SRI's service eliminates the need for
in-house inventory or processing facilities and the process costs associated
with stocking and discarding disposable products.
CONCERN REGARDING THE TRANSMISSION OF INFECTIOUS DISEASES. The health
care industry must manage risks of transmission of infectious diseases through
cross-infections. These concerns increase the desirability of surgical barrier
fabrics that protect surgeons and surgical staff from patient liquids. SRI's
liquidproof gown prevents liquid and viral strike-through in critical areas
during surgical procedures involving higher risk. The Company's standard gown is
specially designed to resist liquid and bacterial strike-through in most other
surgical procedures.
2
CONCERN REGARDING THE HANDLING AND DISPOSAL OF BIOHAZARDOUS WASTE. The
disposal of large volumes of infectious and hazardous waste generated by the
health care industry continues to attract increased public awareness. The
increased burdens on hospitals generating biohazardous waste due to restrictions
on incineration and access to dump sites offer an advantage to reprocessing
systems, such as SRI's, which replace disposable surgical products with reusable
surgical products. The SRI reprocessing system substantially reduces
biohazardous waste and its impact on the environment.
INCREASED OUTSOURCING OF HOSPITAL FUNCTIONS THAT DO NOT INVOLVE PATIENT
CARE. Hospitals with significant staff, capital and space dedicated to in-house
processing of reusable surgical products are increasingly outsourcing this
function to more efficient outside providers. This trend is consistent with the
overall industry focus on efficiency and improved patient care. Surgical Express
allows hospitals to outsource to SRI the ownership and reprocessing of surgical
products, including instruments, and inventory management of complementary
disposable products as well.
STRATEGY
The Company's objective is to continue its growth and become the
surgical supply solution, providing reusable surgical products and related
delivery and retrieval services to hospitals and surgery centers. The Company's
principal strategies for achieving this objective are as follows:
LEVERAGE INFRASTRUCTURE WITH INCREASED PENETRATION IN EXISTING MARKETS.
The Company believes its existing facilities currently operate at approximately
60% of their aggregate annual revenue capacity. The Company believes that by
supplementing its core reusable product line with instruments and other
components of its Surgical Express program, SRI should substantially increase
its total revenue capacity in existing facilities and reduce its need for
significant additional capital expenditures for equipment or new facilities.
HELP SOLVE HOSPITALS' COST ISSUES. The Company believes that its
service addresses hospitals' needs to reduce operating costs. More importantly,
when fully implemented, SRI's Surgical Express program offers hospitals more
comprehensive value by reducing product expenditures, supply chain process
costs, biohazardous waste, and instrument costs. Under its Surgical Express
programs, the Company will also provide hospitals an attractive per procedure
billing arrangement that allows them to easily measure that cost component of
their services.
EXPAND NATIONAL AND REGIONAL AGREEMENTS. The Company's existing service
agreements are primarily with individual hospitals. To leverage their purchasing
power, many hospitals have joined in large groups and increasingly in recent
years, smaller independent delivery networks. These small regional buying groups
believe that they can negotiate and control their product supply relatively
better than large group purchasing organizations. SRI maintains arrangements to
supply national group purchasing organizations Novation (the supply company for
VHA and UHC) and Health Services Corporation of America (see "Business--Group
Purchasing Agreements"). As a key part of its marketing strategy, management
will offer its Surgical Express Program to national and regional hospital
groups, as well as the individual hospitals that have been SRI's customer base.
ADD FACILITIES IN SELECTED MARKETS. SRI currently services customers in
25 states through eleven regional facilities. SRI serves several large
metropolitan areas through highway transport and satellite depots supported by a
regional facility. To expand geographically, the Company in 1999 built
additional facilities in Stockton, California and Chattanooga, Tennessee, which
were markets that it previously served by highway transport. From these new
facilities, SRI now serves new metropolitan areas that were previously too
distant from an existing regional facility. Under its Surgical Express program,
the Company will open new distribution centers that enable the Company to
service larger accounts and provide closer customer contact, enabling the
Company to move into selected markets without constructing a new facility. In
2000, the Company added new distribution centers in Worcester, Massachusetts to
service UMass Memorial Medical Center and Burlington, North Carolina to service
Rex Healthcare.
UTILIZE OPERATIONAL KNOWLEDGE. The Company's management originally
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.
3
DELIVERY, RETRIEVAL AND REPROCESSING SYSTEM
SRI's Surgical Express procedure-based service furnishes hospital
customers the products needed for a 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. In one trip, SRI's trucks
deliver clean carts of sterilized surgical products to the hospital or surgical
center and retrieve carts containing soiled products and return them to its
facility for reprocessing. The specially designed aluminum carts which hold
sterile products are locked to maintain security. 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.
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 are segregated and processed through specially designed processes by
qualified Instrument Technicians. SRI processes only high quality reusable
instruments designed to be thoroughly cleaned and disinfected. Following the
cleaning/disinfecting process, all instruments are 100% inspected and tested for
functionality prior to being included in a pack/instrument set. Stainless steel
basin components, delivery carts and other hard reusable products are processed
through special 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.
Because the Company's ability to manage its amortization expense
depends on maintaining its sewn goods' useful lives, SRI closely monitors its
reprocessing to ensure longevity. SRI uses a barcoding system to track its
reusable surgical products' status, history, and number of uses. SRI continues
to improve its operating processes.
The growth of SRI's business reflects its products' appeal, its service
quality, and general customer resistance to change when the SRI system is in
place. SRI also believes its direct relationship with the hospital's staff has
been important in attracting and retaining customers. Many of SRI's competitors
use a distributor system that introduces an intermediary between the competition
and their customers, which S5 RI 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 it retain existing customers.
SRI believes that its new Surgical Express program for laparoscopy procedures
will have shorter lead times, as experienced in the early months of its sales
efforts.
SRI bills its customers weekly for its previous week's deliveries under
service contracts or purchase orders. Consistent with industry custom, these
contracts generally are cancelable by either party with 90 days notice, and
customers may without penalty unilaterally reduce their use of the Company's
services under these contracts. Surgical Express contracts will have longer
terms, typically three to five years, with more stringent cancellation
provisions. The Company does not have any order backlog because its products are
generally delivered daily in response to customer orders. Surgical Express
customers will be typically billed on a per procedure basis, rather than based
on products delivered.
PRODUCTS
SRI's principal reusable surgical products are its liquidproof and
liquid resistant surgical gowns, towels, drapes, and stainless steel basin sets.
SRI offers these products in a variety of packs configured to the hospital's
specific needs. Packs are comprised of various combinations of gowns, absorbent
towels, liquidproof backtable covers, mayo stand covers, and stainless
components.
