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 March 30, 1997
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.
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(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 May 2, 1997 the registrant had outstanding 9,883,727 shares
of Common Stock, $.0l par value.
Page 1
Exhibit Index is on Page 9
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION: PAGE
- ------------------------------ ----
ITEM 1. Financial Statements:
a. Condensed Consolidated Balance Sheets, 3
March 30, 1997 (unaudited) and December 29, 1996
b. Condensed Consolidated Statements of Operations (unaudited) 4
for the quarters ended March 30, 1997 and March 31, 1996
c. Condensed Consolidated Statements of Cash Flows (unaudited) 5
for the quarters ended March 30, 1997 and March 31, 1996
d. Notes to Condensed Consolidated Financial Statements (unaudited) 6-7
ITEM 2. Management's Discussion and Analysis of 7-9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 9
ITEM 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
EXHIBITS:
EXHIBIT 11 - Computation of Earnings Per Share 11
EXHIBIT 27 - Financial Data Schedule 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
March 30, 1997 Dec. 29, 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents (including restricted amount of $100) $ 2,985 $ 2,795
Short-term investments 3,337 3,325
Accounts receivable, net of allowance for doubtful accounts of $116 2,653 2,899
Inventories 3,138 3,534
Other 169 134
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Total current assets 12,282 12,687
Property and equipment, net 2,153 2,325
Property held for sale, net 5,565 5,636
Patents and licensed technology, net 584 610
Other assets 225 232
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Total Assets $ 20,809 $ 21,490
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 480 $ 468
Accounts payable 654 777
Accrued liabilities 2,042 2,306
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Total current liabilities 3,176 3,551
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Long-term debt 6,518 6,631
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized, 9,882 shares
issued and outstanding 99 99
Additional paid-in capital 32,718 32,714
Accumulated deficit (21,702) (21,505)
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Total stockholders' equity 11,115 11,308
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Total Liabilities and Stockholders' Equity $ 20,809 $ 21,490
======== ========
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:
March 30, 1997 March 31, 1996
Net sales $ 3,073 $ 2,765
Cost of sales 1,345 1,050
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Gross profit 1,728 1,715
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Operating expenses:
Selling, general and administrative 1,720 2,018
Product development 231 436
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1,951 2,454
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Operating loss (223) (739)
Interest expense 172 144
Interest income (125) (106)
Other income (73) --
Equity in loss of joint venture -- 43
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Loss before income taxes (197) (820)
Provision for income taxes -- --
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Net loss $ (197) $ (820)
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Net loss per share $ (0.02) $ (0.08)
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Shares used in calculating net loss per share 9,882 9,854
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The accompanying notes are an integral part of these statements.
4
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Quarter Ended:
March 30, 1997 March 31, 1996
Cash Flows From Operating Activities:
Net loss $ (197) $ (820)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Equity in loss of joint venture -- 44
Depreciation and amortization 277 240
Imputed interest (6) (4)
(Increase) decrease in assets:
Accounts receivable 246 352
Inventories 416 314
Other current assets (35) (118)
Other assets (20) 6
Increase (decrease) in liabilities:
Accounts payable (123) 140
Accrued liabilities (258) (62)
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Net cash provided by operating activities 300 92
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Cash Flows From Investing Activities:
Sale (purchases) of short-term investments, net (11) 1,264
Additions to property and equipment (40) (43)
Patent costs 38 (18)
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Net cash provided by (used in) investing activities (13) 1,203
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Cash Flows From Financing Activities:
Payments on long-term debt (97) (53)
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Net cash used in financing activities (97) (53)
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Net increase in cash and cash equivalents 190 1,242
Cash and Cash Equivalents, Beginning of Period 2,795 4,903
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Cash and Cash Equivalents, End of Period $ 2,985 $ 6,145
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The accompanying notes are an integral part of these statements.
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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 March 30, 1997 and the
results of operations and cash flows for the quarters ended March 30, 1997 and
March 31, 1996.
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 29, 1996, as filed with the Securities
and Exchange Commission. Interim results for the quarter ended March 30, 1997
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 quarter ended March 30, 1997. Income
taxes paid for the quarter ended March 31, 1996 were $15,200, primarily
representing federal alternative minimum taxes. Interest paid for the quarters
ended March 30, 1997 and March 31, 1996 was $172,000 and $146,000, respectively.
