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 September 29, 1996
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
147 Keystone Drive
Montgomeryville, PA 18936
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(Address of principal executive offices)
(Zip Code)
(215) 619-3600
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(Registrant's telephone number, including area code)
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(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 12, 1996, the registrant had outstanding 9,881,543 shares of
Common Stock, $.01 par value.
Page 1
Exhibit Index is on Page 13
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
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ITEM 1. Financial Statements:
a. Condensed Consolidated Balance Sheets,
September 29, 1996 (unaudited) and December 31, 1995 3
b. Condensed Consolidated Statements of Operations
(unaudited) for the quarters ended
September 29, 1996 and October 1, 1995 4
c. Condensed Consolidated Statements of Operations
(unaudited) for the nine months ended
September 29, 1996 and October 1, 1995 5
d. Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 29, 1996 and October 1, 1995 6
e. Notes to Condensed Consolidated Financial
Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 12
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBITS 15
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Sep. 29, Dec. 31,
1996 1995
--------- --------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................................................................. $ 5,526 $ 4,903
(including restricted amounts of $100)
Short-term investments ................................................................................ 1,216 3,244
Accounts receivable, net of allowance for doubtful
accounts of $116 and $118 ........................................................................... 2,438 3,225
Inventories ........................................................................................... 3,576 3,866
Other ................................................................................................. 182 194
------ ------
Total current assets ................................................................................. 12,938 15,432
Property and equipment, net ............................................................................ 7,486 8,250
Other assets ........................................................................................... 1,207 1,139
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Total Assets ......................................................................................... $21,631 $24,821
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................................................... $ 222 $ 212
Accounts payable ...................................................................................... 851 467
Accrued liabilities ................................................................................... 2,991 2,163
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Total current liabilities ............................................................................ 4,064 2,842
------ ------
Long-term debt ......................................................................................... 5,995 6,289
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized,
9,882 shares and 9,851 shares issued and outstanding ................................................. 99 99
Additional paid-in capital ............................................................................ 32,713 32,588
Accumulated deficit ................................................................................... (21,240) (16,997)
------ ------
Total stockholders' equity ........................................................................... 11,572 15,690
------ ------
Total Liabilities and Stockholders' Equity ........................................................... $21,631 $24,821
====== ======
The accompanying notes are an integral part of these statements
Page 3
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Quarter Ended:
-------------------------------
Sep. 29, Oct. 1,
1996 1995
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Net sales ............................................................................ $2,416 $3,082
Cost of sales ........................................................................ 840 1,333
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Gross profit ......................................................................... 1,576 1,749
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Operating expenses:
Selling, general and administrative ................................................. 2,048 2,179
Product development ................................................................. 344 417
Non-recurring charges ............................................................... 1,504 --
------ ------
3,896 2,596
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Operating income (loss) .............................................................. (2,320) (847)
Interest expense ..................................................................... 140 160
Interest income ...................................................................... (95) (19)
Other (income) expense ............................................................... 58 --
Equity in (earnings) loss of joint venture ........................................... 60 8
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Income (loss) before income taxes .................................................... (2,483) (996)
Provision for income taxes ........................................................... -- --
------ ------
Net income (loss) .................................................................... ($2,483) ($ 996)
====== ======
Net income (loss) per share .......................................................... ($ 0.25) ($ 0.10)
====== ======
Shares used in calculating net income (loss) per share ............................... 9,872 9,851
====== ======
The accompanying notes are an integral part of these statements.
Page 4
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Nine Months Ended:
--------------------------------
Sep. 29, Oct. 1,
1996 1995
-------- --------
Net sales .......................................................................... $7,965 $11,055
Cost of sales ...................................................................... 2,819 4,639
------ -------
Gross profit ....................................................................... 5,146 6,416
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Operating expenses:
Selling, general and administrative ............................................... 6,387 7,815
Product development ............................................................... 1,154 1,768
Non-recurring charges ............................................................. 1,504 390
------ -------
9,045 9,973
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Operating income (loss) ............................................................ (3,899) (3,557)
Interest expense ................................................................... 424 471
Interest income .................................................................... (286) (89)
Other (income) expense ............................................................. 43 --
Equity in (earnings) loss of joint venture ......................................... 164 2
------ -------
Income (loss) before income taxes .................................................. (4,244) (3,941)
Provision for income taxes ......................................................... -- --
------ -------
Net income (loss) .................................................................. ($4,244) ($3,941)
====== ======
Net income (loss) per share ........................................................ ($ 0.43) ($ 0.40)
====== ======
Shares used in calculating net income (loss) per share ............................. 9,861 9,851
====== ======
The accompanying notes are an integral part of these statements.
