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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 30, 2001
|_| 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 11, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $719,001, based on the
average bid and asked price of the registrant's Common Stock on March 11, 2002
as reported on the Nasdaq Bulletin Board System.
The registrant had 19,491,216 Common Shares outstanding as of March 11,
2002.
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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 Baltimore,
Chicago, Detroit, Houston, and Tampa.
1
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). The
Company has a variety of service programs to meet customer demand. 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 and a selection of disposable products, 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.
2
This business currently operates five industrial reprocessing facilities
that can sterilize, package, reassemble, decontaminate and deliver to customers
on a daily basis. The Company provides Instrument Sets for operating room and
labor and delivery room procedures, such as 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 to the hospital. 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 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
3
with several on-site service offerings that include: instrument processing,
consulting, department management, staffing, training, and endoscopy services.
The Company is recognized as one of the only service providers to offer the full
service continuum and a flexible service offering. It provides customized
solutions that include both on-site and off-site management programs for
individual hospitals and healthcare delivery networks.
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-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. Surgical Express, previously Sterile Recoveries, Inc. and
Angelica Corporation now compete with the Company. Substantial know-how and
capital intensive barriers continue to limit competitive interest.
Customers
The Company markets and sells services to acute care hospitals, and
stand-alone surgery centers in 15 states and the District of Columbia. Customers
have been attracted to the Company because of its quality of service,
comprehensive service offering and cost reduction opportunities. 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 trained technicians on site
5.) Upgrade to premium equipment and instruments
6.) Improved staff and physician satisfaction
7.) Capital avoidance
8.) The ability to convert non-productive space to revenue generating
space
9.) Elimination of repair and maintenance costs
4
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, and 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.
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. Contracts
are generally executed with terms of three years or more providing a multi-year
revenue stream. 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, quantified cost savings and
knowledgeable technical personnel.
Contracts are generally 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. 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.
As of March 11, 2002, the Company provided services pursuant to service
contracts with 185 hospitals and ambulatory surgi-centers. For the fiscal year
ended December 30, 2001, one customer accounted for 10% or more of the Company's
total revenues and 10 customers represented approximately 47% of the accounts
receivable balance. The loss of any one of these customers could have a
significant impact on the Company's financial position or results of operations.
5
Suppliers
The Company purchases surgical instruments, sterilization containers,
surgeon's gowns and surgical towels from several vendors including Pilling Weck,
a wholly-owned subsidiary of Teleflex. The Company believes that such products
are readily available at market prices.
Sales and Marketing
Surgical Services' sales and marketing strategy is to develop new accounts
and 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 consulting, on-site management services and EtO
sterilization. The Company's sales and marketing efforts are coordinated with
several manufacturer alliances and their sales forces to maximize growth
opportunities.
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.
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 30, 2001, the Company had 454 full-time and 27 part-time
employees. None of its employees are covered by any collective bargaining
agreement.
Item 2. Description of Property
Surgical Services leases facilities 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 its corporate
headquarters and an instrument repair facility in leased offices in Orlando,
Florida.
6
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 February 28, 2003
McGaw Park, IL 26,000 sq. ft. Leased September 7, 2010
Livonia, MI 32,000 sq. ft. Leased August 31, 2003
Houston, TX 46,000 sq. ft. Leased April 30, 2003
Syosset, NY 103,000 sq. ft.(1) Leased March 31, 2010
Tampa, FL 47,000 sq. ft Leased November 30, 2002
Orlando, FL 10,000 sq. ft. Leased December 31, 2008
Note:
1. The Company subleases approximately 50,000 square feet of the premises. The
Company is currently renegotiating this sublease agreement.
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, they will require capacity enhancements as
business continues to expand. The Company believes that additional facilities
and equipment can be acquired as necessary.
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, cash flows 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 30, 2001.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock, $.01 par value per share, is 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 11, 2002 was 248.
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
2002 (through March 11, 2002):
2002 High Bid Low Bid
- -------------------------------------------------------------------------------
First Quarter (through March 11, 2002) $0.40 $0.20
2001
- ----
Fourth Quarter 0.30 0.19
Third Quarter 0.39 0.18
Second Quarter 0.37 0.16
First Quarter 0.56 0.25
2000
- ----
Fourth Quarter 0.44 0.13
Third Quarter 0.81 0.31
Second Quarter 1.25 0.50
First Quarter 1.50 0.13
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.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make and continuously evaluate estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
The company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
Allowance for Doubtful Accounts. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of the Company's customers
were to deteriorate, impairing their ability to make payments, additional
allowances may be required.
Valuation of Long-lived Assets. The Company's long-lived assets include
property, plant and equipment and goodwill, which are reviewed annually for
impairment based on estimates of future cash flows. In addition, the Company
will adopt Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets in fiscal year 2002. SFAS 142 requires
goodwill and other intangible assets to be subject to an annual determination of
continuing value (an impairment test) rather than be amortized annually.
Overview
The Company's revenues are generated from a comprehensive menu of services
to hospitals and surgery centers, with a primary focus on the operating room.
