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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 26, 1999
|_| 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 2-85008-NY
SSI Surgical Services, Inc.
(Exact name of registrant as specified in its charter)
New York 11-2621408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5776 Hoffner Avenue, Suite 200, Orlando Florida 32822
(Address of principal executive offices) (Zip Code)
(407) 249-1946
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of March 10, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $2,647,057 based on the
average bid and asked price of the registrant's Common Stock on March 10, 2000
as reported on the Nasdaq Bulletin Board System.
The registrant had 19,491,216 Common Shares outstanding as of March 10,
2000.
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Form 10-K is incorporated from the registrant's Proxy Statement for
its 2000 Annual Meeting of Shareholders.
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Item 1. Description of Business
Overview
SSI Surgical Services, Inc. ("Surgical Services" or the "Company") is a
healthcare services company focused on providing surgical support services to
hospitals and surgery centers throughout the United States. SSI Surgical
Services, Inc. (OTCBB, SGSI.OB) is approximately 84.5% owned by TFX Equities
Incorporated (TFX), a wholly owned subsidiary of Teleflex, Incorporated
(Teleflex), a Fortune 1000 company with headquarters in Plymouth Meeting,
Pennsylvania.
The Company was founded in May 1982 as Medical Sterilization, Inc., a New
York Corporation. Effective May 28, 1999, the Company changed its name to SSI
Surgical Services, Inc.
On January 11, 1999, the Company acquired all of the issued and
outstanding shares of Endoscopy Specialists, Incorporated ("ESI"), a
Florida-based surgical instrument management services firm, and all of the
issued and outstanding shares not already held by the Company of SSI Surgical
Services, Inc. ("SSI"), a Joint Venture with TFX. Both businesses were acquired
from TFX in exchange for 13,400,000 shares of Common Stock and warrants to
purchase an aggregate of 1,500,000 shares of Common Stock. As a result of the
transaction, TFX now owns a majority of the outstanding common stock of the
Company.
Beginning in the mid-1990's, TFX brought together several medical services
operations that made up ESI and SSI. Each of these operations brought its own
healthcare knowledge, specialties and expertise to the new company, resulting in
a comprehensive package of service offerings. Running through the history of the
company is a dedication to high-quality, reusable products offered to its
customers on a per procedure basis.
In late 1995, TFX purchased ESI. ESI was founded in 1992 to provide
on-site speciality instrument management programs, primarily for minimally
invasive surgical procedures. This component of the Company provides surgical
instruments, video equipment, and on-site, trained technicians for each
contracted laproscopic procedure performed in a hospital.
During 1997, ESI acquired three other companies to complement the services
already offered: United Endoscopy and Medco, which provided services similar to
ESI; and Morse Technologies, providing surgical and endoscopic instrument
repair.
SSI was formed in 1997 as a joint venture between TFX and the Company. SSI
was established to provide general and specialty instrument sets, basins and
surgical gowns and towels to hospitals and other facilities. In August 1998, SSI
acquired Sterilization Management Group ("SMG") which owned and managed five
surgical instrument and linen reprocessing facilities located in Chicago,
Detroit, Tampa, Houston, and Baltimore/Washington.
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Today the Company offers a comprehensive menu of services to hospitals and
surgery centers, with a primary focus on the operating room (OR). Company
headquarters are located in Orlando, Florida and the Company's employees are
based in hospitals, medical centers and sterilization facilities in numerous
locations around the country.
On Site Services
The Company provides customers specialty instrument management programs
that focus on minimally invasive surgical procedures (endoscopic services).
Surgical Services assigns trained service technicians to each customer hospital.
The service technician is responsible for assisting with the operating room
set-up prior to the start of the designated case, and remains on-site to serve
as a technical expert available to respond to questions from the surgical staff
regarding the proper use of the products and video systems supplied by the
Company. At the completion of the case, the technician decontaminates and
reprocesses the company's instruments and performs quality assurance checks on
the instruments to validate their readiness for the next procedure. The Company
manages all repairs, refurbishing, reprocessing and replacement costs associated
with the provided products.
The Company offers services for general surgery, gynecology, urology, ENT,
orthopedics, plastic surgery, thoracic surgery and cardiovascular surgery. The
related instrument sets can be basic, containing only instrumentation, or
increasingly complex, to include scopes, video equipment and other accessories.
By using high quality reusable instruments that are properly managed by trained
technicians, the Company delivers higher quality products billed on a per
procedure basis, thus providing a basis for potentially reducing hospital costs.
In addition to the specialty instrument management program, Surgical
Services provides professional management to train and direct the sterile
processing departments in hospitals. The Company provides the customer with
trained and certified technicians to increase productivity and assumes
responsibility for management of the instrument inventory that includes the
establishment of an inventory tracking system, repair and maintenance,
replacement and purchase of new instruments. This service is billed to the
customer on a contractual basis.
Off Site Services
The Company provides off-site cleaning, decontamination and sterilization
processing of its standard containerized reprocessable surgical instrument sets
as well as sterilized items for healthcare providers such as hospitals and
ambulatory surgery centers within the United States. The Company contracts with
healthcare providers to provide instruments that are reprocessed and reusable
surgical products consisting of gowns, towels, mayo-stand and back table covers
and basins.
Surgical Services currently operates six industrial reprocessing
facilities that can sterilize, package, reassemble, decontaminate and deliver to
customers on a daily basis. The Company has designed approximately 85 different
Instrument Sets for operating room procedures and labor
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and delivery, including gall bladder, tonsillectomy and adenoidectomy, open
heart, vascular, orthopedic, endoscopy, cesarean sections, newborn delivery,
hysterectomy and dilation and curettage.
The Company also packages its reusable textiles (surgical gowns and
towels) in a variety of packs to meet customers' needs. The reusable textiles
are cleaned, inspected, sterilized, and delivered. The Company offers a
reprocessing service that utilizes state-of-the-art products such as GORE(R)
Surgical Barrier Fabric (GORE is a trademark of W.L. Gore & Associates, Inc.), a
surgical barrier fabric for gowns that is liquidproof and a series of one-ply
and two-ply gowns that are liquid resistant. All of the gown materials are
technologically advanced for comfort.
The Company's services are designed to replace or supplement the existing
in-house sterilization facilities of healthcare providers. Many hospitals have
less efficient sterilization facilities, staff their facilities with nurses
whose skills could be more effectively used elsewhere and underutilize their
sterilization facilities by operating their equipment only once per day. Because
of the relatively low volume of sterilization activities undertaken at many of
these facilities, worker productivity may not be as high as in other areas of
the healthcare organization, causing concern for administrators. In addition, as
hospitals continue to evaluate ways in which to utilize their available space
better, many hospitals are seeking to replace their in-house sterilization
facilities with profit generating centers such as operating rooms. Many
hospitals are also looking for ways in which to improve operating room
efficiency by eliminating the sterilization processing delays and shortages
sometimes experienced with their in-house sterilization facilities.
By utilizing state of the art equipment, modern sterilization technology,
trained technicians, and handling larger volumes, the Company believes that it
offers a cost-effective, high quality alternative to in-house sterilization. The
Company has installed modern, industrial size sterilization equipment at its
facilities, including ultrasonic cleaning systems, tunnel washers, steam
sterilizers and ETO sterilizers.
The Company believes that it is able to offer improved sterility assurance
levels than those maintained at many hospitals. The Company has established
rigorous testing measures and procedures, such as sterilization process monitors
(including temperature and pressure recording), chemical indicators and
bacteriological spore and culture testing. See "Government Regulation."
