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 31, 2002
--------------
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 8, 2002 the registrant had outstanding 2,327,965 shares of
Common Stock, $.0l par value.
Page 1
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
- ------------------------------ ----
ITEM 1. Financial Statements:
a. Condensed Consolidated Balance Sheets March 31, 2002 3
(unaudited) and December 30, 2001
b. Condensed Consolidated Statements of Operations and Other 4
Comprehensive Loss (unaudited) for the quarters ended
March 31, 2002 and April 1, 2001
c. Condensed Consolidated Statements of Cash Flows (unaudited) 5
for the quarters ended March 31, 2002 and April 1, 2001
d. Notes to Condensed Consolidated Financial Statements 6-8
(unaudited)
ITEM 2. Management's Discussion and Analysis of 8-10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION:
- ----------------------------
Item 1. Legal Proceedings 11
SIGNATURES 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 31, 2002 Dec. 30, 2001
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $896 $497
Short-term investments 1,110 1,519
Accounts receivable, net of allowance for doubtful 1,865 1,824
Inventories (Note 3) 2,833 3,006
Other 438 414
------------------------------------
Total current assets 7,142 7,260
Property and equipment, net 3,058 3,151
Intangible assets 908 927
Other assets 115 127
-----------------------------------
Total assets $11,223 $11,465
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $177 $173
Note payable 118 --
Accounts payable 642 851
Accrued liabilities 553 411
------------------------------------
Total current liabilities 1,490 1,435
------------------------------------
Long-term debt 2,698 2,937
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized, 2,328 shares
issued and outstanding 23 23
Additional paid-in capital 33,727 33,725
Accumulated deficit (26,719) (26,666)
Accumulated other comprehensive income 4 11
------------------------------------
Total stockholders' equity 7,035 7,093
------------------------------------
Total liabilities and stockholders' equity $11,223 $11,465
====================================
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:
March 31, 2002 April 1, 2001
Net sales $2,759 $2,271
Cost of sales 1,566 1,180
-----------------------------------
Gross profit 1,193 1,091
-----------------------------------
Operating expenses:
Selling, general and administrative 1,138 1,159
Product development 117 147
-----------------------------------
1,255 1,306
-----------------------------------
Operating loss (62) (215)
Interest expense 33 47
Interest income (42) (47)
-----------------------------------
Loss before income taxes (53) (215)
Provision for income taxes -- --
-----------------------------------
Net loss ($53) ($215)
===================================
Basic and diluted loss per share ($0.02) ($0.09)
===================================
Shares used in calculating basic loss per share 2,328 2,328
Shares used in calculating diluted loss per share 2,328 2,328
===================================
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OTHER COMPREHENSIVE LOSS (UNAUDITED)
(In thousands)
For the Quarter Ended:
March 31, 2002 April 1, 2001
Net loss ($53) ($215)
Other comprehensive loss:
Unrealized securities gains arising during period 2 7
Less: reclassification for gains included in net loss (9) (13)
------------------------------------
Increase in accumulated other comprehensive loss (7) (6)
------------------------------------
Total comprehensive loss ($60) ($221)
====================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Quarter Ended:
March 31, 2002 April 1, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($53) ($215)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 202 233
Provision for bad debts -- (50)
(Increase) decrease in assets:
Accounts receivable (41) 401
Inventories 130 (235)
Other current assets (24) (101)
Other assets 9 (24)
Increase (decrease) in liabilities:
Accounts payable (33) 101
Accrued liabilities 142 (249)
------------------------------------
Net cash provided by (used in) operating activities 332 (139)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments 402 81
Purchases of property and equipment (39) (17)
Patent costs (4) (3)
------------------------------------
Net cash provided by investing activities 359 61
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (40) (30)
Payments on note payable (23) --
Net advances (payments) on line of credit (229) 133
------------------------------------
Net cash provided by (used in) financing activities (292) 103
------------------------------------
Net increase in cash and cash equivalents 399 25
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 497 702
------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $896 $727
====================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. Basis of Presentation:
The condensed consolidated financial statements of the Company for the
three-month periods ended March 31, 2002 and April 1, 2001 have been prepared by
the Company without audit by the Company's independent auditors. In the opinion
of the Company's management, all adjustments necessary to present fairly the
financial position, results of operations and cash flows of the Company as of
March 31, 2002 and for the periods ended March 31, 2002 and April 1, 2001 have
been made. Those adjustments consist only of normal and recurring adjustments.
The condensed consolidated balance sheet of the Company as of December 30, 2001
has been derived from the audited consolidated balance sheet of the Company as
of that date.
Certain information and note disclosures normally included in our annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in our Form 10-K annual report for 2001 filed with
the Securities and Exchange Commission.