These services include specialty instrument management programs that focus on
minimally invasive surgical procedures, professional management and staffing of
sterile processing departments in hospitals, off-site cleaning, decontamination
and sterilization processing of containerized surgical instrument sets and
reusable surgical gowns and towels.
Results of Operations
2001 Compared with 2000
Revenues
Revenues increased $1,976,000, or 6.2%, from $31,935,000 in fiscal 2000 to
$33,911,000 in fiscal 2001. This increase is attributable to the full year
impact of multi-year contracts signed in 2000 and the partial year impact of new
multi-year contracts signed in fiscal 2001. In fiscal
9
2001, the Company's instrument and linen sterilization services, endoscopic
services and management of sterile processing departments within hospitals
accounted for approximately 44%, 47% and 9%, respectively, of the Company's
revenues, compared to 50%, 41% and 9% in 2000. These sources of revenue reflect
the Company's stategy to provide a complete service offering to hospitals and
surgery centers.
Operating Expenses
Operating expenses increased $2,530,000 or 10.0% from $25,393,000 in
fiscal 2000 to $27,923,000 in fiscal 2001. This increase was principally the
result of additional volume, additional training of operations personnel and
higher depreciation expense.
Distribution Costs
Distribution costs decreased $152,000 or 8.6% from $1,768,000 in fiscal
2000 to $1,616,000 in fiscal 2001. The decrease in distribution costs from
reprocessing facilities resulted from more efficient route planning and the
reduction in use of third party transport services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $909,000 from
$6,332,000 in 2000 to $5,423,000 in fiscal 2001. The decrease was primarily the
result of a reduction in commissioned based selling expense relating to the
Pilling Sales and Marketing Agreement. The Company expects the current level of
selling, general and administrative expenses to remain relatively stable during
2002.
Interest Expense
Interest expense increased by $3,000 from $1,838,000 in fiscal 2000 to
$1,841,000 in fiscal 2001. The increase is attributed to interest on existing
and additional borrowings from Teleflex used in connection with continued
capital spending on surgical instruments and linens to support the growth of the
hospital business, offset by a decrease in interest rates from a weighted
average of 10.5% in fiscal 2000 to a weighted average of 8.2% in fiscal 2001.
Write-down of Assets
Write-down of assets includes $234,000 carrying value of unrecoverable
equipment relating to an endoscopic contract and $358,000 for closure of the
Houston facility.
Net Income (Loss)
Net loss in fiscal 2001 was $2,125,000 an increase of $53,000 from net
loss of $2,072,000 in fiscal 2000. Diluted and basic loss per share in fiscal
2001 and 2000 was $0.11.
10
Results of Operations
2000 Compared with 1999
Revenues
Revenues increased $1,143,000, or 4%, from $30,792,000 in fiscal 1999 to
$31,935,000 in fiscal 2000. This increase is attributable to the partial year
impact of new multi-year instrument and linen sterilization contracts signed in
fiscal 2000, and the impact of 53 operating weeks in fiscal 2000 compared to 52
operating weeks in fiscal 1999.
Operating Expenses
Operating expenses increased $1,505,000 or 6% from $23,888,000 in fiscal
1999 to $25,393,000 in fiscal 2000. This increase was principally the result of
higher depreciation expense on fiscal 1999 and fiscal 2000 instrument and linen
purchases. These purchases were made to support new and expanded multi-year
signed contracts.
Distribution Costs
Distribution costs increased $321,000 or 22% from $1,447,000 in fiscal
1999 to $1,768,000 in fiscal 2000. The increase in distribution costs from
reprocessing facilities resulted from an increase in volumes delivered, extended
geographic delivery areas and an increase in fuel and maintenance costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $2,641,000 from
$3,691,000 in 1999 to $6,332,000 in fiscal 2000. The increase was primarily the
result of investments in sales force development and infrastructure. During
early 2000, sales personnel and management were added to implement the Company's
sales and marketing strategies with a focus on the areas surrounding existing
reprocessing facilities. Investments in internal infrastructure, including
upgrades to financial and operational computer systems, were made to service and
support revenue growth. The Company expects the current level of selling,
general and administrative expenses to remain relatively stable during 2001.
Interest Expense
Interest expense increased by $790,000 from $1,048,000 in fiscal 1999 to
$1,838,000 in fiscal 2000. The increase is attributed to interest on existing
and additional borrowings from Teleflex used in connection with continued
capital spending on surgical instruments and linens to support the growth of the
hospital business.
11
Net Income (Loss)
Net loss in fiscal 2000 was $2,072,000, a decrease of $2,593,000 from net
income of $521,000 in fiscal 1999.
Net (Loss) Income Applicable to Common Shareholders
Diluted earnings (loss) per share in fiscal 2000 represented a net loss
per share of $0.11, compared to net income per share of $0.03 in fiscal 1999.
Basic earnings (loss) per share in fiscal 2000 also represented a net loss per
share of $0.11, compared to net income per share of $0.03 in fiscal 1999.
