10-K 1 d02-36979.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 30, 2001 |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________________ to ___________________ Commission file number 2-85008-NY SSI Surgical Services, Inc. (Exact name of registrant as specified in its charter) New York 11-2621408 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5776 Hoffner Avenue, Suite 200, Orlando Florida 32822 (Address of principal executive offices) (Zip Code) (407) 249-1946 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 11, 2002, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $719,001, based on the average bid and asked price of the registrant's Common Stock on March 11, 2002 as reported on the Nasdaq Bulletin Board System. The registrant had 19,491,216 Common Shares outstanding as of March 11, 2002. ================================================================================ Item 1. Description of Business Overview SSI Surgical Services, Inc. ("Surgical Services" or the "Company") is a healthcare services company focused on providing surgical support services to hospitals and surgery centers throughout the United States. SSI Surgical Services, Inc. (OTCBB, SGSI.OB) is approximately 84.5% owned by TFX Equities Incorporated (TFX), a wholly owned subsidiary of Teleflex Incorporated (Teleflex), a Fortune 1000 company with headquarters in Plymouth Meeting, Pennsylvania. The Company was founded in May 1982 as Medical Sterilization, Inc., a New York Corporation. Effective May 28, 1999, the Company changed its name to SSI Surgical Services, Inc. On January 11, 1999, the Company acquired all of the issued and outstanding shares of Endoscopy Specialists, Incorporated ("ESI"), a Florida-based surgical instrument management services firm, and all of the issued and outstanding shares not already held by the Company of SSI Surgical Services, Inc. ("SSI"), a Joint Venture with TFX. Both businesses were acquired from TFX in exchange for 13,400,000 shares of Common Stock and warrants to purchase an aggregate of 1,500,000 shares of Common Stock. As a result of the transaction, TFX now owns a majority of the outstanding common stock of the Company. Beginning in the mid-1990's, TFX brought together several medical services operations that made up ESI and SSI. Each of these operations brought its own healthcare knowledge, specialties and expertise to the new company, resulting in a comprehensive package of service offerings. Running through the history of the company is a dedication to high-quality, reusable products offered to its customers on a per procedure basis. In late 1995, TFX purchased ESI. ESI was founded in 1992 to provide on-site speciality instrument management programs, primarily for minimally invasive surgical procedures. This component of the Company provides surgical instruments, video equipment, and on-site, trained technicians for each contracted laproscopic procedure performed in a hospital. During 1997, ESI acquired three other companies to complement the services already offered: United Endoscopy and Medco, which provided services similar to ESI; and Morse Technologies, providing surgical and endoscopic instrument repair. SSI was formed in 1997 as a joint venture between TFX and the Company. SSI was established to provide general and specialty instrument sets, basins and surgical gowns and towels to hospitals and other facilities. In August 1998, SSI acquired Sterilization Management Group ("SMG") which owned and managed five surgical instrument and linen reprocessing facilities located in Baltimore, Chicago, Detroit, Houston, and Tampa. 1 Today the Company offers a comprehensive menu of services to hospitals and surgery centers, with a primary focus on the operating room (OR). Company headquarters are located in Orlando, Florida and the Company's employees are based in hospitals, medical centers and sterilization facilities in numerous locations around the country. On Site Services The Company provides customers specialty instrument management programs that focus on minimally invasive surgical procedures (endoscopic services). The Company has a variety of service programs to meet customer demand. Surgical Services assigns trained service technicians to each customer hospital. The service technician is responsible for assisting with the operating room set-up prior to the start of the designated case, and remains on-site to serve as a technical expert available to respond to questions from the surgical staff regarding the proper use of the products and video systems supplied by the Company. At the completion of the case, the technician decontaminates and reprocesses the company's instruments and performs quality assurance checks on the instruments to validate their readiness for the next procedure. The Company manages all repairs, refurbishing, reprocessing and replacement costs associated with the provided products. The Company offers services for general surgery, gynecology, urology, ENT, orthopedics, plastic surgery, thoracic surgery and cardiovascular surgery. The related instrument sets can be basic, containing only instrumentation, or increasingly complex, to include scopes, video equipment and other accessories. By using high quality reusable instruments that are properly managed by trained technicians and a selection of disposable products, the Company delivers higher quality products billed on a per procedure basis, thus providing a basis for potentially reducing hospital costs. In addition to the specialty instrument management program, Surgical Services provides professional management to train and direct the sterile processing departments in hospitals. The Company provides the customer with trained and certified technicians to increase productivity and assumes responsibility for management of the instrument inventory that includes the establishment of an inventory tracking system, repair and maintenance, replacement and purchase of new instruments. This service is billed to the customer on a contractual basis. Off Site Services The Company provides off-site cleaning, decontamination and sterilization processing of its standard containerized reprocessable surgical instrument sets as well as sterilized items for healthcare providers such as hospitals and ambulatory surgery centers within the United States. The Company contracts with healthcare providers to provide instruments that are reprocessed and reusable surgical products consisting of gowns, towels, mayo-stand and back table covers and basins. 2 This business currently operates five industrial reprocessing facilities that can sterilize, package, reassemble, decontaminate and deliver to customers on a daily basis. The Company provides Instrument Sets for operating room and labor and delivery room procedures, such as gall bladder, tonsillectomy and adenoidectomy, open heart, vascular, orthopedic, endoscopy, cesarean sections, newborn delivery, hysterectomy and dilation and curettage. The Company also packages its reusable textiles (surgical gowns and towels) in a variety of packs to meet customers' needs. The reusable textiles are cleaned, inspected, sterilized, and delivered to the hospital. The Company offers a reprocessing service that utilizes state-of-the-art products such as GORE(R) Surgical Barrier Fabric (GORE is a trademark of W.L. Gore & Associates, Inc.), a surgical barrier fabric for gowns that is liquidproof and a series of one-ply and two-ply gowns that are liquid resistant. All of the gown materials are technologically advanced for comfort. The Company's services are designed to replace or supplement the existing in-house sterilization facilities of healthcare providers. Many hospitals have less efficient sterilization facilities, staff their facilities with nurses whose skills could be more effectively used elsewhere and underutilize their sterilization facilities by operating their equipment only once per day. Because of the relatively low volume of sterilization activities undertaken at many of these facilities, worker productivity may not be as high as in other areas of the healthcare organization, causing concern for administrators. In addition, as hospitals continue to evaluate ways in which to utilize their available space better, many hospitals are seeking to replace their in-house sterilization facilities with profit generating centers such as operating rooms. Many hospitals are also looking for ways in which to improve operating room efficiency by eliminating the sterilization