UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-20997
SRI/SURGICAL EXPRESS, INC.
(Exact name of Registrant as specified in its Charter)
Florida 59-3252632
(State of Incorporation) (I.R.S. Employer
Identification No.)
12425 Racetrack Road
Tampa, Florida 33626
(Address of Principal Executive Offices)
(813) 891-9550
(Registrant's Telephone Number)
Indicate by check whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
-----
Number of outstanding shares of each class of Registrant's Common Stock as of
July 24, 2001:
Common Stock, par value $.001 - 6,240,961
INDEX
Page
----
PART I Financial Information
Item 1 Condensed Financial Statements
Condensed Statements of Income for the
three months and six months ended June 30,
2001 (unaudited) and June 30, 2000 (unaudited)............... 1
Condensed Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000............................ 2
Condensed Statements of Cash Flows for the
six months ended June 30, 2001 (unaudited)
and June 30, 2000 (unaudited)................................ 3
Notes to Condensed Financial Statements
(unaudited).................................................. 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 5
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................................................... 11
Item 2 Changes in Securities................................................. 11
Item 3 Defaults Upon Senior Securities ...................................... 11
Item 4 Submission of Matters to a Vote of Security Holders................... 11
Item 5 Other Information .................................................... 11
Item 6 Exhibits and Reports on Form 8-K...................................... 11
SIGNATURE ................................................................................. 12
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
------
SRI/SURGICAL EXPRESS, INC.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ----- ---- ----
Revenues $22,469 $19,662 $43,767 $37,993
Cost of revenues 15,015 13,430 29,563 26,349
------- ------- ------- -------
Gross profit 7,454 6,232 14,204 11,644
Distribution expenses 1,339 1,309 2,688 2,671
Selling and administrative expenses 3,183 2,798 5,910 5,627
------- ------- ------- -------
Income from operations 2,932 2,125 5,606 3,346
Interest expense, net 355 299 743 516
------- ------- ------- -------
Income before income taxes 2,577 1,826 4,863 2,830
Income tax expense 992 712 1,872 1,103
------- ------- ------- -------
Net income $ 1,585 $ 1,114 $ 2,991 $ 1,727
======= ======= ======= =======
Dividends on preferred stock 5 51 57 102
------- ------- ------- -------
Net income available for common shareholders $ 1,580 $ 1,063 $ 2,934 $ 1,625
======= ======= ======= =======
Net income per common share - basic $ 0.26 $ 0.19 $ 0.50 $ 0.29
======= ======= ======= =======
Net income per common share - diluted $ 0.24 $ 0.18 $ 0.46 $ 0.28
======= ======= ======= =======
Weighted average common shares
outstanding - basic 6,160 5,677 5,879 5,677
======= ======= ======= =======
Weighted average common shares
outstanding - diluted 6,693 6,284 6,558 6,270
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
1
SRI/SURGICAL EXPRESS, INC.
CONDENSED BALANCE SHEETS
(In thousands)
June. 30, December 31,
2001 2000
---- ----
(unaudited)
ASSETS
Cash and cash equivalents $ 105 $ 132
Accounts receivable, net 10,859 9,825
Inventories 5,688 5,569
Prepaid expenses and other assets 1,943 1,381
Reusable surgical products, net 22,002 24,168
Property, plant and equipment, net 22,806 19,979
Goodwill, net 5,354 5,462
------- -------
Total assets $68,757 $66,516
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $16,121 $15,593
Accounts payable 3,964 4,325
Employee related accrued expenses 1,031 1,402
Other accrued expenses 936 1,462
Deferred tax liability, net 882 882
------- -------
Total liabilities 22,934 23,664
Shareholders' equity
Preferred stock - 1
Common stock 6 6
Additional paid-in capital 26,926 26,889
Retained earnings 18,891 15,956
------- -------
Total shareholders' equity 45,823 42,852
------- -------
Total liabilities and shareholders' equity $68,757 $66,516
======= =======
The accompanying notes are an integral part of these financial statements.
