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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 29, 2002
[_] 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. [_]
Indicate by check mark whether the registrant is an accelerated filer
[as defined in Rule 12b-2 of the Act]. [ ] Yes [X] No
The aggregate market value of Common Stock of the registrant
held by non-affiliates of the registrant (2,914,696) on June 28, 2002 (the
last business day of the registrant's most recently completed fiscal second
quarter) was approximately $888,982. The aggregate market value was computed
based on the average bid and asked price of the registrant's Common Stock on
such date as reported on the Nasdaq Bulletin Board System.
The registrant had 19,491,216 Common Shares outstanding as of June 28,
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 four 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 with several on-site service
offerings that include: instrument processing, consulting, department
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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. 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 10, 2003, the Company provides services to a customer base
of approximately 151 hospitals and ambulatory surgi-centers. For the fiscal year
ended December 29, 2002, one customer accounted for 10% or more of the Company's
total revenues and 14 customers represented approximately 51% 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
Surgical (Pilling), 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.
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 29, 2002, the Company had 399 full-time and 18 part-time
employees, none of which were covered by any collective bargaining agreement.
The Company considers its employee relations to be good.
In February of 2003, 10 employees in a certain employee group elected
to join the United Food and Commercial Workers Local 338. As of March 10, 2003,
a collective bargaining agreement has not been negotiated.
6
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.
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
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 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 29, 2002.
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 10, 2003 was 245.
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
2003 (through March 10, 2003):
2003 High Bid Low Bid
------------------------------------------------------------
First Quarter (through March 10, 2003) $0.24 $0.22
2002
----
Fourth Quarter 0.25 0.10
Third Quarter 0.28 0.21
Second Quarter 0.32 0.21
First Quarter 0.33 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
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.
8
Item 6. Selected Financial Data
- -------------------------------
Five-Year Statistical Summary
(Dollars and shares in thousands, except per share) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Income Statement Information
Revenues 34,872 33,911 31,935 30,792 7,560
Income (loss) from operations (732) (1,643) (1,558) 1,766 (874)
Interest expense 1,538 1,841 1,838 1,048 428
Income (loss) before income taxes (2,270) (3,484) (3,396) 718 (1,302)
Income taxes (886) (1,359) (1,324) 197 -
Net income (1,384) (2,125) (2,072) 521 (1,302)
- -----------------------------------------------------------------------------------------------------------
Financial Position and Cash Flow Information
Total Assets 37,830 36,480 37,410 33,687 8,751
Capital expenditures 6,527 6,076 7,534 5,656 1,809
Depreciation and amortization 5,388 5,373 4,376 3,346 705
Long-term borrowings 26,544 23,338 21,064 14,834 4,303
Shareholders' equity 8,891 10,275 12,400 14,472 280
- -----------------------------------------------------------------------------------------------------------
Per Share Information
Basic earnings per share (0.07) (0.11) (0.11) 0.03 (0.46)
Diluted earnings per share (0.07) (0.11) (0.11) 0.03 (0.46)
Cash dividends declared - - - - (168)
Average common shares outstanding 19,491 19,491 19,491 19,491 3,170
Average shares, assuming dilution 19,491 19,491 19,491 19,491 3,170
- -----------------------------------------------------------------------------------------------------------
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:
9
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. The Company adopted
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
2002 Compared with 2001
- -----------------------
Revenues
- --------
Revenues increased $961,000, or 2.8%, from $33,911,000 in fiscal 2001
to $34,872,000 in fiscal 2002. Revenue increases from endoscopic services were
attributable to the full year impact of multi-year contracts signed in 2001 and
the partial year impact of new multi-year contracts signed in fiscal 2002. This
revenue growth was partially offset by a reduction in instrument and linen
sterilization services revenue resulting from the unanticipated loss of several
customers and the closure of the Tampa facility. In fiscal 2002, the Company's
endoscopic services, instrument and linen sterilization services and management
of sterile processing departments within hospitals accounted for approximately
51%, 39% and 10%, respectively, of the Company's revenues, compared to 47%, 44%
and 9% in 2001. These sources of revenue reflect the Company's strategy to
provide a complete service offering to hospitals and surgery centers.
Operating Expenses
- ------------------
Operating expenses increased $1,388,000 or 5.0% from $27,923,000 in
fiscal 2001 to $29,311,000 in fiscal 2002. This increase was principally the
result of additional volume, increased employee benefit costs and higher
depreciation expense.
