Back to GetFilings.com
================================================================================
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 31, 2000
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________________ to
___________________
Commission file number 2-85008-NY
SSI Surgical Services, Inc.
(Exact name of registrant as specified in its charter)
New York 11-2621408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5776 Hoffner Avenue, Suite 200, Orlando Florida 32822
(Address of principal executive offices) (Zip Code)
(407) 249-1946
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of March 16, 2001, the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $825,383, based on the
average bid and asked price of the registrant's Common Stock on March 16, 2001
as reported on the Nasdaq Bulletin Board System.
The registrant had 19,491,216 Common Shares outstanding as of March 16,
2001.
================================================================================
Item 1. Description of Business
Overview
SSI Surgical Services, Inc. ("Surgical Services" or the "Company") is a
healthcare services company focused on providing surgical support services to
hospitals and surgery centers throughout the United States. SSI Surgical
Services, Inc. (OTCBB, SGSI.OB) is approximately 84.5% owned by TFX Equities
Incorporated (TFX), a wholly owned subsidiary of Teleflex Incorporated
(Teleflex), a Fortune 1000 company with headquarters in Plymouth Meeting,
Pennsylvania.
The Company was founded in May 1982 as Medical Sterilization, Inc., a New
York Corporation. Effective May 28, 1999, the Company changed its name to SSI
Surgical Services, Inc.
On January 11, 1999, the Company acquired all of the issued and
outstanding shares of Endoscopy Specialists, Incorporated ("ESI"), a
Florida-based surgical instrument management services firm, and all of the
issued and outstanding shares not already held by the Company of SSI Surgical
Services, Inc. ("SSI"), a Joint Venture with TFX. Both businesses were acquired
from TFX in exchange for 13,400,000 shares of Common Stock and warrants to
purchase an aggregate of 1,500,000 shares of Common Stock. As a result of the
transaction, TFX now owns a majority of the outstanding common stock of the
Company.
Beginning in the mid-1990's, TFX brought together several medical services
operations that made up ESI and SSI. Each of these operations brought its own
healthcare knowledge, specialties and expertise to the new company, resulting in
a comprehensive package of service offerings. Running through the history of the
company is a dedication to high-quality, reusable products offered to its
customers on a per procedure basis.
In late 1995, TFX purchased ESI. ESI was founded in 1992 to provide
on-site speciality instrument management programs, primarily for minimally
invasive surgical procedures. This component of the Company provides surgical
instruments, video equipment, and on-site, trained technicians for each
contracted laproscopic procedure performed in a hospital.
During 1997, ESI acquired three other companies to complement the services
already offered: United Endoscopy and Medco, which provided services similar to
ESI; and Morse Technologies, providing surgical and endoscopic instrument
repair.
SSI was formed in 1997 as a joint venture between TFX and the Company. SSI
was established to provide general and specialty instrument sets, basins and
surgical gowns and towels to hospitals and other facilities. In August 1998, SSI
acquired Sterilization Management Group ("SMG") which owned and managed five
surgical instrument and linen reprocessing facilities located in Chicago,
Detroit, Tampa, Houston, and Baltimore/Washington.
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 six 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 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
3
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.
The Company's principal competition for its on-site management programs is
the hospitals' in-house departments. In addition, on-site services are offered
by several local and regional service companies as well as large corporations
such as Allegiance, who now competes with several on-site service offerings that
include: instrument processing, consulting, department management, staffing,
training, and endoscopy services. The Company is recognized as one of the the
only service providers to offer the full service continuum and a flexible
service offering. It provides customized solutions that includes both on-site
and off-site management programs for individual hospitals and healthcare
delivery networks.
Customers
The Company markets and sells services to acute care hospitals, and
stand-alone surgery centers in 17 states domestically. 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
Hospitals have continued to embrace the idea of outsourcing support
functions that are not core competencies. Outsourcing those areas that have
significant staff requirements demanding specialized knowledge, large upfront
capital demands, & space constraints has
4
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. The Company
believes that once an agreement is signed with a new customer, the customer is
unlikely to move away from the service due to its premium service level, quality
of products provided, quantified cost savings and knowledgeable technical
personnel.
Contracts are generally executed with terms of three years or more.
Termination with cause by either party for a breach of the agreement with ninety
days written notice is a standard provision of the contract. Surgical Services'
sales strategy is to expand its regional agreements. The majority of the
Company's service agreements are with single hospitals. It is the Company's
belief that the trend toward the increased development of the Integrated
Delivery Network's (IDN's) will continue well into the future. The IDN's and
regional buying groups have been able to negotiate for products and services in
many cases better than Group Purchasing Organizations. Surgical Services
continues to maximize its exposure to the individual hospital while intensifying
sales efforts at the regional or IDN level. Management feels the need for
hospitals to reduce operating costs and improve efficiencies provides
opportunities for continued sales growth.
The Company plans to target existing markets in an effort to maximize
existing assets and infrastructure. Additionally, suppliers that provide
products to Surgical Services provide a valuable network in which the sales
force are able to identify new customers. The future performance of the Company
is dependent upon its ability to attract new customers and expand services in
existing facilities.
As of March 16, 2001, the Company provided services pursuant to service
contracts with 175 hospitals and ambulatory surgi-centers. For the fiscal year
ended December 31, 2000, one customer accounted for 10% or more of the Company's
total revenues and 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.
Suppliers
The Company purchases surgical instruments, sterilization containers,
surgeon's gowns and surgical towels from several vendors including Pilling Weck,
a wholly-owned subsidiary of Teleflex. The Company believes that such products
are readily available at market prices.
5
Sales and Marketing
Surgical Services' sales and marketing strategy is to develop new accounts
and grow existing accounts by service expansion: for example, if the Company is
serving the labor and delivery department of a hospital it will attempt to
leverage its services into the general operating room of the hospital after a
period of successful product performance in the labor and delivery area. The
Company has expanded its portfolio of reprocessing services to include new
service offerings such as consulting, on-site management services and EtO
sterilization. The Company's sales and marketing efforts are coordinated with
several manufacturer alliances and their sales forces to maximize growth
opportunities.
Intellectual Property
The Company does not rely on any patents for the conduct of its business.
The Company does rely upon the know-how of its employees.