Competition
The Company's principal competition with respect to its off-site
management programs comes from the in-house sterilization facilities of
hospitals and ambulatory surgi-centers. Most hospitals have in-house
sterilization capabilities and many have invested significant capital in their
sterilization facilities. Also, healthcare facilities with in-house
sterilization departments may be committed to maintaining their sterilization
capabilities and their current staffing levels. As a result, healthcare
providers may be reluctant to shift their sterilization activities from in-
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house to an off-site contractor. Furthermore, some hospitals have union
agreements that preclude or mitigate a hospital's ability to outsource. In
today's managed care driven, consolidating environment, hospitals and hospital
networks are renegotiating these agreements with yet to be determined success.
The Company has competition for its off-site reprocessing facilities in
most of its markets. Sterile Recoveries, Inc. and Angelica Corporation now
compete with the Company. Substantial know-how and capital intensive barriers
continue to limit competitive interest.
The Company's principal competition for its on-site management programs is
the hospitals' in-house departments. In addition, on-site services are offered
by several local and regional service companies as well as large corporations
such as Allegiance, who now competes with several on-site service offerings that
include: instrument processing, consulting, department management, staffing,
training, and endoscopy services. The Company believes it is still the only
service provider to offer the full service continuum and it can provide
customized solutions that includes both on-site and off-site management programs
for individual hospitals and healthcare delivery networks.
Customers
The Company markets and sells services to acute care hospitals, and stand
alone surgery centers in 22 states domestically. Customers have been attracted
to the Company because of its quality of service, comprehensive service offering
and relationships with hospital staff. The Company provides services directly to
the customer, thereby eliminating a third party to intervene on its behalf.
Customers become interested in the Company's service menu due to the following:
1.) Savings from reusable versus disposable products
2.) Savings on reduced inventory requirements
3.) Savings from outside management of processes
4.) Added efficiencies by having a trained technician
5.) Upgrade to premium equipment and instruments
6.) Improved staff and physician satisfaction
7.) Capital avoidance
Hospitals have continued to embrace the idea of outsourcing support
functions that are not core competencies. Outsourcing those areas that have
significant staff requirements demanding specialized knowledge, large upfront
capital demands, & space constraints has become increasingly more universal. The
idea of outsourcing is consistent with the customer's focus on improved
efficiency, cost reduction, improved patient care and staff and physician
satisfaction. The Company allows hospitals to focus on these initiatives by
outsourcing the ownership of instrumentation, surgical linen, and equipment.
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The Company's sales cycle for new customers is typically between three to
twelve months from the first contact. The sales cycle entails significant lead
times in most institutions due to existing agreements with suppliers, Group
Purchasing Organizations and cost reviews from hospital management. The Company
believes that once an agreement is signed with a new customer, the customer is
unlikely to move away from the service due to its premium service level, quality
of products provided, and knowledgeable technical personnel.
Contracts are executed with terms of three years or more. Termination with
cause by either party for a breach of the agreement with ninety days written
notice is a standard provision of the contract. Surgical Services' sales
strategy is to expand its regional agreements. The majority of the Company's
service agreements are with single hospitals. It is the Company's belief that
the trend toward the increased development of the Integrated Delivery Network's
(IDN's) will continue well into the future. The IDN's and regional buying groups
have been able to negotiate for products and services in many cases better than
Group Purchasing Organizations. Surgical Services continues to maximize its
exposure to the individual hospital while intensifying sales efforts at the
regional or IDN level. To accomplish this mission the Company has committed to
developing a sales team, and local Area Vice Presidents to support the selling
effort on a regional basis. Management feels the need for hospitals to reduce
operating costs and improve efficiencies provides opportunities for continued
sales growth.
The Company plans to target existing markets in an effort to maximize
existing assets and infrastructure. Additionally, suppliers that provide
products to Surgical Services provide a valuable network in which the sales
force are able to identify new customers. The future performance of the Company
is dependent upon its ability to attract new customers and expand services in
existing facilities. Surgical Services' decentralized management approach will
allow the Company to respond to regional market pressure and capitalize on new
opportunities.
As of March 10, 2000, the Company provided services pursuant to service
contracts with 169 hospitals and ambulatory surgi-centers. One customer
accounted for 10% or more of the Company's total revenues for the fiscal year
ended December 26, 1999.
Suppliers
The Company purchases surgical instruments, sterilization containers,
surgeon's gowns and surgical towels from several vendors. The Company believes
that such products are readily available at market prices.
Sales and Marketing
Surgical Services' sales and marketing strategy is to grow existing
accounts by service expansion: for example, if the Company is serving the labor
and delivery department of a hospital it will attempt to leverage its services
into the general operating room of the hospital after a period of successful
product performance in the labor and delivery area. The Company has expanded its
portfolio of reprocessing services to include new service offerings such as
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consulting, on-site management services and EtO sterilization. The Company's
sales and marketing efforts are coordinated by sales professionals with
appropriate clinical and hospital expertise.
Intellectual Property
The Company does not rely on any patents for the conduct of its business.
The Company does rely upon the know-how of its employees and has executed
non-disclosure and non-competition agreements with its employees.
Government Regulation
Significant aspects of the Company's business are subject to state and
federal statutes or regulations. Additionally, some products sold by the company
are regulated as medical devices by the US Food and Drug Administration (FDA) or
other state and federal agencies. The Company's facilities are subject to
regular inspection by the FDA which has the power to seize adulterated products,
require the manufacturer to remove non-compliant products from the market, or
administer other remedies deemed appropriate. Although the Company believes it
is in substantial compliance with applicable federal and state statutes and
regulations, additional restrictions could be imposed that could materially
affect the Company.
Employees
As of December 26, 1999, the Company had 403 full-time and 21 part-time
employees. None of its employees are covered by any collective bargaining
agreement.
Item 2. Description of Property
Surgical Services leases six reprocessing and sterilization facilities
located in Baltimore, Chicago, Detroit, Houston, Long Island, and Tampa. These
facilities are used for decontamination, sterilization, and packaging of
reusable surgical instruments and surgical linens. The Company owns substantial
leasehold improvements and equipment located in each of the facilities. The
Company also maintains it corporate headquarters and instrument repair facility
in leased offices in Orlando, Florida.
The table below sets forth information on the Company's properties:
Location Approximate Size Owned/Leased Lease Expiration
- -------- ---------------- ------------ ----------------
Baltimore, MD. 40,000 sq. ft. Leased December 30, 2002
McGaw Park, IL 12,000 sq. ft. Leased July 30, 2000(1)
Livonia, MI 32,000 sq. ft. Leased July 31, 2003
Houston, TX 46,000 sq. ft. Leased April 30, 2003
Syosset, NY 103,000 sq. ft.(2) Leased February 28, 2001(3)
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Tampa, FL 47,000 sq. ft Leased November 30, 2002
Orlando, FL 8,500 sq. ft. Leased December 31, 2004
Notes:
1. The Company has tentatively identified an approximately 26,000 square foot
property for relocation of its McGaw Park facility in fiscal year 2000.
The proposed property is located in Waukegan, IL, approximately 2 miles
from the McGaw Park location. Lease negotiations and construction plans
are in progress.
2. In October 1998, the Company signed a short-term lease agreement providing
for sublease of approximately 50,000 square feet of the premises. The
sublease was subsequently extended until February 28, 2001. The sublease
provides approximately $262,000 annual revenue.
3. The Company is currently involved in negotiations with the landlord for a
long-term extension of the lease.
