================================================================================
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 June 28, 1998
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.)
147 Keystone Drive
Montgomeryville, PA 18936
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 619-3600
----------------------------------------------------
(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 August 3, 1998 the registrant had outstanding 9,889,452
shares of Common Stock, $.0l par value.
================================================================================
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
-----
PART I. FINANCIAL INFORMATION: PAGE
- ------------------------------ ----
ITEM 1. Financial Statements:
a. Condensed Consolidated Balance Sheets,
June 28, 1998 (unaudited) and December 28, 1997 3
b. Condensed Consolidated Statements of Operations (unaudited) for the
quarters ended June 28, 1998 and June 29, 1997 4
c. Condensed Consolidated Statements of Operations (unaudited) for the six months ended
June 28, 1998 and June 29, 1997 5
d. Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 28, 1998 and June 29, 1997 6
e. Notes to Condensed Consolidated Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
EXHIBITS:
EXHIBIT 27.1 - Financial Data Schedule, June 28, 1998 13
EXHIBIT 27.2 - Amended Financial Data Schedule, June 29, 1997 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
June 28, 1998 Dec. 28, 1997
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents (including restricted
amount of $100) $ 1,312 $ 1,555
Short-term investments 5,118 4,994
Accounts receivable, net of allowance for doubtful
accounts of $152 and $155 1,450 1,925
Inventories 2,964 2,986
Other 373 445
-------- --------
Total current assets 11,217 11,905
Property and equipment, net 1,648 1,998
Property held for sale, net 4,767 4,869
Patents and licensed technology, net 559 576
Other assets 605 648
-------- --------
Total Assets $ 18,796 $ 19,996
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 529 $ 504
Accounts payable 833 512
Accrued liabilities 1,184 1,481
-------- --------
Total current liabilities 2,546 2,497
-------- --------
Long-term debt 5,862 6,142
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized,
9,889 shares and 9,887 shares issued and outstanding 99 99
Additional paid-in capital 33,197 33,144
Accumulated deficit (22,874) (21,886)
Deferred compensation (34) --
-------- --------
Total stockholders' equity 10,388 11,357
-------- --------
Total Liabilities and Stockholders' Equity $ 18,796 $ 19,996
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Quarter Ended:
June 28, 1998 June 29, 1997
Net sales $ 2,284 $ 2,904
Cost of sales 1,038 1,273
------- -------
Gross profit 1,246 1,631
------- -------
Operating expenses:
Selling, general and administrative 1,496 1,707
Product development 339 218
------- -------
1,835 1,925
------- -------
Operating loss (589) (294)
Interest expense 150 161
Interest income (87) (74)
Other income (125) (99)
------- -------
Loss before income taxes (527) (282)
Provision for income taxes -- --
------- -------
Net loss ($ 527) ($ 282)
======= =======
Basic and diluted loss per share ($ 0.05) ($ 0.03)
======= =======
Shares used in calculating basic and diluted loss per
share 9,889 9,883
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Six Months Ended:
June 28, 1998 June 29, 1997
Net sales $ 4,651 $ 5,977
Cost of sales 2,079 2,618
------- -------
Gross profit 2,572 3,359
------- -------
Operating expenses:
Selling, general and administrative 3,031 3,427
Product development 617 449
------- -------
3,648 3,876
------- -------
Operating loss (1,076) (517)
Interest expense 304 333
Interest income (172) (199)
Other income (223) (172)
------- -------
Loss before income taxes ($ 985) ($ 479)
Provision for income taxes 3 --
------- -------
Net loss ($ 988) ($ 479)
======= =======
Basic and diluted loss per share ($ 0.10) ($ 0.05)
======= =======
Shares used in calculating basic and diluted loss per
share 9,889 9,883
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Six Months Ended:
June 28, 1998 June 29, 1997
Cash Flows From Operating Activities:
Net loss ($ 988) ($ 479)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 547 527
Imputed interest (14) (6)
(Increase) decrease in assets:
Accounts receivable 475 72
Inventories 68 924
Other current assets 72 10
Other assets 45 (25)
Increase (decrease) in liabilities:
Accounts payable 321 (102)
Accrued liabilities (253) (601)
------- -------
Net cash provided by operating activities 273 320
------- -------
Cash Flows From Investing Activities:
(Purchase) sale of short-term investments, net (124) 291
Additions to property and equipment (53) (136)
Patent costs (63) 32
Purchase of marketing agreement (30) --
------- -------
Net cash (used in) provided by investing
activities (270) 187
------- -------
Cash Flows From Financing Activities:
Payments on long-term debt (246) (210)
------- -------
Net cash used in financing activities (246) (210)
------- -------
Net (decrease) increase in cash and cash equivalents (243) 297
Cash and Cash Equivalents, Beginning of Period 1,555 2,795
------- -------
Cash and Cash Equivalents, End of Period $ 1,312 $ 3,092
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial 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 June 28, 1998 and the
results of operations and cash flows for the quarters and six months ended
June 28, 1998 and June 29, 1997.