10
Distribution Costs
- ------------------
Distribution costs decreased $197,000 or 12.2% from $1,616,000 in
fiscal 2001 to $1,419,000 in fiscal 2002. The decrease in distribution costs
from reprocessing facilities resulted from more efficient route planning and the
closure of the Tampa facility.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $897,000 from
$5,423,000 in 2001 to $4,526,000 in fiscal 2002. The decrease was primarily the
result of a reduction in provision for doubtful accounts expense and legal
expense. The Company expects the current level of selling, general and
administrative expenses to remain relatively stable during 2003.
Interest Expense
- ----------------
Interest expense decreased by $303,000 from $1,841,000 in fiscal 2001
to $1,538,000 in fiscal 2002. The decrease is attributed to a reduction in
interest rates on borrowings from Teleflex from a weighted average of 8.2% in
fiscal 2001 to a weighted average of 5.9% in fiscal 2002 offset by additional
borrowings from Teleflex used in connection with continued capital spending on
surgical instruments and linens to support the growth of the hospital business.
Write-down of Assets
- --------------------
Write-down of assets includes $348,000 relating to the closure of the
Tampa facility.
Net Income (Loss)
- -----------------
Net loss in fiscal 2002 was $1,384,000 a decrease of $741,000 from a
net loss of $2,125,000 in fiscal 2001. Diluted and basic loss per share in
fiscal 2002 and 2001 was $0.07 and $0.11, respectively.
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 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
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2000. These sources of revenue reflect the Company's strategy 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 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.
12
Liquidity and Capital Resources
The Company generated cash flow from operations of $3,592,000 in fiscal
2002 compared to $3,922,000 in fiscal 2001. The decrease in cash flow resulted
from an increase in working capital in relation to fiscal 2001.
Capital expenditures totaled $6,527,000 in 2002 compared with
$6,076,000 in 2001. These purchases were principally surgical instruments and
linen products made to support the Company's new sales contracts entered into
during fiscal 2002 and fiscal 2001.
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 $30,000 in obligations under capital leases for
equipment and surgical instruments at December 29, 2002. In addition, the
Company had borrowings of $26,431,000 outstanding at December 29, 2002 under a
$27,500,000 unsecured revolving loan agreement with Teleflex, its majority
shareholder. The additional borrowings under this agreement of $3,274,000 during
fiscal 2002 were used to support capital expenditures and net third party debt
repayment of $344,000. The outstanding principal on this credit facility is due
and payable on April 30, 2004. 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 2003.
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.
Such forward-looking statements include matters such as the suitability of the
Company's facilities and equipment for future operations, the availability of
additional facilities and equipment in the future, and the sufficiency of funds
for the Company's working capital requirements during 2003. 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.
13
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
61% 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.
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
--------------------
None
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 10, 2003 and
the positions currently held by each such person with the Company.
14
Name Age Position
---- --- --------
Todd Riddell 43 Director, President, Chief Executive Officer
John J. Sickler (1) 61 Director, Chairman of the Board
Steven K. Chance (2) 57 Director, Secretary
D. Michael Deignan (2) 59 Director
Christopher E. Tihansky 38 Director
Michael S. Irwin 55 Vice President Off Site Operations
Paul A. D'Alesio 45 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.
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 November 1, 2002 he has been retained as a consultant
with Vasomedical, Inc., a provider of noninvasive vascular device and therapies
to treat angina. From January 6, 2000 to October 31, 2002 he was President and
Chief Executive Officer of Vasomedical, Inc.
John J. Sickler has been a Director since January 8, 1997. Since
December 2000, he has been Vice Chairman of Teleflex and Chairman - Teleflex
Medical Group. From 1990 to 2000, he was President of TFX, a subsidiary of
Teleflex engaged in business development. He is a director of Penn Engineering
and Manufacturing Corp and Microlog Corporation.
Christopher E. Tihansky was elected Director of the Company on
September 19, 2001. Since January 2003, he has been Vice President Surgical,
Teleflex Medical North America, a business segment of Teleflex. From April 1999
to December 2002 he was Vice President Business Development of Teleflex Medical
Group. From September 1995 to April 1999 he was Senior Healthcare Analyst at
Genesis Merchant Group, an investment banking firm.
15
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.