4
The Company's liquidproof gown has GORE(R) Surgical Barrier Fabric in
critical areas to provide protection for procedures which present a higher risk
of liquid strike-through. 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 the longest 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. The Company in
August 1998 signed a ten-year sales and manufacturing agreement with Standard
Textile Co., Inc., under which Standard Textile will manufacture the bulk of
SRI's reusable textile products with fabric provided by W.L. Gore and other
textile suppliers. The other components of the Company's products are currently
available at reasonable costs from a variety of suppliers. To complement its
reusable surgical products, the Company offers disposable accessory packs
containing smaller surgical products, such as needles, syringes, and tubing. The
Company develops these packs with its customers' cooperation to assure a
desirable and cost-effective product mix. SRI purchases the products from major
manufacturers, assembles the products in packs, arranges for ethylene oxide
sterilization by a third party, and delivers them to customers on its carts with
its reusable products.
SRI has in 2000 expanded its product offering to include selected
reusable instruments. SRI offers laparoscopic instruments through its Surgical
Express service for laparoscopic procedures. The service includes instruments,
reusable textiles, and disposable products used in the procedure.
EMPLOYEES
As of December 31, 2000, SRI employed 1,089 people, consisting of 70
persons in management, administration and finance at its corporate office and
1,019 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, utensils, 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.
5
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 QSRs, (21 CFR Part 820). Since the
QSRs were first issued on June 1, 1997, the focus of most routine FDA
inspections has been compliance with these new regulations. In addition, the
Company's medical devices must be initially listed with the FDA, and its
labeling and promotional activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The Medical Device Reporting
("MDR") regulation obligates the Company to provide information to the FDA on
injuries or deaths alleged to have been associated with the use of a product or
in connection with certain product failures which could have caused serious
injury or death. If the Company fails to comply with the applicable provisions
of the FDA Act, the FDA may institute proceedings to detain or seize products,
impose fines, enjoin future company activities, impose product labeling
restrictions, or enforce product recalls or withdrawals from the market.
The Company and its hospital customers also must comply with
regulations of OSHA, including the bloodborne pathogen rule requiring "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 hazardous materials, which include containing and labeling waste as well as
reporting various discharges. The Company complies with these regulations by
confining soiled products in marked liquidproof bags and locked, marked transfer
carts. Sterilization of the Company's disposable accessory packs is provided by
a third-party contractor. The use of ethylene oxide by that 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 expenditures for environmental compliance
in 2001.
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.
6
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 capital expenditures for additional surgical products and
equipment during the next several years to achieve its operating and expansion
plans. To adequately service a new customer, SRI typically makes an investment
in new reusable surgical products and carts of approximately 40% of the
projected new annual revenue from the customer. The Company's inability to
obtain adequate capital could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Note G of Notes to
Consolidated Financial Statements."
NEW PRODUCT OFFERING; DEPENDENCE ON A SUPPLIER. Surgical Express for
Laparoscopy is a new product offering for the Company. The Company is in its
initial stages of implementing the program and remains subject to a risk that
the market will not broadly accept it. Further, the Company is relying on
Aesculap, Inc. as its major source of supply of laparoscopic instruments for the
program. The Joint Marketing Agreement between SRI and Aesculap provides for
Aesculap to furnish instruments to the Company for at least three years, subject
to terms and conditions stated in the agreement. Any failure of Aesculap to
furnish instruments for any reason would materially adversely affect the
Company's ability to implement this program.
DEPENDENCE ON A SIGNIFICANT CUSTOMER. During 2000, Premier Hospitals
and HCA-The Healthcare Company hospitals accounted for approximately 20% and 12%
of the Company's sales, compared to 23% and 11% in 1999, respectively. The
Company has in each of its last five years continued to grow its business with
Premier and HCA member hospitals. Although each Premier and HCA hospital
currently makes its purchasing decisions on an individual basis, and no single
hospital accounted for more than 7% of the Company's sales, the loss of a
substantial portion of the Premier or Columbia 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 adversely affect the Company.
7
ITEM 2. PROPERTIES
The Company operates eleven processing facilities that range in size
between 20,000 and 57,000 square feet in Baltimore, Chattanooga, Cincinnati,
Dallas, Detroit, Houston, Los Angeles, Raleigh, Salt Lake City, Stockton, and
Tampa. Each facility contains a uniform set of computerized and fully automated
heavy duty washers, dryers, and sterilizers to achieve consistent cleaning and
sterilization cycles for reusable surgical products. The Company uses standard
operating procedures at each facility, and regularly implements at all
facilities efficiencies that have been developed and tested at one location.
The Company's properties and the major markets that they serve are
summarized below. All 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, at which 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,
(Options to 2012) Richmond, New Jersey,
Washington D.C., Massachusetts
Chattanooga, Tennessee 50,000 September 14, 2002 Atlanta, Birmingham, Nashville
(Options to 2005)
Cincinnati, Ohio 50,000 Owned Columbus, Akron, Cincinnati
Louisville, Lexington
Dallas, Texas 31,000 March 31, 2002 Dallas, Oklahoma City, Tulsa
(Options to 2012)
Detroit, Michigan 23,000 September 30, 2002 Chicago, Detroit, Milwaukee,
(Options to 2012) Toledo, Flint, Cleveland,
Ann Arbor, Champaign
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 31,500 April 30, 2002 South Carolina, North Carolina
(Options to 2012)
Salt Lake City, Utah 28,900 July 6, 2006 Utah, Idaho
(Options to 2018)
Stockton, California 57,000 August 31, 2002 Sacramento, San Francisco,
(Options to 2005) Oakland
Tampa, Florida 29,000 February 6, 2002 Tampa, Miami, Orlando,
(Options to 2012) Jacksonville, Gainesville, Ocala, Ft. Myers, Ft.
Lauderdale
Service centers:
Boston, Massachusetts 13,500 June 30, 2005 -
Chicago, Illinois 3,200 November 30, 2001 -
Louisville, Kentucky 10,000 (1) -
Miami, Florida 4,000 January 31, 2002 -
Raleigh, North Carolina 15,000 July 30, 2002 -
Warehouses:
Detroit, Michigan 11,000 November 30, 2003 -
Long Beach, California 3,300 July 31, 2002 -
Salt Lake City, Utah 5,400 Month to Month -
Disposable products facility:
Plant City, Florida 40,800 November 1, 2004 -
(Options to 2009)
Corporate office:
Tampa, Florida 42,000 March 26, 2021 -
(1) Service center provided by hospital
8
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any
litigation or other legal proceeding expected to have a material effect on the
Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
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, 1999 through December 31, 2000. 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
1999 HIGH LOW
---- ---- ---
First Quarter $12.250 $ 9.500
Second Quarter $12.000 $ 6.875
Third Quarter $12.250 $ 7.625
Fourth Quarter $ 8.250 $ 6.813
2000
----
First Quarter $ 7.250 $ 3.875
Second Quarter $ 8.000 $ 4.266
Third Quarter $13.875 $ 7.625
Fourth Quarter $15.500 $12.188
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently expects that its earnings will be retained for
development and expansion, and does not anticipate paying dividends on its
Common Stock in the foreseeable future. Financial covenants in the Company's
credit facility prohibit the payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Notes to Consolidated
Financial Statements." On March 1, 2000, there were approximately 50 holders of
record of the Common Stock.
