UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2002
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 Race Track 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
May 1, 2002:
Common Stock, par value $.001 - 6,421,277
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1 Condensed Financial Statements
Condensed Statements of Income for the
three months ended March 31, 2002 (unaudited)
and March 31, 2001(unaudited) .................... 1
Condensed Balance Sheets as of March 31,
2002 (unaudited) and December 31, 2001 ........... 2
Condensed Statements of Cash Flows for the
three months ended March 31, 2002 (unaudited)
and March 31, 2001 (unaudited) ................... 3
Notes to Condensed Financial Statements
(unaudited) ...................................... 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 6
PART II OTHER INFORMATION
Item 1 Legal Proceedings .................................... 11
Item 2 Changes in Securities ................................ 11
Item 3 Defaults Upon Senior Securities ...................... 11
Item 4 Submission of Matters to a Vote of Security Holders .. 11
Item 5 Other Information .................................... 11
Item 6 Exhibits and Reports on Form 8-K ..................... 11
SIGNATURE ............................................................... 12
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
March 31, March 31,
2002 2001
---- ----
(restated)
Revenues $ 21,755 $ 21,298
Cost of revenues 15,497 14,548
--------- ---------
Gross profit 6,258 6,750
Distribution expenses 1,432 1,349
Selling and administrative expenses 3,456 2,727
--------- ---------
Income from operations 1,370 2,674
Unrealized gain (loss) on derivative instruments 65 (222)
Interest expense, net 238 388
--------- ---------
Income before income taxes 1,197 2,064
Income tax expense 449 797
--------- ---------
Income before cumulative effect of change in accounting policy 748 1,267
Cumulative effect of change in accounting policy, net of tax -- (113)
--------- ---------
Net income $ 748 $ 1,154
========= =========
Dividends on preferred stock -- 51
--------- ---------
Net income available for common shareholders $ 748 $ 1,103
========= =========
Income per common share, basic:
Income available for common shareholders before cumulative
effect of change in accounting principle $ 0.12 $ 0.22
Cumulative effect of change in accounting principle $ -- $ (0.02)
--------- ---------
Net income available for common shareholders $ 0.12 $ 0.20
========= =========
Income per common share, diluted:
Income before cumulative effect of change in accounting principle $ 0.11 $ 0.20
Cumulative effect of change in accounting principle $ -- $ (0.02)
--------- ---------
Net income $ 0.11 $ 0.18
========= =========
Weighted average common shares outstanding, basic 6,417 5,628
========= =========
Weighted average common shares outstanding, diluted 6,618 6,509
========= =========
The accompanying notes are an integral part of these financial statements.
1
SRI/SURGICAL EXPRESS, INC.
CONDENSED BALANCE SHEETS
(In thousands)
March 31, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
Cash and cash equivalents $ 575 $ 538
Accounts receivable, net 10,903 11,896
Inventories, net 6,835 6,737
Prepaid expenses and other assets 2,320 2,631
Reusable surgical products, net 24,348 25,554
Property, plant and equipment, net 31,145 30,085
Goodwill, net 5,244 5,244
---------- -----------
Total assets $ 81,370 $ 82,685
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to bank $ 16,876 $ 17,612
Accounts payable 3,980 6,479
Employee related accrued expenses 1,063 943
Other accrued expenses 1,302 1,532
Obligation under capital lease 4,536 4,562
Deferred tax liability, net 1,064 1,064
Unrealized loss on derivative instruments 524 589
---------- -----------
Total liabilities 29,345 32,781
Shareholders' equity
Common stock 6 6
Additional paid-in capital 30,314 28,941
Retained earnings 21,705 20,957
---------- -----------
Total shareholders' equity 52,025 49,904
---------- -----------
Total liabilities and shareholders' equity $ 81,370 $ 82,685
========== ===========
The accompanying notes are an integral part of these financial statements.