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, 2002 200,000 7,500 3,241
Pres., CEO & Director 2001 200,000 7,500 150,000 3,236
2000 179,231 15,000 2,688
Michael S. Irwin, 2002 129,375 5,000 2,144
Vice-President 2001 129,291 5,000 25,000 2,143
2000 125,000 10,000 1,927
Paul A. D'Alesio, 2002 120,742 5,000 2,015
Treas. & CFO 2001 118,947 5,000 25,000 1,988
2000 115,000 10,000 1,854
Craig Little, 2002 134,423 - 2,214
Vice-President 2001 119,904 - 25,000 1,916
2000 104,538 22,500 1,682
(1) Represents the Company's matching contributions to the 401K Plan.
16
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 $
- ---- ----------- ------------- --------- ---------- ----------
NONE
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 0 112,500 87,500 0 0
Michael S. Irwin 0 0 23,750 16,250 0 0
Paul A. D'Alesio 0 0 23,750 16,250 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.
Compensation of Directors
-------------------------
Mr. Deignan was the only Director in 2002 who was not an employee of
the Company, Teleflex or TFX. 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 10, 2003, 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) 112,500 *
Michael S. Irwin (7) 43,750 *
Paul A. D'Alesio (8) 46,250 *
--------- -----
All Executive Officers and Directors
as a group (9) ........................... 18,483,690 86.38%
- ----------
* 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 10, 2003 ("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.
18
(4) Consists of 16,470,720 shares of Common Stock and 1,500,000 Presently
Exercisable Securities held by TFX. Mr. Sickler 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 112,500 Presently Exercisable Securities.
(7) Consists of 20,000 shares of Common Stock and 23,750 Presently
Exercisable Securities.
(8) Consists of 22,500 shares of Common Stock and 23,750 Presently
Exercisable Securities.
(9) Consists of 16,576,520 shares of Common Stock and 1,907,170 Presently
Exercisable Securities.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
John J. Sickler, a Director of the Company, is Vice Chairman of
Teleflex. TFX, a subsidiary of Teleflex, 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
Surgical, Teleflex Medical North America, a business segment of Teleflex.
Transactions with Management and Others
- ---------------------------------------
The Company has 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, 2004. 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 2002, 2001 and 2000 at a weighted average rate of 5.9%,
8.2% and 10.5%, respectively. Interest charged by TFX amounted to $1,525,000,
$1,777,000 and $1,684,000 for the years ended December 29, 2002, December 30,
2001 and December 31, 2000, 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 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
29, 2002,
19
December 30, 2001 and December 31, 2000, were approximately $937,000, $772,000,
and $1,308,000, 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 years ended December 29, 2002 and December 30, 2001, the Company incurred
expenses for fees due to Pilling totaling $175,000 and $138,000, respectively.
Teleflex charges the Company fees for legal, treasury, tax and other
financial services. Fees of $200,000 were charged for the year ended December
29, 2002.
Item 14. Controls and Procedures
- --------------------------------
As of a date within 90 days prior to the date of the filing of this report,
our Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures, which
included inquiries made to certain other of our employees. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures are effective and
sufficient to ensure that we record, process, summarize, and report information
required to be disclosed by us in our periodic reports filed under the
Securities Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms. Subsequent to the date of their
evaluation, there have not been any significant changes in our internal controls
or in other factors that could significantly affect these controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses
Item 15. 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.
20
(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.
(10)(5) Revolving Loan Account Agreement dated December 26,
1999 between the Company and Teleflex Incorporated - filed as Exhibit
(10)(5) to the Annual Report for the year ended December 26, 1999 on
Form 10-K and incorporated herein by reference.
(10)(6) Revolving Loan Account Agreement dated December 29,
2000 between the Company and Teleflex Incorporated - filed as Exhibit
(10)(6) to the Annual Report for the year ended December 31, 2000 on
Form 10-K and incorporated herein by reference.