Government Regulation
Significant aspects of the Company's business are subject to state and
federal statutes or regulations. Additionally, some products sold by the company
are regulated as medical devices by the US Food and Drug Administration (FDA) or
other state and federal agencies. The Company's facilities are subject to
regular inspection by the FDA which has the power to seize adulterated products,
require the manufacturer to remove non-compliant products from the market, or
administer other remedies deemed appropriate. Although the Company believes it
is in substantial compliance with applicable federal and state statutes and
regulations, additional restrictions could be imposed that could materially
affect the Company.
Employees
As of December 31, 2000, the Company had 431 full-time and 22 part-time
employees. None of its employees are covered by any collective bargaining
agreement.
Item 2. Description of Property
Surgical Services leases six reprocessing and sterilization facilities
located in Baltimore, Chicago, Detroit, Houston, Long Island, and Tampa. These
facilities are used for decontamination, sterilization, and packaging of
reusable surgical instruments and surgical linens. The Company owns substantial
leasehold improvements and equipment located in each of the facilities. The
Company also maintains its corporate headquarters and an instrument repair
facility in leased offices in Orlando, Florida.
6
The table below sets forth information on the Company's properties:
Location Approximate Size Owned/Leased Lease Expiration
- -------- ---------------- ------------ ----------------
Baltimore, MD 40,000 sq. ft. Leased December 30, 2002
McGaw Park, IL 26,000 sq. ft. Leased September 7, 2010
Livonia, MI 32,000 sq. ft. Leased July 31, 2003
Houston, TX 46,500 sq. ft. Leased April 30, 2003
Syosset, NY 103,000 sq. ft.(1) Leased March 31, 2010
Tampa, FL 47,000 sq. ft Leased November 30, 2002
Orlando, FL 8,500 sq. ft. Leased December 31, 2004
Note:
(1) The short-term lease agreement providing for sublease of approximately
50,000 square feet of the premises expired February 28, 2001. The Company
is currently renegotiating this sublease agreement.
The company conducts a substantial portion of its business in facilities
(primarily hospitals and surgery centers) owned or operated by the customer. The
Company has no obligation for rent, utilities, or maintenance of those
facilities.
The Company believes that its facilities are suitable for its operations
as presently conducted and for its foreseeable future operations. Equipment
owned or leased by the company is believed adequate for the Company's present
and foreseeable operations, however, they will require capacity enhancements as
business continues to expand. The Company believes that additional facilities
and equipment can be acquired as necessary, although there can be no assurance
the additional facilities or equipment will be available upon reasonable or
acceptable terms, if at all.
Item 3. Legal Proceedings
In management's opinion, there are no pending claims or litigation, the
adverse determination of which would have a material adverse effect on the
financial position, 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 31, 2000.
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 16, 2001 was 251.
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
2001 (through March 16, 2001):
2001 High Bid Low Bid
- --------------------------------------------------------------------------------
First Quarter (through March 16, 2001) $0.438 $0.250
2000
Fourth Quarter 0.438 0.125
Third Quarter 0.813 0.313
Second Quarter 1.250 0.500
First Quarter 1.500 0.125
1999
Fourth Quarter 0.469 0.156
Third Quarter 0.688 0.375
Second Quarter 0.875 0.500
First Quarter 1.125 0.531
The Company has never paid cash dividends with respect to its shares of
Common Stock. The Company currently intends to retain earnings, if any, for use
in its business and does not anticipate paying cash dividends on its shares of
Common Stock in the foreseeable future.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
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
8
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.
The Company's sales cycle for new customers is typically between three to
twelve months from the first contact. Contracts are generally executed with
terms of three years or more providing a multi-year revenue stream.
In fiscal 2000, the Company's instrument and linen sterilization services,
endoscopic services and management of sterile processing departments within
hospitals accounted for approximately 50%, 41% and 9%, respectively, of the
Company's revenues, compared to 50%, 42% and 8% in 1999. These sources of
revenue reflect the Company's stategy to provide a complete service offering to
hospitals and surgery centers.
In December 2000, the Company renewed a revolving credit facility with
Teleflex. The agreement provides the Company up to $27,500,000 of unsecured
financing. The outstanding principal on this credit facility is due and payable
on April 30, 2003. Interest under this agreement is payable at the prevailing
Prime rate of PNC Bank, plus 1.25 percent, remaining unchanged from fiscal 2000.
Results of Operations
2000 Compared with 1999
Revenues
Revenues increased $1,143,000, or 4%, from $30,792,000 in fiscal 1999 to
$31,935,000 in fiscal 2000. This increase is attributable to the partial year
impact of new multi-year instrument and linen sterilization contracts signed in
fiscal 2000, and the impact of 53 operating weeks in fiscal 2000 compared to 52
operating weeks in fiscal 1999.
Operating Expenses
Operating expenses increased $1,505,000 or 6% from $23,888,000 in fiscal
1999 to $25,393,000 in fiscal 2000. This increase was principally the result of
higher depreciation expense on fiscal 1999 and fiscal 2000 instrument and linen
purchases. These purchases were made to support new and expanded multi-year
signed contracts.
Distribution Costs
Distribution costs increased $321,000 or 22% from $1,447,000 in fiscal
1999 to $1,768,000 in fiscal 2000. The increase in distribution costs from
reprocessing facilities resulted
9
from an increase in volumes delivered, extended geographic delivery areas and an
increase in fuel and maintenance costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $2,641,000 from
$3,691,000 in 1999 to $6,332,000 in fiscal 2000. The increase was primarily the
result of investments in sales force development and infrastructure. During
early 2000, sales personnel and management were added to implement the Company's
sales and marketing strategies with a focus on the areas surrounding existing
reprocessing facilities. Investments in internal infrastructure, including
upgrades to financial and operational computer systems, were made to service and
support revenue growth. The Company expects the current level of selling,
general and administrative expenses to remain relatively stable during 2001.
Interest Expense
Interest expense increased by $790,000 from $1,048,000 in fiscal 1999 to
$1,838,000 in fiscal 2000. The increase is attributed to interest on existing
and additional borrowings from Teleflex used in connection with continued
capital spending on surgical instruments and linens to support the growth of the
hospital business.
Net Income (Loss)
Net loss in fiscal 2000 was $2,072,000, a decrease of $2,593,000 from net
income of $521,000 in fiscal 1999.
Net (Loss) Income Applicable to Common Shareholders
Diluted earnings (loss) per share in fiscal 2000 represented a net loss
per share of $0.11, compared to net income per share of $0.03 in fiscal 1999.