On August 31, 1998, the Company acquired from Standard Textile Co.,
Inc. all the stock of RePak Surgical Enterprises, Inc. ("RePak") in exchange for
566,667 shares of its convertible Series A Preferred Stock. The Series A
Preferred Stock is convertible by its holder at any time into the same number of
shares of the Company's Common Stock. Under certain conditions, including the
Company's Common Stock having an average closing trading price of $18.00 per
share for a specified time period, the Preferred Stock is mandatorily
convertible into the Company's Common Stock. The Company's issuance of the
Series A Preferred Stock to Standard Textile Co., Inc. was exempt from
registration requirements under Section 4(2) of the Securities Act of 1933.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected financial data and is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this report. The selected financial data have been
derived from the Company's audited financial statements. The following
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
SRI/SURGICAL EXPRESS, INC.
------------------------------------------------------------
YEARS ENDED
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 77,817 $ 68,596 $ 52,318 $ 39,854 $ 32,168
Cost of revenues 53,043 47,011 35,334 26,286 21,764
-------- -------- -------- -------- --------
Gross profit 24,774 21,585 16,984 13,568 10,404
Distribution expenses 5,293 5,121 3,788 3,150 3,000
Selling and administrative expenses 11,224 9,700 7,065 5,924 4,734
-------- -------- -------- -------- --------
Income from operations 8,257 6,764 6,131 4,494 2,670
Interest expense (income), net 1,174 307 52 (142) 648
-------- -------- -------- --------- --------
Income before income taxes 7,083 6,457 6,079 4,636 2,022
Income tax expense(1) 2,463 2,503 2,393 1,835 190
-------- -------- -------- -------- --------
Net income $ 4,620 $ 3,954 $ 3,686 $ 2,801 $ 1,832
======== ======== ======== ======== ========
Dividends on preferred stock 204 208 67
-------- -------- --------
Net income available for common shareholders $ 4,416 $ 3,746 $ 3,619
======== ======== ========
UNAUDITED PRO FORMA INFORMATION (1):
Historical income before income taxes $ 2,022
Pro forma income tax expense 778
---------
Pro forma net income $ 1,244
=========
Historical and pro forma (1996 only)
net income per common share, basic $ 0.78 $ 0.66 $ 0.64 $ 0.50 $ 0.29
======== ======== ======== ======== =========
Historical and pro forma (1996 only)
net income per common share, diluted $ 0.73 $ 0.63 $ 0.61 $ 0.48 $ 0.28
======== ======== ======== ======== =========
Weighted average common shares outstanding,
basic 5,673 5,676 5,662 5,637 4,300
======== ======== ======== -------- =========
Weighted average common shares outstanding,
diluted 6,360 6,322 6,019 5,862 4,491
======== ======== ======== ======== =========
BALANCE SHEET DATA:
Reusable surgical products, net $24,168 $ 19,796 $ 14,705 $10,034 $ 6,915
Total assets 66,516 56,155 43,620 27,546 25,006
Total indebtedness 15,593 8,852 2,408 -- 1,000
Shareholders' equity 42,852 38,974 35,122 24,348 20,756
(1) As an S Corporation for federal income tax purposes, the Company had
not been subject to income tax until the date of its initial public
offering (July 18, 1996), at which time the Company became a C
Corporation. On a pro forma basis, assuming the Company had been
subject to income tax for all periods presented, the Company would not
have recognized any corporate income tax expense prior to 1996. See
"Notes B and G of Notes to Consolidated Financial Statements".
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,
2000 2000 2000 2000
---- ---- ---- ----
(In thousands, except per share data)
Net 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
Net income per common share, basic 0.10 0.19 0.22 0.27
Net income per common share, diluted 0.10 0.18 0.20 0.25
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 Consolidated Financial Statements and the Notes thereto
included elsewhere in this report. This discussion and analysis contains trend
analysis and might contain forward-looking statements. These statements are
based on current expectations and actual results might differ materially. Among
the factors that could cause actual results to vary are those described in this
"Overview" section and in "Business - Certain Considerations."
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 the pricing by
type of surgical pack.
On August 31, 1998, the Company acquired all the shares of stock of
RePak, a wholly owned subsidiary of Standard Textile Co., Inc., in exchange for
566,667 shares of its convertible Series A Preferred Stock. From a facility in
the Cincinnati area, RePak provides the Ohio and Michigan markets with reusable
surgical product services similar to the Company's reprocessing service. The
Company also purchased the RePak facility's real estate for $1.5 million cash
from affiliates of Standard Textile. The Company merged RePak into the Company
in January 2001. See "Note C of Notes to Consolidated Financial Statements."
On February 26, 1999, the Company acquired assets of NPAC, the reusable
surgical product business of the textile rental segment of National Service
Industries, Inc., for approximately $604,000 cash, of which $449,000 has been
allocated to goodwill. Goodwill is amortized over 30 years. The Company has
accounted for the acquisition as a purchase. NPAC's operating results are
included in the Company's operating results since the date of acquisition. Pro
forma results are not materially different from historical results and therefore
are not presented.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of revenues represented by certain items reflected in the statements of income
of the Company.
YEARS ENDED
DECEMBER 31,
--------------------------------
2000 1999 1998
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 68.2 68.5 67.5
------ ------ ------
Gross profit 31.8 31.5 32.5
Distribution expenses 6.8 7.5 7.2
Selling and administrative expenses 14.4 14.1 13.6
------ ------ ------
Income from operations 10.6 9.9 11.7
Interest expense, net 1.5 0.5 0.1
------ ------ ------
Income before income taxes 9.1 9.4 11.6
Income tax expense 3.2 3.6 4.6
------ ------ ------
Net income 5.9% 5.8% 7.0%
====== ====== ======
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
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.
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 is incurring to expand its product offering
to include instruments and introduce its Surgical Express program, and due to
expenses associated with the Company's new computer system.
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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues increased $16.3 million, or 31.1%, to $68.6 million in 1999
from $52.3 million in 1998. The revenue increases were attributable in roughly
equal amounts to new customers and increased revenues from current customers.
The Company also benefited from additional revenues from the RePak acquisition.
GROSS PROFIT
Gross profit increased $4.6 million, or 27.1%, to $21.6 million in 1999
from $17.0 million in 1998. As a percentage of revenues, gross profit decreased
to 31.5% in 1999 from 32.5% in 1998. The decline in gross profit percentage
resulted from the Company's failure to grow revenues as expected in its third
and fourth quarters of 1999, and from expenses incurred in opening and
initiating operation of two new reprocessing facilities and a new disposable
product facility, along with continued implementation costs of the Company's new
information systems.