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 28, 1997, as filed with the Securities
and Exchange Commission. Interim results for the quarter and six months ended
June 28, 1998 are not necessarily indicative of the results to be expected for
the full year.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS No. 130"), which requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 became effective for fiscal years
beginning after December 15, 1997, with initial application as of the beginning
of the Company's 1998 fiscal year. SFAS No. 130 requires comparative financial
statements provided for earlier periods to be reclassified to reflect
application of the provisions of this new standard.
The Company has reviewed SFAS No. 130 and has determined that for the six months
ended June 28, 1998 and for the year ended December 28, 1997, no items meeting
the definition of comprehensive income as specified in SFAS No. 130 existed in
the financial statements. As a result, no disclosure is necessary to comply with
SFAS No. 130.
2. Supplemental Cash Flow Information:
There were no income taxes paid for the six months ended June 28, 1998. Income
taxes paid for the six months ended June 29, 1997 were $9,000. Interest paid for
the six months ended June 28, 1998 and June 29, 1997 was $304,000 and $333,000,
respectively.
7
The following noncash investing and financing activities took place:
For the six months ended June 28, 1998 and June 29, 1997, $8,000 and $10,000,
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. Basic and Diluted Loss Per Share:
Basic and diluted loss per share have been computed under the guidelines of
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). Due to the Company's net loss for the quarters and six months ended
June 28, 1998 and June 29, 1997, the inclusion of common share equivalents had
an anti-dilutive effect when calculating diluted earnings per share under SFAS
No. 128 and, as a result, diluted earnings per share were equivalent to basic
earnings per share for those periods.
4. Bank Borrowings:
At June 28, 1998, the Company had a $2,535,000 line of credit agreement with a
bank, which included a $535,000 sub-line for letters of credit. Under its
sub-line, the Company issued a letter of credit in the amount of $453,000, which
replaced the letter of credit issued in 1996 of $515,000 in favor of the
Montgomery County Industrial Development Corporation ("MCIDC") under the terms
of the Mortgage and Security Agreement for the Company's property in Oaks,
Pennsylvania. Additionally, in 1996, the Company issued a letter of credit for
$17,510 to its lessor in compliance with the lease agreement for the
Montgomeryville, Pennsylvania facility. Other than for these letters of credit
there were no borrowings under the line during the six months ended June 28,
1998. 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 May 31, 1999. The Company's line of credit agreement prohibits the
declaration or payment of any dividends or distributions on any of 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 June 28, 1998.
5. Income Taxes:
The tax provision for the six months ended June 28, 1998 was for state income
taxes. No income tax provision was made for the six months ended June 29, 1997,
due to the net loss incurred.
6. Segment and Geographic Data:
The Company is engaged in primarily one business segment: the design,
development, manufacture, sale and rental of proprietary laser systems and
delivery systems for both contact and non-contact surgery. The Company's
customers are primarily hospitals and medical centers. Foreign sales represented
16% of net sales in the first six months of 1998, as compared to 24% in the same
period in 1997.