Basic earnings (loss) per share in fiscal 2000 also represented a net loss per
share of $0.11, compared to net income per share of $0.03 in fiscal 1999.
Results of Operations
1999 Compared with 1998
Revenues
Revenues increased $23,232,000, or 307%, from $7,560,000 in fiscal 1998 to
$30,792,000 in fiscal 1999. The increase was principally the result of the
acquisition of ESI and SSI. Had the acquistion occurred at the beginning of
fiscal 1998, revenues would have increased approximately $1,824,000 from the
proforma amount of $28,968,000 in fiscal 1998. This increase is attributable to
the realization of the full year impact of revenues derived from multi-
10
year surgical instrument sterilization contracts signed in fiscal 1998,
partially offset by some weakness in other off-site operations.
Operating Expenses
Operating expenses increased $18,946,000 or 383.4% from $4,942,000 in
fiscal 1998 to $23,888,000 in fiscal 1999. This increase was principally the
result of the acquisition of ESI and SSI. On a proportionate basis, the acquired
operations have higher direct expenses and lower selling, general and
administrative expenses than historical operations.
Distribution Costs
Distribution costs increased $692,000 or 91.7% from $755,000 in fiscal
1998 to $1,447,000 in fiscal 1999. The increase is directly related to increased
sales volume with the acquisition of ESI and SSI. Distribution costs as a
percentage of revenue generated from instrument and linen sterilization
services, remained relatively stable.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $954,000 from
$2,737,000 in 1998 to $3,691,000 in fiscal 1999. The increase resulted from the
acquisition of ESI and SSI, including amortization expense of $406,000 in fiscal
1999. In addition, fiscal 1998 was negatively impacted by additional unexpected
one-time costs related to the disposal of the electron beam business and other
nonrecurring expenditures including severance and termination expenses related
to the elimination of several senior management positions.
Interest Expense
Interest expense increased by $620,000 from $428,000 in fiscal 1998 to
$1,048,000 in fiscal 1999. The increase is attributed to borrowings from
Teleflex assumed in connection with the acquisition of ESI and SSI and continued
capital spending on surgical instruments and linens to support the growth of the
hospital business.
Net Income (Loss)
Net income in fiscal 1999 was $521,000, an increase of $1,823,000 from a
net loss of $1,302,000 in fiscal 1998.
Net (Loss) Income Applicable to Common Shareholders
Diluted earnings per share in fiscal 1999 represented net income per share
of $0.03, compared to a net loss per share of $0.46 in fiscal 1998. Basic
earnings per share in fiscal 1999 also represented net income per share of
$0.03, compared to a net loss per share of $0.46 in fiscal
11
1998. Excluding the effect of preferred dividends in 1998, diluted earnings per
share for fiscal 1998 were a net loss per share of $0.41.
Liquidity and Capital Resources
The Company generated cash flows from operations of $1,575,000 in fiscal
2000 compared to $2,230,000 in fiscal 1999. The decrease in cash flows resulted
from a net loss offset by higher depreciation expense and a reduction in working
capital growth in relation to fiscal 1999.
Capital expenditures totaled $7,534,000 in 2000 compared with $5,656,000
in 1999. These purchases were principally surgical instruments and linen
products made to support the Company's new sales contracts entered into during
fiscal 2000 and fiscal 1999. In addition, approximately $1,600,000 was invested
in leasehold improvements and equipment relating to the relocation of the McGaw
Park, IL reprocessing and sterilization facility.
The Company plans to purchase additional surgical instruments and linens,
as and if required to support the Company's growth objectives. The Company
believes that additional borrowing capacity under the existing loan agreement
with Teleflex and cash flows from operating activities will provide support for
these expenditures.
The Company had $939,000 in obligations under capital leases for equipment
and surgical instruments at December 31, 2000. In addition, the Company had
borrowings of $20,500,000 outstanding at December 31, 2000 under a $27,500,000
unsecured revolving loan agreement with Teleflex, its majority shareholder. The
additional borrowings under this agreement of $6,840,000 during fiscal 2000 were
used to support capital expenditures, working capital, growth and net third
party debt repayment of $1,064,000. The outstanding principal on this credit
facility is due and payable on April 30, 2003. Interest under this agreement is
payable at the prevailing Prime rate of PNC Bank, plus 1.25 percent.
The Company believes that the anticipated future cash flow from
operations, along with its cash on hand and available funding from its major
shareholder will be sufficient to meet working capital requirements during 2001.
There can be no assurance, however, that the Company will not require additional
working capital and, if it does require such capital, that such capital will be
available to the Company on acceptable terms, if at all.
Inflation
The Company believes that inflation has not had, and will not have in the
future, a material effect on its results of operations.
12
Certain Factors That May Affect Future Results
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities
Exchange Commission (including this Form 10-K) may contain statements which are
not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. Forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995;
in particular, statements made relating to the suitability of the Company's
facilities and equipment for future operations and the availability of
additional facilities and equipment in the future; the sufficiency of funds for
the Company's working capital requirements during 2001 may be forward-looking
statements. The Company's actual future results may differ significantly from
those stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below. Each
of these factors, and others, are discussed from time to time in the Company's
filings with the Securities and Exchange Commission.
The Company's future results are subject to risks and uncertainties. The
Company has operated at a loss or small profit for its entire history and there
can be no assurance of its ever achieving consistent profitability. The Company
may require additional working capital in the future and there can be no
assurance that such working capital will be available on acceptable terms, if at
all. The failure of the Company to continue to compete effectively with existing
or new competitors could result in price erosion, decreased margins and
decreased revenues, any or all of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
Approximately 64% of the Company's healthcare provider customers are currently
concentrated in the Northeast Corridor. Any factors affecting this market
generally could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company is subject to
government regulation in certain aspects of its operations. Changes in such
regulations could have a material adverse effect on the Company's business,
results of operations and financial condition.