The company conducts a substantial portion of its business in facilities
(primarily hospitals and surgery centers) owned or operated by the customer. The
Company has no obligation for rent, utilities, or maintenance of those
facilities.
The Company believes that its facilities are suitable for its operations
as presently conducted and for its foreseeable future operations. Equipment
owned or leased by the company is believed adequate for the Company's present
and foreseeable operations, however, will require capacity enhancements as
business continues to expand. The Company believes that additional facilities
and equipment can be acquired as necessary, although there can be no assurance
the additional facilities or equipment will be available upon reasonable or
acceptable terms, if at all.
Item 3. Legal Proceedings
In management's opinion, there are no pending claims or litigation, the
adverse determination of which would have a material adverse effect on the
financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted for a vote of security-holders during the
Company's fiscal quarter ended December 26, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock, $.01 par value per share, was traded in the
over-the-counter market (under the symbol "MSTI") since September 26, 1983. The
Company's name, which was Medical Sterilization, Inc., was changed on May 28,
1999 to SSI Surgical Services,
7
Inc. and its Common Stock is now quoted on the Nasdaq Bulletin Board (under the
symbol "SGSI"). Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions. The approximate number of record holders of the Company's Common
Stock as of March 10, 2000 was 261.
The following table sets forth the high and low bid prices for a share of
the Company's Common Stock as reported on the Nasdaq Bulletin Board for each
fiscal quarter in the last two fiscal years and for the first fiscal quarter of
2000 (through March 10, 2000):
2000 High Bid Low Bid
-------------------------------------------------------------------
First Quarter (through March 10, 2000) $1.875 $0.156
1999
Fourth Quarter 0.469 0.156
Third Quarter 0.688 0.375
Second Quarter 0.875 0.500
First Quarter 1.125 0.531
1998
Fourth Quarter 1.063 0.500
Third Quarter 1.000 0.563
Second Quarter 1.875 0.750
First Quarter 1.313 0.875
The Company has never paid cash dividends with respect to its shares of
Common Stock. The Company currently intends to retain earnings, if any, for use
in its business and does not anticipate paying cash dividends on its shares of
Common Stock in the foreseeable future.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On January 11, 1999, the Company acquired all of the issued and
outstanding shares of ESI, a Florida-based surgical instrument management
services firm, and all of the issued and outstanding shares not already held by
the Company of SSI, a Joint Venture with TFX. Both businesses were acquired from
TFX in exchange for 13,400,000 shares of Common Stock and warrants to purchase
an aggregate of 1,500,000 shares of Common Stock.
8
The Company reported net income of $521,000 in fiscal 1999 compared to a
net loss of $1,302,000 in 1998. The increase in net income was principally the
result of the earnings contribution from the acquired operations as well as
improved performance of the historic instrument sterilization business. The
Company incurred unexpected one-time costs in fiscal 1998 related to the
disposal of the electron beam business of approximately $230,000 and other
nonrecurring expenditures including severance and termination expenses of
approximately $400,000 related to the elimination of several senior management
positions.
The Company's earnings in fiscal 1998 were also severely impacted by its
inability to offset approximately $250,000 in unabsorbed plant rental, realty
taxes and other fixed overhead at its facility associated with the discontinued
electron beam business. The fiscal 1999 earnings were not similarly impacted as
the Company signed a short-term sublease agreement on October 15, 1998 that was
subsequently extended through February, 28, 2001, to sublease 50,000 square feet
of its premises at a rental of approximately $262,000 annually.
Revenues in fiscal 1999 were up approximately $1,824,000 in comparison to
pro-forma fiscal 1998 revenues, principally resulting from the full year impact
of new multi-year surgical instrument sterilization contracts sign in 1998,
partially offset by some weakness in other off-site operations.
In fiscal 1999, the Company's instrument and linen sterilization services,
endoscopic services and management of sterile processing departments within
hospitals accounted for approximately 50%, 42% and 8%, respectively, of the
Company's revenues. In fiscal 1998, prior to the acquisition of ESI and SSI, the
Company's revenues were generated from instrument and linen sterilization
services and contract sterilization of disposable medical products, comprising
94% and 6% of revenues, respectively. The change in sources of revenue reflects
the Company's desire to provide a comprehensive service offering to hospitals
and surgery centers. During the second quarter of fiscal 1998, the Company
successfully completed divestiture of its electron beam accelerator and related
equipment to Shamrock Technologies, Inc. The proceeds of the sale were used by
the Company to repay the entire balance of a bank note secured by the electron
beam accelerator, with the residual monies applied against the Company's
financing agreement with its commercial lender.
In December 1999, the Company entered into a new revolving credit facility
with Teleflex. The new agreement provides the Company up to $15,000,000 of
unsecured financing, the terms of which will be reviewed annually beginning
March 2002. Interest under the new agreement will be payable at the prevailing
Prime rate of PNC Bank, plus 1.25 percent. Interest was charged on indebtedness
with Teleflex at a fixed rate of 8 percent during fiscal 1999.
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Results of Operations
1999 Compared with 1998
Revenues
Revenues increased $23,232,000, or 307%, from $7,560,000 in fiscal 1998 to
$30,792,000 in fiscal 1999. The increase was principally the result of the
acquisition of ESI and SSI. Had the acquistion occurred at the beginning of
fiscal 1998, revenues would have increased approximately $1,824,000 from the
proforma amount of $28,968,000 in fiscal 1998. This increase is attributable to
the realization of the full year impact of revenues derived from multi-year
surgical instrument sterilization contracts signed in fiscal 1998, partially
offset by some weakness in other off-site operations.
Operating Expenses
Operating expenses increased $18,946,000 or 383.4% from $4,942,000 in
fiscal 1998 to $23,888,000 in fiscal 1999. This increase was principally the
result of the acquisition of ESI and SSI. On a proportionate basis, the acquired
operations have higher direct expenses and lower selling, general and
administrative expenses than historical operations.
Distribution Costs
Distribution costs increased $692,000 or 91.7% from $755,000 in fiscal
1998 to $1,447,000 in fiscal 1999. The increase is directly related to increased
sales volume with the acquisition of ESI and SSI. Distribution costs as a
percentage of revenue generated from instrument and linen sterilization
services, remained relatively stable.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $934,000 from
$2,591,000 in 1998 to $3,525,000 in fiscal 1999. The increase resulted from the
acquisition of ESI and SSI, including amortization expense of $406,000 in fiscal
1999. In addition, fiscal 1998 was negatively impacted by additional unexpected
one-time costs related to the disposal of the electron beam business and other
nonrecurring expenditures including severance and termination expenses related
to the elimination of several senior management positions.
Bad Debt Expense
Bad debt expense increased $20,000 from $146,000 in fiscal 1998 to
$166,000 in fiscal 1999. The Company has determined that its allowance for
doubtful accounts is sufficient to cover the receivables from its operations.
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Interest Expense
Interest expense increased by $620,000 from $428,000 in fiscal 1998 to
$1,048,000 in fiscal 1999. The increase is attributed to borrowings from
Teleflex assumed in connection with the acquisition of ESI and SSI and continued
capital spending on surgical instruments and linens to support the growth of the
hospital business.
Net Income (Loss)
Net income in fiscal 1999 was $521,000, an increase of $1,823,000 from a
net loss of $1,302,000 in fiscal 1998.
Net (Loss) Income Applicable to Common Shareholders
Diluted earnings per share in fiscal 1999 represented net income per share
of $0.03, compared to a net loss per share of $0.46 in fiscal 1998. Basic
earnings per share in fiscal 1999 also represented net income per share of
$0.03, compared to a net loss per share of $0.46 in fiscal 1998. Excluding the
effect of preferred dividends in 1998, diluted earnings per share for fiscal
1998 were a net loss per share of $0.41.