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 growth in sales, the Company redefined its strategy for growth
during 1997 to include a specific focus in the surgical specialties of
Otolaryngology and Head and Neck ("ENT") surgery. In conjunction with this
focused strategy, the Company has and will continue to seek to enter into
relationships with other companies to expand the use of the Company's products
8
in surgical specialties other than ENT, and has and will continue to seek to
utilize its strengths in supplying other companies with products that draw on
the Company's expertise and competencies. While refocusing its strategy in ENT,
the Company will take these other actions in an effort to enhance sales and to
promote continued utilization of its products and services in those other
surgical specialties.
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 the Company's core competencies under their product
labeling.
Net sales for the quarter ended June 28, 1998 of $2,284,000 decreased $620,000
or 21% compared to the second quarter 1997 net sales of $2,904,000. For the six
months ended June 28, 1998, net sales were $4,651,000 compared to $5,977,000 in
the first six months of 1997, a decrease of $1,326,000 or 22%. Net sales of
Nd:YAG laser systems for the six months ended June 28, 1998 decreased 68% from
the first six months of 1997. All other net sales for the six months ended June
28, 1998, including Contact Laser delivery systems, accessories, rentals and
other sales, decreased 7% from the comparable period in 1997. The decrease in
laser system sales was attributed to both domestic hospital budget constraints
and to the effect of the Asian economic situation which rendered certain
distributors unable to secure funding for planned purchases.
Gross profits of $1,246,000 for the quarter ended June 28, 1998 decreased
$385,000 or 24% from the second quarter of 1997, while gross profits for the six
months ended June 28, 1998 of $2,572,000 decreased $787,000 or 23% from the
first six months of 1997. As a percentage of net sales, gross profit of 55% and
56% was relatively consistent for the six months ended June 28, 1998 and June
29, 1997, respectively.
Operating expenses for the second quarter of 1998 were $1,835,000, a decrease of
$90,000 or 5% from the second quarter of 1997. For the first six months of 1998,
operating expenses were $3,648,000 a decrease of $228,000 or 6% from the first
six months of 1997. These reductions in operating expenses were due primarily to
a reduction in legal fees as a result of settlements reached during 1997, offset
in part by an increase in internal product development expense.
Selling, general and administrative expenses were $1,496,000 in the second
quarter of 1998, a decrease of $211,000 or 12% from the comparable prior year
period. In the first six months of 1998, selling, general and administrative
expenses were $3,031,000 compared to $3,427,000 in the first six months of 1997,
a decrease of $396,000 or 12%. Reductions in legal fees accounted for the
majority of the reduced spending level.
Product development expenses of $339,000 in the second quarter of 1998 increased
by $121,000 or 56% from the comparable period in 1997. Product development
expenses of $617,000 in the first six months of 1998 increased by $168,000 or
37% from the comparable period in 1997. The higher level of spending was
principally due to increased manpower and other expenses associated with the
Company's private label and ENT product development efforts.
Other income was $125,000 in the second quarter of 1998 and $223,000 in the
first six months of 1998, an increase of $26,000 and $51,000, respectively, from
the comparable periods in 1997. Other income primarily consists of facility
related income and expense items.
Net interest expense was $132,000 and $134,000 in the first six months of 1998
and 1997, respectively.
Liquidity and Capital Resources
The Company had cash, cash equivalents and short-term investments of $6,430,000
at June 28, 1998, of which $100,000 was restricted. In addition, the Company
currently has a $2,535,000 credit facility with its bank. The facility includes
a sub-line for letters of credit of $535,000. Other than for the letter of
9
credit issued in the amount of $453,000 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 June 28, 1998. The facility expires on
May 31, 1999.
Net cash provided by operating activities was $273,000 in the first six months
of 1998 compared to cash provided by operating activities of $320,000 in the
comparable period in 1997. The comparable decrease in cash provided by operating
activities resulted from the increase in the net loss incurred and a lower
reduction in inventory levels, offset in part by higher accounts receivable
collections and a lower level of accounts payable and accrued liability
payments.
