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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 27, 1998
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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
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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 November 4, 1998 the registrant had outstanding 9,889,527 shares of
Common Stock, $.0l par value.
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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, September 27, 1998 (unaudited)
and December 28, 1997 3
b. Condensed Consolidated Statements of Operations (unaudited) for the
quarters ended September 27, 1998 and September 28, 1997 4
c. Condensed Consolidated Statements of Operations (unaudited) for the
nine months ended September 27, 1998 and September 28, 1997 5
d. Condensed Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 27, 1998 and September 28, 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 9
PART II. OTHER INFORMATION:
- ----------------------------
ITEM 1. Legal Proceedings 11
ITEM 2. Changes in Securities 11
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBITS:
EXHIBIT 27.1 - Financial Data Schedule (unaudited), September 27, 1998 14
EXHIBIT 27.2 - Amended Financial Data Schedule (unaudited), September 28, 1997 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
Sept. 27, Dec. 28,
1998 1997
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ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents (including restricted amount of $100) $ 1,499 $ 1,555
Short-term investments 4,523 4,994
Accounts receivable, net of allowance for doubtful accounts of $145 and $155 1,491 1,925
Inventories 2,829 2,986
Other 369 445
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Total current assets 10,711 11,905
Property and equipment, net 1,499 1,998
Property held for sale, net 4,716 4,869
Patents and licensed technology, net 551 576
Other assets 578 648
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Total Assets $ 18,055 $ 19,996
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,166 $ 504
Accounts payable 731 512
Accrued liabilities 1,201 1,481
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Total current liabilities 4,098 2,497
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Long-term debt 4,097 6,142
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized,
9,890 shares and 9,887 shares issued and outstanding 99 99
Additional paid-in capital 33,185 33,144
Accumulated deficit (23,401) (21,886)
Deferred compensation (23) --
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Total stockholders' equity 9,860 11,357
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Total Liabilities and Stockholders' Equity $ 18,055 $ 19,996
====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Quarter Ended:
Sept. 27, Sept. 28,
1998 1997
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Net sales $ 2,200 $ 3,007
Cost of sales 1,014 1,097
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Gross profit 1,186 1,910
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Operating expenses:
Selling, general and administrative 1,402 1,704
Product development 329 362
Non-recurring credits -- (177)
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1,731 1,889
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Operating income (loss) (545) 21
Interest expense 147 158
Interest income (78) (88)
Other income (87) (96)
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Income (loss) before income taxes (527) 47
Provision for income taxes -- --
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Net income (loss) ($ 527) $ 47
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Basic and diluted income (loss) per share ($ 0.05) $ 0.00
==================
Shares used in calculating basic and diluted income (loss) per share 9,889 9,886
==================
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 Nine Months Ended:
Sept. 27, Sept. 28,
1998 1998
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Net sales $ 6,851 $ 8,984
Cost of sales 3,093 3,715
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Gross profit 3,758 5,269
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Operating expenses:
Selling, general and administrative 4,433 5,131
Product development 946 811
Non-recurring credits -- (177)
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5,379 5,765
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Operating loss (1,621) (496)
Interest expense 450 491
Interest income (249) (287)
Other income (310) (268)
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Loss before income taxes (1,512) (432)
Provision for income taxes 3 --
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Net loss ($1,515) ($ 432)
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Basic and diluted loss per share ($ 0.15) ($ 0.04)
==================
Shares used in calculating basic and diluted loss per share 9,889 9,884
==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Nine Months Ended:
Sept. 27, Sept. 28,
1998 1997
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Cash Flows From Operating Activities:
Net loss ($1,515) ($ 432)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 824 795
Imputed interest (20) (8)
Non-recurring charges -- 823
(Increase) decrease in assets:
Accounts receivable 434 155
Inventories 192 687
Other current assets 76 40
Other assets 45 (25)
Increase (decrease) in liabilities:
Accounts payable 219 (111)
Accrued liabilities (229) (433)
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Net cash provided by operating activities 26 1,491
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Cash Flows From Investing Activities:
Sale (Purchase) of short-term investments, net 471 (1,664)
Additions to property and equipment (77) (68)
Patent costs (73) 15
Purchase of marketing agreement (30) (81)
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Net cash provided by (used in) investing activities 291 (1,798)
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Cash Flows From Financing Activities:
Payments on long-term debt (373) (327)
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Net cash used in financing activities (373) (327)
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Net decrease in cash and cash equivalents (56) (634)
Cash and Cash Equivalents, Beginning of Period 1,555 2,795
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Cash and Cash Equivalents, End of Period $ 1,499 $ 2,161
==================
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)
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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, results of operations and
cash flows for the interim periods presented.
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 nine months ended
September 27, 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 nine
months ended September 27, 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 nine months ended September 27, 1998.
Income taxes paid for the nine months ended September 28, 1997 were $9,000.
Interest paid for the nine months ended September 27, 1998 and September 28,
1997 was $450,000 and $491,000, respectively.