21
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, 2003 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, 2003
- ---------------------------- (principal executive)
Todd Riddell
/s/ Paul A. D'Alesio Treasurer, Chief Financial Officer March 26, 2003
- ---------------------------- (principal accounting officer)
Paul A. D'Alesio
/s/ John J. Sickler Director, Chairman of the Board March 26, 2003
- ----------------------------
John J. Sickler
/s/ Steven K. Chance Director and Secretary March 26, 2003
- ----------------------------
Steven K. Chance
/s/ D. Michael Deignan Director March 26, 2003
- ----------------------------
D. Michael Deignan
/s/ Christopher E. Tihansky Director March 26, 2003
- ----------------------------
Christopher E. Tihansky
22
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------
I, Todd Riddell, Chief Executive Officer and President of SSI Surgical Services,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of SSI Surgical Services,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Todd Riddell
- -------------------------------------
Chief Executive Officer and President
23
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Paul A. D'Alesio, Chief Financial Officer and Treasurer of SSI Surgical
Services, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of SSI Surgical Services,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Paul A. D'Alesio
- -------------------------------------
Chief Financial Officer and Treasurer
24
SSI SURGICAL SERVICES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
PAGE
----
Financial Statements:
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 29, 2002 and December 30, 2001 F-2
Consolidated Statements of Operations for the years ended December 29, 2002,
December 30, 2001 and December 31, 2000 F-3
Consolidated Statements of Shareholders' Equity for the years ended
December 29, 2002, December 30, 2001 and December 31, 2000 F-4
Consolidated Statements of Cash Flows for the years ended December 29, 2002,
December 30, 2001 and December 31, 2000 F-5
Notes to the Consolidated Financial Statements F-6
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 29, 2002 and December 30, 2001, and the
results of its operations and cash flows for the years ended December 29, 2002,
December 30, 2001 and December 31, 2000, 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.
As discussed in Note 2 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangibles" effective December 31, 2001.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 28, 2003
SSI SURGICAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 2002 AND DECEMBER 30, 2001
- --------------------------------------------------------------------------------
(Dollars in Thousands)
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 29 $ 72
Accounts receivable, net of allowance for doubtful accounts
of $415 and $567 6,912 6,794
Prepaid expenses and other assets 1,919 1,416
--------------- ---------------
Total current assets 8,860 8,282
--------------- ---------------
Property and equipment, net 24,203 23,412
Intangibles, net 4,637 4,637
Other assets 130 149
--------------- ---------------
$ 37,830 $ 36,480
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,365 $ 2,521
Obligations under capital leases 30 346
--------------- ---------------
Total current liabilities 2,395 2,867
Obligations under capital leases - 30
Payable to affiliates 26,544 23,308
--------------- ---------------
Total liabilities 28,939 26,205
--------------- ---------------
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 (14,323) (12,939)
--------------- ---------------
Total shareholders' equity 8,891 10,275
--------------- ---------------
Total liabilities and shareholders' equity $ 37,830 $ 36,480
=============== ===============
The accompanying notes are an integral part of these financial statements.
F-2
SSI SURGICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 29, 2002,
DECEMBER 30, 2001 AND DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
2002 2001 2000
------------ ------------ ------------
Net revenues $ 34,872 $ 33,911 $ 31,935
------------ ------------ ------------
Cost and expenses:
Operating 29,311 27,923 25,393
Distribution 1,419 1,616 1,768
Selling, general and administrative 4,526 5,423 6,332
Other expenses:
Interest expense 1,538 1,841 1,838
Write-down of assets 348 592 -
------------ ------------ ------------
Total costs and expenses 37,142 37,395 35,331
------------ ------------ ------------
Income (loss) before income taxes (2,270) (3,484) (3,396)
------------ ------------ ------------
Income taxes 886 1,359 1,324
------------ ------------ ------------
Net income (loss) applicable
to common shareholders $ (1,384) $ (2,125) $ (2,072)
============ ============ ============
Earnings (loss) per common share - basic $ (.07) $ (.11) $ (.11)
============ ============ ============
Earnings (loss) per common share - diluted $ (.07) $ (.11) $ (.11)
============ ============ ============
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-3
SSI SURGICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 29, 2002,
DECEMBER 30, 2001 AND DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------- ------------ ------------ ------------- -----------
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
Net loss for year (1,384) (1,384)
------------ ------------ ------------ ------------ ------------
Balance at December 29, 2002 19,491,216 $ 195 $ 23,019 $ (14,323) $ 8,891
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
SSI SURGICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 29, 2002,
DECEMBER 30, 2001 AND DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(Dollars in Thousands)
2002 2001 2000
----------- ------------ -----------
Cash flows from operating activities:
Net income (loss) $ (1,384) $ (2,125) $ (2,072)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,388 5,373 4,376
Provision for doubtful accounts - 120 120
Write-down of assets 348 492 -
Changes in operating assets and liabilities:
Accounts receivable (118) 917 (481)
Prepaid expenses and other assets (484) 105 (387)
Accounts payable and accrued liabilities (158) (960) 19
------------ ------------ ------------
Net cash provided by operating
activities 3,592 3,922 1,575
------------ ------------ ------------
Cash flows for investing activities:
Net purchase of property and equipment (6,527) (6,076) (7,534)
------------ ------------ ------------
Net cash used in investing activities (6,527) (6,076) (7,534)
------------ ------------ ------------
Cash flows from financing activities:
Net repayments under capital lease obligations (344) (563) (1,064)
Net borrowings from affiliates 3,236 2,718 6,840
------------ ------------ ------------
Net cash provided by financing
activities 2,892 2,155 5,776
------------ ------------ ------------
Increase/(decrease) in cash and cash equivalents (43) 1 (183)
Cash and cash equivalents at beginning of period 72 71 254
------------ ------------ ------------
Cash and cash equivalents at end of period $ 29 $ 72 $ 71
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(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. 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.