Liquidity and Capital Resources
The Company generated cash flow from operations of $3,922,000 in fiscal
2001 compared to $1,575,000 in fiscal 2000. The increase in cash flow resulted
from a reduced loss before depreciation expense and a reduction in working
capital in relation to fiscal 2000.
Capital expenditures totaled $6,076,000 in 2001 compared with $7,534,000
in 2000. These purchases were principally surgical instruments and linen
products made to support the Company's new sales contracts entered into during
fiscal 2001 and fiscal 2000. In addition, approximately $1,100,000 was invested
in leasehold improvements at the Syosset, NY reprocessing and sterilization
facility.
The Company plans to purchase additional surgical instruments and linens,
as and if required to support the Company's growth objectives. The Company
believes that additional borrowing capacity under the existing loan agreement
with Teleflex and cash flows from operating activities will provide support for
these expenditures.
The Company had $376,000 in obligations under capital leases for equipment
and surgical instruments at December 30, 2001. In addition, the Company had
borrowings of $23,157,000 outstanding at December 30, 2001 under a $27,500,000
unsecured revolving loan agreement with Teleflex, its majority shareholder. The
additional borrowings under this agreement of $2,657,000 during fiscal 2001 were
used to support capital expenditures and net third party debt repayment of
$563,000. The outstanding principal on this credit facility is due and payable
on April 30, 2003. Interest under this agreement is payable at the prevailing
Prime rate of PNC Bank, plus 1.25 percent.
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 working capital requirements during 2002.
12
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 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 2002 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. 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
64% 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 its operations. Changes in such regulations could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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.
13
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
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information regarding the
individuals who are directors and executive officers as of March 11, 2002 and
the positions currently held by each such person with the Company.
Name Age Position
---- --- --------
Todd Riddell 42 Director, President, Chief Executive Officer
John J. Sickler (1) 60 Director, Chairman of the Board
Steven K. Chance (2) 56 Director, Secretary
D. Michael Deignan (2) 58 Director
Christopher E. Tihansky 37 Director
Michael S. Irwin 54 Vice President Off Site Operations
Paul A. D'Alesio 44 Treasurer, Chief Financial Officer
(1) Member of Compensation Committee
(2) Member of Audit Committee
Directors
Todd Riddell was elected a Director, President and Chief Executive Officer
on August 3, 2000. From March 1999 to August 2000 he was Senior Vice President
and from September 1999 to August 2000 he was Chief Operating Officer. From
July, 1997 to March 1999 he was Executive Vice President of SSI Surgical
Services, Inc. which was acquired by the Company, then Medical Sterilization,
Inc., in January 1999. For five years prior thereto he was Vice President of
Endoscopy Specialists, Incorporated ("ESI") which was acquired by the Company in
January 1999.
14
Steven K. Chance was elected a Director on January 8, 1999. He is and has
been since 1993 Vice President, Secretary and General Counsel of Teleflex.
D. Michael Deignan was elected President, Chief Operating Officer and
Director of the Company on September 8, 1995 and Chief Executive Officer on
December 31, 1995. He resigned as President and Chief Executive Officer on
January 8, 1999. Since January 6, 2000 he has been President and Chief Executive
Officer of Vasomedical, Inc., a provider of noninvasive vascular device and
therapies to treat angina.
John J. Sickler has been a Director since January 8, 1997. Since December
2000, he has been Vice Chairman of Teleflex. He is and has been since 1990 the
President of TFX, a subsidiary of Teleflex engaged in business development.
Christopher E. Tihansky was elected Director of the Company on September
19, 2001. Since April 1999, he has been Vice President Business Development of
Teleflex Medical Group, a business segment of Teleflex. From September 1995 to
April 1999 he was Senior Healthcare Analyst at Genesis Merchant Group, an
investment banking firm.
Executive Officers
Michael S. Irwin was elected Vice President-Off Site Operations on March
2, 1999. For two years prior to March 2, 1999 he was General Manager of
Sterilization Management Group ("SMG") which was acquired by SSI in August 1998.
SMG owned and managed five surgical instrument and linen reprocessing
facilities. From 1994 to 1997 he was a plant manager and division director of
operations for the Interwoven Division of Baxter Healthcare, Inc., a
manufacturer and distributor of medical supplies and equipment.
Paul A. D'Alesio was elected Treasurer and Chief Financial Officer on
March 2, 1999. For more than five years prior thereto he was Controller of Meyer
International, Inc., a holding company for distributors of building materials
and its subsidiaries.
15
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities (1)
Name and Principal Salary Bonus Underlying All Other
Position Year ($) ($) Options Compensation ($)
-------------------------------------------------------------------
Todd Riddell, 2001 200,000 7,500 150,000 3,236
Pres., CEO & Director 2000 179,231 15,000 2,688
1999 143,439 99,974 50,000 2,222
Michael S. Irwin, 2001 129,291 5,000 25,000 2,143
Vice-President 2000 125,000 10,000 1,927
1999 115,391 8,000 15,000 1,074
Paul A. D'Alesio, 2001 118,947 5,000 25,000 1,988
Treas. & CFO 2000 115,000 10,000 1,854
1999 89,779 -- 15,000 1,240
Craig Little, 2001 119,904 -- 25,000 1,916
Vice-President 2000 104,538 22,500 1,682
1999 83288 13,550 15,000 1,684
Raymond Taurasi,(2) 2001 100,362 12,000 --
Project Director 2000 93,743 10,000 --
1999 89,907 8,233 --
(1) Represents the Company's matching contributions to the 401K Plan.