processing delays and shortages sometimes experienced with their in-house sterilization facilities. By utilizing state of the art equipment, modern sterilization technology, trained technicians, and handling larger volumes, the Company believes that it offers a cost-effective, high quality alternative to in-house sterilization. The Company has installed modern, industrial size sterilization equipment at its facilities, including ultrasonic cleaning systems, tunnel washers, steam sterilizers and ETO sterilizers. The Company believes that it is able to offer improved sterility assurance levels than those maintained at many hospitals. The Company has established rigorous testing measures and procedures, such as sterilization process monitors (including temperature and pressure recording), chemical indicators and bacteriological spore and culture testing. See "Government Regulation." Competition The Company's principal competition for its on-site management programs is the hospitals' in-house departments. In addition, on-site services are offered by several local and regional service companies as well as large corporations such as Allegiance, who now competes 3 with several on-site service offerings that include: instrument processing, consulting, department management, staffing, training, and endoscopy services. The Company is recognized as one of the only service providers to offer the full service continuum and a flexible service offering. It provides customized solutions that include both on-site and off-site management programs for individual hospitals and healthcare delivery networks. The Company's principal competition with respect to its off-site management programs comes from the in-house sterilization facilities of hospitals and ambulatory surgi-centers. Most hospitals have in-house sterilization capabilities and many have invested significant capital in their sterilization facilities. Also, healthcare facilities with in-house sterilization departments may be committed to maintaining their sterilization capabilities and their current staffing levels. As a result, healthcare providers may be reluctant to shift their sterilization activities from in-house to an off-site contractor. Furthermore, some hospitals have union agreements that preclude or mitigate a hospital's ability to outsource. In today's managed care driven, consolidating environment, hospitals and hospital networks are renegotiating these agreements with yet to be determined success. The Company has competition for its off-site reprocessing facilities in most of its markets. Surgical Express, previously Sterile Recoveries, Inc. and Angelica Corporation now compete with the Company. Substantial know-how and capital intensive barriers continue to limit competitive interest. Customers The Company markets and sells services to acute care hospitals, and stand-alone surgery centers in 15 states and the District of Columbia. Customers have been attracted to the Company because of its quality of service, comprehensive service offering and cost reduction opportunities. The Company provides services directly to the customer, thereby eliminating a third party to intervene on its behalf. Customers become interested in the Company's service menu due to the following: 1.) Savings from reusable versus disposable products 2.) Savings on reduced inventory requirements 3.) Savings from outside management of processes 4.) Added efficiencies by having trained technicians on site 5.) Upgrade to premium equipment and instruments 6.) Improved staff and physician satisfaction 7.) Capital avoidance 8.) The ability to convert non-productive space to revenue generating space 9.) Elimination of repair and maintenance costs 4 Hospitals have continued to embrace the idea of outsourcing support functions that are not core competencies. Outsourcing those areas that have significant staff requirements demanding specialized knowledge, large upfront capital demands, and space constraints has become increasingly more universal. The idea of outsourcing is consistent with the customer's focus on improved efficiency, cost reduction, improved patient care and staff and physician satisfaction. The Company allows hospitals to focus on these initiatives by outsourcing the ownership of instrumentation, surgical linen, and equipment. The Company's sales cycle for new customers is typically between three to twelve months from the first contact. The sales cycle entails significant lead times in most institutions due to existing agreements with suppliers, Group Purchasing Organizations and cost reviews from hospital management. Contracts are generally executed with terms of three years or more providing a multi-year revenue stream. The Company believes that once an agreement is signed with a new customer, the customer is unlikely to move away from the service due to its premium service level, quality of products provided, quantified cost savings and knowledgeable technical personnel. Contracts are generally executed with terms of three years or more. Termination with cause by either party for a breach of the agreement with ninety days written notice is a standard provision of the contract. Surgical Services' sales strategy is to expand its regional agreements. The majority of the Company's service agreements are with single hospitals. It is the Company's belief that the trend toward the increased development of the Integrated Delivery Network's (IDN's) will continue well into the future. The IDN's and regional buying groups have been able to negotiate for products and services in many cases better than Group Purchasing Organizations. Surgical Services continues to maximize its exposure to the individual hospital while intensifying sales efforts at the regional or IDN level. Management feels the need for hospitals to reduce operating costs and improve efficiencies provides opportunities for continued sales growth. The Company plans to target existing markets in an effort to maximize existing assets and infrastructure. Additionally, suppliers that provide products to Surgical Services provide a valuable network in which the sales force are able to identify new customers. The future performance of the Company is dependent upon its ability to attract new customers and expand services in existing facilities. As of March 11, 2002, the Company provided services pursuant to service contracts with 185 hospitals and ambulatory surgi-centers. For the fiscal year ended December 30, 2001, one customer accounted for 10% or more of the Company's total revenues and 10 customers represented approximately 47% of the accounts receivable balance. The loss of any one of these customers could have a significant impact on the Company's financial position or results of operations. 5 Suppliers The Company purchases surgical instruments, sterilization containers, surgeon's gowns and surgical towels from several vendors including Pilling Weck, a wholly-owned subsidiary of Teleflex. The Company believes that such products are readily available at market prices. Sales and Marketing Surgical Services' sales and marketing strategy is to develop new accounts and grow existing accounts by service expansion: for example, if the Company is serving the labor and delivery department of a hospital it will attempt to leverage its services into the general operating room of the hospital after a period of successful product performance in the labor and delivery area. The Company has expanded its portfolio of reprocessing services to include new service offerings such as consulting, on-site management services and EtO sterilization. The Company's sales and marketing efforts are coordinated with several manufacturer alliances and their sales forces to maximize growth opportunities. Intellectual Property The Company does not rely on any patents for the conduct of its business. The Company does rely upon the know-how of its employees. Government Regulation Significant aspects of the Company's business are subject to state and federal statutes or regulations. Additionally, some products sold by the company are regulated as medical devices by the US Food and Drug Administration (FDA) or other state and federal agencies. The Company's facilities are subject to regular inspection by the FDA which has the power to seize adulterated products, require the manufacturer to remove non-compliant products from the market, or administer other remedies deemed appropriate. Although the Company believes it is in substantial compliance with applicable federal and state statutes and regulations, additional restrictions could be imposed that could materially affect the Company. Employees As of December 30, 2001, the Company had 454 full-time and 27 part-time employees. None of its employees are covered by any collective bargaining agreement. Item 2. Description of Property Surgical Services leases facilities used for decontamination, sterilization, and packaging of reusable surgical instruments and surgical linens. The Company owns substantial leasehold improvements and equipment located in each of the facilities. The Company also maintains its corporate headquarters and an instrument repair facility in leased offices in Orlando, Florida. 