DISTRIBUTION EXPENSES
Distribution expenses increased $1.3 million, or 35.2%, to $5.1 million
in 1999 from $3.8 million in 1998. As a percentage of revenues, distribution
expenses increased to 7.5% in 1999 from 7.2% in 1998. The increase in
distribution expenses as a percentage of revenues resulted primarily from higher
fuel costs and new truck routes added to serve new customers as the Company
expanded its geographic reach.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $2.6 million, or 37.3%,
to $9.7 million in 1999 from $7.1 million in 1998. As a percentage of revenues,
selling and administrative expenses increased to 14.1% in 1999 from 13.6% in
1998. Expenses increased due to the significant efforts that the Company made in
1999 to expand its product offering with instruments and to introduce its
Surgical Express program. The increase in selling and administrative expenses as
a percentage of revenues resulted primarily from expenses incurred by the
Company in adding sales representatives and implementing its new information
systems.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED
INTEREST EXPENSE, NET
Interest expense increased $255,000 to $307,000 in 1999 from $52,000 in
1998, primarily due to borrowings under the Company's revolving credit facility.
INCOME BEFORE INCOME TAX EXPENSE
As a result of the foregoing, the Company's income before income taxes
increased to $6.5 million in 1999, from $6.1 million in 1998. As a percentage of
revenues, income before income taxes was 9.4% of revenues in 1999 and 11.6% of
revenues in 1998.
INCOME TAX EXPENSE
Income tax expense increased $110,000 to $2.5 million in 1999 from $2.4
million in 1998. The Company's effective tax rate was 38.8% for 1999 and 39.4%
for 1998.
NET INCOME PER COMMON SHARE
The Company recorded net income per common share of $0.63 on a diluted
per share basis, and $0.66 on a basic per share basis for 1999, compared with
$0.61 on a diluted per share basis and $0.64 on a basic per share basis in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from
operations, operating leases for facilities and distribution vehicles, and
borrowings under its working capital loan facility.
The Company's positive cash flow provided by operating activities was
approximately $9.4 million in 2000, compared to approximately $11.0 million in
1999. The decrease in cash from operating activities in 2000 resulted primarily
from decreased accounts payable and increased inventories and accounts
receivable, and was partially offset by increased net income before
amortization, shrinkage and depreciation expense and other accrued expenses.
The Company used approximately $2.2 million less net cash in investing
activities in 2000 than in 1999. The Company in 2000 made capital expenditures
for equipment of $5.6 million and for reusable surgical products of $9.6 million
compared to $6.3 million for equipment and $10.9 million for reusable surgical
products in 1999. These expenditures were funded from cash provided by operating
activities and borrowings under the Company's revolving credit facility.
The Company continues to invest in more reusable surgical products,
primarily to support anticipated increases in business. The Company's business
is capital intensive and will require substantial capital expenditures for
additional surgical products and equipment during the next several years to
achieve operating and expansion plans. To adequately service a new customer, the
Company estimates that it makes an investment in new reusable surgical products
and carts equal to approximately 40% of the projected first year revenue from
the customer. The Company estimates capital expenditures
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
for new carts and reusable surgical products will be approximately
$800,000 per month for the next 12 months, although the amount will fluctuate
with the growth of its business. The Company also made additional expenditures
in 2000 of approximately $3.1 million for equipment upgrades, including the
addition of instrument reprocessing equipment and equipment to increase its
facilities' aggregate capacity. In recent years, the Company has spent $2.4
million in a continuing project to upgrade its technology software and related
hardware, including $344,000 in 2000 to substantially complete this project. The
Company has spent $3.9 million to expand and further equip its Cincinnati, Ohio
facility, including $1.6 million in 2000 to complete this project. In addition,
the Company has spent approximately $258,000 as of December 31, 2000, and
expects to spend an additional $1.4 million in 2001 for leasehold improvements
for its new corporate offices located in Tampa, Florida.
The Company recently expanded its revolving credit facility with First
Union National Bank to include two participating institutions, SouthTrust Bank
and The Bankers Bank, and to increase the available amount from $15.0 million to
$45.0 million, subject to terms and conditions in the credit agreement. As of
December 31, 2000, the Company's outstanding balance under its revolving credit
facility was approximately $15.6 million.
The revolving facility is secured by substantially all of SRI's assets
and has a maturity date of June 30, 2003. The facility's interest rate varies
between 225 and 275 basis points over LIBOR (6.4390% as of December 31, 2000),
depending on the Company's leverage. The credit facility requires the Company to
maintain (a) minimum consolidated net worth of not less than $37.0 million plus
75% of cumulative consolidated net income for each fiscal quarter beginning with
the fiscal quarter ending March 31, 2000; (b) a consolidated leverage ratio of
not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of 2.25 to 1.0
through December 31, 2002, and 2.35 to 1.0 thereafter. The credit facility
restricts the Company in paying dividends, engaging in acquisition transactions,
incurring additional indebtedness, and encumbering its assets.
The revolving credit facility allows the Company to repurchase up to $5
million of its stock from time to time through open market purchases at
prevailing market prices. As of December 31, 2000, the Company had repurchased
35,900 shares of its common stock, valued at approximately $549,000.
As of February 1, 1999, the Company entered into a $10.6 million lease
agreement for two new processing facilities in Stockton, California and
Chattanooga, Tennessee. The lease terms are for three years. The Company
guarantees all lease payments and a substantial residual value for the
facilities when the lease terms end. The lease terms can be extended upon
approval of the Company and the lessor. Each lease agreement includes a purchase
option for the Company at the original cost of each leased facility. The Company
accounts for these leases as operating leases.
As of December 31, 2000, the Company had cash of approximately
$132,000. 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 does not have any material market risk sensitive financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
17
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SRI/Surgical Express, Inc.
We have audited the accompanying consolidated balance sheets of
SRI/Surgical Express, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the two years in the period ended December 31, 2000. Our audits also included
the financial statement schedule listed in the index at Item 14(a) for each of
the two years in the period ended December 31, 2000. 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 consolidated financial position of
SRI/Surgical Express, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Tampa, Florida
February 8, 2001
18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
SRI/Surgical Express, Inc.