The following noncash investing and financing activities took place:
For the nine months ended September 27, 1998 and September 28, 1997, the value
of the stock warrants and capitalized cash payments outstanding to MedTREK
Corporation was $347,000 and $505,000, respectively (see Note 7, MedTREK
Agreement)
For the nine months ended September 27, 1998 and September 28, 1997, $9,000 and
$23,000, 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 Income (Loss) Per Share:
Basic and diluted income (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 quarter ended
September 27, 1998 and the nine months ended September 27, 1998 and September
28, 1997, the inclusion of common share equivalents had an anti-dilutive effect
7
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. For the quarter ended September 28, 1997, the inclusion of common share
equivalents had no effect on diluted earnings per share and, as a result,
diluted earnings per share was equivalent to basic earnings per share for that
period.
4. Bank Borrowings:
At September 27, 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 nine months ended September
27, 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 September 27, 1998.
5. Income Taxes:
The tax provision for the nine months ended September 27, 1998 was for state
income taxes. No income tax provision was made for the nine months ended
September 28, 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 principally hospitals and medical centers. Foreign sales
represented 13% of net sales in the first nine months of 1998, as compared to
18% in the same period in 1997.
7. MedTREK Agreement:
During the third quarter ending September 28, 1997, the Company acquired
exclusive worldwide rights to certain new products and medical devices used in
minimally invasive otolaryngology and head and neck surgery, pursuant to an
agreement with MedTREK Corporation and its President. In accordance with the
terms of the agreement, the Company is required to make cash payments to
MedTREK, when certain products have been commercially introduced, and to issue
stock warrants to MedTREK or its nominees when predetermined revenue targets
have been achieved. The Company has valued the stock warrants using the
Black-Scholes option pricing model and has recorded both the cost of these stock
warrants and the cash payments for commercial introduction of products, a total
of $480,000, within Other Long-Term Assets. This asset is being amortized over a
five year period, which is the initial term of the agreement. Amortization
expense was $63,000 and $49,000 for the nine months ended September 27, 1998 and
September 28, 1997, respectively.
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 entered and will continue to seek to enter
8
into relationships with other companies to expand the use of the Company's
products in surgical specialties other than ENT, and has utilized 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, under their own product labeling, products encompassing the Company's
core competencies.
Net sales for the quarter ended September 27, 1998 of $2,200,000 decreased
$807,000 or 27% compared to the third quarter 1997 net sales of $3,007,000. For
the nine months ended September 27, 1998, net sales were $6,851,000 compared to
$8,984,000 in the first nine months of 1997, a decrease of $2,133,000 or 24%.
Net sales of Nd:YAG laser systems for the nine months ended September 27, 1998
decreased 63% from the first nine months of 1997. All other net sales for the
nine months ended September 27, 1998, including Contact Laser(TM) delivery
systems, accessories, rentals and other sales, decreased 14% from the comparable
period in 1997. The decrease in laser system sales was attributable 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 $1,186,000 for the quarter ended September 27, 1998 decreased
$724,000 or 38% from the third quarter of 1997, while gross profits for the nine
months ended September 27, 1998 of $3,758,000 decreased $1,511,000 or 29% from
the first nine months of 1997. As a percentage of net sales, gross profit
decreased to 55% for the first nine months of 1998 from 59% in the comparable
period of 1997. The decrease in gross profit as a percentage of net sales
resulted from the inclusion in the third quarter of 1997 of contract development
fees for which there were no comparable fees in the 1998 period.
In the third quarter of 1997, the Company recorded a benefit from the settlement
of litigation with C.R. Bard and the Bard Urological Division of $1,000,000.
This benefit was offset in part by non-recurring facility-related charges of
$542,000 related to the Company's former headquarters facility and $281,000
related to the Company's former manufacturing facility in Kentucky. The $542,000
charge resulted from a write-down in the carrying value of the former
headquarters facility necessitated by the terms on which the facility is
expected to be sold at the end of the tenant's initial lease term. The $281,000
charge resulted from the loss of the Company's former tenant and subsequent
signing of a new tenant at a lesser rate.
Operating expenses, excluding the net non-recurring credit of $177,000 discussed
in the preceding paragraph, were $1,731,000 for the third quarter of 1998, a
decrease of $335,000 or 16% from the third quarter of 1997. For the first nine
months of 1998, operating expenses were $5,379,000, a decrease of $563,000 or 9%
from the first nine months of 1997, excluding the same net non-recurring credit.
These reductions in operating expenses were due primarily to a reduction in
legal fees as a result of litigation settlements reached during 1997, offset in
part by an increase in internal product development expense.
Selling, general and administrative expenses were $1,402,000 in the third
quarter of 1998, a decrease of $302,000 or 18% from the comparable prior year
period. In the first nine months of 1998, selling, general and administrative
expenses were $4,433,000 compared to $5,131,000 in the first nine months of
1997, a decrease of $698,000 or 14%. Significantly lower legal fees accounted
for the majority of the reduced spending level.