Results of Operations
1998 Compared with 1997
Revenues
Revenues in fiscal 1998 decreased approximately 24% to $7,560,000 from
approximately $9,890,000 in fiscal 1997. The decrease in revenues was
attributable to an approximate $3,600,000 or 89% decrease in revenues related to
the Company's contract sterilization and radiation processing of industrial
products services in line with the Company's decision to divest this business,
partially offset by an approximate $1,276,000 or 22% increase in revenues
related to the Company's sterilization services to healthcare providers. The
increase in revenues related to the Company's sterilization services to
healthcare providers was attributable to market penetration of new customers and
expanded services to the Company's existing customer base. During fiscal 1998,
the Company also began to recognize, through increased implementation of
Instrument Sets, the full impact of revenues derived from new multi-year
contracts that were signed in fiscal 1997 with several major healthcare
providers in the region.
Other Income
During fiscal 1997, the Company received a nonrefundable deposit of
$150,000 related to the sale of its contract sterilization services to E-BEAM.
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Operating Expenses
Operating expenses decreased $1,045,000, or approximately 17%, from
approximately $5,987,000 in fiscal 1997 to approximately $4,942,000 in fiscal
1998. This decrease was attributable to a reduction in expenses associated with
the Company's divestiture of the contract sterilization and radiation processing
of industrial products business, as well as improved production efficiencies in
the Company's facility.
Distribution Costs
Distribution costs increased $212,000 or 39% from approximately $543,000
in fiscal 1997 to $755,000 in fiscal 1998. The increase is directly related to
increased sales volume and expanded geographical coverage in the hospital
services division.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $250,000 from
approximately $2,341,000 in fiscal 1997 to $2,591,000 in fiscal 1998. The
increase is principally attributed to additional unexpected one-time costs
related to the disposal of the electron beam business and other nonrecurring
expenditures including severance and termination expenses related to the
elimination of several senior management positions.
Bad Debt Expense
Bad debt expense increased by $85,000 from $61,000 in fiscal 1997 to
$146,000 in fiscal 1998. The increase was due to the write-off of a receivable
from a customer who filed for bankruptcy during fiscal 1998. The Company has
determined that its allowance for doubtful accounts is sufficient to cover the
receivables from its hospital operations.
Interest Expense
Interest expense decreased by $58,000 from $486,000 in fiscal 1997 to
$428,000 in fiscal 1998. The decrease is directly attributed to the sale of the
electron beam and the subsequent repayment of debt, partially offset by
continued capital spending on surgical instruments to support the growth of the
hospital business.
Net (Loss) Income
Net loss in fiscal 1998 was $1,302,000, a decrease of $1,915,000 from net
income of approximately $613,000 in fiscal 1997.
12
Net (Loss) Income Applicable to Common Shareholders
Diluted earnings per share in fiscal 1998 represented a net loss per share
of $0.46, compared to net income per share of $0.09 in fiscal 1997. Basic
earnings per share in fiscal 1998 also represented a net loss per share of
$0.46, compared to net income per share of $0.16 in fiscal 1997. Excluding the
effect of preferred dividends, diluted earnings per share in fiscal 1998
represented a net loss per share of $0.41, compared to net income per share of
$0.11 in fiscal 1997.
Liquidity and Capital Resources
Current assets increased $6,519,000 to $8,867,000 at December 26, 1999
from $2,348,000 at December 31, 1998. The Company had working capital of
approximately $4,486,000 at December 26, 1999, compared to working capital of
approximately $125,000 at December 31, 1998. The Company's current ratio at
December 26, 1999, was 2.02 to 1 compared to a current ratio of 1.06 to 1 at
December 31, 1998. The increase in the Company's current assets, working capital
and current ratio at December 26, 1999 compared to December 31, 1998 was
primarily the result of the acquisition of ESI and SSI in January 1999. With
this acquisition, the Company increased its customer base and portfolio of
services to include endoscopic services and management of sterile processing
departments.
Capital expenditures totaled $5,656,000 in 1999 compared with $1,809,000
in 1998. These purchases were principally surgical instruments and linen
products made to support the Company's new sales contracts entered into during
fiscal 1999 and fiscal 1998, in addition to existing contracts of the acquired
businesses.
Management plans to purchase additional surgical instruments and linens,
as and if required to support the Company's growth objectives. Cash flows from
operating activities will provide support for these expenditures, however,
additional external financing is expected to be required. There can be no
assurance, however, that such capital will be available to the Company on
acceptable terms, if at all.
The Company had $2,003,000 in obligations under capital leases for
equipment and surgical instruments at December 26, 1999. In addition, the
Company has entered into a $15,000,000 unsecured revolving loan agreement with
Teleflex, its majority shareholder. At December 26, 1999, $13,750,000 was drawn
against this facility, of which approximately $6,500,000 was assumed in
connection with the acquisitions of ESI and SSI while $5,732,000 was incremental
financing to support capital expenditures, working capital, growth and net third
party debt repayment of $2,109,000 during fiscal 1999. Interest is charged on
the unpaid balance at prime plus 1.25 percent. The terms of the agreement will
be reviewed annually beginning March, 2002.
The Company believes that the anticipated future cash flow from
operations, along with its cash on hand and available funding from its major
shareholder will be sufficient to meet
13
working capital requirements during 2000. There can be no assurance, however,
that the Company will not require additional working capital and, if it does
require such capital, that such capital will be available to the Company on
acceptable terms, if at all.
Year 2000 Issue
The Company substantially completed its Year 2000 remediation project
during 1999. No systems failures causing disruption in normal business
operations have occurred.
Inflation
The Company believes that inflation has not had, and will not have in the
future, a material effect on its results of operations.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities
Exchange Commission (including this Form 10-K) may contain statements which are
not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. Forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995;
in particular, statements made above in "Item 2. Description of Property"
relating to the suitability of the Company's facilities and equipment for future
operations and the availability of additional facilities and equipment in the
future; the sufficiency of funds for the Company's working capital requirements
during 2000; the Company's expectation that future cash flow will continue to be
provided from operations; and the Company's present belief that inflation will
not have any significant impact on its business may be forward-looking
statements. The Company's actual future results may differ significantly from
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in the Company's
filings with the Securities and Exchange Commission.
The Company's future results are subject to risks and uncertainties. The
Company has operated at a loss or small profit for its entire history and there
can be no assurance of its ever achieving consistent profitability. The Company
may require additional working capital in the future and there can be no
assurance that such working capital will be available on acceptable terms, if at
all. The failure of the Company to continue to compete effectively with existing
or new competitors could result in price erosion, decreased margins and
decreased revenues, any or all of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Approximately 60% of the Company's healthcare provider customers are currently
concentrated in the Northeast Corridor. Any factors affecting this market
generally could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company is subject to
government regulation in certain aspects of
14
its operations. Changes in such regulations could have a material adverse effect
on the Company's business, results of operations and financial condition.