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. Teleflex will provide the financial support, under a revolving
credit facility, necessary for the Company to continue its current operations.
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends the last Sunday in December. There were 52 weeks
in fiscal 2002 and fiscal 2001 and 53 weeks in fiscal 2000.
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
On December 31, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS), No. 142, "Goodwill and Other Intangible Assets", which
requires that goodwill and indefinite-lived intangible assets no longer be
amortized, but are subject to impairment testing at least annually.
F-6
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
The Company completed its initial impairment review during the first quarter and
concluded a transitional impairment charge from the adoption of the standard
would not be required. The Company completed its annual impairment review in the
fourth quarter and concluded an impairment charge would not be required.
Amortization expense of $406,000 (pretax) and $248,000 (after-tax) was recorded
in the years ended December 30, 2001 and December 31, 2000 for such assets. A
reconciliation of reported net income to adjusted net income and adjusted
earnings per share amounts for the twelve months ended December 29, 2002,
December 30, 2001 and December 31, 2000 are as follows:
TWELVE MONTHS ENDED
--------------------------------------------
DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
------------- ------------- ------------
Reported net income (loss) $ (1,384) $ (2,125) $ (2,072)
Add back: Goodwill amortization - 248 248
------------ ------------ ------------
Adjusted net income (loss) $ (1,384) $ (1,897) $ (1,824)
============ ============ ============
Reported basic and diluted earnings
(loss) per share $ (.07) $ (.11) $ (.11)
Add back: Goodwill amortization - .01 .01
------------ ------------ ------------
$ (.07) $ (.10) $ (.10)
============ ============ ============
Intangible assets consist principally of goodwill, which is the excess purchase
price over the fair value of the assets of businesses acquired. Intangibles are
stated net of accumulated amortization of $1,458 as of December 29, 2002 and
December 30, 2001.
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
dilative securities have been excluded from the 2002, 2001 and 2000 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.
F-7
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
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 year ended December 29, 2002, 14 customers represented
approximately 51% of the accounts receivable balance. For the fiscal year ended
December 30, 2001, 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 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.
STOCK-BASED COMPENSATION
The Company applies the disclosure-only provisions of SFAS 123 and SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment to FASB Statement No. 123," 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 29, 2002, December
30, 2001 and December 31, 2000 would have been:
2002 2001 2000
----------- ----------- ----------
Net income (loss) attributable to common
shareholders as reported $ (1,384) $(2,125) $ (2,072)
Pro forma income (loss) $ (1,384) $(2,199) $ (2,086)
Earnings per common share as reported - Diluted $ (.07) $ (.11) $ (.11)
Pro forma earnings per share - Diluted $ (.07) $ (.11) $ (.11)
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 and 2000, 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-8
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
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.
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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No 13, and Technical Corrections as of April 2002" (SFAS 145)
In May 2002, the FASB issued SFAS 145 which, among other things, rescinds
various pronouncements regarding early extinguishment of debt. It allows
extraordinary accounting treatment for early extinguishment of debt only when
the provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," are met. SFAS 145 provisions regarding early extinguishment of
debt are generally effective for fiscal years beginning after May 15, 2002.
