FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1995
OR
[ ] 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: 0-17919
SURGICAL LASER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1093148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Cresson Boulevard, P.O. Box 880
Oaks, PA 19456
(Address of principal executive offices)
(Zip Code)
(610) 650-0700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
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
Yes X No
On November 15, 1995, the registrant had outstanding 9,853,356 shares
of Common Stock, $.01 par value.
Page 1 of 16 Pages
Index is on Page 2
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
a. Condensed Consolidated Balance Sheets,
October 1, 1995 (unaudited) and January 1, 1995 3
b. Condensed Consolidated Statements of Operations
(unaudited) for the quarters ended October 1, 1995
and October 2, 1994 4
c. Condensed Consolidated Statements of Operations
(unaudited) for the nine months ended October 1, 1995
and October 2, 1994 5
d. Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended October 1, 1995
and October 2, 1994 6
e. Notes to Condensed Consolidated Financial
Statements (unaudited) 7-9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 12-13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBITS:
EXHIBIT 11 - Computation of Earnings Per Share 15
EXHIBIT 27 - Financial Data Schedule 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Oct. 1, Jan. 1,
1995 1995
---- ----
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,546 $ 4,143
(including restricted amounts of $100)
Accounts receivable, net of allowance for doubtful
accounts of $118 and $110 3,092 4,468
Inventories 5,143 4,725
Other 367 257
-------- --------
Total current assets 10,148 13,593
Property and equipment, net 8,412 8,869
Patents and licensed technology, net 3,508 3,627
Other assets 587 365
-------- --------
Total Assets $ 22,655 $ 26,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 215 $ 314
Accounts payable 1,234 1,298
Accrued liabilities 2,616 2,590
-------- --------
Total current liabilities 4,065 4,202
-------- --------
Long-term debt 6,795 6,567
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized,
9,851 shares and 9,840 shares issued and outstanding 99 98
Additional paid-in capital 32,575 32,526
Accumulated deficit (20,879) (16,939)
-------- --------
Total stockholders' equity 11,795 15,685
-------- --------
Total Liabilities and Stockholders' Equity $ 22,655 $ 26,454
======== ========
The accompanying notes are an integral part of these statements.
- 3 -
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Quarter Ended:
----------------------
Oct 1, Oct. 2,
1995 1994
---- ----
Net sales $ 3,082 $ 5,833
Cost of sales 1,333 2,191
-------- --------
Gross profit 1,749 3,642
-------- --------
Operating expenses:
Selling, general and administrative 2,179 2,695
Product development 417 606
-------- --------
2,596 3,301
-------- --------
Operating income (loss) (847) 341
Interest expense 160 159
Interest income (19) (22)
Equity in (earnings) loss of joint venture 8 (5)
-------- --------
Income (loss) before income taxes (996) 209
Provision for income taxes -- 6
-------- --------
Net income (loss) ($ 996) $ 203
======== ========
Net income (loss) per share ($ 0.10) $ 0.02
======== ========
Shares used in calculating net income
(loss) per share 9,851 9,255
======== ========
The accompanying notes are an integral part of these statements.
- 4 -
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Nine Months Ended:
--------------------------
Oct. 1, Oct. 2,
1995 1994
---- ----
Net sales $ 11,055 $ 15,802
Cost of sales 4,639 5,939
-------- --------
Gross profit 6,416 9,863
-------- --------
Operating expenses:
Selling, general and administrative 7,815 7,851
Product development 1,768 1,528
Non-recurring charges(credits) 390 (892)
-------- --------
9,973 8,487
-------- --------
Operating income (loss) (3,557) 1,376
Interest expense 471 538
Interest income (89) (67)
Equity in (earnings) loss of joint venture 2 (19)
-------- --------
Income (loss) before income taxes (3,941) 924
Provision for income taxes 0 26
-------- --------
Net income (loss) ($ 3,941) $ 898
======== ========
Net income (loss) per share ($ 0.40) $ 0.10
======== ========
Shares used in calculating net income
(loss) per share 9,851 9,211
======== ========
The accompanying notes are an integral part of these statements.