Page 5
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Nine Months Ended:
--------------------------------
Sep. 29, Oct. 1,
1996 1995
------ ------
Cash Flows From Operating Activities:
Net income (loss) .................................................................... ($4,244) ($3,941)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in (earnings) loss of joint venture ........................................ 164 2
Depreciation and amortization ..................................................... 696 1,385
Imputed interest .................................................................. (12) (16)
Non-recurring charges (credits) ................................................... 1,346 390
Decrease (increase) in assets:
Accounts receivable .............................................................. 527 1,377
Inventories ...................................................................... 326 (340)
Other current assets ............................................................. 12 (110)
Other assets ..................................................................... 7 (81)
Increase (decrease) in liabilities:
Accounts payable ................................................................. 385 379
Accrued liabilities .............................................................. 40 (349)
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Net cash used in operating activities ................................................ (753) (1,304)
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Cash Flows From Investing Activities:
Sale (purchase) short term investments ............................................... 2,028 --
Investment in joint venture ......................................................... (200) (150)
Sale (purchase) property and equipment ............................................... (236) (375)
Patent costs ........................................................................ (57) (506)
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Net cash provided by (used in) investing activities .................................. 1,535 (1,031)
------ ------
Cash Flows From Financing Activities:
Payments on long-term debt .......................................................... (159) (262)
------ ------
Net cash used in financing activities ................................................ (159) (262)
Net increase (decrease) in cash and cash equivalents ................................. 623 (2,597)
Cash and Cash Equivalents, Beginning of Period ....................................... 4,903 4,143
------ ------
Cash and Cash Equivalents, End of Period ............................................. $5,526 $1,546
====== ======
The accompanying notes are an integral part of these statements.
Page 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 September 29, 1996, the
results of operations for the quarters and nine months ended September 29, 1996
and October 1, 1995 and cash flows for the nine months ended September 29, 1996
and October 1, 1995.
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 December 31, 1995, as filed with the Securities
and Exchange Commission. Interim results for the quarter and nine months ended
September 29, 1996 are not necessarily indicative of the results to be expected
for the full year.
2. Supplemental Cash Flow Information:
Income taxes paid for the nine months ended September 29, 1996 were $35,000,
primarily representing federal alternative minimum taxes. There were no income
taxes paid for the nine months ended October 1, 1995. Interest paid for the nine
months ended September 29, 1996 and October 1, 1995 was $423,000 and $470,000,
respectively.
The following noncash investing and financing activities took place:
In the third quarter of 1995, the Company issued a note of $442,000 which
replaced previous notes and incorporated additional patent litigation costs
incurred in the third quarter of 1995. This note, and others issued previously,
were completely repaid following the settlement in December 1995 of the patent
litigation with Sharplan Lasers, Inc. and its parent, Laser Industries Ltd. For
the nine months ended September 29, 1996 and October 1, 1995, $126,000 and
$50,000 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.
Page 7
3. Net Loss Per Share:
Net loss per share has been computed using the weighted average number of common
shares outstanding during each period. Common share equivalents have not been
considered as they are anti-dilutive.
4. Bank Borrowings:
At September 29, 1996, 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 $576,000 in
favor of the Montgomery County Industrial Development Corporation (MCIDC) under
the terms of the Mortgage and Security Agreement and one other minor trade
letter of credit. There were no other borrowings under the line at September 29,
1996. 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
of credit expires on June 30, 1997. The Company's line of credit agreement
prohibits the declaration or payment of any dividends or distributions on any
capital stock at any time there are outstanding obligations to the bank without
the prior written consent of the bank. The line is subject to the Company
maintaining certain financial covenants, as defined.
5. Income Taxes:
No income tax provision was made for the first nine months of 1996 or 1995 due
to the losses incurred.
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
represented 24% of sales in the first nine months of 1996, as compared to 22% in
the same period in 1995. Sales to the Company's joint venture (see Note 7) were
2% and 8% of net sales in the first nine months of 1996 and 1995, respectively.
Page 8
7. Investment in MEDIQ PRN/SLT:
At September 29, 1996, the Company was 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 arm's-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 $131,000 and
$911,000 for the nine months ended September 29, 1996 and October 1, 1995,
respectively. Accounts receivable from sales to Mediq PRN/SLT at September 29,
1996 were $18,000. On September 30, 1996, the Company acquired the remaining 50%
interest in the joint venture from Mediq PRN. The acquisition will be accounted
for as a purchase and the results of operations and assets and liabilities
acquired will be reflected in the Company's fourth quarter 1996 results.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales for the quarter ended September 29, 1996 were $2,416,000.
Compared to the third quarter of 1995, net sales decreased $666,000, or 22%. For
the nine months ended September 29, 1996, net sales were $7,965,000 compared to
$11,055,000 for the first nine months of 1995, a decrease of $3,090,000, or 28%.