Management does not believe that the impact of adopting SFAS 145 will have a
material effect on the Company's consolidated financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146)
In July 2002, the FASB issued SFAS 146 which addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities. These activities include
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS 146 also includes (1) costs related to
terminating a contract that is not a capital lease and (2) termination benefits
that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS 146 will be effective for exit
or disposal activities that are initiated after December 30, 2002, with earlier
adoption encouraged. The Company adopted this statement effective January 1,
2003. Management does not believe that the impact of adopting SFAS 146 will have
a material effect on the Company's consolidated financial statements.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123" (SFAS 148)
In December 2002, the FASB issued SFAS 148, which amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of
F-9
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
accounting for stock-based employee compensation. It also amends the disclosure
provisions of SFAS 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. It also amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. Management does not believe that the impact of adopting
SFAS 148 will have a material effect on the Company's consolidated financial
statements.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others"
(FIN 45)
In November 2002, the FASB issued FIN 45 which elaborates on the disclosures to
be made by a guarantor about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for financial statements for periods ending after December 15, 2002.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has adopted the disclosure requirements of FIN 45
for the fiscal year ended December 29, 2002 and has adopted the initial
recognition and measurement provisions for any guarantees issued or modified
starting December 30, 2002. The Company has determined that it does not have any
"Guarantees, Including Indirect Guarantees of Indebtedness of Others".
Therefore, no disclosure is required for the fiscal year ended December 29, 2002
and the adoption of the initial recognition provisions of FIN 46 is not expected
to have a material impact on the Company's financial position, results of
operations, or cash flows.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46)
In January 2003, the FASB issued FIN 46 which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The disclosure requirements of FIN 46 are effective
for financial statements issued after January 31, 2003. The initial recognition
provisions of FIN 46 are applicable immediately to new variable interests in
variable interest entities created after January 31, 2003. For a variable
interest in a variable interest entity created before February 1, 2003, the
initial recognition provisions of FIN 46 are to be implemented no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. The Company has determined that it does not have any variable
interests in any variable interest entities. Therefore, no disclosure is
required for the fiscal year ended December 29, 2002 and the adoption of the
initial recognition provisions of FIN 46 is not expected to have a material
impact on the Company's financial position, results of operations, or cash
flows.
F-10
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
3. PREPAID EXPENSES AND OTHER ASSETS
The composition of prepaids and other assets is as follows:
2002 2001
---------- --------
Consumables and supplies $ 1,513 $ 1,245
Receivables 237 16
Other 169 155
-------- --------
Total $ 1,919 $ 1,416
======== ========
4. PROPERTY AND EQUIPMENT
The composition of property and equipment is as follows:
2002 2001
--------- ---------
Surgical instruments and gowns $ 31,614 $ 26,627
Containers 2,126 1,985
Machinery and equipment 4,800 4,728
Leasehold improvements 3,714 4,056
Furniture and fixtures 2,005 1,877
--------- ---------
44,259 39,273
Accumulated depreciation and amortization (20,056) (15,861)
--------- ---------
$ 24,203 $ 23,412
========= =========
Depreciation and amortization expense for the years ended December 29, 2002,
December 30, 2001 and December 31, 2000 was $5,388, $4,967 and $3,970,
respectively.
F-11
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
The composition of assets recorded under capital leases is as follows:
2002 2001
---------- ----------
Surgical instruments $ 355 $ 2,174
Machinery and equipment 99 685
Containers 49 335
------- ---------
503 3,194
Accumulated amortization (278) (1,538)
------- ---------
$ 225 $ 1,656
======= =========
5. WRITE-DOWN OF PROPERTY AND EQUIPMENT
In November 2002, the Tampa facility was shutdown. The decision was based on low
sales volume and the additional capital expenditures that would have been
required to outfit the facility for instrument processing. The carrying amount
of leasehold improvements and equipment written-off was $207 and $140,
respectively. Remaining severance costs of $60 related to the closure were
accrued at December 29, 2002.
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 was unable to
sublease the facility during 2002 and has provided an additional reserve for
remaining lease obligation costs of $81, which was accrued at December 29, 2002
(total obligation $181).
F-12
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The composition of accounts payable and accrued expenses is as follows:
2002 2001
-------- ---------
Trade accounts payable $ 964 $ 1,345
Salary and other compensation benefits 561 405
Sales and other taxes 320 371
Professional fees 162 162
Lease obligations 181 100
Severance costs 60 -
Other 117 138
-------- --------
Total $ 2,365 $ 2,521
======== ========
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 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 29, 2002,
December 30, 2001 and December 31, 2000 were approximately $93, $87 and $105,
respectively.