- 5 -
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Nine Months Ended:
--------------------------
Oct. 1, Oct. 2,
1995 1994
---- ----
Cash Flows From Operating Activities:
Net income (loss) ($3,941) $ 898
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in (earnings) loss of joint venture 2 (19)
Depreciation and amortization 1,385 1,500
Imputed interest (16) 22
Non-recurring charges (credits) 390 (838)
Decrease (increase) in assets:
Accounts receivable 1,377 (1,307)
Inventories (340) (236)
Other current assets (110) (114)
Other assets (81) 84
Increase (decrease) in liabilities:
Accounts payable 379 414
Accrued liabilities (349) (190)
------- ------
Net cash provided by (used in) operating activities (1,304) 214
------- ------
Cash Flows From Investing Activities:
Additions to property and equipment (375) (499)
Investment in joint venture (150) --
Patent costs (506) (335)
------- ------
Net cash used in investing activities (1,031) (834)
------- ------
Cash Flows From Financing Activities:
Proceeds from exercised stock options and warrants -- 1
Payments on long-term debt (262) (460)
------- ------
Net cash used in financing activities (262) (459)
Net decrease in cash and cash equivalents (2,597) (1,079)
Cash and Cash Equivalents, Beginning of Period 4,143 2,866
------- ------
Cash and Cash Equivalents, End of Period $ 1,546 $ 1,787
======= ======
The accompanying notes are an integral part of these statements.
- 6 -
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Summary Financial Information and Results of Operations:
In the opinion of Surgical Laser Technologies, Inc. and Subsidiaries (the
"Company"), the accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and with the regulations of the Securities and Exchange Commission
and contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position as of October 1, 1995, the
results of operations for the quarters and nine months ended October 1, 1995 and
October 2, 1994 and cash flows for the nine months ended October 1, 1995 and
October 2, 1994.
Interim Financial Information:
While the Company believes that the disclosures presented are adequate to
prevent misleading information, it is suggested that the unaudited condensed
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes included in the Company's Form 10-K
report for the fiscal year ended January 1, 1995, as filed with the Securities
and Exchange Commission. Interim results for the nine months ended October 1,
1995 are not necessarily indicative of the results to be expected for the full
year.
2. Supplemental Cash Flow Information:
There were no income taxes paid for the nine months ended October 1, 1995 or
October 2, 1994. Interest paid for the nine months ended October 1, 1995 and
October 2, 1994 was $470,000 and $538,000, respectively.
The following noncash investing and financing activities took place:
During the first half of 1995, the Company issued additional notes of $342,000
in conjunction with the financing of certain patent litigation. The notes bore
interest at annual interest rates ranging from 9.5% to 10%, were payable in
monthly installments, and were scheduled to be completely repaid between
December 1996 and April 1997. In the third quarter of 1995, the Company issued a
new note, in the amount of $442,000, which replaces the aforementioned notes and
incorporates additional patent litigation costs incurred in the third quarter of
1995. The new note bears interest at an annual rate of 9.75%. Payment of the
note will be made upon the receipt of damages from the Company's patent
litigation with Laser Industries, Limited and its subsidiary, Sharplan Laser,
Inc. (See Legal Proceedings). For the nine months ended October 1, 1995 and
October 2, 1994,
7
$70,000 and $184,000, respectively, of the 8% convertible subordinated notes
were converted at the request of the noteholders into common stock at a
conversion price of $4.50 per share. For the nine months ended October 2, 1994,
the Company issued additional common stock of $114,000 in the form of restricted
stock awards, for bonuses previously accrued.
3. Net Income (Loss) Per Share:
For the quarter and nine months ended October 1, 1995, the net loss per share
has been computed using the weighted average number of shares outstanding during
each period. Common share equivalents have not been considered as they are
anti-dilutive.
Net income per share for the quarter and nine months ended October 2, 1994 has
been computed using the weighted average number of common shares and common
share equivalents outstanding during each period using the treasury stock
method.
4. Bank Borrowings:
At October 1, 1995, the Company had a $2.75 million line of credit agreement
with a bank, which included a $750,000 sub-line for letters of credit. Under its
sub-line, the Company issued a letter of credit in the amount of $629,000 in
favor of the Montgomery County Industrial Development Corporation (MCIDC) under
the terms of the Mortgage and Security Agreement and one other trade letter of
credit in the amount of $27,000.
At October 1, 1995, there were no other borrowings under the line. The
borrowing base calculation would have limited the availability, after accounting
for the letter of credit, to $1.2 million, however, by insuring its
international receivables, the Company could have increased the availability to
the full line of credit.