Future results of the Company will depend significantly on its ability to
successfully convince hospitals and other healthcare providers to utilize the
Company's instrument and linen sterilization services, endoscopic services and
sterile processing department management services as opposed to their own
resources. Hospitals may resist this change for a number of reasons, including
the preferences of hospital staffs which may wish to preserve their existing
staffing, labor unions which may resist any staffing reductions and the ongoing
consolidation of hospitals which may impact the willingness of hospital
administrators to make operational decisions on a timely basis and which may
affect a hospital's decision to outsource sterile processing services as opposed
to retaining one or more of the consolidated hospital group's central
sterilization facilities to provide services for the entire group.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect revenues and
profitability, including: competitive pressures on selling prices and margins;
the timing and cancellation of customer
13
orders; the lengthy sales cycle of the Company's services to healthcare
organizations; the Company's ability to maintain state-of-the-art sterilization
facilities and the corresponding timing and amount of capital expenditures,
particularly if the Company executes its plan for growth; and the introduction
of new services by the Company's competitors. As a result of the foregoing and
other factors, the Company may experience material fluctuations in future
operating results on a quarterly or annual basis which could materially and
adversely effect its business, operating results and stock price.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company does not have any material market risk sensitive financial
instruments.
Item 8. Financial Statements
For the following financial information required by this Item, see Index
on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
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 16, 2001 and
the positions currently held by each such person with the Company.
Name Age Position
---- --- --------
Todd Riddell 41 Director, President, Chief Executive Officer
John J. Sickler (1) 59 Director, Chairman of the Board
Steven K. Chance (2) 55 Director, Secretary
D. Michael Deignan (2) 57 Director
Douglas P. Gill 52 Director
Michael S. Irwin 53 Vice President Off Site Operations
Paul A. D'Alesio 43 Treasurer, Chief Financial Officer
(1) Member of Compensation Committee
(2) Member of Audit Committee
14
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 January 6, 2000 he has been President and Chief Executive
Officer of Vasomedical, Inc., a provider of noninvasive vascular device and
therapies to treat angina.
John J. Sickler has been a Director since January 8, 1997. Since December
2000, he has been Vice Chairman of Teleflex. He is and has been since 1990 the
President of TFX, a subsidiary of Teleflex engaged in business development.
Douglas P. Gill was elected Director of the Company on March 8, 2001.
Since March 5, 2001 he has been Senior Vice President - Business Design of
Teleflex Medical Group, a business segment of Teleflex. From 1998 to 2000 he was
President and Chief Executive Officer of Docucon, Inc., a document imaging
company. He is currently a Director of Docucon, Inc. From 1994 to 1998 he was
General Partner for Foster Management, a venture capital firm.
Executive Officers
Michael S. Irwin was elected Vice President of Services and Solutions on
February 24, 2000. Prior thereto he was Vice President-Off Site Operations from
March 2, 1999. For two years prior to March 2, 1999 he was General Manager of
Sterilization Management Group ("SMG") which was acquired by SSI in August 1998.
SMG owned and managed five surgical instrument and linen reprocessing
facilities. From 1994 to 1997 he was a plant manager and division director of
operations for the Interwoven Division of Baxter Healthcare, Inc., a
manufacturer and distributor of medical supplies and equipment.
Paul A. D'Alesio was elected Treasurer and Chief Financial Officer on
March 2, 1999. For more than five years prior thereto he was Controller of Meyer
International, Inc., a holding company for distributors of building materials
and its subsidiaries.
15
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Name and Principal Salary Bonus Underlying All Other
Position Year ($) ($) Options Compensation ($)
---------------------------------------------------------------
Todd Riddell, Pres. & CEO 2000 179,231 15,000 2,688(3)
Michael S. Irwin, VP 2000 125,000 10,000 1,927(3)
Paul A. D'Alesio, Treas. & CFO 2000 115,000 10,000 1,854(3)
Michael T. Spagnuolo, VP(5) 2000 128,846 10,000 25,000 1,184(3)
Michael D. Klein, Pres. & CEO 2000 107,692 400,000(1) 1,755(3)
D. Michael Deignan, Pres. & CEO(5) 2000 8,115 -- --
Todd Riddell, Senior VP & COO 1999 143,439 99,974 50,000 2,222(3)
Michael T. Spagnuolo, VP(5) 1999 119,077 36,414 25,000 1,799(3)
Michael S. Irwin, VP 1999 115,391 8,000 15,000 1,074(3)
Paul A. D'Alesio, Treas. & CFO 1999 89,779 -- 1,240(3)
Scott A. Bartos, Pres. & CEO 1999 115,946 90,973 100,000(2) 1,779(3)
D. Michael Deignan, Pres. & CEO(5) 1999 160,718 -- 2,329(3)
D. Michael Deignan, Pres. & CEO 1998 165,000 42,600 3,712(4)
(1) These options were terminated pursuant to the option agreement on October
27, 2000 because of Michael Klein's resignation on July 28, 2000.
(2) These options were terminated pursuant to the option agreement on November
18, 1999 because of Scott Bartos' resignation on August 11, 1999.
(3) Represents the Company's matching contributions to the 401K Plan.
(4) Includes $2,062 in contributions by the Company to vested and un-vested
defined contribution plans for Mr. Deignan's benefit.
(5) See "Severance Agreements".
16
Option Grants in Last Fiscal Year
Individual Grants
--------------------------------------------
Number of Percent of
Securities Total Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration Present
Name Granted (#) Fiscal Year ($/Sh) Date Value $(2)
- ------------------------------------------------------------------------------------------------------------
Todd Riddell -- -- -- -- --
Michael S. Irwin -- -- -- -- --
Paul A. D'Alesio -- -- -- -- --
Michael T. Spagnuolo -- -- -- -- --
Michael D. Klein 200,000(1) 44.20% 1.06 -- --
Michael D. Klein 200,000(1) 44.20% 2.00 -- --
(1) These options were terminated pursuant to the option agreement October 27,
2000 because of Michael Klein's resignation on July 28, 2000.
(2) The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the
following weighted average assumptions used for grants in 1999; 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.
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 25,000 25,000 0 0
Michael S. Irwin 0 0 7,500 7,500 0 0
Paul A. D'Alesio 0 0 3,750 11,250 0 0
Michael T. Spagnuolo 0 0 12,500 12,500 0 0
Michael D. Klein 0 0 0 0 0 0
D. Michael Deignan 0 0 247,170 0 0 0
(1) Market value of underlying securities at year end minus the exercise
price.
Severance Agreements
The Company had a severance agreement with Mr. Deignan who resigned as
President and Chief Executive Officer on January 8, 1999. The agreement called
for payment of his base salary and benefits for a period of one year ending
January 7, 2000. Pursuant to the agreement, the Company paid $160,718 and $8,115
to Mr. Deignan in 2000 and 1999, respectively, and contributed $2,329 to the
401K Plan in 1999.