2
SRI/SURGICAL EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Cash flows from operating activities
Net income $ 2,991 $ 1,727
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,339 1,051
Amortization of reusable surgical products 2,080 2,357
Provision for reusable surgical products shrinkage 923 1,084
Change in assets and liabilities:
Accounts receivable, net (1,034) (480)
Inventories (149) (1,651)
Prepaid expenses and other assets (562) 1,102
Accounts payable 620 (3,045)
Employee related and other accrued expenses (897) 845
------- -------
Net cash provided by operating activities 5,311 2,990
------- -------
Cash flows from investing activities
Purchases of property, plant and equipment (4,057) (3,622)
Purchases of reusable surgical products (1,770) (4,395)
------- -------
Net cash used in investing activities (5,827) (8,017)
------- -------
Cash flows from financing activities
Net borrowings on notes payable to bank 528 5,148
Net proceeds from issuance (repurchase) of common stock 37 --
Dividends paid (76) (102)
------- -------
Net cash provided by financing activities 489 5,046
------- -------
Increase (decrease) in cash and cash equivalents (27) 19
Cash and cash equivalents at beginning of period 132 37
------- -------
Cash and cash equivalents at end of period $ 105 $ 56
======= =======
Supplemental cash flow information
Cash paid for interest $ 713 $ 481
======= =======
Cash paid for income taxes $ 2,380 $ 34
======= =======
The accompanying notes are an integral part of these financial statements.
3
SRI/SURGICAL EXPRESS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of SRI/Surgical
Express, Inc. (the "Company"), formerly Sterile Recoveries, Inc., have been
prepared in accordance with the Securities and Exchange Commission's
instructions to Form 10-Q and, therefore, omit or condense footnotes and certain
other information normally included in financial statements prepared in
accordance with generally accepted accounting principles. The accounting
policies followed for quarterly financial reporting conform with generally
accepted accounting principles for interim financial statements and include
those accounting policies disclosed in the Company's Form 10-K for the year
ended December 31, 2000 filed with the Securities and Exchange Commission. In
the opinion of management, all adjustments of a normal recurring nature that are
necessary for a fair presentation of the financial information for the interim
periods reported have been made. The results of operations for the six months
ended June 30, 2001 are not necessarily indicative of the results that can be
expected for the entire year ending December 31, 2001. The unaudited financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Form 10-K.
The Company operates on a 52-53 week fiscal year ending the Sunday nearest
December 31. There are 26 weeks included for the six-month periods ended June
30, 2001 and June 30, 2000, respectively.
2. LINE OF CREDIT
The Company's outstanding balance under its $45.0 million revolving credit
facility was approximately $16.1 million and $14.0 million on June 30, 2001 and
June 30, 2000, respectively.
The credit facility is secured by substantially all of SRI's assets and has
a maturity date of June 30, 2003. The credit facility's interest rate varies
between 225 and 275 basis points over LIBOR (3.835% as of June 30, 2001),
depending on the Company's leverage. The credit facility requires the Company
to maintain (a) minimum consolidated net worth of not less than $37.0 million
plus 75% of cumulative consolidated net income for each fiscal quarter beginning
with the fiscal quarter ending March 31, 2000; (b) a consolidated leverage ratio
of not more than 2.5 to 1.0; and (c) a fixed charge coverage ratio of 2.25 to
1.0 through December 31, 2002, and 2.35 to 1.0 thereafter. The credit facility
restricts the Company in paying dividends, engaging in acquisition transactions,
incurring additional indebtedness, and encumbering its assets.
The credit facility allows the Company to repurchase up to $5 million of
its stock from time to time through open market purchases at prevailing market
prices. As of March 31, 2001, the Company had repurchased 75,400 shares of its
common stock for $1,118,100. No shares were repurchased in the three months
ended June 30, 2001, and the Company does not anticipate repurchasing any
additional shares at this time.
3. COMMITMENTS AND CONTINGENCIES
On March 24, 2001, the Company entered into a new operating lease
arrangement for its new corporate offices located in Tampa, Florida. The
monthly lease payments are $38,300 and the lease term is 20 years. In addition,
the Company incurred and capitalized approximately $2.3 million as of June 30,
2001 for leasehold improvements, furniture and equipment for its corporate
offices. The Company has substantially completed this project.