6 The table below sets forth information on the Company's properties: Location Approximate Size Owned/Leased Lease Expiration -------- ---------------- ------------ ---------------- Baltimore, MD. 40,000 sq. ft. Leased February 28, 2003 McGaw Park, IL 26,000 sq. ft. Leased September 7, 2010 Livonia, MI 32,000 sq. ft. Leased August 31, 2003 Houston, TX 46,000 sq. ft. Leased April 30, 2003 Syosset, NY 103,000 sq. ft.(1) Leased March 31, 2010 Tampa, FL 47,000 sq. ft Leased November 30, 2002 Orlando, FL 10,000 sq. ft. Leased December 31, 2008 Note: 1. The Company subleases approximately 50,000 square feet of the premises. The Company is currently renegotiating this sublease agreement. The company conducts a substantial portion of its business in facilities (primarily hospitals and surgery centers) owned or operated by the customer. The Company has no obligation for rent, utilities, or maintenance of those facilities. The Company believes that its facilities are suitable for its operations as presently conducted and for its foreseeable future operations. Equipment owned or leased by the Company is believed adequate for the Company's present and foreseeable operations; however, they will require capacity enhancements as business continues to expand. The Company believes that additional facilities and equipment can be acquired as necessary. Item 3. Legal Proceedings In management's opinion, there are no pending claims or litigation, the adverse determination of which would have a material adverse effect on the financial position, cash flows or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security-Holders No matters were submitted for a vote of security-holders during the Company's fiscal quarter ended December 30, 2001. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock, $.01 par value per share, is quoted on the Nasdaq Bulletin Board (under the symbol "SGSI"). Such quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. The approximate number of record holders of the Company's Common Stock as of March 11, 2002 was 248. The following table sets forth the high and low bid prices for a share of the Company's Common Stock as reported on the Nasdaq Bulletin Board for each fiscal quarter in the last two fiscal years and for the first fiscal quarter of 2002 (through March 11, 2002): 2002 High Bid Low Bid ------------------------------------------------------------------------------- First Quarter (through March 11, 2002) $0.40 $0.20 2001 ---- Fourth Quarter 0.30 0.19 Third Quarter 0.39 0.18 Second Quarter 0.37 0.16 First Quarter 0.56 0.25 2000 ---- Fourth Quarter 0.44 0.13 Third Quarter 0.81 0.31 Second Quarter 1.25 0.50 First Quarter 1.50 0.13 The Company has never paid cash dividends with respect to its shares of Common Stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate paying cash dividends on its shares of Common Stock in the foreseeable future. Item 6. Selected Financial Data Not applicable. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make and continuously evaluate estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: Allowance for Doubtful Accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, impairing their ability to make payments, additional allowances may be required. Valuation of Long-lived Assets. The Company's long-lived assets include property, plant and equipment and goodwill, which are reviewed annually for impairment based on estimates of future cash flows. In addition, the Company will adopt Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets in fiscal year 2002. SFAS 142 requires goodwill and other intangible assets to be subject to an annual determination of continuing value (an impairment test) rather than be amortized annually. Overview The Company's revenues are generated from a comprehensive menu of services to hospitals and surgery centers, with a primary focus on the operating room. These services include specialty instrument management programs that focus on minimally invasive surgical procedures, professional management and staffing of sterile processing departments in hospitals, off-site cleaning, decontamination and sterilization processing of containerized surgical instrument sets and reusable surgical gowns and towels. Results of Operations 2001 Compared with 2000 Revenues Revenues increased $1,976,000, or 6.2%, from $31,935,000 in fiscal 2000 to $33,911,000 in fiscal 2001. This increase is attributable to the full year impact of multi-year contracts signed in 2000 and the partial year impact of new multi-year contracts signed in fiscal 2001. In fiscal 9 2001, the Company's instrument and linen sterilization services, endoscopic services and management of sterile processing departments within hospitals accounted for approximately 44%, 47% and 9%, respectively, of the Company's revenues, compared to 50%, 41% and 9% in 2000. These sources of revenue reflect the Company's stategy to provide a complete service offering to hospitals and surgery centers. Operating Expenses Operating expenses increased $2,530,000 or 10.0% from $25,393,000 in fiscal 2000 to $27,923,000 in fiscal 2001. This increase was principally the result of additional volume, additional training of operations personnel and higher depreciation expense. Distribution Costs Distribution costs decreased $152,000 or 8.6% from $1,768,000 in fiscal 2000 to $1,616,000 in fiscal 2001. The decrease in distribution costs from reprocessing facilities resulted from more efficient route planning and the reduction in use of third party transport services. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by $909,000 from $6,332,000 in 2000 to $5,423,000 in fiscal 2001. The decrease was primarily the result of a reduction in commissioned based selling expense relating to the Pilling Sales and Marketing Agreement. The Company expects the current level of selling, general and administrative expenses to remain relatively stable during 2002. Interest Expense Interest expense increased by $3,000 from $1,838,000 in fiscal 2000 to $1,841,000 in fiscal 2001. The increase is attributed to interest on existing and additional borrowings from Teleflex used in connection with continued capital spending on surgical instruments and linens to support the growth of the hospital business, offset by a decrease in interest rates from a weighted average of 10.5% in fiscal 2000 to a weighted average of 8.2% in fiscal 2001. Write-down of Assets Write-down of assets includes $234,000 carrying value of unrecoverable equipment relating to an endoscopic contract and $358,000 for closure of the Houston facility. Net Income (Loss) Net loss in fiscal 2001 was $2,125,000 an increase of $53,000 from net loss of $2,072,000 in fiscal 2000. Diluted and basic loss per share in fiscal 2001 and 2000 was $0.11. 10 Results of Operations 2000 Compared with 1999 Revenues Revenues increased $1,143,000, or 4%, from $30,792,000 in fiscal 1999 to $31,935,000 in fiscal 2000. This increase is attributable to the partial year impact of new multi-year instrument and linen sterilization contracts signed in fiscal 2000, and the impact of 53 operating weeks in fiscal 2000 compared to 52 operating weeks in fiscal 1999. Operating Expenses Operating expenses increased $1,505,000 or 6% from $23,888,000 in fiscal 1999 to $25,393,000 in fiscal 2000. This increase was principally the result of higher depreciation expense on fiscal 1999 and fiscal 2000 instrument and linen purchases. These purchases were made to support new and expanded multi-year signed contracts. Distribution Costs Distribution costs increased $321,000 or 22% from $1,447,000 in fiscal 1999 to $1,768,000 in fiscal 2000. The increase in distribution costs from reprocessing facilities resulted from an increase in volumes delivered, extended geographic delivery areas and an increase in fuel and maintenance costs. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $2,641,000 from $3,691,000 in 1999 to $6,332,000 in fiscal 2000. The increase was primarily the result of investments in sales force development and infrastructure. During early 2000, sales personnel and management were added to implement the Company's sales and marketing strategies with a focus on the areas surrounding existing reprocessing facilities. Investments in internal infrastructure, including upgrades to financial and operational computer systems, were made to service and support revenue growth. The Company expects the current level of selling, general and administrative expenses to remain relatively stable during 2001. Interest Expense Interest expense increased by $790,000 from $1,048,000 in fiscal 1999 to $1,838,000 in fiscal 2000. The increase is attributed to interest on existing and additional borrowings from Teleflex used in connection with continued capital spending on surgical instruments and linens to support the growth of the hospital business. 11 Net Income (Loss) Net loss in fiscal 2000 was $2,072,000, a decrease of $2,593,000 from net income of $521,000 in fiscal 1999. Net (Loss) Income Applicable to Common Shareholders Diluted earnings (loss) per share in fiscal 2000 represented a net loss per share of $0.11, compared to net income per share of $0.03 in fiscal 1999. Basic earnings (loss) per share in fiscal 2000 also represented a net loss per share of $0.11, compared to net income per share of $0.03 in fiscal 1999. Liquidity and Capital Resources The Company generated cash flow from operations of $3,922,000 in fiscal 2001 compared to $1,575,000 in fiscal 2000. The increase in cash flow resulted from a reduced loss before depreciation expense and a reduction in working capital in relation to fiscal 2000. Capital expenditures totaled $6,076,000 in 2001 compared with $7,534,000 in 2000. These purchases were principally surgical instruments and linen products made to support the Company's new sales contracts entered into during fiscal 2001 and fiscal 2000. In addition, approximately $1,100,000 was invested in leasehold improvements at the Syosset, NY reprocessing and sterilization facility. The Company plans to purchase additional surgical instruments and linens, as and if required to support the Company's growth objectives. The Company believes that additional borrowing capacity under the existing loan agreement with Teleflex and cash flows from operating activities will provide support for these expenditures. The Company had $376,000 in obligations under capital leases for equipment and surgical instruments at December 30, 2001. In addition, the Company had borrowings of $23,157,000 outstanding at December 30, 2001 under a $27,500,000 unsecured revolving loan agreement with Teleflex, its majority shareholder. The additional borrowings under this agreement of $2,657,000 during fiscal 2001 were used to support capital expenditures and net third party debt repayment of $563,000. The outstanding principal on this credit facility is due and payable on April 30, 2003. Interest under this agreement is payable at the prevailing Prime rate of PNC Bank, plus 1.25 percent. The Company believes that the anticipated future cash flow from operations, along with its cash on hand and available funding from its major shareholder will be sufficient to meet working capital requirements during 2002. 12 Inflation The Company believes that inflation has not had, and will not have in the future, a material effect on its results of operations. Certain Factors That May Affect Future Results From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities Exchange Commission (including this Form 10-K) may contain statements which are not historical facts, so-called "forward-looking statements," which involve risks and uncertainties. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995; in particular, statements made relating to the suitability of the Company's facilities and equipment for future operations and the availability of additional facilities and equipment in the future; the sufficiency of funds for the Company's working capital requirements during 2002 may be forward-looking statements. The Company's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. Each of these factors, and others, are discussed from time to time in the Company's filings with the Securities and Exchange Commission. The Company's future results are subject to risks and uncertainties. The Company has operated at a loss or small profit for its entire history. The failure of the Company to continue to compete effectively with existing or new competitors could result in price erosion, decreased margins and decreased revenues, any or all of which could have a material adverse effect on the Company's business, results of operations and financial condition. Approximately 64% of the Company's healthcare provider customers are currently concentrated in the Northeast Corridor. Any factors affecting this market generally could have a material adverse effect on the Company's business, results of operations and financial condition. The Company is subject to government regulation in certain aspects of its operations. Changes in such regulations could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including: competitive pressures on selling prices and margins; the timing and cancellation of customer orders; the lengthy sales cycle of the Company's services to healthcare organizations; the Company's ability to maintain state-of-the-art sterilization facilities and the corresponding timing and amount of capital expenditures, particularly if the Company executes its plan for growth; and the introduction of new services by the Company's competitors. 13 Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company does not have any material market risk sensitive financial instruments. Item 8. Financial Statements For the following financial information required by this Item, see Index on Page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information regarding the individuals who are directors and executive officers as of March 11, 2002 and the positions currently held by each such person with the Company. Name Age Position ---- --- -------- Todd Riddell 42 Director, President, Chief Executive Officer John J. Sickler (1) 60 Director, Chairman of the Board Steven K. Chance (2) 56 Director, Secretary D. Michael Deignan (2) 58 Director Christopher E. Tihansky 37 Director Michael S. Irwin 54 Vice President Off Site Operations Paul A. D'Alesio 44 Treasurer, Chief Financial Officer (1) Member of Compensation Committee (2) Member of Audit Committee Directors Todd Riddell was elected a Director, President and Chief Executive Officer on August 3, 2000. From March 1999 to August 2000 he was Senior Vice President and from September 1999 to August 2000 he was Chief Operating Officer. From July, 1997 to March 1999 he was Executive Vice President of SSI Surgical Services, Inc. which was acquired by the Company, then Medical Sterilization, Inc., in January 1999. For five years prior thereto he was Vice President of Endoscopy Specialists, Incorporated ("ESI") which was acquired by the Company in January 1999. 14 Steven K. Chance was elected a Director on January 8, 1999. He is and has been since 1993 Vice President, Secretary and General Counsel of Teleflex. D. Michael Deignan was elected President, Chief Operating Officer and Director of the Company on September 8, 1995 and Chief Executive Officer on December 31, 1995. He resigned as President and Chief Executive Officer on January 8, 1999. Since January 6, 2000 he has been President and Chief Executive Officer of Vasomedical, Inc., a provider of noninvasive vascular device and therapies to treat angina. John J. Sickler has been a Director since January 8, 1997. Since December 2000, he has been Vice Chairman of Teleflex. He is and has been since 1990 the President of TFX, a subsidiary of Teleflex engaged in business development. Christopher E. Tihansky was elected Director of the Company on September 19, 2001. Since April 1999, he has been Vice President Business Development of Teleflex Medical Group, a business segment of Teleflex. From September 1995 to April 1999 he was Senior Healthcare Analyst at Genesis Merchant Group, an investment banking firm. Executive Officers Michael S. Irwin was elected Vice President-Off Site Operations on March 2, 1999. For two years prior to March 2, 1999 he was General Manager of Sterilization Management Group ("SMG") which was acquired by SSI in August 1998. SMG owned and managed five surgical instrument and linen reprocessing facilities. From 1994 to 1997 he was a plant manager and division director of operations for the Interwoven Division of Baxter Healthcare, Inc., a manufacturer and distributor of medical supplies and equipment. Paul A. D'Alesio was elected Treasurer and Chief Financial Officer on March 2, 1999. For more than five years prior thereto he was Controller of Meyer International, Inc., a holding company for distributors of building materials and its subsidiaries. 15 Item 11. Executive Compensation SUMMARY COMPENSATION TABLE