Subsequent to the end of the third quarter, the Company and its bank changed the
borrowing base calculation which governs the availability under the line of
credit. Had the new borrowing base been in effect at the end of the third
quarter, the availability after accounting for the letter of credit would have
been $.9 million. By insuring its international receivables, the Company could
increase the borrowing base to approximately $1.5 million, however, the Company
has not done so at this time since borrowings have not been required.
Borrowings on the line are secured by the Company's accounts receivable and
inventories and bear interest at the bank's prime rate plus 1/2%. The line
expires on June 30, 1996.
The Company's line of credit agreement prohibits the declaration or payment of
any dividends or distributions on any of its capital stock at any time there are
outstanding obligations to the bank without the prior written consent of the
bank. In addition, the agreement requires the Company to maintain a leverage
covenant, as defined.
8
5. Income Taxes:
No income tax provision was made for the quarter or nine months ended October 1,
1995 due to the losses incurred. Income taxes of $26,000 were provided for the
nine months ended October 2, 1994; they consisted primarily of federal
alternative minimum tax and were significantly less than the statutory rate due
to the utilization of net operating loss carryforwards.
6. Segment and Geographic Data:
The Company is engaged in one business segment: the design, development,
manufacture and marketing of laser products for medical applications. The
Company's customers are primarily hospitals and medical centers. Foreign sales,
excluding 1994 sales to C.R. Bard, represented 22% of net sales in the first
nine months of 1995 as compared to 18% in the same period in 1994. Sales to the
Company's joint venture (see Note 7) were 8% and 5% of net sales in the first
nine months of 1995 and 1994, respectively. Sales to one customer (C.R. Bard) in
the first nine months of 1994 represented 7% of net sales. There were no sales
to C.R. Bard in the first nine months of 1995.
7. Investment in MEDIQ PRN/SLT:
The Company is a 50% owner of MEDIQ PRN/SLT, a joint venture formed in the third
quarter of 1993 to provide rentals of lasers and related equipment to hospitals
and other health care providers. The investment in MEDIQ PRN/SLT is accounted
for using the equity method and is included in other assets. Sales to MEDIQ
PRN/SLT are recorded at an arms-length price. Under the equity method, 50% of
the gross profit from the sales to the joint venture is deferred and amortized
to income as the related asset is used by the joint venture. The Company's sales
to the joint venture were $911,000 and $861,000 for the nine months ended
October 1, 1995 and October 2, 1994, respectively. Accounts receivable from
sales to MEDIQ PRN/SLT at October 1, 1995 are $425,000.
8. Non-recurring charges(credits):
In the second quarter of 1995, the Company recorded a charge of $390,000 for
severance and other expenses accrued in connection with a workforce reduction.
In the second quarter of 1994, the Company recorded a benefit of $838,000 which
is the net effect of the settlement of a lawsuit with Advanced Laser Systems
Technology, Inc. and its principals ("ALST") partially offset by a separate
legal settlement with a former distributor. The net benefit is reflected in the
statement of operations as a non-recurring credit to operating expenses of
$892,000 and interest expense of $54,000.
9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net sales for the quarter ended October 1, 1995 of $3,082,000 were $2,751,000,
or 47% lower than the same period in 1994, while net sales for the nine months
ended October 1, 1995 of $11,055,000 decreased $4,748,000, or 30%, from the
first nine months of 1994. Included in the first nine months of 1994 net sales
were $1,076,000 of sales to C.R. Bard for which there were no corresponding
sales in 1995.
Net sales of delivery systems declined 28% and 8% in the third quarter and nine
months of 1995 relative to the comparable periods in 1994. These percentages
exclude the 1994 sales to C.R. Bard for which there were no corresponding sales
in 1995. Net sales of Contact Laser(TM) Systems, also excluding 1994 sales to
C.R. Bard, declined 76% and 57% in the third quarter of 1995 and the first nine
months of 1995 from the comparable periods in 1994.
The primary factors affecting the sales of Contact Laser Systems and delivery
systems in 1995 are: (1) market confusion regarding the use of the
electrosurgical roller ball products versus lasers to perform TURP urologic
procedures; and (2) the continued restriction and postponement of medical device
capital purchases by hospitals within the U.S. hospital market.