4
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------ ------ ------ ------
(In thousands, except per share data)
Basic (unaudited)
-----
Numerator:
Net income $1,585 $1,114 $2,991 $1,727
Less effect of dividends of preferred stock (5) (51) (57) (102)
------ ------ ------ ------
Net income available for common
shareholders $1,580 $1,063 $2,934 $1,625
====== ====== ====== ======
Denominator:
Weighted average shares outstanding 6,160 5,677 5,879 5,677
====== ====== ====== ======
Net income per common share - basic $ 0.26 $ 0.19 $ 0.50 $ 0.29
====== ====== ====== ======
Diluted
-------
Numerator:
Net income $1,585 $1,114 $2,991 $1,727
====== ====== ====== ======
Denominator:
Weighted average shares outstanding 6,160 5,677 5,879 5,677
Effect of dilutive securities:
Employee stock options 471 40 366 27
Convertible preferred stock 62 567 313 567
------ ------ ------ ------
6,693 6,284 6,558 6,270
====== ====== ====== ======
Net income per common share - diluted $ 0.24 $ 0.18 $ 0.46 $ 0.28
====== ====== ====== ======
Options to purchase 12,000 and 655,400 shares of common stock for the three
month periods ended June 30, 2001 and June 30, 2000, respectively, were not
included for all or a portion of the computation of diluted net income per
common share because those options' exercise prices were greater than the
average market price of the common shares, and therefore the effect would be
anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------
of Operations
Overview
From 18 service centers, the Company provides hospitals and surgery centers
with a comprehensive surgical procedure-based delivery and retrieval service for
reusable gowns, towels, drapes, basins, and instruments, and provides other
disposable products necessary for surgery. At 11 reprocessing facilities and
one disposable products division, the Company collects, sorts, cleans, inspects,
packages, sterilizes and delivers its reusable products on a just-in-time basis.
The Company offers an integrated "closed-loop" reprocessing service that uses
two of the most technologically advanced reusable textiles: (i) a GORE(R)
Surgical Barrier Fabric for gowns and drapes that is breathable yet liquidproof
and provides a viral/bacterial barrier and (ii) an advanced microfiber polyester
surgical fabric for gowns and drapes that is liquid and bacterial resistant.
The Company also offers state of the art reusable laparoscopic instruments from
Aesculap, Inc., one of the oldest and largest worldwide suppliers of surgical
instruments. The surgical instruments have been designed either to be taken
apart or with flush ports to allow for complete cleaning and decontamination.
GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
5
The Company offers its Surgical Express(R) program, which uses daily
delivery and retrieval to provide customers an expanded program of products and
services. Surgical Express is an outsourced Surgical Case Cart Management
Program that the Company expects will reduce hospital and surgery centers'
processing costs and their investment in surgical products. With its Surgical
Express program, the Company supplements its core reusable products offering
with disposable accessory packs containing smaller surgical items that are not
reusable, such as needles, syringes, and tubing. Since the fourth quarter of
2000, the Company has offered customers its first complete procedure-based
service, Surgical Express for Laparoscopy, which combines the Company's core
reusable products offering with disposable products and laparoscopic instruments
required for laparoscopic surgical procedures. Aesculap, Inc furnishes
laparoscopic instruments for this program under a joint marketing arrangement
with the Company. The Company believes that this unique product and service
offering improves its competitive position in the marketplace.
In May 2001, the Company announced its contract with HealthTrust Purchasing
Group (HPG). After Novation, this is the second significant group purchasing
organization (GPO) contract for the Company and now represents the acceptance of
the Company's optimized delivery service, Surgical Express, as an available
contracted alternative for over 2000 hospitals and surgery centers across the
country. The Company continues to pursue additional GPO contracts that will
allow it to further penetrate the surgical supply market.
Results of Earnings
The following table sets forth for the periods shown the percentage of
revenues represented by certain items reflected in the statement of income of
the Company.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 66.8 68.3 67.5 69.4
----- ----- ----- -----
Gross profit 33.2 31.7 32.5 30.6
Distribution expenses 6.0 6.7 6.1 7.0
Selling and administrative expenses 14.2 14.2 13.6 14.8
----- ----- ----- -----
Income from operations 13.0 10.8 12.8 8.8
Interest expense, net 1.6 1.5 1.7 1.4
----- ----- ----- -----
Income before income taxes 11.5 9.3 11.1 7.4
Income tax expense 4.3 3.6 4.3 2.9
----- ----- ----- -----
Net income 7.1% 5.7% 6.8% 4.5%
===== ===== ===== =====
Three Months and Six Months Ended June 30, 2001 Compared to Three Months and Six
Months Ended June 30, 2000
Revenues. Revenues increased $2.8 million, or 14.3%, to $22.5
million in the three months ended June 30 2001, from $19.7 million in the three
months ended June 30, 2000. In the six months ended June 30, 2001, the
Company's revenues increased $5.8 million, or 15.2%, to $43.8 million, from
$38.0 million in the six months ended June 30, 2000. The revenue increases
resulted primarily from increased Surgical Express business and expansion of the
Company's instrument program (Surgical Express for Laparoscopy), and were
partially offset by planned reductions in the Company's customer base of
smaller, less profitable accounts. Second quarter revenues were also affected by
flooding in Texas from Tropical Storm Allison that forced hospital customers
there to defer or divert surgeries, conditions that SRI expects to continue in
its third quarter.