The Company had a severance agreement with Mr. Spagnuolo whose position
was eliminated on August 7, 2000. The agreement called for payment of his base
salary and benefits for a period of six months ended February 9, 2001. Pursuant
to the agreement, the Company paid $51,377 to Mr. Spagnuolo in 2000.
17
Compensation of Directors
Messrs. Deignan and Whittaker were the only Directors in 2000 who were not
employees of the Company or TFX. Mr. Whittaker resigned as Director in February
2001. Outside Directors are paid an annual fee of $3,000 plus a meeting fee of
$500.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 16, 2001, 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:
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 -- *
Douglas P. Gill -- *
Todd Riddell (6) 25,000 *
Michael S. Irwin (7) 17,500 *
Paul A. D'Alesio (8) 16,250 *
---------- -----
All Executive Officers and Directors
as a group (9) ............ 18,339,940 86.21%
- ----------
(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,
18
based on information provided to the Company by the persons and entities
named in the table.
(3) Total Voting Securities are 19,491,296 shares of Common Stock. Pursuant to
the rules of the SEC, all outstanding options and warrants which are
exercisable within 60 days of March 16, 2001 ("Presently Exercisable
Securities") held by the relevant person or entity are included as
outstanding Total Voting Securities for purposes of determining that
person's or entity's Percentage of Total Voting Securities, but are not
included for purposes of determining any other person's or entity's
Percentage of Total Voting Securities.
(4) Consists of 16,385,720 shares of Common Stock and 1,500,000 Presently
Exercisable Securities held by TFX. Mr. Sickler is President of TFX and
has voting and investment power over the shares held by TFX. Mr. Sickler
disclaims beneficial ownership of the shares held by TFX.
(5) Consists of 63,300 shares of Common Stock owned and 247,170 Presently
Exercisable Securities.
(6) Consists of 25,000 Presently Exercisable Securities.
(7) Consists of 10,000 shares of Common Stock and 7,500 Presently Exercisable
Securities.
(8) Consists of 12,500 shares of Common Stock and 3,750 Presently Exercisable
Securities.
(9) Consists of 16,556,520 shares of Common Stock and 1,783,420 Presently
Exercisable Securities.
Item 13. Certain Relationships and Related Transactions
John J. Sickler, a Director of the Company, is Vice Chairman of Teleflex
and President of TFX, a subsidiary of Teleflex. TFX owns 84.5% of the
outstanding voting securities of SSI.
Steven K. Chance, a Director and Secretary of the Company, is Vice
President, Secretary and General Counsel of Teleflex.
Douglas P. Gill, a Director of the Company, is Senior Vice President -
Business Design of TFX Medical Group, a business segment of Teleflex.
Transactions with Management and Others
On January 11, 1999, the Company consummated a transaction, pursuant to
which it exchanged 13,400,000 shares of Common Stock and warrants to purchase an
aggregate of 1,500,000 shares of Common Stock for all of the issued and
outstanding shares of ESI and all of
19
the issued and outstanding shares of Common Stock and Preferred Stock, not
already held by the Company, of SSI, a joint venture with TFX.
In connection with the Company's January 1999 acquisition of ESI and SSI
from TFX, the Company assumed approximately $6,500,000 of financing from
Teleflex. In addition, the Company entered into a revolving credit facility with
Teleflex. The agreement as amended, provides the Company up to $27,500,000 of
unsecured financing. The outstanding principal on this credit facility is due
and payable on April 30, 2003. Interest under this agreement is payable at the
prevailing Prime rate of PNC Bank, plus 1.25 percent. Interest was charged on
the unpaid principal balance during 2000 at a weighted average of 10.5 percent
and at a fixed rate of 8 percent during 1999. Interest charged by TFX amounted
to $1,684,000, $649,000 and $29,000 for the years ended December 31, 2000,
December 26, 1999 and December 31, 1998, respectively.
The Company purchases from surgical instrument manufacturers the surgical
instruments included in instrument sets that are utilized in providing the
Company's services. Pilling Weck, a national surgical instrument manufacturer
and a subsidiary of Teleflex, has agreed to supply surgical instruments to the
Company. Purchases from Pilling Weck are made on commercial terms. Instrument
purchases from Pilling Weck, including instruments financed under capital lease
obligations, for the years ended December 31, 2000, December 26, 1999 and
December 31, 1998, were approximately $1,308,000, $969,000, and $556,000,
respectively.
Teleflex also charged the Company fees for executive management, legal,
treasury, tax and other financial services. Fees of $350,000 were charged for
the year ended December 31, 2000.
The response to this item is incorporated by reference from the Section
titled "Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement for its 2001 Annual Meeting of Shareholders.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
(3)(i)(1) Restated Certificate of Incorporation filed May 21, 1999.
(3)(ii)(1) Amended and Restated By-Laws dated June 2, 1987 - filed
as Exhibit (3)(4) to Annual Report for the year ended December 31,1995 on Form
10-KSB and incorporated herein by reference.
(10)(1) 1994 Stock Option Plan - filed as Exhibit (10)(a)(1) to
Annual Report for the year ended December 31, 1993 on Form 10-K and incorporated
herein by reference.
(10)(2) 1996 Stock Option Plan - filed as Exhibit (10)(2) to the
Annual Report for the year ended December 31, 1995 on Form 10-KSB and
incorporated herein by reference.
20
(10)(3) Lease dated November 20, 1995 with Barlich Realty, Inc. -
filed as Exhibit (10)(4) to Annual Report for the year ended December 31, 1995
on Form 10-KSB and incorporated herein by reference.
(10)(4) Acquisition Agreement dated November 19, 1998 between the
Company and TFX Equities Incorporated - filed as Exhibit (1) to Form 8-K dated
January 26, 1999 and incorporated herein by reference. Incorporated.
(10)(5) Revolving Loan Account Agreement dated December 26, 1999
between the Company and Teleflex Incorporated.
(10)(6) Revolving Loan Account Agreement dated December 29, 2000
between the Company and Teleflex Incorporated.