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of SRI/Surgical Express, Inc. for the year
ended December 31, 1998. Our audit also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 also includes examining
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of the consolidated operations and
cash flows of SRI/Surgical Express, Inc for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ GRANT THORNTON LLP
Tampa, Florida
February 26, 1999
19
SRI/SURGICAL EXPRESS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
2000 1999 1998
------- ------- -------
Revenues $77,817 $68,596 $52,318
Cost of revenues 53,043 47,011 35,334
------- ------- -------
Gross profit 24,774 21,585 16,984
Distribution expenses 5,293 5,121 3,788
Selling and administrative expenses 11,224 9,700 7,065
------- ------- -------
Income from operations 8,257 6,764 6,131
Interest expense, net 1,174 307 52
------- ------- -------
Income before income taxes 7,083 6,457 6,079
Income tax expense 2,463 2,503 2,393
------- ------- -------
Net income $ 4,620 $ 3,954 $ 3,686
======= ======= =======
Dividends on preferred stock 204 208 67
------- ------- -------
Net income available for
common shareholders $ 4,416 $ 3,746 $ 3,619
======= ======= =======
Net income per common share -
basic $ 0.78 $ 0.66 $ 0.64
======= ======= =======
Net income per common share -
diluted $ 0.73 $ 0.63 $ 0.61
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
20
SRI/SURGICAL EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
2000 1999
------- -------
ASSETS
Cash and cash equivalents $ 132 $ 37
Accounts receivable, net 9,825 8,614
Inventories 5,569 3,311
Prepaid expenses and other assets 1,381 2,052
Reusable surgical products 24,168 19,796
Property, plant and equipment, net 19,979 16,664
Goodwill, net 5,462 5,681
------- -------
Total assets $66,516 $56,155
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $15,593 $ 8,852
Accounts payable 4,325 5,574
Employee related accrued expenses 1,402 1,076
Other accrued expenses 1,462 796
Deferred tax liability, net 882 883
------- -------
Total liabilities 23,664 17,181
Shareholders' equity
Convertible preferred stock-authorized 5,000,000 shares
of $.001 par value; 566,667 shares issued and
outstanding at December 31, 2000 and 1999 1 1
Common stock-authorized 30,000,000 shares of $.001 par value; issued and
outstanding 5,641,894 and 5,676,794 shares at December 31,
2000 and 1999, respectively 6 6
Additional paid-in capital 26,889 27,427
Retained earnings 15,956 11,540
------- -------
Total shareholders' equity $42,852 $38,974
------- -------
Total liabilities and shareholders' equity $66,516 $56,155
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
21
SRI/SURGICAL EXPRESS, INC.
CONSOLIDATED 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, 1997 5,659,894 $ 6 -- -- $ 20,167 $ 4,175 $ 24,348
Exercise of stock options 4,900 -- -- -- 15 -- 15
Acquisition of RePak Surgical
Enterprises, Inc. -- -- 566,667 1 7,139 -- 7,140
Dividend on preferred stock -- -- -- -- -- (67) (67)
Net income -- -- -- -- -- 3,686 3,686
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 5,664,794 6 566,667 1 27,321 7,794 35,122
Exercise of stock options 12,000 -- -- -- 106 -- 106
Dividend on preferred stock -- -- -- -- -- (208) (208)
Net income -- -- -- -- -- 3,954 3,954
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1999 5,676,794 6 566,667 1 27,427 11,540 38,974
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
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
22
SRI/SURGICAL EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net income $ 4,620 $ 3,954 $ 3,686
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,535 1,677 1,067
Amortization of reusable surgical products 4,066 4,036 2,910
Provision for reusable surgical products shrinkage 2,145 1,742 1,523
Deferred income taxes (1) 741 409
Change in assets and liabilities (net of business
combinations)
Accounts receivable (1,211) (866) (878)
Inventories (2,258) (987) (326)
Prepaid expenses and other assets 671 (871) (404)
Accounts payable (2,206) 1,425 2,142
Employee related and other accrued expenses 992 139 (219)
-------- -------- --------
Net cash provided by operating activities 9,353 10,990 9,910
-------- -------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (5,631) (6,278) (3,303)
Purchases of reusable surgical products (9,626) (10,867) (7,810)
Reimbursable construction costs -- 330 --
Payment for acquisition of business -- (604) (1,428)
-------- -------- --------
Net cash used in investing activities (15,257) (17,419) (12,541)
-------- -------- --------
Cash flows from financing activities
Net borrowings on notes payable to bank 6,741 6,443 2,408
Net proceeds from issuance (repurchase) of common stock (538) 106 15
Dividends paid (204) (255) --
-------- -------- --------
Net cash provided by financing activities 5,999 6,294 2,423
-------- -------- --------
Increase (decrease) in cash 95 (135) (208)
Cash and cash equivalents at beginning of year 37 172 380
-------- -------- --------
Cash and cash equivalents at end of year $ 132 $ 37 $ 172
======== ======== ========
Supplemental cash flow information
Cash paid for interest $ 1,246 $ 294 $ 69
======== ======== ========
Cash paid for income taxes $ 1,325 $ 2,700 $ 2,202
======== ======== ========
Supplemental schedule of non-cash investing activities
Acquisition of businesses
Fair value of assets acquired $ -- $ 604 $ 9,330
Cash paid -- (604) (1,428)
Convertible preferred stock issued -- -- 7,140
-------- -------- --------
Liabilities incurred or assumed $ -- $ -- $ 762
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF ORGANIZATION AND BUSINESS
SRI/Surgical Express, Inc. ("SRI" or the "Company"), formerly Sterile
Recoveries, Inc., provides hospitals and surgery centers in 25 states 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
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
FINANCIAL STATEMENT PRESENTATION
The Company operates on a 52-53 week fiscal year ending the Sunday
nearest December 31. The financial statements reflect the Company's year-end as
December 31 for presentation purposes. There were 52 weeks in 2000, 53 weeks in
1999, and 52 weeks in 1998.
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, 2000 and 1999 was approximately $106,000 and $90,000, respectively.
For the years ended December 31, 2000, 1999 and 1998, revenues from two
hospital groups (Premier Hospitals and HCA-The Healthcare Company) accounted for
approximately 32%, 34% and 39% 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, 2000, 1999 and 1998, 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, 2000
and 1999, the Company had a reserve for slow-moving inventory and obsolescence
of approximately $284,000 and $107,000, respectively.
24
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED 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) are 75, 100, and 125 uses based on
several factors. Accumulated amortization as of December 31, 2000 and 1999 was
approximately $10.2 million and $8.5 million, respectively.
As of December 31, 2000 and 1999, the Company had reserves for
shrinkage and obsolescence of approximately $1.2 million and $799,000,
respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization is computed by the straight-line method over the estimated useful
lives of the assets, or the term of the related leases for leasehold
improvements.
GOODWILL
Goodwill from acquisitions is stated at cost. Amortization is computed
by the straight-line method over a period of 20 to 30 years. For the years ended
December 31, 2000, 1999 and 1998, amortization of goodwill was ap-proximately
$218,000, $202,000 and $83,000, respectively. Accumulated amortization as of
December 31, 2000 and 1999 was approximately $556,000 and $338,000,
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 exists for all years presented.
REVENUE RECOGNITION
Revenues are recognized as the agreed upon services are delivered,
generally daily. The Company's revenues are principally generated from service
agreements with varying terms of one to 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 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 consolidated statements of income.
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.
25
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 (SFAS 123). Under SFAS 123, the Company may elect to
recognize stock-based compensation expense based on the fair value of the awards
or continue to account for stock-based compensation under APB 25, and disclose
in the consolidated financial statements the effects of SFAS 123 as if the
recognition provisions were adopted.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has adopted in 1998 Statement of Position 98-1 ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE (SOP
98-1). This SOP segments an internal use software project into stages and
accounts for the project's costs based on the stage in which the costs are
incurred. Specified costs for each application development stage are capitalized
if the preliminary project stage is complete, management authorized the project,
and completion of the project is probable. Capitalizable costs of internal-use
software projects consist of (1) external direct costs of materials and services
used to develop or purchase internal-use software, (2) payroll and
payroll-related costs for time spent directly on the project by employees
directly associated with the internal-use software project, and (3) interest
costs incurred during the development of internal use software. The Company's
adoption of this pronouncement did not materially impact its financial
statements. The Company's policy was to capitalize internal-use software costs.