6
Gross Profit. Gross profit increased $1.2 million, or 19.6%, to $7.5
million in the three months ended June 30, 2001, from $6.2 million in the three
months ended June 30, 2000; and $2.6 million, or 22.0%, to $6.2 million in the
six months ended June 30, 2001, from $11.6 million in the six months ended June
30, 2000. As a percentage of revenues, gross profit increased by 1.5% to 33.2%
in the three months ended June 30, 2001, from 31.7% in the three months ended
June 30, 2000; and increased 1.9% to 32.5% in the six months ended June 30,
2001, from 30.6% in the six months ended June 30, 2000. The increase in gross
profit reflects increased productivity as a result of improved methods and
leveraged fixed costs, coupled with the Company's elimination of smaller, less
profitable customers.
Distribution Expenses. Distribution expenses increased $30,000, or
2.3%, to $1.3 million in the three months ended June 30, 2001, from $1.3 million
in the three months ended June 30, 2000; and increased $17,000, or 0.6%, to $2.7
million in the six months ended June 30, 2001, from $2.7 million in the six
months ended June 30, 2000. As a percentage of revenues, distribution expenses
decreased 0.7% to 6.0% in the three months ended June 30, 2001, from 6.7% in the
three months ended June 30, 2000; and decreased 0.9% to 6.1% in the six months
ended June 30, 2001, from 7.0% in the six months ended June 30, 2000. The
Company benefited from increased volume per shipment and use of efficient truck
routes.
Selling and Administrative Expenses. Selling and administrative
expenses increased $385,000, or 13.8%, to $3.2 million in three months ended
June 30, 2001, from $2.8 million in the three months ended June 30, 2000; and
increased $283,000, or 5.0%, to $5.9 million in the six months ended June 30,
2001, from $5.6 million in the six months ended June 30, 2000. As a percentage
of revenues, selling and administrative expenses remained the same at 14.2% for
the three months ended June 30, 2001 and June 30, 2000, respectively; and
decreased 1.2% to 13.6% in the six months ended June 30, 2001, from 14.8% in the
six months ended June 30, 2000. The Company's expenses increased due to
administrative fees for new GPO contracts, its new corporate offices, and growth
in its sales force. The decrease as a percentage of revenues reflects positive
leverage of increased revenues.
Income from Operations. Income from operations increased $807,000, or
38.0%, to $2.9 million in the three months ended June 30, 2001, from $2.1
million in the three months ended June 30, 2000; and increased $2.3 million, or
67.5%, to $5.6 million in the six months ended June 30, 2001, from $3.3 million
in the six months ended June 30, 2000. As a percentage of revenues, income from
operations increased 2.2% to 13.0% for the three months ended June 30, 2001 from
10.8% for the three months ended June 30, 2000; and increased 4.0% to 12.8% in
the six months ended June 30, 2001, from 8.8% in the six months ended June 30,
2000, as a result of the decreased costs described above.
Interest Expense, Net. Interest expense increased $56,000 to $355,000
in the three months ended June 30, 2001, compared to $299,000 in the three
months ended June 30, 2000; and increased $227,000 to $743,000 in the six months
ended June 30, 2001, from $516,000 in the six months ended June 30, 2000,
primarily due to higher borrowings under the Company's revolving credit
facility.
Income Tax Expense. Income tax expense increased $280,000 to $1.0
million in the three months ended June 30, 2001, compared to $712,000 in the
three months ended June 30, 2000; and increased $769,000 to $1.9 million in the
six months ended June 30, 2001, from $1.1 million in the six months ended June
30, 2000. The Company's effective tax rate is 38.5%.