(2) See "Severance Agreements".
Option Grants in Last Fiscal Year
Individual Grants
-------------------------------------
Number of Percent of
Securities Total Options Exercise
Underlying Granted to or Base Grant Date
Options Employees in Price Expiration Present
Name Granted (#) Fiscal Year ($/Sh) Date Value $ (1)
--------------------------------------------------------------------------
Todd Riddell 150,000 46.9% .44 3/8/11 37,290
Michael S. Irwin 25,000 7.8% .44 3/8/11 6,215
Paul A. D'Alesio 25,000 7.8% .44 3/8/11 6,215
(1) 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 2001; no
dividend yield; expected volatility of 90%; risk-free interest rate of
4.65% to 4.70%; and expected lives ranging from approximately 4.5 to 5
years. Weighted averages are used because of varying assumed exercise
dates.
16
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised in-the-money options
Options at Fiscal at Fiscal Year End
Year End(#) (#)(1)
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-----------------------------------------------------------------------------------------------
Todd Riddell 0 0 62,500 137,500 0 0
Michael S. Irwin 0 0 13,750 26,250 0 0
Paul A. D'Alesio 0 0 13,750 26,250 0 0
D. Michael Deignan 0 0 247,170 0 0 0
(1) Market value of underlying securities at year end minus the exercise price.
Severance Agreements
The Company has a severance agreement with Mr. Taurasi whose position was
eliminated on January 29, 2002. The agreement calls for payment of his base
salary and benefits for a period of three months ending April 23, 2002.
Compensation of Directors
Messrs. Deignan and Whittaker were the only Directors in 2001 who were not
employees of the Company or TFX. Mr. Whittaker resigned as Director in February
2001. Outside Directors are paid an annual fee of $3,000 plus a meeting fee of
$500.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 11, 2002, the beneficial
ownership of the Company's voting securities by (i) each person who, to the
knowledge of the Company, beneficially owned more than 5% of the Company's
voting securities outstanding at such date, (ii) each current Director of the
Company, (iii) each executive officer of the Company and (iv) all current
Directors and executive officers as a group:
17
Number of Shares Percentage of Total
Name and Address (1) Beneficially Owned (2) Voting Securities (3)
- -------------------- ---------------------- ---------------------
John J. Sickler (4) 17,970,720 85.61%
c/o TFX Equities Incorporated ("TFX")
630 West Germantown Pike
Suite 450
Plymouth Meeting, PA 19462
D. Michael Deignan (5) 310,470 1.57%
Steven K. Chance -- *
Christopher E. Tihansky -- *
Todd Riddell (6) 62,500 *
Michael S. Irwin (7) 23,750 *
Paul A. D'Alesio (8) 26,250 *
---------- ----------
All Executive Officers and Directors
as a group (9) ..................... 18,393,690 86.24%
- ----------
* Represents holdings of less than 1%
(1) Pursuant to the rules of the SEC, addresses are provided only for 5%
beneficial owners.
(2) Except as otherwise noted in the footnotes to this table, each person or
entity named in the table has sole voting and investment power with
respect to all shares shown as owned, based on information provided to the
Company by the persons and entities named in the table.
(3) Total Voting Securities are 19,491,216 shares of Common Stock. Pursuant to
the rules of the SEC, all outstanding options and warrants which are
exercisable within 60 days of March 11, 2001 ("Presently Exercisable
Securities") held by the relevant person or entity are included as
outstanding Total Voting Securities for purposes of determining that
person's or entity's Percentage of Total Voting Securities, but are not
included for purposes of determining any other person's or entity's
Percentage of Total Voting Securities.
(4) Consists of 16,470,720 shares of Common Stock and 1,500,000 Presently
Exercisable Securities held by TFX. Mr. Sickler is President of TFX and
has voting and investment power over the shares held by TFX. Mr. Sickler
disclaims beneficial ownership of the shares held by TFX.
(5) Consists of 63,300 shares of Common Stock owned and 247,170 Presently
Exercisable Securities.
(6) Consists of 62,500 Presently Exercisable Securities.
(7) Consists of 10,000 shares of Common Stock and 13,750 Presently Exercisable
Securities.
18
(8) Consists of 12,500 shares of Common Stock and 13,750 Presently Exercisable
Securities.
(9) Consists of 16,556,520 shares of Common Stock and 1,837,170 Presently
Exercisable Securities.
Item 13. Certain Relationships and Related Transactions
John J. Sickler, a Director of the Company, is Vice Chairman of Teleflex
and President of TFX, a subsidiary of Teleflex. TFX owns 84.5% of the
outstanding voting securities of SSI.