Accordingly, to upgrade its technology software and related hardware, the
Company capitalized approximately $2.4 million, including $344,000 in 2000 as it
completed this project. The Company amortizes these costs over five years.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. In June 2000, FASB issued Statement of
Financial Accounting Standards No. 138 ACCOUNTING FOR CERTAIN DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES - AN AMENDMENT OF FASB STATEMENT NO.
133. These statements require all derivatives to be recorded on the balance
sheet at fair market value and establishes new accounting rules for hedging
instruments, and are effective for fiscal years beginning after June 15, 2000.
The Company currently does not have any derivative instruments and is not
involved in hedging activities and therefore does not expect these Statements to
have an impact on its results of operations or financial position.
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
26
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 report any items of other comprehensive income in any of the years
presented.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to conform
to the 2000 presentation.
NOTE C--BUSINESS COMBINATIONS
On February 26, 1999, the Company acquired assets of NPAC, the reusable
surgical product business of the textile rental segment of National Service
Industries, Inc., for approximately $604,000 cash, of which $449,000 has been
allocated to goodwill. Goodwill is amortized over 30 years. The Company has
accounted for the acquisition as a purchase. NPAC's operating results are
included in the Company's operating results since the date of acquisition. Pro
forma results are not materially different from historical results and therefore
are not presented.
On August 31, 1998, the Company acquired all the stock of RePak
Surgical Enterprises, Inc. ("RePak"), a wholly owned subsidiary of Standard
Textile Co., Inc. ("Standard Textile"), in exchange for 566,667 shares of its
convertible Series A Preferred Stock. The Company also purchased the RePak
facility's real estate for $1.5 million cash from Standard Textile's affiliates.
The Company has accounted for the acquisition as a purchase. RePak's operating
results are included in the Company's operating results since the date of
acquisition. Of the approximately $8.6 million total costs it incurred to
complete the acquisition, the Company allocated approximately $4.7 million to
tangible assets, assumed approximately $760,000 in liabilities, and allocated
approximately $4.7 million to goodwill. In January 2001, the Company merged
RePak into the Company.
The following unaudited pro forma results of operations for the year
ended December 31, 1998 assumes the RePak acquisition described above had
occurred January 1, 1998, and does not purport to show the results that actually
would have occurred if the acquisition was made as of that date or results that
might occur in the future.
YEAR ENDED DECEMBER 31,1998
---------------------------
(UNAUDITED)
(IN THOUSANDS)
Revenues $58,262
Net income $ 4,017
Net income available for common shareholders $ 3,809
Net income per common share, basic $ 0.67
Net income per common share, diluted $ 0.63
NOTE D--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
27
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
USEFUL LIVES DECEMBER 31,
IN YEARS 2000 1999
-------- ---- ----
Land - $ 429,460 $ 429,460
Buildings and improvements 40 4,000,317 2,905,132
Leasehold improvements 2-18 2,677,069 2,555,124
Machinery and equipment 3-12 13,975,433 10,718,283
Office furniture, equipment and computers 3-10 5,378,253 4,220,319
----------- -----------
26,460,532 20,828,318
Less: Accumulated depreciation and amortization 6,481,275 4,164,303
----------- -----------
$19,979,257 $16,664,015
=========== ===========
For the years ended December 31, 2000, 1999 and 1998, depreciation and
amortization expense was approximately $2.3 million, $1.5 million, and $984,000,
respectively.
NOTE E- NOTES PAYABLE TO BANK
The Company's outstanding balance under its revolving credit facility
with First Union National Bank was approximately $15.6 million and $8.9 million
as of December 31, 2000 and December 31, 1999, respectively.
The Company recently expanded its revolving credit facility with First
Union National Bank to include two participating institutions, SouthTrust Bank
and The Bankers Bank, and to increase the available amount from $15.0 million to
$45.0 million, subject to terms and conditions in the credit agreement.
The revolving facility is secured by substantially all of SRI's assets
and has a maturity date of June 30, 2003. The facility's interest rate varies
between 225 and 275 basis points over LIBOR (6.4390% as of December 31, 2000),
depending on the Company's leverage. The credit facility requires the Company to
maintain (a) minimum consolidated net worth of not less than $37.0 million plus
75% of cumulative consolidated net income for each fiscal quarter beginning with
the fiscal quarter ending March 31, 2000; (b) a consolidated leverage ratio of
not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of 2.25 to 1.0
through December 31, 2002, and 2.35 to 1.0 thereafter. The credit facility
restricts the Company in paying dividends, engaging in acquisition transactions,
incurring additional indebtedness, and encumbering its assets.
The revolving credit facility allows the Company to repurchase up to $5
million of its stock from time to time through open market purchases at
prevailing market prices. As of December 31, 2000, the Company had repurchased
35,900 shares of its common stock, valued at approximately $549,000.
For the years ended December 31, 2000, 1999 and 1998, interest expense
was approximately $1.3 million, $320,000, and $100,000, respectively.
28
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE F--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases offices, facilities, office equipment, and
distribution vehicles under non-cancellable operating leases with terms ranging
from one year to nine years. The office and processing facility leases contain
various renewal options and escalating payments. At present, the Company intends
to exercise certain aspects of these renewal options when the initial terms
expire. The vehicle leases contain contingent rentals based on mileage.
Future minimum lease payments as of December 31, 2000 under leases in
excess of one year are as follows:
YEAR ENDING DECEMBER 31
2001 $ 4,163,000
2002 4,570,000
2003 4,516,000
2004 4,598,000
2005 4,791,000
Thereafter 2,151,000
-----------
Total $24,789,000
===========
Rental expense for the years ended December 31, 2000, 1999 and 1998
totaled approximately $4.1 million, $3.0 million, and $1.7 million (including
contingent rentals of approximately $267,000, $293,000, and $237,000),
respectively.
As of February 1, 1999, the Company entered lease arrangements totaling
$10.6 million for two new processing facilities in Stockton, California and
Chattanooga, Tennessee. The lease terms are for three years. The Company
guarantees all lease payments and a substantial residual value for the
facilities when the lease terms end. The lease terms can be extended upon
approval of the Company and the lessor. Each lease agreement includes a purchase
option for the Company at the original cost of each leased facility. The Company
accounts for these leases as operating leases. For the years ended December 31,
2000 and 1999, lease expense was approximately $629,000 and $191,000 for the two
facilities, respectively. In addition, the Company has spent approximately
$258,000 as of December 31, 2000, and expects to spend an additional $1.4
million (unaudited) in 2001 for leasehold improvements for its new corporate
offices located in Tampa, Florida.