2
SRI/SURGICAL EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended March 31,
2002 2001
---- ----
(restated)
Cash flows from operating activities
Net income $ 748 $ 1,154
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 750 696
Amortization of reusable surgical products 892 1,042
Provision for reusable surgical products shrinkage 506 603
Deferred income taxes -- (151)
Cumulative effect of change in accounting principle -- 181
Unrealized loss on derivative instruments (65) 222
Change in assets and liabilities (net of business combinations):
Accounts receivable, net 993 254
Inventories (98) (344)
Prepaid expenses and other assets 311 (199)
Accounts payable (2,499) 782
Employee related and other accrued expenses 82 (961)
-------- --------
Net cash provided by operating activities 1,620 3,279
-------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (1,810) (1,850)
Purchases of reusable surgical products (192) (1,064)
-------- --------
Net cash used in investing activities (2,002) (2,914)
-------- --------
Cash flows from financing activities
Net borrowings on notes payable to bank (736) (38)
Payments on obligation under capital lease (26) --
Net proceeds from issuance (repurchase) of common stock 1,181 (355)
Dividends paid -- (51)
-------- --------
Net cash provided by (used in) financing activities 419 (444)
-------- --------
Increase (decrease) in cash and cash equivalents 37 (79)
Cash and cash equivalents at beginning of period 538 132
-------- --------
Cash and cash equivalents at end of period $ 575 $ 53
======== ========
Supplemental cash flow information
Cash paid for interest $ 186 $ 393
======== ========
Cash paid for income taxes $ (9) $ 1,270
======== ========
Supplemental schedule of non-cash activities:
Income tax benefit of stock options exercised $ 192 $ --
======== ========
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, 2001 filed with the Securities and Exchange Commission. In
the opinion of management, all adjustments of a normal recurring nature that are
necessary for a fair presentation of the financial information for the interim
periods reported have been made. The results of operations for the three months
ended March 31, 2002 are not necessarily indicative of the results that can be
expected for the entire year ending December 31, 2002. The unaudited financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Form 10-K.
The Company operates on a 52-53 week fiscal year ending the Sunday
nearest December 31. There are 13 weeks included for the three month periods
ended March 31, 2002 and March 31, 2001, respectively.
The condensed statements of income and cash flows for the three months
ended March 31, 2001 have been restated for the effect of derivative financial
instruments recognized during the fourth quarter of 2001 as previously
disclosed.
2. LINE OF CREDIT
The Company's outstanding balance under its $45.0 million revolving
credit facility was approximately $16.9 million and $17.6 million on March 31,
2002 and December 31, 2001, respectively.
The revolving facility is secured by substantially all of the
Company'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 (1.880% as of
March 31, 2002), 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 Company was in
compliance with all requirements of the credit facility at March 31, 2002.
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 March 31, 2002, the Company had repurchased
75,400 shares of its common stock, valued at approximately $1.1 million. The
Company has not repurchased shares since the first quarter of 2001 and does not
anticipate repurchasing any additional shares at this time.
4
3. EARNINGS PER SHARE
The following table sets forth the Company's computation of basic and
diluted earnings per share before the cumulative effect of change in accounting
policy:
Three Months Ended
March 31,
2002 2001
---- ----
(restated)
(In thousands, except
per share data)
(unaudited)
Basic
-----
Numerator:
Income before cumulative effect of change
in accounting policy $ 748 $ 1,267
Less effect of dividends of preferred stock -- (51)
------- -------
Income available for common shareholders before cumulative
effect of change in accounting policy $ 748 $ 1,216
======= =======
Denominator:
Weighted average shares outstanding 6,417 5,628
======= =======
Income per common share before cumulative effect of
change in accounting policy - basic $ 0.12 $ 0.22
======= =======
Diluted
-------
Numerator:
Income before cumulative effect of change in accounting
policy $ 748 $ 1,267
======= =======
Denominator:
Weighted average shares outstanding 6,417 5,628
Effect of dilutive securities:
Employee stock options 201 314
Convertible preferred stock -- 567
------- -------
6,618 6,509
======= =======
Net income per common share - diluted $ 0.11 $ 0.20
======= =======
Options to purchase 265,000 and 239,500 shares of common stock for the
three month periods ended March 31, 2002 and March 31, 2001, respectively, were
not included for all or a portion of the computation of diluted net income per
common share, as the options' exercise prices were greater than the average
market price of the common shares and therefore the effect would be
anti-dilutive.
4. IMPLEMENTATION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS" AND SFAS NO. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS".
Issued in October 2001, SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The accounting model for long-lived assets to be disposed of by sales applies to
all long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business", for the disposal of
segments of a business. SFAS No. 144 requires that those long-lived assets be
measured at the lower of the carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 also broadens the reporting for discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company adopted the provisions of SFAS No.