Interim Financial Information:
While we believe 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 our Form 10-K report for
the fiscal year ended December 30, 2001, as filed with the Securities and
Exchange Commission. Interim results for the quarter ended March 31, 2002 are
not necessarily indicative of the results to be expected for the full year.
2. Supplemental Cash Flow Information:
There were no material income taxes paid for the quarters ended March 31, 2002
and April 1, 2001. Interest paid for the quarters ended March 31, 2002 and April
1, 2001 was $35,000 and $47,000, respectively. For the period ending March 31,
2002, non-cash operating and financing activities consisted of the
reclassification of payables to a capital lease agreement in the amount of
$35,000 and a reclassification from accounts payable to notes payable amounting
to $141,000.
3. Inventories:
Inventories at March 31, 2002 and December 30, 2001 were as follows (in
thousands of dollars)
March 31, 2002 December 30, 2001
-------------- -----------------
Raw material and work-in-process $1,862 $1,913
Finished goods 971 1,093
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Total Inventories $2,833 $3,006
===========================================================================
4. Accrued Liabilities:
During the first quarter of 2002, the Company received $223,000 of unclaimed
funds previously set aside in July 1999 for the redemption of the Company's
subordinated notes. This amount is included in accrued liabilities at March 31,
2002.
6
5. 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") as follows (in thousands except for per share amounts):
For the Quarter Ended:
March 31, 2002 April 1, 2001
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Basic EPS Calculation
Net loss ($53) ($215)
Denominator:
Common Stock Outstanding 2,328 2,328
-------------------------------------
Basic EPS ($0.02) ($0.09)
=====================================
Diluted EPS Calculation
Net loss ($53) ($215)
Denominator:
Common Stock Outstanding 2,328 2,328
-------------------------------------
Diluted EPS ($0.02) ($0.09)
=====================================
For the quarters ended March 31, 2002 and April 1, 2001, the Company had common
stock options and warrants outstanding of 604,000 and 615,000, respectively. Due
to the net losses incurred for the quarters ended March 31, 2002 and April 1,
2001, the inclusion of these common share equivalents had an anti-dilutive
effect when calculating diluted loss per share under SFAS No. 128, and as a
result, were excluded from the calculations.
6. Bank Borrowings:
The Company has a $3 million credit facility from a bank. The credit facility
has a commitment term of three years expiring June 2003, permits deferment of
principal payments until the end of the commitment term, and is secured by the
Company's business assets, including collateralization of $2 million of the
Company's cash and cash equivalents and short-term investments. The credit
facility has an interest rate of either the 30, 60, 90 or 180 day floating LIBOR
plus 2.25% and is subject to certain covenants and borrowing base certificates,
as defined, with which the Company was in compliance at March 31, 2002. The
interest rate on the credit facility at March 31, 2002 was 4.15%. At March 31,
2002, the Company had $2,544,000 in outstanding obligations and $456,000 was
available under the credit facility.
7. Income Taxes:
In accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes", the Company has recorded no current provision for
income taxes due to the loss incurred in the quarters ended March 31, 2002 and
April 1, 2001, and has recorded no net deferred provision by reason of the loss
incurred. Any benefit from such loss has been fully reserved due to
uncertainties as to the realizability of such benefit based on the Company's
historical results and the general market conditions which the Company continues
to experience.
8. Business Segment and Geographic Data:
The Company is engaged primarily in one business segment: the design,
development and manufacture of laser products and the marketing of those laser
products as well as other instruments for medical applications. The Company
markets its offering through traditional sales efforts as well as through the
provision of fee-based surgical services. The Company's customers are primarily
hospitals and surgery centers. For the quarters ended March 31, 2002 and April
1, 2001, the Company did not have material net sales to any individual customer.