27.1 Financial Data Schedule
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 30, 2001 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 30, 2001
- ---------------------- (principal executive)
Todd Riddell
/s/ Paul A. D'Alesio Treasurer, Chief Financial Officer March 30, 2001
- ---------------------- (principal accounting officer)
Paul A. D'Alesio
/s/ John J. Sickler Director, Chairman of the Board March 30, 2001
- ----------------------
John J. Sickler
/s/ Steven K. Chance Director and Secretary March 30, 2001
- ----------------------
Steven K. Chance
/s/ D. Michael Deignan Director March 30, 2001
- ----------------------
D. Michael Deignan
/s/ Douglas P. Gill Director March 30, 2001
- ----------------------
Douglas P. Gill
22
SSI Surgical Services, Inc.
Index to the Consolidated Financial Statements
December 31, 2000
- --------------------------------------------------------------------------------
Page
Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 2000 and December 26, 1999 F-3
Consolidated Statements of Operations for the years ended December 31,
2000, December 26, 1999 and December 31, 1998 F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7
F-1
Report of Independent Accountants
To the Board of Directors
of SSI Surgical Services, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of SSI
Surgical Services, Inc. at December 31, 2000 and December 26, 1999, and the
results of their operations and their cash flows for the years ended December
31, 2000, December 26, 1999 and December 31, 1998, 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.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 6, 2001
F-2
SSI Surgical Services, Inc.
Consolidated Balance Sheets
December 31, 2000 and December 26, 1999
(Dollars in Thousands)
- --------------------------------------------------------------------------------
Assets 2000 1999
Current assets:
Cash and cash equivalents $ 71 $ 254
Accounts receivable, net of allowance for doubtful accounts
of $470 and $407 7,831 7,470
Prepaid expenses and other assets 1,512 1,143
-------- --------
Total current assets 9,414 8,867
-------- --------
Property and equipment, net 22,795 19,231
Intangibles, net 5,043 5,449
Other assets 158 140
-------- --------
$ 37,410 $ 33,687
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,481 $ 3,462
Obligations under capital leases 465 919
-------- --------
Total current liabilities 3,946 4,381
-------- --------
Obligations under capital leases 474 1,084
Payable to affiliates 20,590 13,750
-------- --------
Total liabilities 25,010 19,215
-------- --------
Preferred stock:
Convertible redeemable cumulative preferred stock, par value
$.01 per share; Series B - authorized 1,000,000 shares,
issued and outstanding 0 shares in 2000 and 1999 -- --
-------- --------
Shareholders' equity:
Convertible preferred stock, par value $.01 per share Series C -
authorized 3,000,000 shares, issued and outstanding 0 shares
in 2000 and 1999 -- --
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 (10,814) (8,742)
-------- --------
Total shareholders' equity 12,400 14,472
-------- --------
Total liabilities and shareholders' equity $ 37,410 $ 33,687
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
SSI Surgical Services, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2000, December 26, 1999
and December 31, 1998
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
2000 1999 1998
Net revenues $ 31,935 $ 30,792 $ 7,560
------------ ----------- -----------
Cost and expenses:
Operating 25,393 23,888 4,942
Distribution 1,768 1,447 755
Selling, general and administrative 6,332 3,691 2,737
Interest 1,838 1,048 428
------------ ----------- -----------
Total costs and expenses 35,331 30,074 8,862
------------ ----------- -----------
Income (loss) before income taxes (3,396) 718 (1,302)
Income taxes (1,324) 197 --
------------ ----------- -----------
Net income (loss) (2,072) 521 (1,302)
Preferred stock dividends -- -- (168)
------------ ----------- -----------
Net income (loss) applicable to common shareholders $ (2,072) $ 521 $ (1,470)
============ =========== ===========
Earnings (loss) per common share - basic $ (.11) $ .03 $ (.46)
============ =========== ===========
Earnings (loss) per common share - diluted $ (.11) $ .03 $ (.46)
============ =========== ===========
Weighted average common shares 19,491,216 19,491,216 3,170,496
============ =========== ===========
Weighted average dilutive common shares 19,491,216 19,491,216 3,170,496
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
SSI Surgical Services, Inc.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2000 and December 26, 1999
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
Common stock Preferred stock Additional
--------------------- ------------------------ paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
Balance at December 31, 1998 3,170,496 $ 32 1,945,625 $ 1,946 $ 7,565 $ (9,263) $ 280
Issuance of common stock 13,400,000 134 11,591 11,725
Preferred stock conversion 2,920,720 29 (1,945,625) (1,946) 3,863 1,946
Net income for the year 521 521
---------- ---- ---------- ------- ------- -------- --------
Balance at December 26, 1999 19,491,216 195 -- -- 23,019 (8,742) 14,472
Net (loss) for year (2,072) (2,072)
---------- ---- ---------- ------- ------- -------- --------
Balance at December 31, 2000 19,491,216 $195 -- -- $23,019 $(10,814) $ 12,400
========== ==== ========== ======= ======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
SSI Surgical Services, Inc.
Consolidated Statements of Cash Flow
For the Years Ended December 31, 2000, December 26, 1999
and December 31, 1998
(Dollars in Thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities:
Net income (loss) $(2,072) $ 521 $(1,302)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,376 3,346 705
Doubtful debt expense 120 166 146
Loss on asset sales -- -- 71
Changes in operating assets and liabilities:
Accounts receivable (481) (1,327) 279
Prepaid expenses and other assets (387) (400) (131)
Accounts payable and accrued liabilities 19 (76) 681
------- ------- -------
Net cash provided by operating activities 1,575 2,230 449
------- ------- -------
Cash flows for investing activities:
Net purchase of property and equipment (7,534) (5,656) (1,809)
Proceeds from asset sales -- -- 1,181
------- ------- -------
Net cash used in investing activities (7,534) (5,656) (628)
------- ------- -------
Cash flows from financing activities:
Net repayments of revolving line of credit -- (1,182) (218)
Repayments of long-term debt -- (50) (902)
Net repayments under capital lease obligations (1,064) (877) (226)
Proceeds from long-term debt -- -- 1,550
Net borrowings from affiliates 6,840 5,732 --
------- ------- -------
Net cash provided by financing activities 5,776 3,623 204
------- ------- -------
Increase/(decrease) in cash and cash equivalents (183) 197 25
Cash and cash equivalents at beginning of period 254 57 32
------- ------- -------
Cash and cash equivalents at end of period $ 71 $ 254 $ 57
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-6
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
1. Basis of Presentation and Nature of Business
The Company was incorporated in New York State on May 27, 1982, as Medical
Sterilization, Inc ("MSI"). Effective January 8, 1999, the Company's
headquarters and principal place of business was moved to Orlando,
Florida. Effective May 28, 1999, the Company changed its name to SSI
Surgical Services, Inc.