144 on January 1, 2002. The adoption did not have a material effect on the
results of operations, financial position or cash flows of the Company.
Effective January 1, 2002 the Company adopted SFAS No. 142 "Goodwill
and Other Intangible Assets". SFAS No. 142 requires the Company to test goodwill
and indefinite-lived intangible assets for impairment rather than amortize them.
The Company will complete the impairment analysis of goodwill by the end of the
second quarter 2002, and any impairment charge, if necessary, resulting from
these transitional impairment tests will be recorded at that time. The following
table provides information relating to the Company's goodwill as of March 31,
2002 (in thousands):
Accumulated
Cost Amortization
------ --------------
Goodwill 6,019 774
Pro forma results for the three months ended March 31, 2001, assuming
the discontinuation of amortization of goodwill, are as follows (in thousands
except per share amounts):
Reported net income $ 1,154
Goodwill amortization, net of taxes 34
-------
Adjusted net income $ 1,188
=======
5
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 complete cleaning
and decontamination.
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. In 2001, the Company introduced additional instrument
procedures and expects to continue developing new instrument programs on a
regular basis. As of March 31, 2002, the Company was servicing 36 instrument
projects from eight of its facilities. The Company believes that its unique
product and service offerings improve its competitive position in the
marketplace.
In May 2001, the Company announced its contract with HealthTrust
Purchasing Group (HPG), a group purchasing organization representing over 600
hospitals and surgery centers. The contract with HPG designates the Company as
its primary outsource vendor for reusable surgical products including
instruments. The Company was servicing 40 HPG hospitals and 18 surgery centers
when the HPG contract was signed, and 22 new hospitals have been added through
the end of the first quarter of 2002. In addition, through its relationship with
Standard Textile Co., Inc., the Company has the opportunity to provide Surgical
Express to Novation member hospitals. With its acceptance by HPG and Novation,
Surgical Express is an available contracted alternative for over 2,000 hospitals
and surgery centers across the country. The Company continues to pursue
additional group purchasing organization contracts that will allow it to further
penetrate the surgical supply market.
*GORE(R) Surgical Barrier Fabric is a registered trademark of W.L. Gore &
Associates, Inc.
6
Results of Operations
The following table sets forth for the periods shown the percentage of
revenues represented by certain items reflected in the statement of income of
the Company.
Three Months
Ended March 31,
2002 2001
---- ----
Revenues 100.0% 100.0%
Cost of revenues 71.2 68.3
----- -----
Gross profit 28.8 31.7
Distribution expenses 6.6 6.3
Selling and administrative expenses 15.9 12.8
----- -----
Income from operations 6.3 12.6
Unrealized gain (loss) on derivative instruments .3 (1.1)
Interest expense, net 1.1 1.8
----- -----
Income before income taxes 5.5 9.7
Income tax expense 2.1 3.8
----- -----
Income before cumulative effect of change in accounting policy 3.4 5.9
Cumulative effect of change in accounting policy, net of tax -- .5
----- -----
Net income 3.4% 5.4%
===== =====
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues. Revenues increased $457,000, or 2.1%, to $21.8 million in
the first quarter of 2002, from $21.3 million in the first quarter of 2001. The
increased revenues were primarily attributable to the growth in instrument and
Surgical Express accounts.
7
Gross Profit. Gross profit decreased $492,000, or 7.3%, to $6.2 million in
the first quarter of 2002, from $6.7 million in the first quarter of 2001. As a
percentage of revenues, gross profit decreased by 2.9% to 28.8% in the first
quarter of 2002, from 31.7% in the first quarter of 2001. The decrease in gross
profit reflects planned increases in salaries and lease expenses plus
unanticipated increases in health insurance expense.
Distribution Expenses. Distribution expenses increased $83,000, or 6.2%, to
$1.4 million in the first quarter of 2002, from $1.3 million in the first
quarter of 2001. As a percentage of revenues, distribution expenses increased to
6.6% in the first quarter of 2002 from 6.3% in the first quarter of 2001. The
increase in distribution expenses resulted primarily from increased vehicle
lease expenses and salaries.
Selling and Administrative Expenses. Selling and administrative expenses
increased $729,000, or 26.7%, to $3.4 million in first quarter of 2002, from
$2.7 million in the first quarter of 2001. As a percentage of revenues, selling
and administrative expenses increased 3.1% to 15.9% in the first quarter of
2002, from 12.8% in the first quarter of 2001. The Company's selling and
administrative expenses increased due to additional legal fees, expenses related
to the corporate office, marketing and administrative fees for GPO contracts,
and an increased number of sales and marketing personnel.
