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, 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
May 1, 2001:
Common Stock, par value $.001 - 6,217,361
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1 Condensed Financial Statements
Condensed Statements of Income for the three months
ended March 31, 2001 (unaudited) and March 31, 2000
(unaudited)........................................... 1
Condensed Balance Sheets as of March 31,
2001(unaudited) and December 31,
2000.................................................. 2
Condensed Statements of Cash Flows for the three months
ended March 31, 2001 (unaudited) and March 31, 2000
(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............................................ 10
Item 2 Changes in Securities........................................ 10
Item 3 Defaults Upon Senior Securities ............................. 10
Item 4 Submission of Matters to a Vote of Security Holders.......... 10
Item 5 Other Information ........................................... 10
Item 6 Exhibits and Reports on Form 8-K............................. 10
SIGNATURE .................................................................. 11
PART I - FINANACIAL 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,
2001 2000
----- ----
Revenues $ 21,298 $ 18,332
Cost of revenues 14,548 12,920
--------- --------
Gross profit 6,750 5,412
Distribution expenses 1,349 1,362
Selling and administrative expenses 2,727 2,829
--------- --------
Income from operations 2,674 1,221
Interest expense, net 388 218
--------- --------
Income before income taxes 2,286 1,003
Income tax expense 880 391
--------- --------
Net income $ 1,406 $ 612
========= ========
Dividends on preferred stock 51 51
--------- --------
Net income available for common shareholders $ 1,355 $ 561
========= ========
Net income per common share - basic $ 0.24 $ 0.10
========= ========
Net income per common share - diluted $ 0.22 $ 0.10
========= ========
Weighted average common shares
outstanding - basic 5,628 5,677
========= ========
Weighted average common shares
outstanding - diluted 6,509 6,257
========= ========
The accompanying notes are an integral part of these financial statements.
1
SRI/SURGICAL EXPRESS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended March 31,
2001 2000
---- ----
Cash flows from operating activities
Net income $ 1,406 $ 612
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 696 461
Amortization of reusable surgical products 1,042 1,111
Provision for reusable surgical products shrinkage 603 500
Change in assets and liabilities:
Accounts receivable, net 254 (908)
Inventories (344) (2,078)
Prepaid expenses and other assets (199) 562
Accounts payable 782 1,129
Employee related and other accrued expenses (961) 636
------------ -----------
Net cash provided by operating activities 3,279 2,025
------------ -----------
Cash flows from investing activities
Purchases of property, plant and equipment (1,850) (2,674)
Purchases of reusable surgical products (1,064) (3,665)
------------ -----------
Net cash used in investing activities (2,914) (6,339)
------------ -----------
Cash flows from financing activities
Net borrowings on notes payable to bank (38) 4,389
Net proceeds from issuance (repurchase) of common stock (355) --
Dividends paid (51) (51)
------------ -----------
Net cash provided by (used in) financing activities (444) 4,338
------------ -----------
Increase (decrease) in cash and cash equivalents (79) 24
Cash and cash equivalents at beginning of period 132 37
------------ -----------
Cash and cash equivalents at end of period 53 $ 61
============ ===========
Supplemental cash flow information
Cash paid for interest 393 $ 183
============ ===========
Cash paid for income taxes 1,270 $ 212
============ ===========
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 tShe 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 three months
ended March 31, 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 13 weeks included for the three month periods
ended March 31, 2001 and March 31, 2000, respectively.
2. LINE OF CREDIT
The Company's outstanding balance under its $45.0 million revolving
credit facility was approximately $15.6 million and $13.2 million on March 31,
2001 and March 31, 2000, 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 (5.078% as of
March 31, 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 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, 2001, the Company had repurchased
72,000 shares of its common stock, for a total of $1,073,144.
3. COMMITMENTS AND CONTINGENCIES
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
approximately $1.4 million as of March 31, 2001, and expects to incur an
additional $750,000 in 2001 for leasehold improvements, furniture and equipment
for its corporate offices.