PURCHASE AGREEMENT WITH STANDARD TEXTILE
In conjunction with the RePak acquisition, the Company signed a
procurement agreement with Standard Textile under which the Company agreed to
purchase 80% of its reusable surgical products from Standard Textile. The
Company's management believes that Standard Textile's prices are and will be
comparable to prices available from other vendors. Standard Textile's President
and Chief Executive Officer became a director of the Company on August 31, 1998.
A significant percentage of the Company's business is dependent on its ability
to obtain a key component of its liquid-proof surgical products from one
principal vendor.
LEGAL PROCEEDINGS
Neither the Company nor any of its property is subject to any
litigation or other legal proceedings expected to have a material effect on the
Company or its business.
29
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED 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 end of the second month after the end of
the incentive year. The participant must still be an employee of the Company at
that time. Approximately $483,000, $200,000, and $212,000 of incentives were
recognized during the years ended December 31, 2000, 1999 and 1998,
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:
2000 1999 1998
----------- ----------- -----------
Current $ 2,464,000 $ 1,762,000 $ 1,984,000
Deferred (1,000) 741,000 409,000
----------- ----------- -----------
Total $ 2,463,000 $ 2,503,000 $ 2,393,000
=========== =========== ===========
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:
2000 1999 1998
------ ------ ------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal 5.2 5.2 4.6
Benefit of state tax credits (3.0) -- --
Other, net (1.4) (.4) .8
------ ------ ------
34.8% 38.8% 39.4%
====== ====== ======
Significant components of the Company's deferred tax assets and liabilities were
as follows:
DECEMBER 31,
---------------------------
2000 1999
----------- -----------
Deferred tax assets:
Inventory $ 694,000 $ 467,000
Accounts receivable 41,000 35,000
Accrued expenses 234,000 135,000
State tax credits 136,000 --
Other 4,000 12,000
----------- -----------
1,109,000 649,000
Deferred tax liabilities:
Depreciation (1,459,000) (1,025,000)
Software development costs (519,000) (502,000)
Other (13,000) (5,000)
----------- -----------
Net deferred income tax liability $ (882,000) $ (883,000)
=========== ===========
30
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED 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.
CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$.001 par value per share. The Board of Directors has the authority, without any
further vote or action by the Company's shareholders, to issue Preferred Stock
in one or more series and to fix the number of shares, designations, relative
rights (including voting rights), preferences, and limitations of those series
to the full extent now or hereafter permitted by Florida law.
On August 31, 1998, the Company acquired from Standard Textile all the
stock of Repak. Standard Textile received in this transaction 566,667 shares of
the Company's Series A Preferred Stock, which is convertible by its holder at
any time into the same number of shares of the Company's Common Stock. Under
certain conditions, including the Company's Common Stock having an average
closing trading price of $18.00 per share for a specified time period, the
Series A Preferred Stock is mandatorily convertible into the Company's Common
Stock. The Series A Preferred Stock accrues a 2% dividend, payable quarterly,
until the earlier of September 2004 or the date that it is converted into Common
Stock.
NOTE 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 provides 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, 2000, options to purchase 678,100 shares were
outstanding under this Plan.
THE 1998 STOCK OPTION PLAN
The 1998 Stock Option Plan provides employees with incentive or
non-qualified options to purchase up to 300,000 shares of Common Stock. The
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, 2000, options to purchase 164,000 shares were
outstanding under this Plan.
THE NON-EMPLOYEE PLAN
The Non-Employee Plan provides for the grant of non-qualified stock
options to purchase up to 100,000 shares of Common Stock to members of the Board
of Directors who are not employees of the Company. At the completion of its
initial public offering, each non-employee director was granted options to
purchase 4,000 shares of Common Stock for each full remaining year of the
director's term. Thereafter, on the date on which a new non-
31
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
initial term, and will be granted options to purchase 4,000 shares of Common
Stock for each year of any subsequent term to which he is elected. All options
become exercisable ratably over the director's term and have an exercise price
equal to the fair market value of the Common Stock on the date of grant. As of
December 31, 2000, options to purchase 71,500 shares were outstanding 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. The options vest ratably over
five years, and have an exercise price of $15.06 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,
----------------------------------------
2000 1999 1998
-------- -------- --------
Net income As reported $ 4,620 $ 3,954 $ 3,686
Pro forma $ 3,932 $ 2,973 $ 2,991
Basic net income per share As reported $ 0.78 $ 0.66 $ 0.64
Pro forma $ 0.66 $ 0.49 $ 0.52
Diluted net income per share As reported $ 0.73 $ 0.63 $ 0.61
Pro forma $ 0.62 $ 0.47 $ 0.50
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, 2000, 1999 and 1998,
respectively, no dividend yield for all years, expected volatility of 69%, 61%
and 53%; risk-free interest rates of 7.0%, 7.5%, and 6.0%, and expected lives of
4.1, 4.0, and 4.0 years. The weighted average fair value of options granted
during the years ended December 31, 2000, 1999 and 1998 were $4.46, $5.91, and
$7.89, respectively.
32
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the Company's fixed stock option plan as of
December 31, 2000, 1999 and 1998, and changes during the years ended on those
dates is presented below:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
-------- ---------
Outstanding as of December, 31, 1997 631,200 $ 11.17
Granted 132,500 $ 17.26
Exercised (4,900) $ 2.98
Forfeited (55,800) $ 13.26
-------- ---------
Outstanding as of December 31, 1998 703,000 $ 12.21
Granted 216,000 $ 11.18
Exercised (12,000) $ 7.68
Forfeited (14,500) $ 14.86
-------- ---------
Outstanding as of December 31, 1999 892,500 $ 11.98
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
======== =========
The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 2000:
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
--------------- ----------- ---------------- ----------------
$ 4.43 - 5.85 272,000 5.9 $ 5.45
$ 5.86 - 9.50 239,000 4.9 $ 8.92
$ 9.51 - 17.50 381,100 6.2 $14.37
$17.51 - 19.00 99,500 7.3 $18.01
------- ------
991,600 $10.97
======= ======
EXERCISABLE SHARES
$ 4.43 - 5.85 134,000 $ 5.15
$ 5.86 - 9.50 171,300 $ 9.40
$ 9.51 - 17.50 179,699 $15.31
$17.51 - 19.00 39,800 $18.01
------- ------
524,799 $10.99
======= ======
At December 31, 1999 and 1998, exercisable options totaled 368,299 and
263,400 at weighted average exercise prices of $10.25 and $8.85, respectively.