The following noncash investing and financing activities took place:
For the quarters ended March 30, 1997 and March 31, 1996, $4,000 and $1,000,
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.
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. The Company has determined that adoption
of the Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," has no effect on net loss per share for the quarters ended March 30,
1997 and March 31, 1996.
4. Bank Borrowings:
At March 30, 1997, 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 $515,000 in
favor of the Montgomery County Industrial Development Corporation ("MCIDC")
under the terms of the Mortgage and Security Agreement. Additionally, in 1996,
SLT issued a letter of credit for $17,510 to its lessor, Nappen Associates in
compliance with the lease agreement. Other than for these letters of credit and
other minor trade letters of credit issued from time to time, there were no
borrowings under the line during the quarter ended or at March 30, 1997.
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, 1997. The Company's line of credit agreement prohibits the
declaration or payment of any dividends or distributions on any of
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its capital stock without the prior written consent of the bank at any time
there are outstanding obligations to the bank. The line is subject to the
Company maintaining certain financial covenants, as defined, with which the
Company was in compliance at March 30, 1997.
5. Income Taxes:
No income tax provision was made for the quarter ended March 30, 1997 or
for the comparable quarter of 1996 due to 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 26% of net sales in the first quarter of 1997, as compared to 27% in
the same period in 1996. Sales to the Company's joint venture (see Note 7) were
3% of net sales in the first quarter of 1996.
7. Investment in Mediq PRN/SLT:
On September 30, 1996 the Company acquired the remaining 50% interest in the
Mediq PRN/SLT joint venture held by Mediq PRN for the assumption of outstanding
liabilities. The joint venture company was formed in the third quarter of 1993
to provide rentals of lasers and related equipment to hospitals and other health
care providers. Prior to the acquisition, the investment in Mediq PRN/SLT was
recorded using the equity method of accounting. Sales to Mediq PRN/SLT were
recorded at an arms-length price. Under the equity method, 50% of the gross
margin from sales to the joint venture was deferred and amortized to income as
the related asset was used by the joint venture. The Company's sales to Mediq
PRN/SLT were $73,000 for the quarter ended March 31, 1996. While Mediq PRN will
continue to provide logistic services to the Company, the Company is now fully
responsible for the management, sales and operations of the business. The
business is now conducted under the trade name "Laser OnCall(TM)."
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Historically, the Company has generated its net sales from positioning its
technology and products across a wide range of surgical specialties. In an
effort to attain more significant growth in sales, the Company is beginning to
transition from the historical marketing approach to an emphasis which would
provide a broader array of products to a more select market segment. The change
in marketing approach is aimed at identifying and acquiring additional products
and technologies that will complement the Company's current product offerings
and serve to leverage its existing customer base and distribution organization.
While focusing its efforts on a more select market segment, the Company intends
to serve other specialty markets by entering into distribution arrangements with
companies which, by focusing their activities in those other specialties, are
closer to the customer and are therefore better suited to serving the customer's
needs.
The Company is also taking actions intended to improve its international
customer relationships, consistent with a focus on a more specific surgical
segment. Additionally, as part of this transition, the Company is exploring
opportunities to expand the utilization of its proprietary technologies by
entering into private label relationships with other companies which will market
products encompassing SLT's core competencies under their product labeling.
Net sales for the quarter ended March 30, 1997 of $3,073,000 increased $308,000
or 11% from the comparable period in 1996. Net sales of Nd:YAG laser systems
increased 54% in the first quarter of 1997 from the first quarter of 1996, while
net sales of delivery systems declined by 9% over the same period.
7
Gross profits of $1,728,000 for the quarter ended March 30,1997 increased
$13,000 or 1% from the first quarter of 1996, principally due to the increased
volume of sales. As a percentage of net sales, gross profit decreased to 56%
from 62% in the comparable period of 1996. The decrease in gross profit as a
percentage of sales was due primarily to two factors. The main factor which
impacted gross profit as a percentage of sales was a temporary reduction in the
international selling price on certain Contact Laser Systems, enacted in an
effort to reduce inventory levels. The second factor which impacted the gross
profit as a percentage of sales in the first quarter of 1997 as compared to the
first quarter of 1996 was the inclusion of the Laser OnCall(TM) rental business
in the 1997 period which operates at a lower percentage gross profit as compared
to the sale of lasers and delivery systems. The Laser OnCall(TM) rental business
had been accounted for in the prior year period under the equity method. (See
Note 7, Investment in Mediq PRN/SLT).