Future results of the Company will depend significantly on its ability to
successfully convince hospitals and other healthcare providers to utilize the
Company's instrument and linen sterilization services, endoscopic services and
sterile processing department management services as opposed to their own
resources. Hospitals may resist this change for a number of reasons, including
the preferences of hospital staffs which may wish to preserve their existing
staffing, labor unions which may resist any staffing reductions and the ongoing
consolidation of hospitals which may impact the willingness of hospital
administrators to make operational decisions on a timely basis and which may
affect a hospital's decision to outsource sterile processing services as opposed
to retaining one or more of the consolidated hospital group's central
sterilization facilities to provide services for the entire group.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect revenues and
profitability, including: competitive pressures on selling prices and margins;
the timing and cancellation of customer orders; the lengthy sales cycle of the
Company's services to healthcare organizations; the Company's ability to
maintain state-of-the-art sterilization facilities and the corresponding timing
and amount of capital expenditures, particularly if the Company executes its
plan for growth; and the introduction of new services by the Company's
competitors. As a result of the foregoing and other factors, the Company may
experience material fluctuations in future operating results on a quarterly or
annual basis which could materially and adversely effect its business, operating
results and stock price.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company does not have any material market risk sensitive financial
instruments.
Item 8. Financial Statements
For the following financial information required by this Item, see Index
on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
15
Item 10. Directors and Executive Officers of the Registrant
The response to this item is incorporated by reference from the Section
titled "Directors and Executive Officers of the Company" in the Registrant's
Proxy Statement for its 2000 Annual Meeting of Shareholders.
Item 11. Executive Compensation
The response to this item is incorporated by reference from the Section
titled "Directors and Executive Officers of the Company" in the Registrant's
Proxy Statement for its 2000 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is incorporated by reference from the Section
titled "Security Ownership of Certain Beneficial Owners and Management" in the
Registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
The response to this item is incorporated by reference from the Section
titled "Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement for its 2000 Annual Meeting of Shareholders.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
(3)(i)(1) Restated Certificate of Incorporation filed May 21, 1999.
(3)(ii)(1) Amended and Restated By-Laws dated June 2, 1987 - filed
as Exhibit (3)(4) to Annual Report for the year ended December 31,1995 on Form
10-KSB and incorporated herein by reference.
(10)(1) 1994 Stock Option Plan - filed as Exhibit (10)(a)(1) to
Annual Report for the year ended December 31, 1993 on Form 10-K and incorporated
herein by reference.
(10)(2) 1996 Stock Option Plan - filed as Exhibit (10)(2) to the
Annual Report for the year ended December 31, 1995 on Form 10-KSB and
incorporated herein by reference.
(10)(3) Lease dated November 20, 1995 with Barlich Realty, Inc. -
filed as Exhibit (10)(4) to Annual Report for the year ended December 31, 1995
on Form 10-KSB and incorporated herein by reference.
16
(10)(4) Acquisition Agreement dated November 19, 1998 between the
Company and TFX Equities Incorporated - filed as Exhibit (1) to Form 8-K dated
January 26, 1999 and incorporated herein by reference.
Incorporated.
(10)(5) Revolving Loan Account Agreement dated December 26, 1999
between the Company and Teleflex Incorporated.
27.1 Financial Data Schedule
17
SIGNATURES
In accordance with Section 13 of 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
March 24, 2000 SSI SURGICAL SERVICES, INC.
By: /s/ Michael D. Klein
----------------------------------------
Name: Michael D. Klein
Title: President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report was
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Name and Signature Title(s) Date
- ------------------ -------- ----
/s/ Michael D. Klein
- -------------------------- President, Chief Executive March 24, 2000
Michael D. Klein Officer (principal executive)
/s/ Paul A. D'Alesio
- -------------------------- Treasurer and Chief Financial March 24, 2000
Paul A. D'Alesio Officer (principal accounting
officer)
- -------------------------- Director March 24, 2000
Larry C. Buckelew
/s/ Steven K. Chance
- -------------------------- Director and Secretary March 24, 2000
Steven K. Chance
/s/ D. Michael Deignan
- -------------------------- Director March 24, 2000
D. Michael Deignan
/s/ John J. Sickler
- -------------------------- Director March 24, 2000
John J. Sickler
- -------------------------- Director March 24, 2000
Forrest R. Whittaker
18
SSI Surgical Services, Inc.
Index to the Consolidated Financial Statements
December 26, 1999
- --------------------------------------------------------------------------------
Page
Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 26, 1999 and
December 31, 1998 F-3
Consolidated Statement of Operations for the years ended
December 26, 1999, December 31, 1998 and December 31, 1997 F-4
Consolidated Statement of Shareholders' Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7
F-1
Report of Independent Accountants
To the Board of Directors
of SSI Surgical Services, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of SSI
Surgical Services, Inc. at December 26, 1999 and December 31, 1998, and the
results of their operations and their cash flows for the years ended December
26, 1999, December 31, 1998 and December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 24, 2000
F-2
SSI Surgical Services, Inc.
Consolidated Balance Sheet
December 26, 1999 and December 31, 1998
(Dollars in Thoudands)
- --------------------------------------------------------------------------------
1999 1998
Assets
Current assets:
Cash and cash equivalents $ 254 $ 57
Accounts receivable, net of allowance for doubtful accounts
of $407 and $295 7,470 1,966
Prepaid expenses and other assets 1,143 325
-------- --------
Total current assets 8,867 2,348
Property and equipment, net 19,231 6,281
Intangibles, net 5,449 --
Other assets 140 122
-------- --------
$ 33,687 $ 8,751
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,462 $ 1,612
Current maturities of long-term debt -- 50
Obligations under capital leases 919 561
-------- --------
Total current liabilities 4,381 2,223
Long-term debt, less current maturities -- 2,732
Obligations under capital leases 1,084 1,571
Payable to affiliates 13,750 --
-------- --------
Total liabilities 19,215 6,526
Preferred stock:
Convertible redeemable cumulative preferred stock, par value
$.01 per share; Series B - authorized 1,000,000 shares,
issued and outstanding 0 and 687,500 shares -- 1,945
-------- --------
Shareholders' equity:
Convertible preferred stock, par value $.01 per share Series C -
authorized 3,000,000 shares, issued and outstanding 0 and 1,945,625
in 1999 and 1998, respectively -- 1,946
Common stock, par value $.01 per share, authorized 30,000,000 shares,
issued and outstanding 19,491,216 shares 195 32
Additional paid-in capital 23,019 7,565
Accumulated deficit (8,742) (9,263)
-------- --------
Total shareholders' equity 14,472 280
-------- --------
Total liabilities and shareholders' equity $ 33,687 $ 8,751
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
SSI Surgical Services, Inc.
Consolidated Statement of Operations
For the Years Ended December 26, 1999, December 31, 1998
and December 31, 1997
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
1999 1998 1997
Net revenues $ 30,792 $ 7,560 $ 9,890
Other income -- -- 150
----------- ----------- -----------
30,792 7,560 10,040
----------- ----------- -----------
Cost and expenses:
Operating 23,888 4,942 5,987
Distribution 1,447 755 543
Selling, general and administrative 3,525 2,591 2,340
Bad debt expense 166 146 61
Interest 1,048 428 486
----------- ----------- -----------
Total costs and expenses 30,074 8,862 9,417
----------- ----------- -----------
Income (loss) before income taxes 718 (1,302) 623
Income taxes 197 -- 10
----------- ----------- -----------
Net income (loss) 521 (1,302) 613
Preferred stock dividends -- (168) (109)
----------- ----------- -----------
Net income (loss) applicable to common shareholders $ 521 $ (1,470) $ 504
=========== =========== ===========
Earnings (loss) per common share - basic $ .03 $ (.46) $ .16
=========== =========== ===========
Earnings (loss) per common share - diluted $ .03 $ (.46) $ .09
=========== =========== ===========
Weighted average common shares 19,491,216 3,170,496 3,157,996
=========== =========== ===========
Weighted average dilutive common shares 19,491,216 3,170,496 5,571,683
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
SSI Surgical Services, Inc.