7
The Company reported net sales in the following categories (in thousands of
dollars):
For the Quarter Ended:
March 31, 2002 April 1, 2001
-------------- -------------
Disposables and accessories $1,107 $1,203
Laser system sales and related maintenance 489 174
Surgical services 1,163 894
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Total net sales $2,759 $2,271
==============================================================================
For the quarters ended March 31, 2002 and April 1, 2001, there were no material
net sales attributed to an individual foreign country. Net sales by geographic
area were as follows (in thousands of dollars)
For the Quarter Ended:
March 31, 2002 April 1, 2001
-------------- -------------
Domestic $2,607 $2,016
Foreign 152 255
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Total net sales $2,759 $2,271
=============================================================================
9. Recent Accounting Pronouncements:
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Intangible
Assets". SFAS No. 141 eliminates the use of the pooling method of accounting and
requires the use of purchase accounting for all business combinations initiated
after June 30, 2001. It also provides guidance on purchase accounting related to
the recognition of intangible assets separate from goodwill. SFAS No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Under SFAS No. 142, goodwill will be tested annually
and whenever events or circumstances occur indicating that goodwill might be
impaired. SFAS No. 141 and SFAS No. 142 are effective for all business
combinations completed after June 30, 2001. The Company is in the process of
adopting these pronouncements. As of December 31, 2001, the beginning of fiscal
2002, the Company no longer amortizes goodwill. During the first quarter of
2001, the Company had goodwill amortization of $8,000. The Company's goodwill is
subject to an annual impairment test, using a two-step process. If impairment
losses are required to be recognized upon the initial application of this
statement, they would be accounted for as a cumulative effect of the change in
accounting principles. The Company has not yet completed the impairment tests
prescribed by SFAS No. 142, but the Company does not believe the adoption of
SFAS No. 142 will have a material impact on the Company's consolidated financial
position or results of operation. The Company has reviewed the other intangible
assets as of the beginning of fiscal 2002 and has determined that no changes
were necessary.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
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OVERVIEW
We develop, manufacture and sell proprietary laser systems for both contact and
non-contact surgery. In addition, we also deliver turn-key surgical services
which include the provision of technicians, capital equipment and disposable and
reusable products for specific surgical procedures. We provide our surgical
services under both contractual agreements and non-contracted arrangements. We
charge all of our surgical service customers for the services we provide on a
per-procedure basis. We also supplement our sales of laser systems and surgical
services with several non-laser product offerings.
Our growth strategy includes a continued emphasis on identifying surgical
procedures that benefit from the precision and hemostatic capabilities of our
proprietary technology coupled with the development and sourcing of products
that provide the opportunity to expand our resources through traditional sales
channels as well as through the provision of fee-based surgical services.
8
In June 2000, we expanded our surgical services offerings through the
acquisition of SIS. SIS provides surgical services utilizing a variety of laser
technologies to its customer base located mainly in the southeastern United
States. During 2001, we expanded the SIS geographic territories to include New
Orleans, LA, Augusta, GA, Milwaukee, WI, Washington DC and Baltimore, MD.
RESULTS OF OPERATIONS
We generate our net sales primarily from three sources: sales of Contact Laser
Delivery Systems and related accessories; sales of Nd:YAG and CTH holmium Laser
Systems and related maintenance; and the provision of surgical services. The
U.S. market is serviced predominantly by a direct sales force, while we drive
sales outside the United States through a network of distributors. Net sales for
the quarter ended March 31, 2002 of $2,759,000 increased $488,000 or 21% from
the comparable period in 2001.
Net sales of disposables and related accessories were $1,107,000 or 40% of total
net sales for the quarter ended March 31, 2002. This represented a decrease of
$96,000 or 8% compared to net sales of disposables and related accessories of
$1,203,000 for the quarter ended April 1, 2001. The decrease was due to the
lower level of Contact Laser Delivery System sales primarily within the U.S.
markets and a decrease in sales of non-laser disposable products.
Net sales of laser systems and related maintenance, which comprised 18% of total
net sales for the quarter ended March 31, 2002, increased $315,000 or 181% from
the quarter ended April 1, 2001. This increase was due to sales of the CTH
holmium laser system which was introduced in June 2001.
We provide per-procedure surgical services for customers which include access to
a laser system and related disposables as well as a technician. Prior to the
acquisition of SIS in June 2000, we offered the use of our proprietary Nd:YAG
laser system in the provision of surgical services. With the acquisition of SIS,
we have acquired several different types of lasers, significantly expanding the
types of surgical procedures that can be performed through our services.
Surgical services revenue was $1,163,000 in the first quarter of 2002 or 42% of
total net sales. This represented an increase of $269,000 or 30% compared to the
first quarter of 2001. This increase was the result of both new surgical
services contracts and the expansion of procedural volumes within our existing
customer base.
Gross profits of $1,193,000 for the quarter ended March 31, 2002 increased
$102,000 or 9% from the first quarter of 2001. As a percentage of net sales,
gross profit was 43% in the quarter ended March 31, 2002 compared to a gross
profit percentage in the quarter ended April 1, 2001 of 48%. This decline was
attributable to two main factors: a change in sales mix, which had an
unfavorable impact in the quarter ended March 31, 2002, and an increase in
surgical service expenses related to the geographic expansion of contract
services.
Operating expenses for the first quarter of 2002 of $1,255,000 were 4% lower
than the first quarter 2001 operating expenses of $1,306,000.
Selling, general and administrative expenses in the first quarter of 2002 of
$1,138,000 decreased 2% from the selling, general and administrative expenses in
the first quarter of 2001 of $1,159,000.