8. INCOME TAXES
The provision for income taxes for the years ended December 29, 2002, December
30, 2001 and December 31, 2000, consisted of the following:
2002 2001 2000
-------- -------- --------
Current:
Federal $ (795) $ (1,220) $ (1,189)
State (91) (139) (135)
------- -------- --------
$ (886) $ (1,359) $ (1,324)
======= ======== ========
F-13
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
Reconciliation between the statutory income tax rate and effective tax rate is
summarized below:
2002 2001 2000
------ ------ ------
Expected federal statutory tax rate (benefit) (35)% (35)% (35)%
State and local taxes, net (4)% (4)% (4)%
Limitation (utilization) of net operating losses - - -
----- ----- -----
Effective tax rate (39)% (39)% (39)%
===== ===== =====
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 2003 through 2012.
9. OBLIGATIONS UNDER CAPITAL LEASES
Future minimum payments as of December 29, 2002 under capital leases for
property and equipment, including surgical instruments, are as follows:
Total minimum lease payments - 2003 $ 31
Less amount representing interest 1
-----
Present value of minimum lease payment $ 30
=====
F-14
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
10. 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.
11. COMMON STOCK WARRANTS
From time to time, the Company has issued Common Stock warrants to directors,
lending institutions, and other third parties. At December 29, 2002 and December
30, 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.
12. 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
F-15
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
(110% in the case of 10% shareholders). At December 29, 2002, Incentive Stock
Options for an aggregate of 349,670 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 29, 2002, Non-Qualified Stock Options for an
aggregate of 845,000 shares of Common Stock at exercise prices ranging from
$0.44 to $1.50 were outstanding.
A summary of the status of the Company's stock option plans as of December 29,
2002 and December 30, 2001 and changes during the years ended on those dates is
presented below.
2002 2001 2000
------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ----------- ----------- ----------- ---------- ------------
Outstanding at beginning of year 1,241,170 $ 0.73 1,015,670 $ 0.83 1,129,670 $ 0.85
Granted - 320,000 0.43 452,500 1.43
Exercised - - - - -
Canceled/Expired 46,500 0.47 94,500 0.77 566,500 1.36
----------- ---------- ---------
Outstanding at end of year 1,194,670 0.74 1,241,170 0.73 1,015,670 0.83
=========== ========== =========
Options exercisable at end of year 955,420 850,045 817,170
=========== ========== =========
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 29, 2002:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
OPTIONS CONTRACTUAL OPTIONS EXERCISE
OUTSTANDING LIFE EXERCISABLE PRICES
------------ ------------ ----------- ----------
260,000 8 65,000 $ 0.43
109,500 6 81,500 0.69
608,000 2 608,000 0.74
187,170 4 170,920 1.09
30,000 4 30,000 1.50
----------- -----------
1,194,670 955,420
=========== ===========
F-16
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
13. 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
29, 2002, December 30, 2001 and December 31, 2000, were approximately $937, $772
and $1,308, 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 29, 2002 and December 30, 2001, Pilling earned fees
totaling $175 and $138, respectively.
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, 2004. 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 2002, 2001 and 2000 at a weighted average rate of 5.9%, 8.2% and
10.5%, respectively. Interest charged by TFX amounted to $1,525, $1,777 and
$1,684 for the years ended December 29, 2002, December 30, 2001 and December 31,
2000, respectively.
Teleflex also charged the Company fees for legal, treasury, tax and other
financial services. Fees of $200 were charged for each of the years ended
December 29, 2002 and December 30, 2001 and fees of $350 were charged for the
year ended December 31, 2000.
See Notes 8 and 10 for other related party transactions.
F-17
SSI SURGICAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 2002
- --------------------------------------------------------------------------------
(Dollars in Thousands, except per share)
14. COMMITMENTS AND CONTINGENCIES:
Minimum annual rental commitments for non-cancelable operating leases,
principally for the Company's off-site sterilization facilities, at December 29,
2002 are as follows:
2003 $ 1,358
2004 1,162
2005 1,124
2006 1,063
2007 1,032
Thereafter 2,335
--------
$ 8,074
========
Rent expense, net of sublease income of approximately $274, $195 and $263, was
approximately $1,795, $1,924 and $1,564 for the years ended December 29, 2002,
December 30, 2001 and December 31, 2000, 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.
15. 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 sold and marketed 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 would, subject to certain
performance criteria, acquire the Company's existing Off-Site facilities through
which SSI currently carries on its Off-Site business. The performance criteria
was not met and the joint venture, World SSI, LLC, was dissolved effective
October 7, 2002.
F-18