Consolidated Statement of Shareholders' Equity
For the Years Ended December 26, 1999 and December 31, 1998
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
Common stock Preferred stock Additional
-------------------- --------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
Balance at December 31, 1997 3,170,496 $ 32 1,945,625 $ 1,946 $7,733 $(7,961) $ 1,750
Accrual of preferred stock dividends (168) (168)
Net loss for year (1,302) (1,302)
---------- ----- ---------- ------- ------- ------- --------
Balance at December 31, 1998 3,170,496 32 1,945,625 1,946 7,565 (9,263) 280
---------- ----- ---------- ------- ------- ------- --------
Issuance of common stock 13,400,000 134 -- 11,591 11,725
Preferred stock conversion 2,920,720 29 (1,945,625) (1,946) 3,863 1,946
Net income for the year 521 521
---------- ----- ---------- ------- ------- ------- --------
Balance at December 26, 1999 19,491,216 $ 195 -- $ -- $23,019 $(8,742) $ 14,472
---------- ----- ---------- ------- ------- ------- --------
The accompanying notes are an integral part of these financial statements.
F-5
SSI Surgical Services, Inc.
Consolidated Statement of Cash Flow
For the Years Ended December 26, 1999, December 31, 1998
and December 31, 1997
(Dollars in Thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
Cash flows from operating activities:
Net income (loss) $ 521 $(1,302) $ 613
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,346 705 682
Doubtful debt expense 166 146 61
Loss on asset sales -- 71 --
Changes in operating assets and liabilities:
Accounts receivable (1,327) 279 (43)
Prepaid expenses and other assets (400) (131) 3
Accounts payable and accrued liabilities (76) 681 (590)
------- ------- -------
Net cash provided by operating activities 2,230 449 726
------- ------- -------
Cash flows for investing activities:
Net purchase of property and equipment (5,656) (1,809) (2,239)
Proceeds from asset sales -- 1,181 --
------- ------- -------
Net cash used by investing activities (5,656) (628) (2,239)
------- ------- -------
Cash flows from financing activities:
Net repayments of revolving line of credit (1,182) (218) (101)
Repayments of long-term debt (50) (902) (413)
Net repayments under capital lease obligations (877) (226) 1,483
Proceeds from long-term debt -- 1,550 500
Net borrowings from affiliates 5,732 -- --
------- ------- -------
Net cash provided by financing activities 3,623 204 1,469
------- ------- -------
Increase in cash and cash equivalents 197 25 (44)
Cash and cash equivalents at beginning of period 57 32 76
------- ------- -------
Cash and cash equivalents at end of period $ 254 $ 57 $ 32
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-6
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
1. Basis of Presentation and Nature of Business
The Company was incorporated in New York State on May 27, 1982, as Medical
Sterilization, Inc ("MSI"). Effective January 8, 1999, the Company's
headquarters and principal place of business was moved to Orlando,
Florida. Effective May 28, 1999, the Company changed its name to SSI
Surgical Services, Inc.
The Company provides both off-site and on-site reprocessing and
sterilization of surgical instrument sets, gowns and towels, as well as
certain other items requiring sterilization for healthcare providers,
hospitals and other medical facilities. In addition the Company provides a
broad range of surgical instrument management services that includes
provision of endoscopic instrument sets and other specialty products to
hospitals and other medical facilities, as well as on-site department
management, staffing and other consulting services.
2. Acquisitions and Divestitures
1999 Acquisitions
In January, 1999, the Company acquired Endoscopy Specialists, Incorporated
("ESI"), a Florida-based surgical instrument management services firm, and
the remaining 62.5% of the shares of SSI Surgical Services, Inc. ("SSI"),
a joint venture in which the Company had held a 37.5% interest. Both
businesses were acquired from TFX Equities, Incorporated ("TFX"), a wholly
owned subsidiary of Teleflex Incorporated, a diversified publicly held
company, in exchange for 13.4 million common shares of the Company and
warrants for an additional 1.5 million common shares. TFX also converted
the preferred shares it owned into common shares. As a result of this
transaction, TFX now owns a majority of the outstanding common stock of
the Company.
The acquisition was accounted for as a purchase. Net assets of the
acquired businesses amounted to $13,000 and the acquisition was financed
through a combination of the equity transactions noted above and the
assumption of approximately $6,500 of intercompany financing from TFX. The
excess purchase price over the fair market value of the assets acquired,
approximately $5,200 was recorded as goodwill and will be amortized to
expense over 15 years.
F-7
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
A summary of the net assets acquired follows:
Current assets $ 5,073
Current liabilities (2,273)
--------
Working capital 2,800
--------
Property and equipment 10,640
Capital lease obligations (401)
--------
Net assets acquired 13,039
--------
Affiliate borrowings assumed 6,508
Issuance of common stock 11,725
--------
Purchase price 18,233
--------
Excess purchase price (goodwill) $ 5,194
========
The following represents the unaudited pro forma results of operations as
if the above noted acquisition had occurred at the beginning of the years
presented:
1998 1997
Revenues $ 28,968 $ 26,646
Net income (loss) (1,402) 348
Net income (loss) per common share $ (0.07) $ 0.02
1998 Divestitures
On April 30, 1998, the Company successfully completed divestiture of its
electron beam accelerator and related equipment for the approximate sum of
$1,250. The proceeds of the sale were immediately used by the Company to
repay the entire balance of a bank note against the beam for approximately
$402, and the residual monies were applied against the Company's financing
agreement with its commercial lender.
3. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year now ends the last Sunday in December. There were
52 weeks in fiscal 1999, 1998 and 1997.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents.
F-8
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
Property and Equipment
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the related assets (ranging from 5 to
15 years) and, for leasehold improvements, over the shorter of the useful
life of the improvement or the term of the lease. Shrinkage-loss of
surgical instruments and containers is provided based upon incurred
losses. Maintenance and repairs are charged to expense in the year
incurred. Expenditures which significantly improve or extend the life of
the assets are capitalized. Upon disposal, the cost and related
accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is included in income.
Intangibles
Intangible assets consist principally of goodwill, which is the excess
purchase price over the fair value of the assets of businesses acquired.
Intangible assets are amortized on a straight-line basis over their
estimated useful lives, not exceeding 15 years. Intangibles net of
amortization of $406 was $5,449 for the fiscal year ended 1999.
Accounting for Long-Lived Assets
On a periodic basis or whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, impairment is
evaluated by comparing future cash flows (undiscounted and without
interest charges) expected to result from the use or sale of the asset and
its eventual disposition, to the carrying amount of the asset.
Earnings Per Share Calculation
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per
Share"("SFAS No. 128"), which establishes standards for computing and
presenting earnings per share. SFAS No. 128 requires presentation of both
basic and diluted earnings per share. Basic earnings per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed in a
similar manner except that the weighted average number of common shares is
increased for dilutive securities. Potentially dilutive securities have
been excluded from the 1999 and 1998 computations of diluted earnings per
share since the result would be anti-dilutive. Potentially dilutive
securities for the 1997 computation of diluted earnings per share consist
of options for 468,062 shares and Series C Convertible Preferred Stock for
1,945,625 shares. Series B Preferred Stock was excluded from the 1997
calculation since the result would be anti-dilutive.
Revenue Recognition
The Company records revenue for hospital services, in accordance with
contractual terms. Revenues for other sterilization services are recorded
upon the completion of processing and/or shipment.