(1) Represents the Company's matching contributions to the 401K Plan. (2) See "Severance Agreements". Option Grants in Last Fiscal Year Individual Grants ------------------------------------- Number of Percent of Securities Total Options Exercise Underlying Granted to or Base Grant Date Options Employees in Price Expiration Present Name Granted (#) Fiscal Year ($/Sh) Date Value $ (1) -------------------------------------------------------------------------- Todd Riddell 150,000 46.9% .44 3/8/11 37,290 Michael S. Irwin 25,000 7.8% .44 3/8/11 6,215 Paul A. D'Alesio 25,000 7.8% .44 3/8/11 6,215 (1) The weighted average fair value of each option has been estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions used for grants in 2001; no dividend yield; expected volatility of 90%; risk-free interest rate of 4.65% to 4.70%; and expected lives ranging from approximately 4.5 to 5 years. Weighted averages are used because of varying assumed exercise dates. 16 Aggregated Option Exercises in Last Fiscal Year And Fiscal Year End Option Values

(1) Market value of underlying securities at year end minus the exercise price. Severance Agreements The Company has a severance agreement with Mr. Taurasi whose position was eliminated on January 29, 2002. The agreement calls for payment of his base salary and benefits for a period of three months ending April 23, 2002. Compensation of Directors Messrs. Deignan and Whittaker were the only Directors in 2001 who were not employees of the Company or TFX. Mr. Whittaker resigned as Director in February 2001. Outside Directors are paid an annual fee of $3,000 plus a meeting fee of $500. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 11, 2002, the beneficial ownership of the Company's voting securities by (i) each person who, to the knowledge of the Company, beneficially owned more than 5% of the Company's voting securities outstanding at such date, (ii) each current Director of the Company, (iii) each executive officer of the Company and (iv) all current Directors and executive officers as a group: 17

---------- * Represents holdings of less than 1% (1) Pursuant to the rules of the SEC, addresses are provided only for 5% beneficial owners. (2) Except as otherwise noted in the footnotes to this table, each person or entity named in the table has sole voting and investment power with respect to all shares shown as owned, based on information provided to the Company by the persons and entities named in the table. (3) Total Voting Securities are 19,491,216 shares of Common Stock. Pursuant to the rules of the SEC, all outstanding options and warrants which are exercisable within 60 days of March 11, 2001 ("Presently Exercisable Securities") held by the relevant person or entity are included as outstanding Total Voting Securities for purposes of determining that person's or entity's Percentage of Total Voting Securities, but are not included for purposes of determining any other person's or entity's Percentage of Total Voting Securities. (4) Consists of 16,470,720 shares of Common Stock and 1,500,000 Presently Exercisable Securities held by TFX. Mr. Sickler is President of TFX and has voting and investment power over the shares held by TFX. Mr. Sickler disclaims beneficial ownership of the shares held by TFX. (5) Consists of 63,300 shares of Common Stock owned and 247,170 Presently Exercisable Securities. (6) Consists of 62,500 Presently Exercisable Securities. (7) Consists of 10,000 shares of Common Stock and 13,750 Presently Exercisable Securities. 18 (8) Consists of 12,500 shares of Common Stock and 13,750 Presently Exercisable Securities. (9) Consists of 16,556,520 shares of Common Stock and 1,837,170 Presently Exercisable Securities. Item 13. Certain Relationships and Related Transactions John J. Sickler, a Director of the Company, is Vice Chairman of Teleflex and President of TFX, a subsidiary of Teleflex. TFX owns 84.5% of the outstanding voting securities of SSI. Steven K. Chance, a Director and Secretary of the Company, is Vice President, Secretary and General Counsel of Teleflex. Christopher E. Tihansky, a Director of the Company, is Vice President Business Development of Teleflex Medical Group, a business segment of Teleflex. Transactions with Management and Others On January 11, 1999, the Company consummated a transaction, pursuant to which it exchanged 13,400,000 shares of Common Stock and warrants to purchase an aggregate of 1,500,000 shares of Common Stock for all of the issued and outstanding shares of ESI and all of the issued and outstanding shares of Common Stock and Preferred Stock, not already held by the Company, of SSI, a joint venture with TFX. In connection with the Company's January 1999 acquisition of ESI and SSI from TFX, the Company assumed approximately $6,500,000 of financing from Teleflex. In addition, the Company entered into a revolving credit facility with Teleflex. The agreement as amended, provides the Company up to $27,500,000 of unsecured financing. The outstanding principal on this credit facility is due and payable on April 30, 2003. Interest under this agreement is payable at the prevailing Prime rate of PNC Bank, plus 1.25 percent. Interest was charged on the unpaid principal balance during 2001 and 2000 at a weighted average rate of 8.2% and 10.5%, respectively. Interest charged by TFX amounted to $1,777,000, $1,684,000 and $649,000 for the years ended December 30, 2001, December 31, 2000 and December 26, 1999, respectively. The Company purchases from surgical instrument manufacturers the surgical instruments included in instrument sets that are utilized in providing the Company's services. Pilling Weck, a national surgical instrument manufacturer and a subsidiary of Teleflex, has agreed to supply surgical instruments to the Company. Purchases from Pilling Weck are made on commercial terms. Instrument purchases from Pilling Weck, including instruments financed under capital lease obligations, for the years ended December 30, 2001, December 31, 2000 and December 26, 1999, were approximately $772,000, $1,308,000, and $969,000, respectively. 19 Teleflex charges the Company fees for legal, treasury, tax and other financial services. Fees of $200,000 were charged for the year ended December 30, 2001. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits (3)(i)(1) Restated Certificate of Incorporation filed May 21, 1999. (3)(ii)(1) Amended and Restated By-Laws dated June 2, 1987 - filed as Exhibit (3)(4) to Annual Report for the year ended December 31,1995 on Form 10-KSB and incorporated herein by reference. (10)(1) 1994 Stock Option Plan - filed as Exhibit (10)(a)(1) to Annual Report for the year ended December 31, 1993 on Form 10-K and incorporated herein by reference. (10)(2) 1996 Stock Option Plan - filed as Exhibit (10)(2) to the Annual Report for the year ended December 31, 1995 on Form 10-KSB and incorporated herein by reference. (10)(3) Lease dated November 20, 1995 with Barlich Realty, Inc. - filed as Exhibit (10)(4) to Annual Report for the year ended December 31, 1995 on Form 10-KSB and incorporated herein by reference. (10)(4) Acquisition Agreement dated November 19, 1998 between the Company and TFX Equities Incorporated - filed as Exhibit (1) to Form 8-K dated January 26, 1999 and incorporated herein by reference. Incorporated. (10)(5) Revolving Loan Account Agreement dated December 26, 1999 between the Company and Teleflex Incorporated. (10)(6) Revolving Loan Account Agreement dated December 29, 2000 between the Company and Teleflex Incorporated. 27.1 Financial Data Schedule 20 SIGNATURES In accordance with Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 26, 2002 SSI SURGICAL SERVICES, INC. By: /s/ Todd Riddell --------------------------------- Name: Todd Riddell Title: President and Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report was signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