In response to lower net sales levels, the Company took action, at the end of
the second quarter and throughout the third quarter, to bring its expenditures
and employment levels in line with current sales levels. The actions taken are
expected to reduce cash expenditure levels by approximately $3.1 million on an
annualized basis. The actions included a reduction in force which affected 41
employees, or 27% of the workforce.
Due to the lower level of sales, gross profits for the quarter ended October 1,
1995 of $1,749,000 decreased $1,894,000, or 52%, from the third quarter of 1994,
while gross profits for the first nine months of 1995 of $6,416,000 decreased
$3,447,000, or 35%, from the first nine months of 1994. As a percentage of net
sales, gross profit decreased to 57% in the third quarter from 62% in the third
quarter of 1994, and to 58% in the first nine months of 1995 from 62% in the
first nine months of 1994. The decrease in gross profit as a percentage of sales
was due primarily to the lower volume of sales.
Operating expenses in the third quarter of 1995 of $2,596,000 were 21% lower
than operating expenses in the third quarter of 1994 of $3,301,000. For the
first nine months of 1995, operating expenses, excluding non-recurring charges
and credits, increased $206,000, or 2%, over the first nine months of 1994.
Product development expenses of $417,000 in the third quarter of 1995 were
$189,000 lower than the comparable period in 1994, due mainly to the one-year
renewal, in the third quarter of 1994, of a consulting agreement with the
principals of ALST, which expired at the end of the
10
second quarter of 1995. Product development expenses were $1,768,000 in the
first nine months of 1995 compared to $1,528,000 in the first nine months of
1994. The increase was due primarily to the renewed consulting agreement with
the principals of ALST and to comparably higher project related expenditures.
Selling, general and administrative expenses were flat in the first nine months
of 1995 compared to the same period of 1994. The selling, general and
administrative expenses in the first nine months of 1995 include a charge of
$200,000 recorded in the first quarter of 1995 in connection with a proposed
business combination transaction, which was not consummated. For the third
quarter of 1995, selling, general and administrative expenses decreased
$516,000, or 19%, from the third quarter of 1994. The lower expenses in the
third quarter of 1995 reflect the results of the actions taken at the end of the
second quarter of 1995 to lower costs.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $1,546,000 at October 1, 1995 of
which $100,000 was restricted. In addition, the Company currently has a $2.75
million line of credit facility with its bank. The facility includes a sub-line
for letters of credit of $750,000. Other than for letters of credit issued in
the amount of $656,000, there were no other borrowings outstanding under the
line of credit. Borrowings under the line are secured by receivables and
inventories and are limited by a borrowing base calculation (see Note 4). The
credit facility expires on June 30, 1996.
Net cash used in operating activities was $1,304,000 for the first nine months
of 1995 compared to cash provided by operating activities of $214,000 for the
first nine months of 1994. The decrease in cash provided by operating activities
is the result of the increase in the net loss incurred.
Net cash used in investing activities was $1,031,000 and $834,000 in the first
nine months of 1995 and 1994, respectively. The increase was due primarily to an
additional investment of $150,000 in MEDIQ PRN/SLT (see Note 7), made in the
second quarter of 1995, and to higher investments in patents (primarily
litigation costs).
Net cash used in financing activities was $262,000 and $459,000 in the first
nine months of 1995 and 1994, respectively. The reduction was due primarily to
lower principal payments on the Company's outstanding debt.
Management anticipates capital expenditures of approximately $400,000 in 1995,
of which $375,000 was spent in the first nine months. The capital expenditures
are mainly for manufacturing and research and development needs and for sales
demonstration lasers. The Company is not contractually committed to spend the
balance of its estimated capital expenditures. Investment in patents (primarily
litigation costs) is anticipated to be approximately $700,000 in
11
1995, of which $506,000 was incurred in the first nine months. Management
believes that its current cash position, cash provided by operations as affected
by the reduction in force and associated expense reductions, and other financing
alternatives will be sufficient for these expenditures.
The negative cash flow experienced during the nine-month period ended October 1,
1995 resulted partially from operating expense levels that were higher than
required for the level of sales experienced during this period, and from high
litigation fees due to the key litigation matters in which the Company is
involved. The company has down-sized its operations bringing operating expenses
and expected operating cash flows to a level more consistent with the level of
sales being experienced. Additionally, the Company established deferred payment
arrangements with respect to a substantial portion of the fees to be incurred in
the litigation with Sharplan/Laser Industries, C.R. Bard and Trimedyne. These
arrangements will reduce the near-term cash flow impact of aggressively pursuing
the resolution of these lawsuits.