Income from Operations. Income from operations decreased $1.3 million, or
48.8%, to $1.4 million in the first quarter of 2002, from $2.7 million in the
first quarter of 2001. As a percentage of revenues, income from operations
decreased 6.3% to 6.3% for the first quarter of 2002, from 12.6% for the first
quarter of 2001.
Unrealized Loss on Derivative Instruments. Pursuant to Statement of
Financial Accounting Standards No. 133, the Company in the first quarter of 2002
recognized a current unrealized gain of $65,000 on two interest rate swaps,
compared to an unrealized loss of $222,000 recognized in the first quarter of
2001. See - "Liquidity and Capital Resources."
Interest Expense, Net. Interest expense decreased $150,000 to $238,000 in
the first quarter of 2002, from $388,000 in the first quarter of 2001, primarily
due to lower interest rates associated with the Company's credit facility.
Income Tax Expense. Income tax expense decreased $348,000 to $449,000 in
the first quarter of 2002, compared to $797,000 in the first quarter of 2001.
The Company's effective tax rate is 37.5%.
Cumulative Effect of Change in Accounting Policy. The Company accrued a
cumulative effect of change in accounting principle of $113,000, which is net of
tax of $69,000, from the initial adoption of Statement 133.
Liquidity and Capital Resources
The Company's principal sources of capital have been cash flows from
operations and borrowings under its working capital loan facility.
The Company's positive cash flow provided by operating activities was $1.6
million during the first quarter of 2002, compared to $3.3 million during the
first quarter of 2001. The decrease in cash from operating activities resulted
primarily from a decrease in net income before amortization and decreased
accounts payable, and was partially offset by a decrease in accounts receivable,
prepaid expenses, and other accrued expenses.
The Company's net cash used in investing activities declined from $2.9
million in the first quarter of 2001 to $2.0 million in the first quarter of
2002. These expenditures were funded from cash provided by operating activities
and borrowings under the Company's revolving credit facility. The decrease is
primarily due to a reduction in the amount of reusable surgical products
purchased.
8
As of February 1, 1999, the Company entered into three-year leases for two
new processing facilities in Stockton, California and Chattanooga, Tennessee.
These three-year leases are a form of off-balance sheet financing in which a
third-party purchased property and leased the asset to the Company as lessee.
Lease payments are based on the approximately $10.6 million aggregate cost of
the facilities and are adjusted as the LIBOR rate fluctuates. The lessor has
entered into interest rate swaps, which the Company guaranteed, on May 28, 1999
and July 1, 1999, to reduce the impact of interest rates on the floating rate
operating leases for its facilities. In April 2002 the interest rate swaps were
sold resulting in a gain of $36,400. The Company's obligations under the leases
are secured by a letter of credit issued by First Union National Bank. The
Company accounts for these leases as operating leases.
In January 2002 the aforementioned lease agreements were extended for one
year to February 2003. When the lease terms end, the Company may extend the
lease terms, replace them with other leasing structures, or purchase the
facilities for their cost (approximately $10.6 million). The Company has not
determined which option it will pursue. The Company currently reflects rent
payments as an expense on its statements of income. If the Company purchases the
land and buildings, the Company would reflect the costs as assets on its balance
sheet, its rent expense would terminate, and the Company would record
depreciation expense for the buildings over their estimated useful lives.
The Company spent $1.6 million in the first quarter of 2002 for facility
equipment and expansion projects that it began in 2001, and expects to spend
approximately an additional $1.0 million in the remainder of 2002 to complete
these projects. The Company estimates that its expenditures for new carts and
reusable surgical products will be approximately $600,000 per month for the rest
of the year, although this amount will fluctuate depending on the growth of
business.
As of March 31, 2002, the Company had cash of approximately $575,000. 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 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. The Company assumes no obligation to update these
forward-looking statements.
Sales Process and Market Acceptance of Products and Services. The Company's
future performance depends on its ability to increase revenues to new and
existing customers. The Company's sales process for new customers is typically
between six and eighteen months in duration from initial contact to purchase
commitment. The extended sales process is typically due to the complicated
approval process within hospitals for purchases from new suppliers, the long
duration of existing supply contracts, and implementation delays pending
termination of a hospital's previous supply relationships. The long sales
process inhibits the ability of the Company to quickly increase revenues from
new and existing
9
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. To adequately service a new customer, the Company 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
-- "Liquidity and Capital Resources."