Product development expenses of $329,000 in the third quarter of 1998 decreased
by $33,000 or 9% from the comparable period in 1997. Product development
expenses of $946,000 in the first nine months of 1998 increased by $135,000 or
17% from the comparable period in 1997. The higher level of spending for the
nine month period of 1998 was principally due to increased manpower and other
expenses associated with the Company's private label and ENT product development
efforts.
9
Other income was $310,000 in the first nine months of 1998, an increase of
$42,000, from the comparable periods in 1997. Other income primarily consisted
of facility related-income and expense items.
Net interest expense was $201,000 and $204,000 in the first nine months of 1998
and 1997, respectively.
Liquidity and Capital Resources
The Company had cash, cash equivalents and short-term investments of $6,022,000
at September 27, 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 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 September 27, 1998. The facility expires
on May 31, 1999.
Net cash provided by operating activities was $26,000 in the first nine months
of 1998 compared to cash provided by operating activities of $1,491,000 in the
comparable period in 1997. The comparative decrease in cash provided by
operating activities resulted from the increase in the net loss incurred, a
lower reduction in inventory levels, and the receipt in the third quarter of
1997 of $1,000,000 from the settlement of litigation. The benefit of this legal
settlement, offset in part by $823,000 of non recurring facility related
changes, represents the net special credit of $177,000, included in the
Statements of Operations presented.
Net cash provided by investing activities was $291,000 in the first nine months
of 1998 compared to cash used in investing activities of $1,798,000 in the first
nine months of 1997. The increase was due principally to the maturity of certain
short-term investments of $471,000 during the first nine months of 1998 as
compared to the purchase of certain short-term investments amounting to
$1,664,000 during the comparable period in 1997.
Net cash used in financing activities was $373,000 and $327,000 in the first
nine 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 information technology systems for the "Year 2000"
compliance issues. Management believes that the "Year 2000" issue related to the
Company's hardware and software programs are not likely to result in any
material adverse disruptions in the Company's computer systems or its internal
business operations. The Company has purchased the latest version of its
operating software package to provide remediation for the "Year 2000" issue. The
costs of this new software have not been material and testing and implementation
is to be completed by the second quarter of 1999.
The Company is currently in the process of evaluating its relationships with
third parties, such as banks, service providers and suppliers, with which the
Company has a direct and material relationship to determine whether they are
"Year 2000" compliant. The responses received to date from such third parties to
inquiries made by the Company indicate that these third parties either are or
expect to be compliant by the Year 2000.
Even assuming that all material third parties confirm that they are or expect to
be "Year 2000" compliant by December 31, 1999, it is not possible to state with
certainty that such parties will be so compliant, or that the operations of such
third parties will not be materially impacted by other parties whom they
themselves have a material relationship, and who fail to timely become "Year
2000" compliant. Consequently, it is not possible to predict whether or to what
10
extent the Year 2000 issues may have an adverse material impact on the Company
as a result of their impact on the operations of the third parties with whom the
Company has a material relationship. For example, the failure to be "Year 2000"
compliant by a bank with whom the Company has a material banking relationship
could cause significant disruption in the Company's ability to make payments,
deposit funds and make investments, which could have a material adverse effect
on the Company's financial condition.
The Company has not established a contingency plan in case of failure of its
information technology systems since it expects to have its new software system
in place by the second quarter of 1999. The Company will continuously monitor
its relationships with banks, service providers and suppliers to ensure they
expect to be "Year 2000" compliant. If the Company learns that one of these
third parties will not be "Year 2000" compliant, the Company's contingency plan
would include replacing such third party.
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 September 27,
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 and
Form 10-Q, Item 1, for the fiscal quarter ended March 29, 1998 and the fiscal
quarter ended June 28, 1998.
The United States District Court for the Central District of California, which
is hearing the patent infringement action by Trimedyne, Inc. against the
Company, has set a status conference for November 23, 1998.
ITEM 2. Changes in Securities
Nasdaq notified the Company on August 19, 1998 that it had failed to meet the
requirement that a listed company, in order to remain listed, must have a
minimum trading price of $1.00, and that if the Company did not come into
compliance with Nasdaq listing requirements, it would be delisted as of November
18, 1998. The Company is considering various avenues (including a reverse split
of the Company's common stock) by which it can come into compliance with Nasdaq
listing requirements.
On October 12, 1998, the Board of Directors approved a proposed amendment to the
Company's Certificate of Incorporation that would implement a one-for-five
reverse split of the Company's common stock. A special stockholders' meeting to
consider the reverse split has been scheduled for December 18, 1998. In light of
the proposal for a reverse split, the Company intends to request a hearing
before Nasdaq prior to November 18, 1998 to stay the delisting.
11
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits: Exhibit 27.1 - Financial Data Schedule, September 27, 1998
Exhibit 27.2 - Amended Financial Data Schedule,
September 28, 1997
b. Reports on Form 8-K: none
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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 6, 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.
13