Steven K. Chance, a Director and Secretary of the Company, is Vice
President, Secretary and General Counsel of Teleflex.
Christopher E. Tihansky, a Director of the Company, is Vice President
Business Development of Teleflex Medical Group, a business segment of Teleflex.
Transactions with Management and Others
On January 11, 1999, the Company consummated a transaction, pursuant to
which it exchanged 13,400,000 shares of Common Stock and warrants to purchase an
aggregate of 1,500,000 shares of Common Stock for all of the issued and
outstanding shares of ESI and all of the issued and outstanding shares of Common
Stock and Preferred Stock, not already held by the Company, of SSI, a joint
venture with TFX.
In connection with the Company's January 1999 acquisition of ESI and SSI
from TFX, the Company assumed approximately $6,500,000 of financing from
Teleflex. In addition, the Company entered into a revolving credit facility with
Teleflex. The agreement as amended, provides the Company up to $27,500,000 of
unsecured financing. The outstanding principal on this credit facility is due
and payable on April 30, 2003. Interest under this agreement is payable at the
prevailing Prime rate of PNC Bank, plus 1.25 percent. Interest was charged on
the unpaid principal balance during 2001 and 2000 at a weighted average rate of
8.2% and 10.5%, respectively. Interest charged by TFX amounted to $1,777,000,
$1,684,000 and $649,000 for the years ended December 30, 2001, December 31, 2000
and December 26, 1999, respectively.
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 30, 2001, December 31, 2000 and
December 26, 1999, were approximately $772,000, $1,308,000, and $969,000,
respectively.
19
Teleflex charges the Company fees for legal, treasury, tax and other
financial services. Fees of $200,000 were charged for the year ended December
30, 2001.
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.
(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.
(10)(6) Revolving Loan Account Agreement dated December 29, 2000
between the Company and Teleflex Incorporated.
27.1 Financial Data Schedule
20
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 26, 2002 SSI SURGICAL SERVICES, INC.
By: /s/ Todd Riddell
---------------------------------
Name: Todd Riddell
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/ Todd Riddell President, Chief Executive Officer March 26, 2002
- ----------------------------- (principal executive)
Todd Riddell
/s/ Paul A. D'Alesio Treasurer, Chief Financial Officer March 26, 2002
- ----------------------------- (principal accounting officer)
Paul A. D'Alesio
/s/ John J. Sickler Director, Chairman of the Board March 26, 2002
- -----------------------------
John J. Sickler
/s/ Steven K. Chance Director and Secretary March 26, 2002
- -----------------------------
Steven K. Chance
/s/ D. Michael Deignan Director March 26, 2002
- -----------------------------
D. Michael Deignan
/s/ Christopher E. Tihansky Director March 26, 2002
- -----------------------------
Christopher E. Tihansky
21
SSI Surgical Services, Inc.
Index to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
Page
Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 30, 2001 and December 31, 2000 F-3
Consolidated Statements of Operations for the years ended December 30,
2001, December 31, 2000 and December 26, 1999 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 30, 2001, December 31, 2000 and December 26, 1999 F-5
Consolidated Statements of Cash Flows for the years ended December 30,
2001, December 31, 2000 and December 26, 1999 F-6
Notes to the Consolidated Financial Statements F-7
Report of Independent Accountants
To the Shareholders and 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 30, 2001 and December 31, 2000, and the
results of its operations and cash flows for the years ended December 30, 2001,
December 31, 2000 and December 26, 1999, in conformity with accounting
principles generally accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 1, 2002
SSI Surgical Services, Inc.
Consolidated Balance Sheets
December 30, 2001 and December 31, 2000
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Assets 2001 2000
Current assets:
Cash and cash equivalents $ 72 $ 71
Accounts receivable, net of allowance for doubtful accounts
of $567 and $470 6,794 7,831
Prepaid expenses and other assets 1,416 1,512
-------- --------
Total current assets 8,282 9,414
-------- --------
Property and equipment, net 23,412 22,795
Intangibles, net 4,637 5,043
Other assets 149 158
-------- --------
$ 36,480 $ 37,410
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,521 $ 3,481
Obligations under capital leases 346 465
-------- --------
Total current liabilities 2,867 3,946
-------- --------
Obligations under capital leases 30 474
Payable to affiliates 23,308 20,590
-------- --------
Total liabilities 26,205 25,010
-------- --------
Shareholders' equity:
Common stock, par value $.01 per share, authorized 30,000,000 shares,
issued and outstanding 19,491,216 shares 195 195
Additional paid-in capital 23,019 23,019
Accumulated deficit (12,939) (10,814)
-------- --------
Total shareholders' equity 10,275 12,400
-------- --------
Total liabilities and shareholders' equity $ 36,480 $ 37,410
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
SSI Surgical Services, Inc.