Net sales of Nd:YAG laser systems for the third quarter of 1996 were
substantially the same as the third quarter of 1995, while such net sales for
the nine months ended September 29, 1996 decreased 27% from the comparable
period in 1995. Net sales of delivery systems declined by 26% in the third
quarter of 1996 and 28% in the first nine months of 1996, from the respective
comparable period in 1995.
With the continuation of a weak market for capital purchases by hospitals,
the Company has taken actions aimed at positioning the Company for increased
sales of delivery systems and becoming more efficient in serving its existing
base of customers. In the third quarter of 1996, the domestic salesforce was
reorganized to focus on more effectively working with the Company's customers to
enhance utilization of their lasers and thereby create additional demand for the
Company's delivery systems. In addition, at the end of the third quarter of
1996, the Company acquired the remaining fifty percent interest in the Mediq
PRN/SLT joint venture rental company. Fourth quarter revenues will include sales
from the rental business that previously had been accounted for under the equity
method of accounting.
Page 9
Principally due to the lower volumes of sales, gross profits for the
quarter ended September 29,1996 of $1,576,000 decreased $173,000, or 10%, from
the third quarter of 1995, while gross profits for the first nine months of 1996
of $5,146,000 decreased $1,270,000, or 20%, from the comparable nine month
period in 1995. As a percentage of net sales, gross profit increased to 65% from
58% in the comparable period of 1995, due primarily to cost reduction measures
taken in the second half of 1995 to reduce manufacturing overhead.
In the third quarter of 1996, the Company recorded a charge for severance
and related costs and for the write-off of certain leasehold improvements,
amounting to $1,504,000. The charge for severance and related costs was due
primarily to changes in and the elimination of executive level positions. The
write-off of certain leasehold improvements was a result of the consolidation
and relocation of the Company's manufacturing, research and warehouse operations
into the Company's newly leased office/research and manufacturing facility in
Montgomeryville, PA. In the second quarter of 1995, in response to the lower
level of sales that were being experienced during 1995 and expected to continue
into 1996, the Company reduced its workforce in an effort to bring expenditure
levels more in line with sales levels being experienced. The actions resulted in
a charge of $390,000 for severance and related costs.
Operating expenses, excluding the above-mentioned charges, were $2,392,000
for the third quarter of 1996 compared to $2,596,000 for the third quarter of
1995. For the first nine months of 1996, operating expenses, excluding the
above-mentioned charges, were $7,541,000 compared to $9,583,000 for the first
nine months of 1995.
Product development expenses of $344,000 for the third quarter of 1996 and
$1,154,000 for the first nine months of 1996 decreased by $73,000, or 18%, and
$614,000, or 35%, respectively, from the comparable periods in 1995. The
decrease was due mainly to lower consulting costs resulting from the expiration
in June 1995 of the one-year consulting arrangement with the principals of
Advanced Laser Systems Technology as well as to lower personnel-related charges
resulting from the reduction in-force at the end of the second quarter of 1995.
Excluding the above-mentioned charges, selling, general and administrative
expenses were $2,048,000 for the third quarter of 1996, a decrease of $131,000,
or 6%, from the comparable prior year period. For the first nine months of 1996,
selling, general and administrative expenses were $6,387,000, compared to
$7,815,000 in the first nine months of 1995, a decrease of $1,428,000, or 18%.
The above-mentioned cost reductions that were taken at the end of the second
quarter of 1995 accounted for the majority of the reduced spending levels in
both comparable periods. In addition, the first nine months of 1995 included a
charge of $200,000 incurred in connection with a proposed business combination
transaction for which there were no corresponding expenses in the comparable
1996 period.
Net interest expense was $45,000 in the third quarter of 1996 and $138,000
in the first nine months of 1996, a decrease of $96,000 and $244,000,
respectively, from the comparable periods in 1995. The reduction was primarily
attributable to higher interest income earned in the 1996 period due to the
substantially higher cash position.
Page 10
Liquidity and Capital Resources
The Company had cash, cash equivalents and short-term investments of
$6,742,000 at September 29, 1996, of which $100,000 was restricted. In addition,
the Company currently has a $2.75 million credit facility with its bank. The
facility includes a sub-line for letters of credit of $750,000. Other than for
the letter of credit issued in the amount of $576,000 in favor of the Montgomery
County Industrial Development Corporation ("MCIDC") as a condition of the
Mortgage and Security Agreement with MCIDC and one other minor trade letter of
credit, there were no other borrowings outstanding under the line of credit.
Borrowings under the line are secured by the Company's accounts receivable and
inventories. The line is subject to the Company maintaining certain financial
covenants, as defined. The line of credit expires on June 30, 1997.