Operating expenses for the first quarter of 1997 of $1,951,000 decreased by
$503,000 or 20% from the first quarter of 1996, due primarily to cost reductions
in the third quarter of 1996.
Product development expenses of $231,000 in the first quarter of 1997 decreased
by $205,000 or 47% from the same period in 1996. The decrease was principally
due to reductions in personnel and facility related expenses resulting from cost
reduction measures taken subsequent to the first quarter of 1996 which included
both manpower reductions and the consolidation of the Company's facilities into
one location. In addition, lower costs were incurred in the first quarter of
1997 as compared to the prior year for clinical study and product development
activities.
Selling, general and administrative expenses of $1,720,000 in the first quarter
of 1997 decreased $298,000 or 15% from the comparable prior year period.
Reductions related to a workforce reduction at the end of the third quarter of
1996 accounted for the majority of the reduced spending level.
The Company has lost the sub-tenant for the greater portion of the leased
facility in Hebron, Kentucky. The sub-tenant filed for protection under Chapter
11 of the Bankruptcy Code on April 1, 1997, but by April 11, 1997, had abandoned
that protection and permitted a secured creditor to dispose of its assets. The
Company is seeking a replacement sub-tenant.
Net interest expense for the first quarter of 1997 of $47,000 increased $9,000
from the comparable period in 1996. The increase was primarily attributable to
interest payments related to the capital leases acquired from the purchase of
the Mediq PRN/SLT joint venture offset by higher interest income earned in the
first quarter of 1997.
Liquidity and Capital Resources
The Company had cash, cash equivalents and short-term investments of $6,322,000
at March 30, 1997, 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 $515,000 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 letter of credit, there were
no 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, with
which the Company was in compliance at March 30, 1997. Management expects to
renew a line of credit facility when this facility expires on June 30, 1997.
Net cash provided by operating activities was $300,000 in the first quarter of
1997 compared to cash provided by operating activities of $92,000 in the
comparable period in 1996. The comparable increase in cash provided by operating
activities was due mainly to the reduction in the net loss incurred.
Net cash used in investing activities was $13,000 in the first quarter of 1997
compared to cash provided by investing activities of $1,203,000 in the first
quarter of 1996. The decrease was due principally to the maturity of certain
short-term investments amounting to $1,264,000 during the first quarter of 1996.
8
Net cash used in financing activities was $97,000 and $53,000 in the first
quarter of 1997 and 1996, respectively.
Management anticipates capital expenditures of approximately $200,000 in 1997,
of which $11,000 was spent in the first quarter. The capital expenditures are
primarily for manufacturing and research and development purposes. The Company
is not contractually committed to spend the balance of its estimated capital
expenditures. 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.
Risk Factors
For information regarding certain risk factors that could cause actual results
to differ materially from those suggested in forward-looking statements
contained herein or otherwise made from time to time by the Company, reference
is made to the Company's Form 10-K, Item 7, "Risk Factors," for the fiscal year
ended December 29, 1996, which is incorporated herein by reference. The risk
factors described in such report continue to be applicable at March 30, 1997. In
addition, the risk factor below should also be considered.
Change in Marketing Approach
The Company is taking, or is contemplating taking, certain actions to transition
its marketing approach from addressing a wide range of surgical specialties to
providing a broader array of products to a more select market segment. Although
the Company believes that this transition will have a long-term positive
financial impact, no assurance can be given that the actions taken will provide
the intended results, or that the Company will not experience short-term
disruptions or an adverse impact on results of operations during the transition
to this new marketing approach.
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 29, 1996, which
is 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 set May 8, 1997 for oral argument on
Trimedyne's appeal of the District Court's grant of summary judgment in favor of
the Company.
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 Form 8-K: none
9
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: May 5, 1997 By: /s/ Michael R. Stewart
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Michael R. Stewart
Vice President, Finance and
Chief Financial Officer
Signing on behalf of the
Registrant and as principal
financial officer.
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