Consolidated Statements of Operations
For the Years Ended December 30, 2001, December 31, 2000 and
December 26, 1999
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
2001 2000 1999
Net revenues $ 33,911 $ 31,935 $ 30,792
------------ ------------ -----------
Cost and expenses:
Operating 27,923 25,393 23,888
Distribution 1,616 1,768 1,447
Selling, general and administrative 5,423 6,332 3,691
Other expenses:
Interest expense 1,841 1,838 1,048
Write-down of assets 592 -- --
------------ ------------ -----------
Total costs and expenses 37,395 35,331 30,074
------------ ------------ -----------
Income (loss) before income taxes (3,484) (3,396) 718
------------ ------------ -----------
Income taxes (1,359) (1,324) 197
------------ ------------ -----------
Net income (loss) applicable to common shareholders $ (2,125) $ (2,072) $ 521
============ ============ ===========
Earnings (loss) per common share - basic $ (.11) $ (.11) $ .03
============ ============ ===========
Earnings (loss) per common share - diluted $ (.11) $ (.11) $ .03
============ ============ ===========
Weighted average common shares 19,491,216 19,491,216 19,491,216
============ ============ ===========
Weighted average dilutive common shares 19,491,216 19,491,216 19,491,216
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
SSI Surgical Services, Inc.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 30, 2001, December 31, 2000 and December 26, 1999
- --------------------------------------------------------------------------------
(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, 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
Net loss for year (2,072) (2,072)
---------- ------- ---------- -------- ------- -------- -------
Balance at December 31, 2000 19,491,216 195 -- -- 23,019 (10,814) 12,400
Net loss for year (2,125) (2,125)
---------- ------- ---------- -------- ------- -------- -------
Balance at December 30, 2001 19,491,216 $ 195 -- -- $23,019 $(12,939) $10,275
========== ======= ========== ======== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
F-5
SSI Surgical Services, Inc.
Consolidated Statements of Cash Flow
For the Years Ended December 30, 2001, December 31, 2000 and
- --------------------------------------------------------------------------------
December 26, 1999
(Dollars in Thousands)
2001 2000 1999
Cash flows from operating activities:
Net income (loss) $(2,125) $(2,072) $ 521
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,373 4,376 3,346
Provision for doubtful accounts 120 120 166
Write-down of assets 492 -- --
Changes in operating assets and liabilities:
Accounts receivable 917 (481) (1,327)
Prepaid expenses and other assets 105 (387) (400)
Accounts payable and accrued liabilities (960) 19 (76)
------- ------- -------
Net cash provided by operating activities 3,922 1,575 2,230
------- ------- -------
Cash flows for investing activities:
Net purchase of property and equipment (6,076) (7,534) (5,656)
------- ------- -------
Net cash used in investing activities (6,076) (7,534) (5,656)
------- ------- -------
Cash flows from financing activities:
Net repayments of revolving line of credit -- -- (1,182)
Repayments of long-term debt -- -- (50)
Net repayments under capital lease obligations (563) (1,064) (877)
Net borrowings from affiliates 2,718 6,840 5,732
------- ------- -------
Net cash provided by financing activities 2,155 5,776 3,623
------- ------- -------
Increase/(decrease) in cash and cash equivalents 1 (183) 197
Cash and cash equivalents at beginning of period 71 254 57
======= ======= =======
Cash and cash equivalents at end of period $ 72 $ 71 $ 254
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-6
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(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 is being amortized to
expense over 15 years.
F-7
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(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
========
3. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year ends the last Sunday in December. There were 52
weeks in fiscal 2001, 53 weeks in fiscal 2000 and 52 weeks in fiscal 1999.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents.
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 are stated net
of accumulated amortization of $1,458 and $1,052 as of December 30, 2001
and December 31, 2000, respectively.
F-8
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
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
Basic earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share are 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
2001, 2000 and 1999 computations of diluted earnings per share 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.
For the fiscal years ended December 30, 2001 and December 31, 2000, 10
customers represented approximately 50% of the accounts receivable
balance. 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.
Following the Company's acquisition of SSI and ESI from TFX in January
1999, the Company's taxable income is 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.
F-9
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
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 2000 and 1999 financial statements have been
reclassified to conform with the 2001 presentation of the financial
statements.
New Accounting Pronouncements
On June 30, 2001, the Financial Accounting Standards Board (FASB) approved
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires all business combinations entered into subsequent to
June 30, 2001 to be accounted for using the purchase method of accounting.
Effective in the first quarter of 2002, SFAS No. 142 requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized but instead be tested for impairment on an annual basis. The
Company is still analyzing the effect of SFAS No. 142 on the financial
statements, including the required transitional impairment tests. Goodwill
amortization expense during the year ended December 30, 2001 was
approximately $406.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset
retirement obligations. Under SFAS 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises and
will be amortized to expense over the life of the asset. Management does
not believe that the impact of adopting SFAS No. 143 will have a material
effect on the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the
rules for accounting for the impairment or disposal of long-lived assets.
The new rules are effective for the Company on December 31, 2001.
Management does not believe that the impact of adopting SFAS No. 144 will
have a material effect on the Company's consolidated financial statements.