Management believes that inflation has not had a material effect on operations.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
For information regarding certain pending lawsuits, reference is made to the
Company's Form 10-K, Item 3, for the fiscal year ended January 1, 1995, and to
the Company's Form 10-Q, Item 1, for the quarters ended April 2, 1995 and July
2, 1995, as filed with the Securities and Exchange Commission, which are
incorporated herein by reference.
With respect to the action for patent infringement brought by the Company
against Sharplan Lasers, Inc. and Laser Industries Ltd. (collectively,
"Sharplan") in the United States District Court for the Eastern District of
Pennsylvania (the "Eastern District"), the Company has submitted its expert
reports on damages; the Company has continued to make fact discovery. Sharplan
has not submitted its expert reports. The pre-trial conference and the trial
itself are targeted for January 1996, but the actual trial date will be set by
the Court and will depend in part upon the judge's case load.
On July 3, 1995, Sharplan brought suit against the Company in the Eastern
District, alleging that the Company fraudulently withheld information responsive
to a request made by Sharplan for document production in the discovery phase for
the liability trial for patent infringement. Sharplan and the Company have each
filed motions for summary judgment; each party is now preparing its reply to the
motion of the other party. Management believes that it has meritorious defenses
to Sharplan's allegations and does not foresee that this suit will delay the
damage trial targeted for January.
With regard to the action in the Eastern District against Heraeus LaserSonics,
Inc. ("Heraeus") for
12
breach of its Supply Agreement with the Company and other claims, Heraeus and
the Company have executed agreements settling the dispute that had been the
subject of the lawsuit. Under the major terms of the settlement agreement, SLT
will continue to supply Heraeus with its requirements of sapphire contact
probes, pursuant to the Supply Agreement entered into in March 1989. Heraeus and
SLT have entered into a different supply contract under which SLT will begin to
supply Heraeus its requirements of orb-tipped and conical-tipped contact fiber
delivery systems, commonly known in the marketplace as sculpted or sharpened
fibers. In addition, Heraeus will pay SLT an undisclosed sum of money.
With regard to the action in the Eastern District against C. R. Bard, Inc. and
the Bard Urological Division (collectively, "Bard"), the Court granted SLT's
motion to join Trimedyne, Inc. ("Trimedyne") and Mr. Marvin Loeb, Trimedyne's
Chairman and Chief Executive Officer, as defendants in this action for
contractual interference and civil conspiracy. The Company has acceded to Mr.
Loeb's request to be released as a personal defendant, provided that Trimedyne
does not raise as a defense that the wrongful acts alleged by the Company were
not those of Trimedyne, but those of Mr. Loeb who was acting ultra vires.
Trimedyne has indicated that it will assert that the United States District
Court for the Eastern District of Pennsylvania has no personal jurisdiction over
Trimedyne on the ground that Trimedyne's contacts with the Eastern District have
been de minimis. The Company intends to object to any such motion; documentary
and other discovery will proceed notwithstanding the pendency of any such
motion.
With respect to the action for patent infringement filed against the Company by
Trimedyne in the United States District Court for the Central District of
California, the Court heard, on November 6, 1995, the Company's motion for
partial summary judgment for non-infringement of the Hussein '737 patent. The
Company is awaiting the Court's final ruling.
With regard to the suit against the Company brought by the inventor of
three of the Company's Contact Laser(TM) patents for breach of contract, among
other counts, filed in the United States District Court for the Southern
District of Ohio, the Court has dismissed the fraud claims and permitted the
balance of the matter to proceed. The Company has until November 30, 1995 to
file its answer, defenses and counterclaims. The Company remains of the belief
that it has meritorious defenses, which it will assert vigorously.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits: Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Disclosure
b. Reports on 8-K: none
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SURGICAL LASER TECHNOLOGIES, INC.
Date: November 20, 1995 By /s/ Michael R. Stewart
-------------------------
Michael R. Stewart
Vice President, Controller and
Chief Financial Officer
Signing on behalf of the registrant
and as principal financial officer
14