Net cash used in operating activities was $754,000 for the first nine
months of 1996 compared to net cash used in operating activities of $1,304,000
for the comparable period in 1995. The comparable decrease in net cash used in
operating activities was due mainly to the reduction in the net loss before
non-recurring charges coupled with a reduction in inventories. The third quarter
non-recurring charge of $1,504,000 included non-cash items of $1,346,000.
Net cash provided by investing activities was $1,535,000 for the first nine
months of 1996 compared to net cash used in investing activities of $1,031,000
for the first nine months of 1995. The increase was due principally to the
maturity of certain short-term investments during the first nine months of 1996,
amounting to $2,028,000.
Net cash used in financing activities was $159,000 and $262,000 for the
first nine months of 1996 and 1995, respectively.
Management anticipates capital expenditures of approximately $320,000 in
1996 of which $236,000 was spent in the first nine months. The capital
expenditures are primarily for manufacturing and research and development needs,
sales demonstration lasers and leasehold improvements. The Company is
contractually committed to spend approximately $75,000 of the balance of its
estimated capital expenditures on leasehold improvements in its new facility.
Management believes that its current cash position and cash provided by
operations will be sufficient for these expenditures.
Management believes that inflation has not had a material effect on
operations.
Page 11
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 December 31, 1995, and to
the Company's Forms 10-Q, Item 1, for the quarters ended March 31, 1996 and June
30, 1996, as filed with the Securities and Exchange Commission, which are
incorporated herein by reference.
With regard to the patent infringement action brought by Trimedyne in the United
States District Court for the Central District of California, the Court of
Appeals for the Federal Circuit has granted Trimedyne's motion to extend until
November 25, 1996 the deadline by which Trimedyne must file a brief supporting
its appeal.
With regard to the suit against the Company which was brought by Mr. Norio
Daikuzono, the inventor of three of the Company's Contact Laser patents, for
breach of contract, among other counts, and which was transferred to the United
States District Court for the Eastern District of Pennsylvania, discovery is
proceeding and depositions are being scheduled for November and December 1996.
The Company's motion for summary judgment is still pending. The court has not
indicated when it will rule on that motion. No specific trial date has been set.
With regard to the action brought by the Company in the United States District
Court for the Eastern District of Pennsylvania against C. R. Bard, Inc. and the
Bard Urological Division for breach of contract, anticipatory repudiation of a
contract, negligent misrepresentation and unfair competition, discovery is
proceeding and depositions are being scheduled. The court has set a discovery
completion deadline of March 31, 1997.
Page 12
ITEM 6. Exhibits and Reports on Form 8-K
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a. Exhibits: Exhibit 10.1 - Employment Agreement dated August 5, 1996,
between Registrant and W. Keith Stoneback.
Exhibit 10.2 - Severance Agreement dated August 11, 1996,
between Registrant and James R. Appleby, Jr.
Exhibit 10.3 - Severance Agreement dated November 5, 1996,
between Registrant and Terry A. Fuller.
Exhibit 10.4 - Property Agreement dated October 30, 1996,
among Registrant, Terry A. Fuller and Fuller
Research Corporation.
Exhibit 10.5 - Amendment to the Joint Venture and Other
Agreements dated September 30, 1996, among Registrant,
Mediq/PRN Life Support Services, Inc., and Mediq PRN/SLT.
Exhibit 10.6 - Non-Disturbance, Subordination and
Attornment Agreement dated August 1, 1996, among
Montgomery County Industrial Development Corporation;
SLT Properties, Inc.; Registrant; and
Suburban Cable TV Co. Inc.
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K: none
Page 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 13, 1996 By /s/ Michael R. Stewart
--------------------------------
Michael R. Stewart
Vice President, Finance and
Chief Financial Officer
Signing on behalf of the registrant
and as principal financial officer
Page 14
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
10.1 Employment Agreement dated August 5, 1996, between Registrant
and W. Keith Stoneback.
10.2 Severance Agreement dated August 11, 1996, between Registrant
and James R. Appleby, Jr.
10.3 Severance Agreement dated November 5, 1996, between Registrant
and Terry A. Fuller.
10.4 Property Agreement dated October 30, 1996, among Registrant,
Terry A. Fuller and Fuller Research Corporation.
10.5 Amendment to the Joint Venture and Other Agreements dated
September 30, 1996, among Registrant; Mediq/PRN Life Support
Services, Inc.; and Mediq PRN/SLT.
10.6 Non-Disturbance, Subordination and Attornment Agreement dated
August 1, 1996, among Montgomery County Industrial Development
Corporation; SLT Properties, Inc.; Registrant; and
Suburban Cable TV Co. Inc.
11 Computation of Earnings Per Share
27 Financial Data Schedule
Page 15