F-10
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
4. Prepaid Expenses and Other Assets
The composition of prepaids and other assets is as follows:
2001 2000
Consumables and supplies $1,245 $1,180
Receivables 16 29
Other 155 303
------ ------
Total $1,416 $1,512
====== ======
5. Property and Equipment
The composition of property and equipment is as follows:
2001 2000
Surgical instruments and gowns $ 26,627 $ 23,213
Containers 1,985 1,973
Machinery and equipment 4,728 5,606
Leasehold improvements 4,056 3,441
Furniture and fixtures 1,877 790
-------- --------
39,273 35,023
Accumulated depreciation and amortization (15,861) (12,228)
-------- --------
$ 23,412 $ 22,795
======== ========
Depreciation and amortization expense for the years ended December 30,
2001, December 31, 2000 and December 26, 1999 was $4,967, $3,970 and
$2,940, respectively.
The composition of assets recorded under capital leases is as follows:
2001 2000
Surgical instruments $ 2,174 $ 3,232
Machinery and equipment 685 685
Containers 335 335
------- -------
3,194 4,252
Accumulated amortization (1,538) (2,019)
------- -------
$ 1,656 $ 2,233
======= =======
F-11
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
6. Write-Down of Property and Equipment
In October 2001, equipment relating to a specific endoscopic contract was
deemed to be unrecoverable. The carrying amount of the equipment
written-off was $234. During the year, there was no revenue recorded on
the contract and depreciation expense of $238 relating to the abandoned
equipment was recorded in operating expenses.
In July 2000, the Houston facility was temporarily shutdown. The decision
was based on low sales volume and the ability to transfer sterilization
equipment from the Houston facility to other facilities, thus avoiding
additional capital expenditures. The facility was to be placed back into
service when a potentially significant instrument processing contract was
signed. This potential contract was not signed and in December 2001, the
decision was made not to place the facility back into service. The
carrying amount of leasehold improvements and equipment written-off was
$203 and $55, respectively. The Company is negotiating with several
parties to take over the leased facility. Based on the status of these
negotiations, the Company provided a reserve for remaining lease
obligation costs of $100, which was accrued at December 30, 2001 (total
obligation $267).
7. Accounts Payable and Accrued Expenses
The composition of accounts payable and accrued expenses is as follows:
2001 2000
Trade accounts payable $1,345 $2,098
Salary and other compensation benefits 405 563
Sales and other taxes 371 356
Professional fees 162 147
Lease obligations 100 --
Other 138 317
------ ------
Total $2,521 $3,481
====== ======
8. 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 fiscal year 1999, 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 30, 2001, December 31, 2000 and December 26,
1999 were approximately $87, $105 and $81, respectively.
F-12
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
9. Income Taxes
The provision for income taxes for the years ended December 30, 2001,
December 31, 2000 and December 26, 1999, consisted of the following:
2001 2000 1999
Current:
Federal $(1,220) $(1,189) $176
State (139) (135) 21
------- ------- ----
$(1,359) $(1,324) $197
======= ======= ====
Reconciliation between the statutory income tax rate and effective tax
rate is summarized below:
2001 2000 1999
Expected federal statutory tax rate (benefit) (35)% (35)% 35%
State and local taxes, net (4)% (4)% 4%
Limitation (utilization) of net operating losses -- -- (12)%
--- --- ---
Effective tax rate (39)% (39)% 27%
=== === ===
Following the Company's acquisition of SSI and ESI from TFX in January
1999, the Company's taxable income is 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 carryforwards generated by the Company prior
to the 1999 acquisitions of approximately $9 million 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.
The Company's federal net operating loss carryforwards will expire in
varying amounts from 2001 through 2013.
F-13
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
10. Obligations Under Capital Leases
Future minimum payments as of December 30, 2001 under capital leases for
property and equipment, including surgical instruments, are as follows:
2002 $361
2003 31
----
Total minimum lease payments 392
Less amount representing interest 16
----
Present value of minimum lease payment 376
Less current portion 346
----
$ 30
====
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 was convertible at the option of the
holder into Common Stock or cash, at $2.00 per share maturing December 31,
1999. Dividends accrued on the Series B Convertible Preferred Stock at the
rate of 8% per year. These dividends were paid in cash or accrued at the
option of the Company. If not paid, accrued dividends were 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.
The Series C Convertible Preferred Stock was 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 were no dividends
payable nor accrued on the Series C Convertible Preferred Stock. In
January 2000, TFX converted the Series C Convertible Preferred Stock into
1,945,625 shares of Common Stock.
In January 1999, the Company increased the number of shares of authorized
Common Stock, par value $.01 per share from 10,000,000 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 31,
2001, the Company had aggregate warrants outstanding to purchase 1,500,000
shares of Common Stock at a price between $1.38 and $2.00 per share with
expiration dates through December 2005.
F-14
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
13. Stock Option Plans
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. On February 24, 2000, the Board of Directors
authorized 500,000 shares of common stock to be issued under the 2000
Stock Plan, which was approved by shareholders on May 22, 2000.