New Product Offering; Dependence on a Supplier. The Company is regularly
developing new instrument processing programs. While these programs are in their
initial implementation stages, the Company is subject to a risk that the market
will not broadly accept them. Further, the Company relies on Aesculap, Inc. as
its major source of supply of laparoscopic instruments for its Surgical Express
for Laparoscopy program. The Joint Marketing Agreement between the Company and
Aesculap provides for Aesculap to furnish instruments to the Company for at
least three years, subject to terms and conditions stated in the agreement. Any
failure of Aesculap to furnish instruments for any reason would materially and
adversely affect the Company's ability to service this program.
Dependence on Significant Customers and Market Consolidation. During the
first quarter of 2002, Novation, Premier, Inc., and HPG hospitals accounted for
approximately 35%, 15%, and 14% of the Company's sales, compared to 27%, 17%,
and 13% in the first quarter of 2001, respectively. Although each Novation,
Premier, and HPG hospital currently makes its purchasing decisions on an
individual basis, and no single hospital accounted for more than 6% of the
Company's sales, the loss of a substantial portion of the Novation, Premier, or
HPG hospitals' business would have a material adverse effect on the Company.
Competition. The Company's business is highly competitive. Competitors
include a number of distributors and manufacturers, as well as the in-house
reprocessing operations of hospitals. Certain of the Company's existing and
potential competitors possess substantially greater resources than the Company.
Some of the Company's competitors, including Allegiance Corporation, serve as
the sole supplier of a wide assortment of products to a significant number of
hospitals. While the Company has a substantial array of surgical products, many
of its competitors have a greater number of products for the entire hospital,
which in some instances is a competitive disadvantage for the Company. There is
no assurance that the Company will be able to compete effectively with existing
or potential competitors.
Government Regulation. Significant aspects of the Company's businesses are
subject to state and federal statutes and regulations governing, among other
things, medical waste-disposal and workplace health and safety. In addition,
most of the products furnished or sold by the Company are subject to regulation
as medical devices by the U.S. Food and Drug Administration (FDA), as well as by
other federal and state agencies. The Company's facilities are subject to
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.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-------
Class Action Litigation. Beginning on November 30, 2001, a series of
substantially identical Class Action Complaints were filed in the United States
District Court for the Middle District of Florida against the Company and
certain of its officers and directors. The plaintiffs purport to assert claims
on behalf of a class of purchasers of the Company's common stock during the
period from July 23, 2001 through November 27, 2001. On April 19, 2002, these
actions were consolidated into one case and the court appointed lead plantiffs
and lead counsel for the case. The actions claim violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated under that act. Among other things, the actions allege that during
the class period, the Company and the individual defendants made materially
false statements concerning the Company's financial condition and its future
prospects. The actions seek compensatory and other damages, and costs and
expenses associated with the litigation.
The Company believes that it has substantial defenses to this matter and
intends to assert them vigorously. Management of the Company is unable to
determine the impact, if any, that the resolution of this matter will have on
the financial position or results of operations of the Company. No accruals for
damages have been recorded for this matter as of March 31, 2002.
SEC Investigation. On February 21, 2002, the Securities and Exchange
Commission issued a Formal Order of Private Investigation with respect to the
Company. The investigation concerns the transactions underlying the Company's
restatement of its financial results announced during its fourth quarter of
2001. The Company is cooperating with the investigation. Management of the
Company is unable to determine the impact, if any, that the resolution of this
matter will have on the financial position or results of operations of the
Company.
Item 2. Changes in Securities
-------
None.
Item 3. Defaults Upon Senior Securities
-------
None
Item 4. Submission of Matters to a Vote of Security Holders
-------
None
Item 5. Other Information
-------
None
Item 6. Exhibits and Reports on Form 8-K
-------
None
Reports on Form 8-K
-------------------
The Company did not file a report on Form 8-K during the first quarter of 2002.
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SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SRI/SURGICAL EXPRESS, INC.
Date: May 15, 2002 By: /s/ James T. Boosales
--------------------------------
Executive Vice President
Chief Financial Officer
12