Net cash used in investing activities was $270,000 in the first six months of
1998 compared to cash provided by investing activities of $187,000 in the first
six months of 1997. The decrease was due principally to the purchase of certain
short-term investments amounting to $124,000 during the first six months of 1998
as compared to the maturity of certain short-term investments of $291,000 during
the comparable period in 1997.
Net cash used in financing activities was $246,000 and $210,000 in the first six
months of 1998 and 1997, respectively.
Management believes the Company's current cash position and available line of
credit will be sufficient to fund operations and meet commitments for long-term
debt, other commitments and contingencies and capital expenditures.
Management believes that inflation has not had a material effect on operations
for the periods presented.
The Company has analyzed its management information systems for the "Year 2000"
compliance issues. The Company has purchased the latest version of a software
package which has eliminated the "Year 2000" issue. The cost of conversion to
the new version of the software package has not been material.
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 28, 1997, which is incorporated herein by reference. The risk
factors described in such report continue to be applicable at June 28, 1998.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
- ------- -----------------
For information regarding certain pending legal matters, reference is made to
the Company's Form 10-K, Item 3, for the fiscal year ended December 28, 1997.
On July 10, 1998, the United States Court of Appeals for the Federal Circuit
ruled on Trimedyne's appeal from the summary judgement rendered against it by
the United States District Court for the Central District of California. The
appellate court affirmed the judgement of the lower court that SLT's Contact
Laser(TM) probes do not infringe Trimedyne's U.S. Patent No. 4,773,413. The `413
patent covers a hot metal tip that has a central bore that allows for direct
irradiation by laser energy.
The appellate court reversed the judgment of the lower court that SLT's SFB 1.0
probe, a side-firing free-beam probe, does not infringe Trimedyne's U.S. Patent
No. 5,380,317. Finding that there were triable issues of fact, the appellate
10
court will remand this aspect of the case back to the lower court. The lower
court has not yet convened the parties to the action to set a schedule for the
remainder of the case.
The Company is presently evaluating its course of action in this remaining
aspect of the case, particularly in light of the fact that sales of the SFB 1.0
probe have declined significantly since introduction in June 1994 and the fact
that the SFB probe appears to have little role to play in surgery of the head
and neck, which is the Company's primary area of focus. The Company believes
that it has meritorious defenses, but further believes that if the probe is
found to infringe, the damages resulting from such a finding would not have a
materially adverse effect on the financial position of the Company.
Nevertheless, no assurance can be given that the Company's defenses will be
successful, or that damages, if any are found, will not be greater than the
Company's belief.
ITEM 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
The Company held its Annual Meeting of Stockholders on July 21, 1998. Sheldon M.
Bonovitz, Richard J. DePiano, Jay L. Federman, Vincenzo Morelli and W. Keith
Stoneback, the director nominees set forth in the Notice of Annual Meeting, were
elected to serve as directors. The following table provides the details of the
votes cast for each director nominee.
Nominee Votes For Abstained
- ------- --------- ---------
Sheldon M. Bonovitz 9,337,209 180,650
Richard J. DePiano 9,342,459 175,400
Jay L. Federman 9,337,834 180,025
Vincenzo Morelli 9,336,359 181,500
W. Keith Stoneback 9,199,409 318,450
Arthur Andersen LLP was ratified to serve as the Company's independent
accountants for the fiscal year ending January 3, 1999, with 9,421,736 votes
favoring ratification, 68,053 votes opposing and 28,070 votes abstaining.
ITEM 5. Other Information
- -------------------------
The persons named as proxies on the form of proxy card to be mailed in
connection with the solicitation of proxies on behalf of the Company's Board of
Directors in connection with the Company's 1999 Annual Meeting of Stockholders
will be authorized to vote in their own discretion on any proposal as to which
the Company shall not have received written notice by May 1, 1999.
ITEM 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
a. Exhibits: Exhibit 27.1 - Financial Data Schedule, June 28, 1998
Exhibit 27.2 - Amended Financial Data Schedule, June 29, 1997
b. Reports on Form 8-K: none
11
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: August 7, 1998 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.
12