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 30, 2001, Incentive
Stock Options for an aggregate of 356,170 shares of Common Stock at
exercise prices ranging from $0.26 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 30, 2001, Non-Qualified Stock
Options for an aggregate of 885,000 shares of Common Stock at exercise
prices ranging from $0.44 to $1.50 were outstanding.
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 30,
2001, December 31, 2000 and December 26, 1999 would have been:
2001 2000 1999
Net income (loss) attributable to common
shareholders as reported $(2,125) $(2,072) $521
Pro forma income (loss) $(2,199) $(2,086) $400
Earnings per Common share as reported - Diluted $ (.11) $ (.11) $.02
Pro forma Earnings per share - Diluted $ (.11) $ (.11) $.02
F-15
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
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 2001, 2000 and
1999, 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.
A summary of the status of the Company's stock option plans as of December
30, 2001 and December 31, 2000 and changes during the years ended on those
dates is presented below.
2001 2000
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Outstanding at beginning of year 1,015,670 $0.83 1,129,670 $0.85
Granted 320,000 0.43 452,500 1.43
Exercised -- -- -- --
Canceled/Expired 94,500 0.77 (566,500) 1.36
---------- ----------
Outstanding at end of year 1,241,170 0.73 1,015,670 0.83
========== ==========
Options exercisable at end of year 850,045 817,170
========== ==========
Weighted average fair value of
options granted during the year $ 0.25 $ 0.52
The following table summarizes information about stock options outstanding
at December 30, 2001:
Weighted
Average Weighted
Remaining Average
Options Contractual Options Exercise
Outstanding Life Exercisable Prices
300,000 9 -- $0.43
116,000 8 56,750 0.69
608,000 3 608,000 0.74
187,170 6 89,670 1.09
30,000 5 30,000 1.50
--------- -------
1,241,170 850,045
F-16
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(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
certain of the Company's services. Pilling Surgical (Pilling), a national
surgical instrument manufacturer and a subsidiary of Teleflex, has agreed
to supply surgical instruments to the Company. Purchases from Pilling are
made on commercial terms. Instrument purchases from Pilling for the years
ended December 30, 2001, December 31, 2000 and December 26, 1999, were
approximately $772, $1,308, and $969, respectively.
Effective April 12, 2001, the Company entered into a Sales and Marketing
Agreement with Pilling. Under the terms of the agreement, Pilling is
granted the sole and exclusive right to market the Company's comprehensive
line of surgical support services to hospitals and ambulatory centers
throughout the United States. The term of the agreement is for three years
ending on April 30, 2004 and provides for early termination in the event
billed sales of services from Pilling generated contracts during any
calendar year do not exceed amounts specified in the agreement. During
each calendar year, the Company will pay Pilling a fee on billed sales
from contracts signed in that calendar year. In the year ended December
30, 2001, Pilling earned fees totaling $138.
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 entered into a revolving credit
facility with Teleflex. The agreement as amended, provides the Company up
to $27,500 of unsecured financing. The outstanding principal on this
credit facility is due and payable on April 30, 2003. Interest under this
agreement is payable at the prevailing Prime rate of PNC Bank, plus 1.25
percent. Interest was charged on the unpaid principal balance during 2001
and 2000 at a weighted average rate of 8.2% and 10.5%, respectively and at
a fixed rate of 8% during 1999. Interest charged by TFX amounted to
$1,777, $1,684 and $649 for the years ended December 30, 2001, December
31, 2000 and December 26, 1999, respectively.
Teleflex also charged the Company fees for executive management, legal,
treasury, tax and other financial services. Fees of $200 were charged for
the year ended December 30, 2001 and fees of $350 were charged for each of
the years ended December 31, 2000 and December 26, 1999, respectively.
See Notes 8 and 10 for other related party transactions.
F-17
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
15. Commitments and Contingencies:
Minimum annual rental commitments for non-cancelable operating leases,
principally for the Company's off-site sterilization facilities, at
December 30, 2001 are as follows:
2002 $ 2,082
2003 1,428
2004 1,241
2005 1,210
2006 1,150
Thereafter 3,323
-------
$10,434
=======
Rent expense, net of sublease income of approximately $195, $263 and $293,
was approximately $1,924, $1,564 and $1,521 for the years ended December
30, 2001, December 31, 2000 and December 26, 1999, respectively.
The Company is subject to a variety of claims and suits that arise from
time to time out of the ordinary course of its business. The Company does
not believe that these actions will have a material impact on the
Company's business, financial condition or results of operations.
16. Joint Venture Agreement
Effective September 7, 2001, the Company entered into a Joint Venture
Agreement with World Healthcare Systems (WHS). Under the terms of the
agreement, the Company and WHS formed a joint venture, World SSI LLC,
majority owned by WHS. World SSI will sell and market the Company's
comprehensive line of off-site surgical support services to hospitals and
ambulatory surgery centers. As part of the joint venture arrangement,
World SSI will, subject to certain performance criteria, acquire the
Company's existing Off-Site facilities through which SSI currently carries
on its Off-Site business.
F-18