The Company provides both off-site and on-site reprocessing and
sterilization of surgical instrument sets, gowns and towels, as well as
certain other items requiring sterilization for healthcare providers,
hospitals and other medical facilities. In addition the Company provides a
broad range of surgical instrument management services that includes
provision of endoscopic instrument sets and other specialty products to
hospitals and other medical facilities, as well as on-site department
management, staffing and other consulting services.
2. Acquisitions and Divestitures
1999 Acquisitions
In January, 1999, the Company acquired Endoscopy Specialists, Incorporated
("ESI"), a Florida-based surgical instrument management services firm, and
the remaining 62.5% of the shares of SSI Surgical Services, Inc. ("SSI"),
a joint venture in which the Company had held a 37.5% interest. Both
businesses were acquired from TFX Equities, Incorporated ("TFX"), a wholly
owned subsidiary of Teleflex Incorporated, a diversified publicly held
company, in exchange for 13.4 million common shares of the Company and
warrants for an additional 1.5 million common shares. TFX also converted
the preferred shares it owned into common shares. As a result of this
transaction, TFX now owns a majority of the outstanding common stock of
the Company.
The acquisition was accounted for as a purchase. Net assets of the
acquired businesses amounted to $13,000 and the acquisition was financed
through a combination of the equity transactions noted above and the
assumption of approximately $6,500 of intercompany financing from TFX. The
excess purchase price over the fair market value of the assets acquired,
approximately $5,200 was recorded as goodwill and is being amortized to
expense over 15 years.
F-7
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
A summary of the net assets acquired follows:
Current assets $ 5,073
Current liabilities (2,273)
--------
Working capital 2,800
--------
Property and equipment 10,640
Capital lease obligations (401)
--------
Net assets acquired 13,039
--------
Affiliate borrowings assumed 6,508
Issuance of common stock 11,725
--------
Purchase price 18,233
--------
Excess purchase price (goodwill) $ 5,194
========
The following represents the unaudited pro forma results of operations as
if the above noted acquisition had occurred at the beginning of the years
presented:
1998
Revenues $ 28,968
Net income (loss) (1,402)
Net income (loss) per common share $ (0.07)
1998 Divestitures
On April 30, 1998, the Company completed divestiture of its electron beam
accelerator and related equipment for the approximate sum of $1,250. The
proceeds of the sale were immediately used by the Company to repay the
entire balance of a bank note against the beam for approximately $402, and
the residual monies were applied against the Company's financing agreement
with its commercial lender.
3. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year now ends the last Sunday in December. There were
53 weeks in fiscal 2000 and 52 weeks in fiscal 1999, and 1998.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents.
F-8
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
Property and Equipment
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the related assets (ranging from 5 to
15 years) and, for leasehold improvements, over the shorter of the useful
life of the improvement or the term of the lease. Shrinkage-loss of
surgical instruments and containers is provided based upon incurred
losses. Maintenance and repairs are charged to expense in the year
incurred. Expenditures which significantly improve or extend the life of
the assets are capitalized. Upon disposal, the cost and related
accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is included in income.
Intangibles
Intangible assets consist principally of goodwill, which is the excess
purchase price over the fair value of the assets of businesses acquired.
Intangible assets are amortized on a straight-line basis over their
estimated useful lives, not exceeding 15 years. Intangibles are stated net
of accumulated amortization of $1,052 and $646 as of December 31, 2000 and
December 26, 1999, respectively.
Accounting for Long-Lived Assets
On a periodic basis or whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, impairment is
evaluated by comparing future cash flows (undiscounted and without
interest charges) expected to result from the use or sale of the asset and
its eventual disposition, to the carrying amount of the asset.
Earnings Per Share Calculation
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 128, "Earnings per
Share"("SFAS No. 128"), which establishes standards for computing and
presenting earnings per share. SFAS No. 128 requires presentation of both
basic and diluted earnings per share. Basic earnings per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed in a
similar manner except that the weighted average number of common shares is
increased for dilutive securities. Potentially dilutive securities have
been excluded from the 1999 and 1998 computations of diluted earnings per
share since the result would be anti-dilutive.
Revenue Recognition
The Company records revenue for hospital services in accordance with
contractual terms. Revenues for other sterilization services are recorded
upon the completion of processing and/or shipment.
Concentration of Credit Risk
Trade receivables arise from long-term and short-term contracts with
healthcare providers. To reduce credit risk, the Company performs credit
evaluations of its customers but does not generally require collateral.
Credit risk is affected by conditions within the economy and the
healthcare industry. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
For the fiscal years ended December 31, 2000 and December 26, 1999, 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.
F-9
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes", which requires that deferred income taxes be recognized for the
tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Following the Company's acquisition of SSI and ESI from TFX in January
1999, the Company's taxable income is included in the consolidated tax
returns of TFX under a tax sharing arrangement. For purposes of these
financial statements, income taxes have been determined and allocated to
the Company on a separate return basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain items in the 1999 and 1998 financial statements have been
reclassified to conform with the 2000 presentation of the financial
statements.
4. Prepaid Expenses and Other Assets
The composition of prepaids and other assets is as follows:
2000 1999
Consumables and supplies $1,180 $ 807
Receivables 29 204
Other 303 132
------ ------
Total $1,512 $1,143
====== ======
F-10
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
5. Property and Equipment
The composition of property and equipment is as follows:
2000 1999
Surgical instruments and gowns $23,213 $18,133
Containers 1,973 1,764
Machinery and equipment 5,606 5,341
Leasehold improvements 3,441 1,802
Furniture and fixtures 790 685
------- -------
35,023 27,725
Accumulated depreciation and amortization 12,228 8,494
------- -------
$22,795 $19,231
======= =======
Depreciation and amortization expense for the years ended December 31,
2000, December 26, 1999 and December 31, 1998 was $3,970 , $2,940 and
$705, respectively.