4
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31,
2001 2000
------ -----
(In thousands, except
per share data)
(unaudited)
Basic
-----
Numerator:
Net income $ 1,406 612
Less effect of dividends of preferred stock (51) (51)
--------- ---------
Net income available for common shareholders $ 1,355 $ 561
========= =========
Denominator:
Weighted average shares outstanding 5,628 5,677
========= =========
Net income per common share - basic $ 0.24 $ 0.10
========= =========
Diluted
-------
Numerator:
Net income $ 1,406 $ 612
========= =========
Denominator:
Weighted average shares outstanding 5,628 5,677
Effect of dilutive securities:
Employee stock options 314 13
Convertible preferred stock 567 567
--------- ---------
6,509 6,257
========= =========
Net income per common share - diluted $ 0.22 $ 0.10
========= =========
Options to purchase 239,500 and 895,500 shares of common stock for the
three month periods ended March 31, 2001 and March 31, 2000, 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.
5
Item 2. Management's Discussion and Analysis of Financial Condition and
-------
Results of Operations
Overview
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 eleven regional facilities, 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. Aesculap furnishes and
maintains the instruments. The surgical instruments are designed with flush
ports or to be taken apart for complete cleaning and decontamination.
6
In 1998, the Company 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 their 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 Company's first complete procedure-based offering,
Surgical Express for Laparoscopy, combines reusable surgical gowns, towels,
drapes, and basins with disposable products and laparoscopic instruments. The
Company believes that the flexibility offered its customers by this unique
product offering improves its competitive position in the marketplace.
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 March 31,
2001 2000
------ ------
Revenues 100.0% 100.0%
Cost of revenues 68.3 70.5
------ ------
Gross profit 31.7 29.5
Distribution expenses 6.3 7.4
Selling and administrative expenses 12.8 15.4
------ ------
Income from operations 12.6 6.7
Interest expense, net 1.9 1.2
------- -------
Income before income taxes 10.7 5.5
Income tax expense 4.1 2.2
------- ------
Net income 6.6% 3.3%
======= ======
Selected Quarterly Data
The Company's selected unaudited quarterly information is as follows:
Quarters Ended
--------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31,
2000 2000 2000 2000 2001
---- ---- ---- ---- ----
(In thousands, except per share data)
Net Revenues $ 18,332 $ 19,662 $ 19,493 $ 20,330 $ 21,298
Gross Profit 5,412 6,232 6,224 6,906 6,750
Net Income 612 1,114 1,281 1,613 1,406
Net income available for common shareholders 561 1,063 1,230 1,562 1,355
Net income per common share, basic 0.10 0.19 0.22 0.27 0.24
Net income per common share, diluted 0.10 0.18 0.20 0.25 0.22
7
Three Months Ended March 31,2001 Compared to Three Months Ended March 31, 2000
Revenues. Revenues increased $3.0 million, or 16.2%, to $21.3 million
in the first quarter of 2001, from $18.3 million in the first quarter of 2000.
While the Company benefited from continued growth in its core reusable business,
the revenue increases were attributable primarily to increased Surgical Express
business and expansion of its instrument program.
Gross Profit. Gross profit increased $1.3 million, or 24.7%, to $6.7
million in the first quarter of 2001, from $5.4 million in the first quarter of
2000. As a percentage of revenues, gross profit increased by 2.2% to 31.7% in
the first quarter of 2001, from 29.5% in the first quarter of 2000. The increase
in gross profit reflects positive leverage of increased revenues.
Distribution Expenses. Distribution expenses decreased $13,000, or
1.0%, to $1.3 million in the first quarter of 2001, from $1.4 million in the
first quarter of 2000. As a percentage of revenues, distribution expenses
decreased to 6.3% in the first quarter of 2001 from 7.4% in the first quarter of
2000. The decrease as a percentage of revenues was achieved despite increases in
fuel costs. The Company was able to offset the increased fuel costs by increased
volume per shipment and increased utilization of optimal truck routes.
Selling and Administrative Expenses. Selling and administrative
expenses decreased $102,000, or 3.6%, to $2.7 million in first quarter of 2001,
from $2.8 million in the first quarter of 2000. As a percentage of revenues,
selling and administrative expenses decreased 2.6% to 12.8% in the first quarter
of 2001 from 15.4% in the first quarter of 2000. The decrease in selling and
administrative expenses resulted primarily from a severance expense incurred in
January 2000.