21 SSI Surgical Services, Inc. Index to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- Page Financial Statements: Report of Independent Accountants F-2 Consolidated Balance Sheets at December 30, 2001 and December 31, 2000 F-3 Consolidated Statements of Operations for the years ended December 30, 2001, December 31, 2000 and December 26, 1999 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 30, 2001, December 31, 2000 and December 26, 1999 F-5 Consolidated Statements of Cash Flows for the years ended December 30, 2001, December 31, 2000 and December 26, 1999 F-6 Notes to the Consolidated Financial Statements F-7 Report of Independent Accountants To the Shareholders and Board of Directors of SSI Surgical Services, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of SSI Surgical Services, Inc. at December 30, 2001 and December 31, 2000, and the results of its operations and cash flows for the years ended December 30, 2001, December 31, 2000 and December 26, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 1, 2002 SSI Surgical Services, Inc. Consolidated Balance Sheets December 30, 2001 and December 31, 2000 -------------------------------------------------------------------------------- (Dollars in Thousands)

The accompanying notes are an integral part of these financial statements. F-3 SSI Surgical Services, Inc. Consolidated Statements of Operations For the Years Ended December 30, 2001, December 31, 2000 and December 26, 1999 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share)

The accompanying notes are an integral part of these financial statements. F-4 SSI Surgical Services, Inc. Consolidated Statements of Shareholders' Equity For the Years Ended December 30, 2001, December 31, 2000 and December 26, 1999 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share)

The accompanying notes are an integral part of these financial statements. F-5 SSI Surgical Services, Inc. Consolidated Statements of Cash Flow For the Years Ended December 30, 2001, December 31, 2000 and -------------------------------------------------------------------------------- December 26, 1999 (Dollars in Thousands)

The accompanying notes are an integral part of these financial statements. F-6 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 1. Basis of Presentation and Nature of Business The Company was incorporated in New York State on May 27, 1982, as Medical Sterilization, Inc ("MSI"). Effective January 8, 1999, the Company's headquarters and principal place of business was moved to Orlando, Florida. Effective May 28, 1999, the Company changed its name to SSI Surgical Services, Inc. The Company provides both off-site and on-site reprocessing and sterilization of surgical instrument sets, gowns and towels, as well as certain other items requiring sterilization for healthcare providers, hospitals and other medical facilities. In addition the Company provides a broad range of surgical instrument management services that includes provision of endoscopic instrument sets and other specialty products to hospitals and other medical facilities, as well as on-site department management, staffing and other consulting services. 2. Acquisitions and Divestitures 1999 Acquisitions In January, 1999, the Company acquired Endoscopy Specialists, Incorporated ("ESI"), a Florida-based surgical instrument management services firm, and the remaining 62.5% of the shares of SSI Surgical Services, Inc. ("SSI"), a joint venture in which the Company had held a 37.5% interest. Both businesses were acquired from TFX Equities, Incorporated ("TFX"), a wholly owned subsidiary of Teleflex Incorporated, a diversified publicly held company, in exchange for 13.4 million common shares of the Company and warrants for an additional 1.5 million common shares. TFX also converted the preferred shares it owned into common shares. As a result of this transaction, TFX now owns a majority of the outstanding common stock of the Company. The acquisition was accounted for as a purchase. Net assets of the acquired businesses amounted to $13,000 and the acquisition was financed through a combination of the equity transactions noted above and the assumption of approximately $6,500 of intercompany financing from TFX. The excess purchase price over the fair market value of the assets acquired, approximately $5,200 was recorded as goodwill and is being amortized to expense over 15 years. F-7 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) A summary of the net assets acquired follows: Current assets $ 5,073 Current liabilities (2,273) -------- Working capital 2,800 -------- Property and equipment 10,640 Capital lease obligations (401) -------- Net assets acquired 13,039 -------- Affiliate borrowings assumed 6,508 Issuance of common stock 11,725 -------- Purchase price 18,233 -------- Excess purchase price (goodwill) $ 5,194 ======== 3. Summary of Significant Accounting Policies Fiscal Year The Company's fiscal year ends the last Sunday in December. There were 52 weeks in fiscal 2001, 53 weeks in fiscal 2000 and 52 weeks in fiscal 1999. Cash and Cash Equivalents All highly liquid investments with maturities of three months or less when purchased are classified as cash equivalents. Property and Equipment Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets (ranging from 5 to 15 years) and, for leasehold improvements, over the shorter of the useful life of the improvement or the term of the lease. Shrinkage-loss of surgical instruments and containers is provided based upon incurred losses. Maintenance and repairs are charged to expense in the year incurred. Expenditures which significantly improve or extend the life of the assets are capitalized. Upon disposal, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in income. Intangibles Intangible assets consist principally of goodwill, which is the excess purchase price over the fair value of the assets of businesses acquired. Intangible assets are amortized on a straight-line basis over their estimated useful lives, not exceeding 15 years. Intangibles are stated net of accumulated amortization of $1,458 and $1,052 as of December 30, 2001 and December 31, 2000, respectively. F-8 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) Accounting for Long-Lived Assets On a periodic basis or whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable, impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use or sale of the asset and its eventual disposition, to the carrying amount of the asset. Earnings Per Share Calculation Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed in a similar manner except that the weighted average number of common shares is increased for dilutive securities. Potentially dilutive securities have been excluded from the 2001, 2000 and 1999 computations of diluted earnings per share since the result would be anti-dilutive. Revenue Recognition The Company records revenue for hospital services in accordance with contractual terms. Revenues for other sterilization services are recorded upon the completion of processing and/or shipment. Concentration of Credit Risk Trade receivables arise from long-term and short-term contracts with healthcare providers. To reduce credit risk, the Company performs credit evaluations of its customers but does not generally require collateral. Credit risk is affected by conditions within the economy and the healthcare industry. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. For the fiscal years ended December 30, 2001 and December 31, 2000, 10 customers represented approximately 50% of the accounts receivable balance. The loss of any one customer could have a significant impact on the Company's financial position or results of operations. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires that deferred income taxes be recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Following the Company's acquisition of SSI and ESI from TFX in January 1999, the Company's taxable income is included in the consolidated tax returns of TFX under a tax sharing arrangement. For purposes of these financial statements, income taxes have been determined and allocated to the Company on a separate return basis. F-9 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain items in the 2000 and 1999 financial statements have been reclassified to conform with the 2001 presentation of the financial statements. New Accounting Pronouncements On June 30, 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. Effective in the first quarter of 2002, SFAS No. 142 requires that goodwill and other intangible assets with indefinite lives no longer be amortized but instead be tested for impairment on an annual basis. The Company is still analyzing the effect of SFAS No. 142 on the financial statements, including the required transitional impairment tests. Goodwill amortization expense during the year ended December 30, 2001 was approximately $406. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations. Under SFAS 143, the costs of retiring an asset will be recorded as a liability when the retirement obligation arises and will be amortized to expense over the life of the asset. Management does not believe that the impact of adopting SFAS No. 143 will have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets. The new rules are effective for the Company on December 31, 2001. Management does not believe that the impact of adopting SFAS No. 144 will have a material effect on the Company's consolidated financial statements. F-10 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 4. Prepaid Expenses and Other Assets The composition of prepaids and other assets is as follows: 2001 2000 Consumables and supplies $1,245 $1,180 Receivables 16 29 Other 155 303 ------ ------ Total $1,416 $1,512 ====== ====== 5. Property and Equipment The composition of property and equipment is as follows: 2001 2000 Surgical instruments and gowns $ 26,627 $ 23,213 Containers 1,985 1,973 Machinery and equipment 4,728 5,606 Leasehold improvements 4,056 3,441 Furniture and fixtures 1,877 790 -------- -------- 39,273 35,023 Accumulated depreciation and amortization (15,861) (12,228) -------- -------- $ 23,412 $ 22,795 ======== ======== Depreciation and amortization expense for the years ended December 30, 2001, December 31, 2000 and December 26, 1999 was $4,967, $3,970 and $2,940, respectively. The composition of assets recorded under capital leases is as follows: 2001 2000 Surgical instruments $ 2,174 $ 3,232 Machinery and equipment 685 685 Containers 335 335 ------- ------- 3,194 4,252 Accumulated amortization (1,538) (2,019) ------- ------- $ 1,656 $ 2,233 ======= ======= F-11 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 6. Write-Down of Property and Equipment In October 2001, equipment relating to a specific endoscopic contract was deemed to be unrecoverable. The carrying amount of the equipment written-off was $234. During the year, there was no revenue recorded on the contract and depreciation expense of $238 relating to the abandoned equipment was recorded in operating expenses. In July 2000, the Houston facility was temporarily shutdown. The decision was based on low sales volume and the ability to transfer sterilization equipment from the Houston facility to other facilities, thus avoiding additional capital expenditures. The facility was to be placed back into service when a potentially significant instrument processing contract was signed. This potential contract was not signed and in December 2001, the decision was made not to place the facility back into service. The carrying amount of leasehold improvements and equipment written-off was $203 and $55, respectively. The Company is negotiating with several parties to take over the leased facility. Based on the status of these negotiations, the Company provided a reserve for remaining lease obligation costs of $100, which was accrued at December 30, 2001 (total obligation $267). 7. Accounts Payable and Accrued Expenses The composition of accounts payable and accrued expenses is as follows: 2001 2000 Trade accounts payable $1,345 $2,098 Salary and other compensation benefits 405 563 Sales and other taxes 371 356 Professional fees 162 147 Lease obligations 100 -- Other 138 317 ------ ------ Total $2,521 $3,481 ====== ====== 8. Employee Benefit Plans The Company has historically maintained a 401(k) defined contribution plan, which allows participants to make contributions based on a percentage of their earnings. During fiscal year 1999, employees of the Company became eligible to participate in a successor 401(k) plan with TFX. The TFX plan allows participants to make pretax contributions, which are matched on a proportionate basis. The Company's contributions for the fiscal years ended December 30, 2001, December 31, 2000 and December 26, 1999 were approximately $87, $105 and $81, respectively. F-12 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 9. Income Taxes The provision for income taxes for the years ended December 30, 2001, December 31, 2000 and December 26, 1999, consisted of the following: 2001 2000 1999 Current: Federal $(1,220) $(1,189) $176 State (139) (135) 21 ------- ------- ---- $(1,359) $(1,324) $197 ======= ======= ==== Reconciliation between the statutory income tax rate and effective tax rate is summarized below: 2001 2000 1999 Expected federal statutory tax rate (benefit) (35)% (35)% 35% State and local taxes, net (4)% (4)% 4% Limitation (utilization) of net operating losses -- -- (12)% --- --- --- Effective tax rate (39)% (39)% 27% === === === Following the Company's acquisition of SSI and ESI from TFX in January 1999, the Company's taxable income is included in the consolidated tax returns of TFX under a tax sharing arrangement. For purposes of these financial statements, income taxes have been determined and allocated to the Company on a separate return basis. The use of net operating loss carryforwards generated by the Company prior to the 1999 acquisitions of approximately $9 million are subject to annual limitations imposed by the Internal Revenue Code. Accordingly, a significant portion of the net operating loss carryforwards generated in prior years will not be available to the Company because of changes in ownership occurring during 1999. Realization of the remaining deferred tax assets associated with the net operating loss carryforward is dependent upon generating sufficient taxable income prior to their expiration. Management believes that there is risk that these operating loss carryforwards may expire unused, and, accordingly, has continued to maintain a valuation allowance equal to the net deferred tax asset amount. The Company's federal net operating loss carryforwards will expire in varying amounts from 2001 through 2013. F-13 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 10. Obligations Under Capital Leases Future minimum payments as of December 30, 2001 under capital leases for property and equipment, including surgical instruments, are as follows: 2002 $361 2003 31 ---- Total minimum lease payments 392 Less amount representing interest 16 ---- Present value of minimum lease payment 376 Less current portion 346 ---- $ 30 ==== 11. Common and Preferred Stock On January 8, 1997, TFX, a wholly owned subsidiary of Teleflex, a diversified publicly held company, purchased the Series B and Series C Convertible Preferred Stock from the previous owners of such stock. This Series B Convertible Preferred Stock was convertible at the option of the holder into Common Stock or cash, at $2.00 per share maturing December 31, 1999. Dividends accrued on the Series B Convertible Preferred Stock at the rate of 8% per year. These dividends were paid in cash or accrued at the option of the Company. If not paid, accrued dividends were added to the face amount of the Series B Convertible Preferred Stock at the time of conversion. In January 1999, TFX converted the face amount of the Series B Convertible Preferred Stock into 975,095 shares of Common Stock. The Series C Convertible Preferred Stock was automatically convertible at $1.00 per share into 1,945,625 shares of Common Stock on December 30, 2004, or earlier at the option of the holder. There were no dividends payable nor accrued on the Series C Convertible Preferred Stock. In January 2000, TFX converted the Series C Convertible Preferred Stock into 1,945,625 shares of Common Stock. In January 1999, the Company increased the number of shares of authorized Common Stock, par value $.01 per share from 10,000,000 shares to 30,000,000 shares, and issued 13,400,000 shares of Common Stock to TFX in connection with an acquisition. See Note 2. 