Concentration of Credit Risk
Trade receivables arise from long-term and short-term contracts with
healthcare providers. To reduce credit risk, the Company performs credit
evaluations of its customers but does not generally require collateral.
Credit risk is affected by conditions within the economy and the
healthcare industry. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
F-9
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
For the fiscal year ended December 26, 1999, 10 customers represented
approximately 50% of the accounts receivable balance, as compared with
seven customers representing approximately 50% of the accounts receivable
balance, for the fiscal year ended December 31, 1998. The loss of any one
customer could have a significant impact on the Company's financial
position or results of operations.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes", which requires that deferred income taxes be recognized for the
tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain items in the 1998 and 1997 financial statements have been
reclassified to conform with the 1999 presentation of the financial
statements.
4. Prepaid Expenses and Other Assets
The composition of prepaids and other assets is as follows:
1999 1998
Consumables and supplies $ 807 $ 55
Other receivables 204 4
Other 132 266
------ ------
Total $1,143 $ 325
====== ======
F-10
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
5. Property and Equipment
The composition of property and equipment is as follows:
1999 1998
Surgical instruments and gowns $18,133 $ 7,484
Containers 1,764 1,394
Machinery and equipment 5,341 2,339
Leasehold improvements 1,802 598
Furniture and fixtures 685 287
------- -------
27,725 12,102
Accumulated depreciation and amortization 8,494 5,821
------- -------
$19,231 $ 6,281
======= =======
Depreciation and amortization expense for the years ended December 26,
1999, December 31, 1998 and December 31, 1997 was $2,940, $705 and $682,
respectively.
The composition of assets recorded under capital leases is as follows:
1999 1998
Surgical instruments $3,232 $2,174
Machinery and equipment 685 685
Containers 335 335
------ ------
4,252 3,194
Accumulated amortization 1,118 487
------ ------
$3,134 $2,707
====== ======
F-11
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
6. Accounts Payable and Accrued Expenses
The composition of accounts payable and accrued expenses is as follows:
1999 1998
Trade accounts payable $1,614 $ 676
Salary and other compensation benefits 848 468
Sales and other taxes 475 127
Professional fees 246 54
Other 279 287
------ ------
Total $3,462 $1,612
====== ======
7. Employee Benefit Plans
The Company has historically maintained a 401(k) defined contribution plan
which allows participants to make contributions based on a percentage of
their earnings. During the year employees of the Company became eligible
to participate in a successor 401(k) plan with TFX. The TFX plan allows
participants to make pretax contributions which are matched on a
proportionate basis. The Company's contributions for the fiscal years
ended December 26, 1999, December 31, 1998 and December 31, 1997 were
approximately $81, $26 and $35, respectively.
8. Income Taxes
The provision for income taxes for the years ended December 26, 1999,
December 31, 1998 and December 31, 1997, consisted of the following:
1999 1998 1997
Current:
Federal $ -- $ -- $ 7
State -- -- 3
---- ---- ----
-- -- 10
---- ---- ----
Deferred:
Federal 176 -- --
State 21 -- --
---- ---- ----
$197 $ -- $ --
---- ---- ----
$197 $ -- $ 10
---- ---- ----
F-12
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
Reconciliation between the statutory income tax rate and effective tax
rate is summarized below:
1999 1998 1997
Expected federal statutory tax rate (benefit) 35% (35)% 35%
State and local taxes, net 4% (6)% 5%
Limitation (utilization) of net operating losses (12)% 41% (38)%
--- --- ---
Effective tax rate 27% 0% 2%
=== === ===
Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities is as follows:
1999 1998
Deferred tax liability:
Depreciation $ (826) $ (323)
------- -------
Total deferred tax liability (826) (323)
Deferred tax asset:
Net operating loss carryforwards 4,010 4,049
Other 197 348
------- -------
Total deferred tax assets 4,207 4,397
Less: Valuation allowance (3,381) (4,074)
------- -------
Net deferred tax assets $ -- $ --
======= =======
Following the Company's acquisition of SSI and ESI from TFX in January
1999, the Company's taxable income will be included in the consolidated
tax returns of TFX under a tax sharing arrangement. For purposes of these
financial statements, income taxes have been determined and allocated to
the Company on a separate return basis.
The use of net operating loss carryforward generated by the Company prior
to the 1999 acquisitions are subject to annual limitations imposed by the
Internal Revenue Code. Accordingly, a significant portion of the net
operating loss carryforwards generated in prior years will not be
available to the Company because of changes in ownership occurring during
1999. Realization of the remaining deferred tax assets associated with the
net operating loss carryforward is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there
is risk that these operating loss carryforwards may expire unused, and,
accordingly, has continued to maintain a valuation allowance equal to the
net deferred tax asset amount.
F-13
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
The Company's federal net operating loss carryforwards will expire in
varying amounts from 2000 through 2013.
9. Long-Term Debt
The composition of long-term debt is as follows:
1998
Note payable to officer and shareholder, payable in annual
installments of $50,000 with interest payable monthly at the
prime rate (8.50% at December 31, 1998) plus 1%(a) $ 50
Note payable to commercial lender, due January 31, 2000 with
interest payable monthly at the rate of 2% per annum over the
prime rate (b) 1,182
Note payable to TFX, due January 3, 2000 with interest payable
monthly at the rate of 8% per annum(c) 1,300
Note payable to Teleflex, due December 17, 2000 with interest
payable monthly at the rate of 8% per annum(d) 250
------
2,782
Less: Current maturities (all due to related parties) 50
------
Long-term debt $2,732
======
(a) Repayment terms are restricted at a rate not to exceed 10% of the
profits in any quarter and to be limited further by the Company's
cash availability.
(b) The agreement provides for a revolving collateralized line of credit
up to $2,000. The line of credit is collateralized by substantially
all assets of the Company. In October 1997, the agreement was
modified and extended to January 31, 2000, and the advance rate on
the Company's eligible Accounts Receivable was increased to 85% from
the existing 75%. The interest rate on the facility was also changed
to prime rate plus 2% (previously prime rate plus 3.5%). The
agreement prohibits the payment of dividends on the shares of Common
Stock. Average monthly borrowings under the revolving line of credit
described above for the year ended December 26, 1999 amounted to
$1,161, and the related weighted average interest rate was 9.85%.
Maximum borrowings at any month end were $2,532 in 1999. The
facility was not drawn upon at December 26, 1999.
F-14
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
(c) In December 1998, the Company entered into a new loan agreement with
TFX, a wholly owned subsidiary of Teleflex. The principal amount of
the new loan totals $1,300 and bears interest at a fixed rate of 8
percent. The note was originally due and payable on January 3, 2000,
but has now been refinanced under the Company's revolving credit
facility with Teleflex. See Note 14.
(d) In December 1998, the Company entered into a revolving loan account
agreement with Teleflex. Under the agreement, Teleflex agreed to
advance the Company up to $750 for no more than two years. Interest
is charged on the unpaid principal balances at a fixed rate of 8
percent. The revolving loan account was refinanced under the
Company's revolving credit facility with Teleflex. See Note 14.
Interest paid during 1999, 1998 and 1997 was $527, $428, and $486,
respectively.