Liquidity and Capital Resources
The Company's principal sources of capital have been cash flows from
operations, operating leases, and borrowings under its revolving credit
facility.
The Company's positive cash flow provided by operating activities was
$5.3 million during the first six months of 2001, compared to $3.0 million
during the first six months of 2000. The increase in
7
cash from operating activities resulted primarily from increased net income
before amortization, shrinkage and depreciation, slower growth in inventories,
and increased accounts payable, and was partially offset by decreased employee
related and other accrued expenses and increased accounts receivable.
The Company's net cash used in investing activities decreased to $5.8
million in the six months ended June 30, 2001, from $8.0 million in the six
months ended June 30, 2000. The Company continues to make substantial capital
expenditures to improve its facilities and to purchase reusable surgical
products to support anticipated increases in business. The Company made
equipment expenditures of $4.1 million during the six months ended June 30,
2001, primarily for new corporate offices, facility equipment, and expansions.
The Company expects to spend an additional $5.0 million for property, plant and
equipment during the balance of 2001, primarily for facility equipment and major
expansions to its facilities in Tampa, Florida, Baltimore, Maryland, and
Raleigh, North Carolina. The Company's expenditures of $1.8 million for reusable
surgical products during the six months ended June 30, 2001 were substantially
lower than the first six months of 2000 expenditures of $4.4 million. The
Company's level of reusable surgical products exceeded its needs at the close of
2000, and management accordingly adjusted its new product expenditures this
year. The Company expects to spend an additional $6.5 million for reusable
surgical products during the balance of 2001.
A new operating lease for the Company's new corporate offices located in
Tampa, Florida commenced on March 24, 2001. The monthly lease payments are
$38,300 and the lease term is 20 years. In addition, the Company incurred and
capitalized approximately $2.3 million as of June 30, 2001 for leasehold
improvements, furniture and equipment for its corporate offices. The Company has
substantially completed this project.
As of June 30, 2001, the Company's outstanding balance under its $45.0
million revolving credit facility was approximately $16.1 million. The credit
facility is secured by substantially all of the Company's assets and matures on
June 30, 2003. The credit facility's interest rate varies between 225 and 275
basis points over LIBOR (3.835% as of June 30, 2001), depending on the Company's
leverage. The credit facility requires the Company to maintain (a) minimum net
worth of not less than $37.0 million plus 75% of cumulative net income for each
fiscal quarter beginning with the fiscal quarter ending March 31, 2000; (b) a
leverage ratio of not more than 2.5 to 1.0; and (c) a fixed charge coverage
ratio of 2.25 to 1.0 through December 31, 2002, and 2.35 to 1.0 thereafter. The
credit facility restricts the Company in paying dividends, engaging in
acquisition transactions, incurring additional indebtedness, and encumbering its
assets.
The credit facility allows the Company to repurchase up to $5 million of
its stock from time to time through open market purchases at prevailing market
prices. As of March 31, 2001, the Company had repurchased 75,400 shares of its
common stock for $1,118,100. The Company did not repurchase shares in the three
months ended June 30, 2001, and does not anticipate repurchasing any additional
shares at this time.
As of June 30, 2001, the Company had cash of approximately $105,000. The
Company believes that its cash flows from operating activities and funds
available under its credit facility will be sufficient to fund its growth and
anticipated capital requirements for the next twelve months.
Certain Considerations
This report, other documents that are publicly disseminated by the Company,
and oral statements that are made on behalf of the Company contain or might
contain both statements of historical fact and forward-looking statements.
Examples of forward-looking statements include: (a) projections of revenue,
earnings, capital structure, and other financial items, (b) statements of the
plans and objectives
8
of the Company and its management, (c) statements of future economic
performance, and (d) assumptions underlying statements regarding the Company or
its business. The cautionary statements set forth below discuss important
factors that could cause actual results to differ materially from any forward-
looking statements.
Sales Process and Market Acceptance of Products and Services. The Company's
future performance depends on its ability to increase revenues to new and
existing customers. The Company's sales process for new customers is typically
between six and 18 months in duration from initial contact to purchase
commitment. The extended sales process is typically due to the complicated
approval process within hospitals for purchases from new suppliers, the long
duration of existing supply contracts, and implementation delays pending
termination of a hospital's previous supply relationships. The long sales
process inhibits the ability of the Company to quickly increase revenues from
new and existing customers or enter new markets. The Company's future
performance will also depend on market acceptance of its combination of reusable
surgical products, disposable accessory packs, and direct delivery and retrieval
service.