33
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE J-EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
BASIC
Numerator:
Net income $ 4,619,616 $ 3,954,310 $ 3,686,000
Less effect of dividends of preferred stock (204,000) (207,923) (67,000)
----------- ----------- -----------
Net income available for common
shareholders $ 4,415,616 $ 3,746,387 $ 3,619,000
=========== =========== ===========
Denominator:
Weighted average shares outstanding 5,673,396 5,676,160 5,662,000
=========== =========== ===========
Net income per common share - basic $ 0.78 $ 0.66 $ 0.64
=========== =========== ===========
DILUTED
Numerator:
Net income $ 4,619,616 $ 3,954,310 $ 3,686,000
=========== =========== ===========
Denominator:
Weighted average shares outstanding 5,673,396 5,676,160 5,662,000
Effect of dilutive securities:
Employee stock options 119,750 79,276 172,000
Convertible preferred stock 566,667 566,667 185,000
----------- ----------- -----------
6,359,814 6,322,103 6,019,000
=========== =========== ===========
Net income per common share - diluted $ 0.73 $ 0.63 $ 0.61
=========== =========== ===========
Options to purchase 666,600, 538,870 and 371,000 shares of common stock
were not included for all or a portion of the years ended December 31, 2000,
1999 and 1998 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
Effective February 1, 1999, 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 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, 2000 and 1999, the Company expense related to the Plan was
approximately $96,000 and $89,000, respectively.
NOTE L-RELATED PARTY TRANSACTIONS
During the years ended December 31, 2000, 1999 and 1998, the Company
paid $33,000, $394,000, and $24,000, 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.
34
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the years ended December 31, 2000, 1999 and 1998, the Company
paid approximately $42,000, $73,000, and $76,000, respectively, to two law
firms. A member of each law firm was a shareholder of the Company when these
services were rendered.
During the years ended December 31, 2000 and 1999, the Company paid
approximately $10.9 million and $7.4 million, respectively, to a company for the
purchase of reusable surgical products. This firm is owned and managed by a
director and shareholder of the Company. As of December 31, 2000 and 1999, the
Company had accounts payable to that company of approximately $1.0 million and
$2.6 million, respectively.
35
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
SRI/SURGICAL EXPRESS, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------- ----------- ------------ --------------- ------------
BALANCE AT CHARGED TO BALANCE0
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) OF PERIOD
------------------------------------- ----------- ------------ ---------------- ------------
Allowance for doubtful accounts:
Year ended December 31, 1998: $ 39,000 $ 11,607 $ (607)(1) $ 50,000
Year ended December 31, 1999: $ 50,000 $ 39,322 $ 678 (2) $ 90,000
Year ended December 31, 2000: $ 90,000 $ 41,362 $ (25,362)(1) $ 106,000
Reserve for shrinkage and obsolescence, reusables:
Year ended December 31, 1998: $ 199,000 $ 1,523,000 $ (1,269,000)(3) $ 453,000
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
Reserve for shrinkage, disposables:
Year ended December 31, 1998: $ 45,000 $ 36,000 $ (13,000)(4) $ 68,000
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
(1) Write-offs of uncollectible accounts
(2) Recoveries were greater than 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.
36
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 2001 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 2001 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 2001 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 2001 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following Financial Statements of the Registrant are included in
Part II, Item 8, Page 16
Reports of Independent Certified Public Accountants . . . . . . . . 19
Consolidated Statements of Income for Years Ended
December 31, 2000, 1999 and 1998 . . . . . . . . . . . . . . 21
Consolidated Balance Sheets at December 31, 2000 and 1999 . . . . 22
Consolidated Statements of Shareholders' Equity for
Years Ended December 31, 2000, 1999 and 1998. . . . . . . . . 23
Consolidated Statements of Cash Flow for Years Ended
December 31, 2000, 1999 and 1998 . . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements . . . . . . . . . . . . 25
2. Financial Statement Schedules of the Registrant: See (d) below.
(b) Reports on Form 8-K: On October 24, 2000, the Company filed a current
report on Form 8-K to announce new customer agreements, its new
Surgical Express for Laparoscopy program, and a new joint marketing
agreement with Aesculap, Inc.
(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.
37
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.
3.1(1) Restated Articles of Incorporation of the Company.
3.2(1) Bylaws of the Company.
3.3(6) First Amendment to Restated Articles of Incorporation dated as
of August 31, 1998, of the Company (for Series A Preferred
Stock).
4.1(1) Specimen certificate for Common Stock of the Company.
4.2(8) Trust Indenture dated as of February 1, 1999, between First
Union National Bank and the Industrial Development Board of
Hamilton County, Tennessee.
4.3(9) Trust Indenture dated as of June 1, 1999, between First Union
National Bank and First Security Bank, National Association.
10.1(1) 1995 Stock Option Plan, as amended, of the Company.
10.2(1) Form of Stock Option Agreement between the Company and
participants under the 1995 Stock Option Plan.
10.3(1) Form of Indemnity Agreement between the Company and each of
its executive officers.
10.4(1) Form of Registration Rights Agreement executed in connection
with the private placement of Common Stock.
10.5(3) Employment Agreement between the Company and each of Messrs.
Isel, Peterson and Boosales: (a) Isel (b) Peterson (c)
Boosales
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.
10.9(1) Lease dated March 30, 1992, between Walter D'Aloisio and Amsco
SRI/Surgical Express, Inc., as assigned to the Company.
38
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.10(1) Standard Industrial Lease -- Multi-Tenant (American Industrial
Real Estate Association) dated February 24, 1992, between
Borstein Enterprises and Amsco SRI/Surgical Express, Inc., as
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).
10.28(8) Security Agreement dated as of February 1, 1999, between the
Company and First Union National Bank (Revolving Line of
Credit).
39
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
10.29(8) Participation Agreement dated as of February 1, 1999, among
the Company, First Union National Bank, and First Security
Bank, National Association (lease facility).
10.30(8) Credit Agreement dated as of February 1, 1999, between First
Security Bank, National Association and First Union National
Bank (lease facility).
10.31(8) Lease Agreement dated as of February 1, 1999, between the
Company and First Security Bank, National Association.
10.32(9) Lease Agreement dated as of June 15, 1999, between the Company
and ProLogis Limited Partnership IV.
10.33(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.
23.1 Consent of Grant Thornton LLP.
23.2 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.
40
(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.
41
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, President
and CEO
Dated: March 27, 2001
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF
1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD T. ISEL Chairman, President, March 27, 2001
---------------------------------------------- Chief Executive Officer
Richard T. Isel and Director
/s/ WAYNE R. PETERSON Executive Vice President and March 27, 2001
---------------------------------------------- Director
Wayne R. Peterson
/s/ JAMES T. BOOSALES Executive Vice President, March 27, 2001
---------------------------------------------- Chief Financial Officer and
James T. Boosales Director
/s/ JAMES M. EMANUEL Director March 27, 2001
----------------------------------------------
James M. Emanuel
/s/ LEE R. KEMBERLING Director March 27, 2001
----------------------------------------------
Lee R. Kemberling
/s/ GARY L. HEIMAN Director March 27, 2001
----------------------------------------------
Gary L. Heiman
/s/ N. JOHN SIMMONS, JR. Director March 27, 2001
---------------------------------------------
N. John Simmons, Jr.
42