10. Obligations Under Capital Leases
Future minimum payments as of December 26, 1999 under capital leases for
property and equipment, including surgical instruments, are as follows:
2000 $1,059
2001 669
2002 447
2003 40
------
Total minimum lease payments 2,215
Less amount representing interest 212
------
Present value of minimum lease payment 2,003
Less current portion 919
------
$1,084
======
11. Common and Preferred Stock
On January 8, 1997, TFX, a wholly owned subsidiary of Teleflex, a
diversified publicly held company, purchased the Series B and Series C
Convertible Preferred Stock from the previous owners of such stock. This
Series B Convertible Preferred Stock is convertible at the option of the
holder into Common Stock or cash, at $2.00 per share maturing December 31,
1999. Dividends accrue on the Series B Convertible Preferred Stock at the
rate of 8% per year. These dividends may be paid in cash or accrued at the
option of the Company. If not paid, accrued dividends are added to the
face amount of the Series B Convertible Preferred Stock at the time of
conversion. In January 1999, TFX converted the face amount of the Series B
Convertible Preferred Stock into 975,095 shares of Common Stock.
F-15
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
The Series C Convertible Preferred Stock is automatically convertible at
$1.00 per share into 1,945,625 shares of Common Stock on December 30,
2004, or earlier at the option of the holder. There are no dividends
payable nor accrued on the Series C Convertible Preferred Stock. There are
no dividends payable nor accrued on the Series C Convertible Preferred
Stock. In January 1999, TFX converted the Series C Convertible Preferred
Stock into 1,945,625 shares of Common Stock.
In February 1997, the Company issued an additional 150,000 shares of its
Common Stock to TFX for $2.00 per share. The shares were used to reduce
amounts payable to another subsidiary of Teleflex, incurred for surgical
instrument purchases.
In January 1999, the Company increased the number of shares of authorized
Common Stock, par value $.01 per share from 10,0000,000 shares to
30,000,000 shares, and issued 13,400,000 shares of Common Stock to TFX in
connection with an acquisition. See Note 2.
12. Common Stock Warrants
From time to time, the Company has issued Common Stock warrants to
directors, lending institutions, and other third parties. At December 26,
1999, the Company had aggregate warrants outstanding to purchase 1,675,000
shares of Common Stock at a price between $1.38 and $2.00 per share with
expiration dates through December 2005.
13. Stock Option Plan
On September 29, 1994, the Board of Directors approved the 1994 Stock
Option Plan and authorized the issuance of up to 1,000,000 shares of
Common Stock of the Company upon the exercise of Incentive and
Non-Qualified Stock Options which may be granted pursuant to the Plan. The
Plan was approved by the shareholders at a meeting held on July 20, 1995.
In 1996, the Board of Directors authorized another 500,000 shares of
Common Stock to be issued under the 1996 Plan, which was approved by
shareholders on May 25, 1996.
Incentive Stock Options may be granted only to key employees, including
officers or directors who are employees of the Company, and are
exercisable immediately or in installments following a period of two (2)
years after grant but within ten (10) years from the date of grant (five
(5) years in the case of options granted to holders of more than 10% of
the Company's voting stock). The exercise price must be at least equal to
the fair market value of the Company's Common Stock on the date granted
(110% in the case of 10% shareholders). At December 26, 1999, Incentive
Stock Options for an aggregate of 444,670 shares of Common Stock at
exercise prices ranging from $.69 to $1.28 were outstanding.
Non-Qualified Stock Options may be granted under the Plans or otherwise to
officers, directors, consultants and key employees. The exercise price is
not limited and may be below the fair market value of the Company's Common
Stock on the date of grant. At December 26, 1999, Non-Qualified Stock
Options for an aggregate of 685,000 shares of Common Stock at exercise
prices ranging from $0.69 to $1.50 were outstanding.
F-16
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
The Company applies the disclosure-only provisions of SFAS 123 "Accounting
for Stock-Based Compensation," continuing to measure compensation cost in
accordance with APB 25 " Accounting for Stock Issued to Employees." Had
compensation cost been determined based on the fair value at the grant
date consistent with the provisions of SFAS 123, the Company's pro forma
net income (loss) and earnings per share for the years ended December 26,
1999, December 31, 1998 and December 31, 1997 would have been:
1999 1998 1997
Net income (loss) attributable to common $ 521 $(1,470) $ 504
shareholders as reported
Pro forma income (loss) $ 400 $(1,491) $ 368
Earnings per Common share as reported - Diluted $0.02 $ (0.46) $0.09
Pro forma Earnings per share - Diluted $0.02 $ (0.46) $0.07
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the
following weighted average assumptions used for grants in 1999, 1998 and
1997, respectively; no dividend yield; expected volatility of 90%;
risk-free interest rate of 5.65% to 6.61%: and expected lives ranging from
approximately 4.5 to 5 years. Weighted averages are used because of
varying assumed exercise dates.
F-17
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock option plans as of December
26, 1999 and December 31, 1998, and changes during the years ended on
those dates is presented below.
1999 1998
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Outstanding at beginning of year 1,155,670 $ .87 1,229,420 $ .88
Granted 385,000 .91 30,000 1.00
Exercised -- -- -- --
Canceled (411,000) .96 (103,750) 1.02
---------- ---------
Outstanding at end of year 1,129,670 .85 1,155,670 0.87
========== =========
Options exercisable at end of year 847,670 1,075,753
========== =========
Weighted average fair value of
options granted during the year $ .51 $ .72
The following table summarizes information about stock options outstanding
at December 26, 1999:
Weighted
Average Weighted Weighted
Ranges of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Prices Exercisable Prices
$0.69 152,000 10 $0.69 -- --
$.74 to $.75 634,500 5 0.74 634,500 $0.74
$1.00 30,000 9 1.00 30,000 1.00
$1.06 214,670 8 1.06 84,670 1.06
$1.28 68,500 8 1.28 68,500 1.28
$1.50 30,000 8 1.50 30,000 1.50
------------- --------- -------- ----- ------- -----
$.69 to $1.50 1,129,670 7 $0.85 847,670 $0.85
F-18
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
14. Related Party Transactions
The Company purchases from surgical instrument manufacturers the surgical
instruments included in instrument sets that are utilized in providing the
Company's services. Pilling Weck, a national surgical instrument
manufacturer and a subsidiary of Teleflex, has agreed to supply surgical
instruments to the Company. Purchases from Pilling Weck are made on
commercial terms. Instrument purchases from Pilling Weck, including
instruments financed under capital lease obligations, for the years ended
December 26, 1999, December 31, 1998 and December 31, 1997, were
approximately $969, $556, and $701, respectively.
In connection with the Company's January 1999 acquisition of ESI and SSI
from TFX, the Company assumed approximately $6,500 of financing from
Teleflex. In addition, the Company has entered into a new revolving credit
facility with Teleflex. The agreement, the terms of which will be reviewed
annually beginning March 2002, provides the Company up to $15,000 of
unsecured financing. Interest under the new agreement will be payable at
the prevailing Prime rate of PNC Bank, plus 1.25 percent. Interest was
charged on the unpaid principal balance during 1999 at a fixed rate of 8
percent, amounting to $649, $29 and $44 for the years ended December 26,
1999, December 31, 1998 and December 31, 1997, respectively.
Teleflex also charged the Company fees for executive management, legal,
treasury, tax and other financial services. Fees of $350 were charged for
the year ended December 26, 1999.
See Notes 6, 8 and 9 for other related party transactions.
15. Commitments and Contingencies:
Minimum annual rental commitments for non-cancelable operating leases,
principally for the Company's off-site sterilization facilities, at
December 26, 1999 are as follows:
2000 $1,812
2001 1,284
2002 1,055
2003 373
2004 187
Thereafter 162
------
$4,873
======
Rent expense net of sublease income of approximately $293 and $86, was
approximately $1,521, $389 and $475 for the years ended December 26, 1999,
December 31, 1998 and December 31, 1997, respectively.
F-19