Need for Capital. The Company's business is capital intensive and will
require substantial capital expenditures for additional surgical products and
equipment during the next several years to achieve its operating and expansion
plans. In the longer term, the Company expects that its needs for capital
expenditures will be substantial and will depend on its growth and
opportunities. The Company's inability to obtain adequate capital could have a
material adverse effect on the Company. See -- "Liquidity and Capital
Resources."
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 Significant Customers and Market Consolidation. During the
six months ended June 30, 2001, revenues from three hospital groups (Novation,
Premier, Inc. and HCA - The Healthcare Company) accounted for approximately 27%,
17% and 11% of the Company's revenues, respectively, compared to 19%, 21% and
12%, respectively, in the six months ended June 30, 2000. No single hospital or
surgery center accounted for more than 7% of the Company's revenues for the six
months ended June 30, 2001 and 2000, respectively. Although each Novation,
Premier and HCA hospital currently make purchasing decisions on an individual
basis, loss of a substantial portion of the Novation, Premier or HCA hospitals'
business would have a material adverse effect on the Company.
Competition. The Company's business is highly competitive. The Company's
competitors include a number of distributors and manufacturers, as well as the
in-house reprocessing operations of hospitals. Certain of the Company's existing
and potential competitors possess substantially greater resources than the
Company. Some of the Company's competitors, including Allegiance Corporation,
serve as the sole supplier of a wide assortment of products to a significant
number of hospitals. Although the Company offers a substantial array of surgical
products, many of its competitors have a greater number of products for the
entire hospital, which in some instances is a competitive disadvantage for the
Company. There is no assurance that the Company will be able to compete
effectively with existing or potential competitors.
Government Regulation. Significant aspects of the Company's businesses are
subject to state and federal statutes and regulations governing, among other
things, medical waste-disposal and workplace health and safety. In addition,
most of the products furnished or sold by the Company are subject to
9
regulation as medical devices by the U.S. Food and Drug Administration (FDA), as
well as by other federal and state agencies. The Company's facilities are
subject to regular inspections by FDA officials. The FDA has authority to enjoin
future violations, seize adulterated or misbranded devices, require the
manufacturer to remove products from the market, and publicize relevant facts.
Federal or state governments might impose additional restrictions or adopt
interpretations of existing laws that could materially adversely affect the
Company.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-------
Neither the Company nor any of its property is subject to any
litigation or other legal proceeding that is expected to have a material effect
on the Company or its business.
Item 2. Changes in Securities
-------
None.
Item 3. Defaults Upon Senior Securities
-------
None
Item 4. Submission of Matters to a Vote of Security Holders
-------
At the annual meeting of the Company's shareholders on May 16, 2001,
the shareholders voted on a proposal to elect Wayne R. Peterson and N. John
Simmons, Jr. as directors of the Company to serve until the 2004 annual meeting.
The following sets forth the votes in this election:
Director Votes For Votes Against or Withheld
-------- --------- -------------------------
Wayne R. Peterson 5,478,549 297,970
N. John Simmons, Jr. 5,566,399 210,120
Richard T. Isel, James T. Boosales, James M. Emanuel, and Lee R.
Kemberling continue to serve as directors. Shareholders also approved
amendments to the Company's 1996 Non-Employee Director Stock Option Plan,
increasing the number of shares from 100,000 to 200,000 by a vote of 4,639,177
for and 495,913 votes against or withheld. The shareholders also approved
amendments to the Company's 1998 Stock Option Plan, increasing the number of
shares from 300,000 to 600,000 by a vote of 4,555,738 for and 579,352 against or
withheld. The appointment of Ernst & Young LLP as the Company's independent
certified public accountants for the 2001 year was also approved by the
shareholders.
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
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Exhibit
Number Exhibit Description
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10.46 Purchasing Agreement dated as of May 1, 2001, between the Company and
HealthTrust Purchasing Group, L.P.
Reports on Form 8-K
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The Company did not file a report on Form 8-K during the second
quarter of 2001.
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SIGNATURE
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Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SRI/SURGICAL EXPRESS, INC.
Date: July 26, 2001 By: /s/ James T. Boosales
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Executive Vice President
Chief Financial Officer
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