Income from Operations. Income from operations increased $1.5 million,
or 119.0%, to $2.7 million in the first quarter of 2001, from $1.2 million in
the first quarter of 2000. As a percentage of revenues, income from operations
increased 5.9% to 12.6% for the first quarter of 2001 from 6.7% for the first
quarter of 2000.
Interest Expense, Net. Interest expense increased $170,000 to $388,000
in the first quarter of 2001, from $218,000 in the first quarter of 2000,
primarily due to higher borrowings under the Company's revolving credit
facility.
Income Tax Expense. Income tax expense increased $489,000 to $880,000
in the first quarter of 2001, compared to $391,000 in the first quarter of 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 for facilities and distribution vehicles, and
borrowings under its revolving credit facility.
The Company's positive cash flow provided by operating activities was
$3.3 million during the first quarter of 2001 compared to $2.0 million during
the first quarter of 2000. The increase in cash from operating activities
resulted primarily from an increase in net income before amortization, shrinkage
and depreciation, slower growth in inventories, and decreased accounts
receivable, and was partially offset by a decrease in employee related and other
accrued expenses.
The Company's net cash used in investing activities declined from $6.3
million in the first quarter of 2000 to $2.9 million in the first quarter of
2001. The Company made substantial capital expenditures in the first quarter of
2000 to improve its facilities and to purchase reusable surgical products. The
Company's equipment expenditures during the first quarter of 2001 were primarily
for its new corporate
8
offices, facility equipment and expansions. The Company expects to spend an
additional $7.0 million for property, plant and equipment during the balance of
2001, primarily for facility equipment and expansions.
The Company's expenditures for reusable surgical products during this
year's first quarter were substantially lower than for its 2000 first quarter.
The Company's level of reusable surgical products exceeded its needs at the
close of 2000, and management adjusted its new product expenditures this year
accordingly. The Company expects to spend an additional $8.0 million for
reusable surgical products during the balance of 2001.
As of March 31, 2001, the Company's outstanding balance under its $45.0
million revolving credit facility was approximately $15.6 million. 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 (5.078% as of March 31, 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 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, 2001, the Company had repurchased
72,000 shares of its common stock, for a total of $1,073,144.
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
approximately $1.4 million as of March 31, 2001, and expects to incur an
additional $750,000 in 2001 for leasehold improvements, furniture and equipment
for its corporate offices.
As of March 31, 2001, the Company had cash of approximately $53,000.
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. 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 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 adversely affect the
Company's ability to implement this program.
Dependence on Significant Customers and Market Consolidation. During
the first quarter of 2001 and the first quarter of 2000, revenues from two
hospital groups (Premier, Inc. and HCA - The Healthcare Company) accounted for
approximately 29% and 33% of the Company's revenues, respectively. No single
hospital or surgery center accounted for more than 7% of the Company's revenues
for the first quarter of 2001 and 2000, respectively. Although each Premier and
HCA hospital currently makes its purchasing decisions on an individual basis,
the loss of a substantial portion of the 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, and their disposable products. Some of the Company's
competitors, including Allegiance Corporation, serve as the sole supplier of a
wide assortment of products to a significant number of hospitals. 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 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 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
-------
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
-------
None
Item 5. Other Information
-------
None
Item 6. Exhibits and Reports on Form 8-K
-------
Exhibit
Number Exhibit Description
------- -------------------
2.5 Articles of Merger dated as of January 3, 2001, between the Company and
RePak Surgical Enterprises, Inc.
10.45 Lease Agreement dated as of February 25, 2000, between the Company and
Coastal Hillsborough Partners, L.L.P.; Confirmation of Lease
Commencement dated as of March 24, 2001.
Reports on Form 8-K
-------------------
The Company did not file a report on Form 8-K during the first quarter of 2001.
11
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 14, 2001 By: /s/ James T. Boosales
--------------------------------------
Executive Vice President
Chief Financial Officer
12