Product development expenses of $117,000 in the first quarter of 2002 decreased
$30,000 or 20% from the comparable period in 2001. The higher level of
expenditure in the first quarter of 2001 related to development of the SLT CTH
holmium laser system.
Interest expense of $33,000 for the first quarter of 2002 was $14,000 lower than
in the first quarter of 2001. This decrease was due to a lower interest rate on
the Company's credit facility.
Interest income of $42,000 for the first quarter of 2002 declined $5,000 or 11%
from the first quarter of 2001 due to the lower level of cash, cash equivalents
and short-term investments, as well as a decline in overall interest rates. This
decrease was offset in part by additional interest income of $20,000 related to
funds set aside in July 1999 held for the payment of our subordinated notes.
9
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at March 31, 2002 were
$2,006,000, a decrease of $10,000 from the December 30, 2001 balance of
$2,016,000. We invest our excess cash in high-quality, liquid, short-term
investments.
Net cash provided by operating activities was $332,000 in the first quarter of
2002 compared to cash used in operating activities of $139,000 in the comparable
period in 2001. The comparative increase was due principally to a reduction in
inventory of $130,000 due to laser sales and an increase in accrued liabilities
of $142,000. The increase in accrued liabilities resulted from the receipt of
unclaimed funds previously set aside in July 1999 for the payment of our
subordinated notes. Cash received of $223,000 was recorded as a reduction in our
outstanding credit facility obligations with a corresponding increase in accrued
liabilities (See Note 4).
Net cash provided by investing activities was $359,000 in the first quarter of
2002, compared to cash provided by investing activities of $61,000 in the first
quarter of 2001. The increase in cash provided by investing activities was due
principally to proceeds from the sale of short-term investments of $402,000 in
the first quarter of 2002 as compared to proceeds from the sale of short-term
investments of $81,000 in the first quarter of 2001.
Net cash used in financing activities was $292,000 in the first quarter of 2002
compared to cash provided by financing activities of $103,000 in the first
quarter of 2001. The decrease is due to the net payments on the line of credit
in the first quarter of 2002 of $229,000 compared to net advances of $133,000 in
the first quarter of 2001.
Our liquidity requirements arise primarily from the funding of working capital
needs and debt obligations. At March 31, 2002, we had working capital of $5.7
million compared to $5.8 million at December 30, 2001. $2 million of this
working capital in each period was collateral for the $3 million credit
facility.
We have a $3 million credit facility from a bank. The credit facility has a
commitment term of three years expiring June 2003, permits deferment of
principal payments until the end of the commitment term, and is secured by our
business assets, including collateralization of $2 million of our cash, cash
equivalents and short-term investments. The credit facility has an interest rate
of either the 30, 60, 90 or 180 day floating LIBOR plus 2.25% and is subject to
certain covenants and borrowing base certificates, as defined, with which we
were in compliance at March 31, 2002. The interest rate on the credit facility
at March 31, 2002 was 4.15%. At March 31, 2002, we had $2,544,000 in outstanding
obligations and $456,000 was available under the credit facility.
Our primary sources of funds are our cash flows from operations, our borrowing
capacity under the credit facility and lease financing for capital expenditures.
We believe that within the range of our current projections, operating cash flow
for fiscal 2002, the available line of credit and lease financing options will
be sufficient to fund operations and/or facilitate our growth plans.
We believe that these factors, along with our current cash position, will be
sufficient to fund operations and meet our commitments for long-term debt, other
commitments and contingencies and capital expenditures.
We do not believe that inflation has had a material effect on operations for the
periods presented.
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 us, reference is made to
our Form 10-K, Item 7, "Risk Factors," for the fiscal year ended December 30,
2001, which is incorporated herein by reference. The risk factors described in
such report continue to be applicable at March 31, 2002.
10
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 30, 2001.
On April 4, 2002, Barbara Tandon filed suit against the Company in the Court of
Common Pleas for the Ninth Judicial Circuit, in the State of South Carolina. The
plaintiff, a former employee of the Company, alleged in the complaint that she
had been wrongfully terminated in breach of contract, that the Company was in
violation of the South Carolina payment of wages statute because it had not paid
her what was allegedly due her, and that the alleged breach of contract was
accompanied by a fraudulent act. The plaintiff has asked for actual and punitive
damages and attorney's fees, in a sum not to exceed $75,000 exclusive of costs
and interest. The Company's insurance carrier is defending the Company in this
action. The Company believes that it has meritorious defenses to the plaintiff's
claims, and intends to defend this action vigorously.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SURGICAL LASER TECHNOLOGIES, INC.
Date: May 10, 2002 By: /s/ Davis Woodward
--------------------
Davis Woodward
Vice President, Finance and
Chief Financial Officer
Signing on behalf of the Company
and as principal financial officer.