The composition of assets recorded under capital leases is as follows:
2000 1999
Surgical instruments $3,232 $3,232
Machinery and equipment 685 685
Containers 335 335
------ ------
4,252 4,252
Accumulated amortization 2,019 1,118
------ ------
$2,233 $3,134
====== ======
F-11
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
6. Accounts Payable and Accrued Expenses
The composition of accounts payable and accrued expenses is as follows:
2000 1999
Trade accounts payable $2,098 $1,614
Salary and other compensation benefits 563 848
Sales and other taxes 356 475
Professional fees 147 246
Other 317 279
------ ------
Total $3,481 $3,462
====== ======
7. Employee Benefit Plans
The Company has historically maintained a 401(k) defined contribution plan
which allows participants to make contributions based on a percentage of
their earnings. During the year employees of the Company became eligible
to participate in a successor 401(k) plan with TFX. The TFX plan allows
participants to make pretax contributions which are matched on a
proportionate basis. The Company's contributions for the fiscal years
ended December 31, 2000, December 26, 1999 and December 31, 1998 were
approximately $105, $81 and $26, respectively.
8. Income Taxes
The provision for income taxes for the years ended December 31, 2000,
December 26, 1999 and December 31, 1998, consisted of the following:
2000 1999 1998
Current:
Federal $(1,189) $ 176 $ --
State (135) 21 --
------- ------- -------
$(1,324) $ 197 $ --
======= ======= =======
Reconciliation between the statutory income tax rate and effective tax
rate is summarized below:
2000 1999 1998
Expected federal statutory tax rate (benefit) (35)% 35% (35)%
State and local taxes, net (4)% 4% (6)%
Limitation (utilization) of net operating losses -- (12)% 41%
--- --- ---
Effective tax rate (39)% 27% --
=== === ===
F-12
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
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 2000 through 2013.
9. Obligations Under Capital Leases
Future minimum payments as of December 31, 2000 under capital leases for
property and equipment, including surgical instruments, are as follows:
2001 $ 523
2002 455
2003 36
------
Total minimum lease payments 1,014
Less amount representing interest 75
------
Present value of minimum lease payment 939
Less current portion 465
------
$ 474
======
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.
F-13
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
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 1999, 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 31,
2000, the Company had aggregate warrants outstanding to purchase 1,525,000
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
(110% in the case of 10% shareholders). At December 31, 2000, Incentive
Stock Options for an aggregate of 340,670 shares of Common Stock at
exercise prices ranging from $0.56 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 31, 2000, Non-Qualified Stock
Options for an aggregate of 675,000 shares of Common Stock at exercise
prices ranging from $0.56 to $1.50 were outstanding.
F-14
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
The Company applies the disclosure-only provisions of SFAS 123 "Accounting
for Stock-Based Compensation," continuing to measure compensation cost in
accordance with APB 25 " Accounting for Stock Issued to Employees." Had
compensation cost been determined based on the fair value at the grant
date consistent with the provisions of SFAS 123, the Company's pro forma
net income (loss) and earnings per share for the years ended December 31,
2000, December 26, 1999 and December 31, 1998 would have been:
2000 1999 1998
Net income (loss) attributable to common
shareholders as reported $(2,072) $ 521 $(1,470)
Pro forma income (loss) $(2,086) $ 400 $(1,491)
Earnings per Common share as reported - Diluted $ (0.11) $0.02 $ (0.46)
Pro forma Earnings per share - Diluted $ (0.11) $0.02 $ (0.46)
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 2000, 1999 and
1998, respectively; no dividend yield; expected volatility of 90%;
risk-free interest rate of 5.65% to 6.61%: and expected lives ranging from
approximately 4.5 to 5 years. Weighted averages are used because of
varying assumed exercise dates.
A summary of the status of the Company's stock option plans as of December
31, 2000 and December 26, 1999, and changes during the years ended on
those dates is presented below.
2000 1999
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Outstanding at beginning of year 1,129,670 $ .85 1,155,670 $ .87
Granted 452,500 1.43 385,000 .91
Exercised -- -- -- --
Canceled/Expired (566,500) 1.36 (411,000) .96
---------- ----------
Outstanding at end of year 1,015,670 .83 1,129,670 .85
========== ==========
Options exercisable at end of year 817,170 847,670
========== ==========
Weighted average fair value of
options granted during the year $ .52 $ .51
F-15
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(Dollars in Thousands, except per share)
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 2000:
Weighted
Average Weighted
Remaining Average
Options Contractual Options Exercise
Outstanding Life Exercisable Prices
27,500 10 -- $0.56
118,000 9 29,500 0.69
608,000 4 608,000 0.74
30,000 8 30,000 1.00
162,170 7 79,670 1.06
40,000 7 40,000 1.28
30,000 7 30,000 1.50
--------- -------
1,015,670 817,170
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 Weck, a national surgical
instrument manufacturer and a subsidiary of Teleflex, has agreed to supply
surgical instruments to the Company. Purchases from Pilling Weck are made
on commercial terms. Instrument purchases from Pilling Weck, including
instruments financed under capital lease obligations, for the years ended
December 31, 2000, December 26, 1999 and December 31, 1998, were
approximately $1,308, $969, and $556, respectively.
In connection with the Company's January 1999 acquisition of ESI and SSI
from TFX, the Company assumed approximately $6,500 of financing from
Teleflex. In addition, the Company entered into a revolving credit
facility with Teleflex. The agreement as amended, provides the Company up
to $27,500 of unsecured financing. The outstanding principal on this
credit facility is due and payable on April 30, 2003. Interest under this
agreement is payable at the prevailing Prime rate of PNC Bank, plus 1.25
percent. Interest was charged on the unpaid principal balance during 2000
at a weighted average of 10.5% and at a fixed rate of 8% during 1999.
Interest charged by TFX amounted to $1,684, $649 and $29 for the years
ended December 31, 2000, December 26, 1999 and December 31, 1998,
respectively.
Teleflex also charged the Company fees for executive management, legal,
treasury, tax and other financial services. Fees of $350 were charged for
each of the years ended December 31, 2000 and December 26, 1999,
respectively.
See Notes 8 and 10 for other related party transactions.
F-16
SSI Surgical Services, Inc.
Notes to the Consolidated Financial Statements
December 31, 2000
(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 31, 2000 are as follows:
2001 $ 2,026
2002 1,839
2003 1,151
2004 984
2005 874
Thereafter 3,753
-------
$10,627
=======
Rent expense, net of sublease income of approximately $263, $293 and $86,
was approximately $1,564, $1,521 and $389 for the years ended December 31,
2000, December 26, 1999 and December 31, 1998, respectively.
The operating lease commitments summarized above do not include any
amounts with respect to the Company's commitments to make certain repairs
at its Syosset, NY facility.
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.
F-17