12. Common Stock Warrants From time to time, the Company has issued Common Stock warrants to directors, lending institutions, and other third parties. At December 31, 2001, the Company had aggregate warrants outstanding to purchase 1,500,000 shares of Common Stock at a price between $1.38 and $2.00 per share with expiration dates through December 2005. F-14 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 13. Stock Option Plans On September 29, 1994, the Board of Directors approved the 1994 Stock Option Plan and authorized the issuance of up to 1,000,000 shares of Common Stock of the Company upon the exercise of Incentive and Non-Qualified Stock Options, which may be granted pursuant to the Plan. The Plan was approved by the shareholders at a meeting held on July 20, 1995. In 1996, the Board of Directors authorized another 500,000 shares of Common Stock to be issued under the 1996 Plan, which was approved by shareholders on May 25, 1996. On February 24, 2000, the Board of Directors authorized 500,000 shares of common stock to be issued under the 2000 Stock Plan, which was approved by shareholders on May 22, 2000. Incentive Stock Options may be granted only to key employees, including officers or directors who are employees of the Company, and are exercisable immediately or in installments following a period of two (2) years after grant but within ten (10) years from the date of grant (five (5) years in the case of options granted to holders of more than 10% of the Company's voting stock). The exercise price must be at least equal to the fair market value of the Company's Common Stock on the date granted (110% in the case of 10% shareholders). At December 30, 2001, Incentive Stock Options for an aggregate of 356,170 shares of Common Stock at exercise prices ranging from $0.26 to $1.28 were outstanding. Non-Qualified Stock Options may be granted under the Plans or otherwise to officers, directors, consultants and key employees. The exercise price is not limited and may be below the fair market value of the Company's Common Stock on the date of grant. At December 30, 2001, Non-Qualified Stock Options for an aggregate of 885,000 shares of Common Stock at exercise prices ranging from $0.44 to $1.50 were outstanding. The Company applies the disclosure-only provisions of SFAS 123 "Accounting for Stock-Based Compensation," continuing to measure compensation cost in accordance with APB 25 " Accounting for Stock Issued to Employees." Had compensation cost been determined based on the fair value at the grant date consistent with the provisions of SFAS 123, the Company's pro forma net income (loss) and earnings per share for the years ended December 30, 2001, December 31, 2000 and December 26, 1999 would have been: 2001 2000 1999 Net income (loss) attributable to common shareholders as reported $(2,125) $(2,072) $521 Pro forma income (loss) $(2,199) $(2,086) $400 Earnings per Common share as reported - Diluted $ (.11) $ (.11) $.02 Pro forma Earnings per share - Diluted $ (.11) $ (.11) $.02 F-15 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) The weighted average fair value of each option has been estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions used for grants in 2001, 2000 and 1999, respectively; no dividend yield; expected volatility of 90%; risk-free interest rate of 5.65% to 6.61%: and expected lives ranging from approximately 4.5 to 5 years. Weighted averages are used because of varying assumed exercise dates. A summary of the status of the Company's stock option plans as of December 30, 2001 and December 31, 2000 and changes during the years ended on those dates is presented below. 2001 2000 -------------------- -------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price Outstanding at beginning of year 1,015,670 $0.83 1,129,670 $0.85 Granted 320,000 0.43 452,500 1.43 Exercised -- -- -- -- Canceled/Expired 94,500 0.77 (566,500) 1.36 ---------- ---------- Outstanding at end of year 1,241,170 0.73 1,015,670 0.83 ========== ========== Options exercisable at end of year 850,045 817,170 ========== ========== Weighted average fair value of options granted during the year $ 0.25 $ 0.52 The following table summarizes information about stock options outstanding at December 30, 2001: Weighted Average Weighted Remaining Average Options Contractual Options Exercise Outstanding Life Exercisable Prices 300,000 9 -- $0.43 116,000 8 56,750 0.69 608,000 3 608,000 0.74 187,170 6 89,670 1.09 30,000 5 30,000 1.50 --------- ------- 1,241,170 850,045 F-16 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 14. Related Party Transactions The Company purchases from surgical instrument manufacturers the surgical instruments included in instrument sets that are utilized in providing certain of the Company's services. Pilling Surgical (Pilling), a national surgical instrument manufacturer and a subsidiary of Teleflex, has agreed to supply surgical instruments to the Company. Purchases from Pilling are made on commercial terms. Instrument purchases from Pilling for the years ended December 30, 2001, December 31, 2000 and December 26, 1999, were approximately $772, $1,308, and $969, respectively. Effective April 12, 2001, the Company entered into a Sales and Marketing Agreement with Pilling. Under the terms of the agreement, Pilling is granted the sole and exclusive right to market the Company's comprehensive line of surgical support services to hospitals and ambulatory centers throughout the United States. The term of the agreement is for three years ending on April 30, 2004 and provides for early termination in the event billed sales of services from Pilling generated contracts during any calendar year do not exceed amounts specified in the agreement. During each calendar year, the Company will pay Pilling a fee on billed sales from contracts signed in that calendar year. In the year ended December 30, 2001, Pilling earned fees totaling $138. In connection with the Company's January 1999 acquisition of ESI and SSI from TFX, the Company assumed approximately $6,500 of financing from Teleflex. In addition, the Company entered into a revolving credit facility with Teleflex. The agreement as amended, provides the Company up to $27,500 of unsecured financing. The outstanding principal on this credit facility is due and payable on April 30, 2003. Interest under this agreement is payable at the prevailing Prime rate of PNC Bank, plus 1.25 percent. Interest was charged on the unpaid principal balance during 2001 and 2000 at a weighted average rate of 8.2% and 10.5%, respectively and at a fixed rate of 8% during 1999. Interest charged by TFX amounted to $1,777, $1,684 and $649 for the years ended December 30, 2001, December 31, 2000 and December 26, 1999, respectively. Teleflex also charged the Company fees for executive management, legal, treasury, tax and other financial services. Fees of $200 were charged for the year ended December 30, 2001 and fees of $350 were charged for each of the years ended December 31, 2000 and December 26, 1999, respectively. See Notes 8 and 10 for other related party transactions. F-17 SSI Surgical Services, Inc. Notes to the Consolidated Financial Statements December 30, 2001 -------------------------------------------------------------------------------- (Dollars in Thousands, except per share) 15. Commitments and Contingencies: Minimum annual rental commitments for non-cancelable operating leases, principally for the Company's off-site sterilization facilities, at December 30, 2001 are as follows: 2002 $ 2,082 2003 1,428 2004 1,241 2005 1,210 2006 1,150 Thereafter 3,323 ------- $10,434 ======= Rent expense, net of sublease income of approximately $195, $263 and $293, was approximately $1,924, $1,564 and $1,521 for the years ended December 30, 2001, December 31, 2000 and December 26, 1999, respectively. The Company is subject to a variety of claims and suits that arise from time to time out of the ordinary course of its business. The Company does not believe that these actions will have a material impact on the Company's business, financial condition or results of operations. 16. Joint Venture Agreement Effective September 7, 2001, the Company entered into a Joint Venture Agreement with World Healthcare Systems (WHS). Under the terms of the agreement, the Company and WHS formed a joint venture, World SSI LLC, majority owned by WHS. World SSI will sell and market the Company's comprehensive line of off-site surgical support services to hospitals and ambulatory surgery centers. As part of the joint venture arrangement, World SSI will, subject to certain performance criteria, acquire the Company's existing Off-Site facilities through which SSI currently carries on its Off-Site business. F-18

SSI SURGICAL SERVICES INC 10-K