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 30, 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.
---------------------------------
(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 2, 2002 the registrant had outstanding 2,327,965 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 30, 2002 (unaudited) and December 30, 2001 3
b. Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss) (unaudited) for the quarters ended
June 30, 2002 and July 1, 2001 4
c. Condensed Consolidated Statements of Operations and Other
Comprehensive Loss (unaudited) for the six months ended
June 30, 2002 and July 1, 2001 5
d. Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2002 and July 1, 2001 6
e. Notes to Condensed Consolidated Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION:
- ----------------------------
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 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)
June 30, 2002 Dec. 30, 2001
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 623 $ 497
Short-term investments 1,404 1,519
Accounts receivable, net of allowance for doubtful accounts of $432 and $482 1,848 1,824
Inventories 3,278 3,006
Other 305 414
----------------------------------
Total current assets 7,458 7,260
Property and equipment, net 3,019 3,151
Goodwill 599 599
Other intangible assets, net 545 328
Other assets 100 127
----------------------------------
Total assets $11,721 $11,465
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 142 $ 173
Notes payable 153 --
Accounts payable 889 851
Accrued liabilities 818 411
----------------------------------
Total current liabilities 2,002 1,435
----------------------------------
Long-term debt 2,668 2,937
Other liabilities 87 --
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized, 2,328 shares issued
and outstanding 23 23
Additional paid-in capital 33,728 33,725
Accumulated deficit (26,787) (26,666)
Accumulated other comprehensive income -- 11
----------------------------------
Total stockholders' equity 6,964 7,093
----------------------------------
Total liabilities and stockholders' equity $11,721 $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:
June 30, 2002 July 1, 2001
Net sales $2,826 $2,685
Cost of sales 1,597 1,262
-----------------------------------
Gross profit 1,229 1,423
-----------------------------------
Operating expenses:
Selling, general and administrative 1,157 1,224
Product development 125 156
-----------------------------------
1,282 1,380
-----------------------------------
Operating income (loss) (53) 43
Interest expense 35 46
Interest income (19) (39)
-----------------------------------
Net income (loss) ($69) $ 36
===================================
Basic and diluted net income (loss) per share ($0.03) $ 0.02
===================================
Shares used in calculating basic net income (loss) per share 2,328 2,328
Shares used in calculating diluted net income (loss) per share 2,328 2,328
===================================
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OTHER COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
For the Quarter Ended:
June 30, 2002 July 1,2001
Net income (loss) ($69) $36
Other comprehensive income:
Unrealized securities gains arising during period 2 1
Less: reclassification for gains included in net income (loss) (6) (6)
-----------------------------------
Decrease in accumulated other comprehensive income (4) (5)
-----------------------------------
Total comprehensive income (loss) ($73) $31
===================================
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 30, 2002 July 1, 2001
Net sales $5,585 $4,956
Cost of sales 3,163 2,442
-----------------------------------
Gross profit 2,422 2,514
-----------------------------------
Operating expenses:
Selling, general and administrative 2,295 2,383
Product development 242 303
-----------------------------------
2,537 2,686
-----------------------------------
Operating loss (115) (172)
Interest expense 68 93
Interest income (61) (86)
-----------------------------------
Net loss ($122) ($179)
===================================
Basic and diluted net loss per share ($0.05) ($0.08)
===================================
Shares used in calculating basic net loss per share 2,328 2,328
Shares used in calculating diluted net 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 Six Months Ended:
June 30, 2002 July 1, 2001
Net loss ($122) ($179)
Other comprehensive loss:
Unrealized securities gains arising during period 4 8
Less: reclassification for gains included in net loss (15) (19)
-----------------------------------
Decrease in accumulated other comprehensive loss (11) (11)
-----------------------------------
Total comprehensive loss ($133) ($190)
===================================
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 30, 2002 July 1, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($122) ($179)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 399 449
Provision for bad debt (50) (46)
(Increase) decrease in assets, net of acquisition:
Accounts receivable 26 48
Inventories (213) (609)
Other current assets 115 (106)
Other assets 14 (44)
Increase (decrease) in liabilities, net of acquisition:
Accounts payable 162 305
Accrued liabilities 244 (179)
-----------------------------------
Net cash provided by (used in) operating activities 575 (361)
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments, net 104 (425)
Purchases of property and equipment (94) (122)
Patent costs (7) (9)
-----------------------------------
Net cash provided by (used in) investing activities 3 (556)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (91) (64)
Payments on note payable (93) --
Net advances (payments) on line of credit (268) 338
-----------------------------------
Net cash provided by (used in) financing activities (452) 274
-----------------------------------
Net increase (decrease) in cash and cash equivalents 126 (643)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 497 702
-----------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $623 $59
===================================
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. Basis of Presentation:
The condensed consolidated financial statements of the Company for the quarter
and six-month periods ended June 30, 2002 and July 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
June 30, 2002 and for the periods then ended 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 the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K report for fiscal year ended December 30, 2001, as filed
with the Securities and Exchange Commission.
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 30, 2001, as filed with the Securities
and Exchange Commission. Interim results for the quarter ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full year.
2. Acquisitions
During the quarter ended June 30, 2002, the Company acquired the CO2 laser
product line of Reliant Technologies, Inc. ("Reliant"). The Company obtained
inventory for the product line for $75,000 cash and $105,000 in a 12 month note
payable. The Company also assumed an outstanding purchase commitment for
inventory of $72,000. In addition, the Company obtained a royalty-bearing
license ("the License") for the use of certain patents of Reliant in surgical
and aesthetic applications. Under the License, the Company shall, over an
18-month period, prepay royalties of $250,000. The License is being amortized on
a straight line basis over an estimated life of 8 years.
3. Supplemental Cash Flow Information:
There were no material income taxes paid for the six months ended June 30, 2002
and July 1, 2001. Interest paid for the six months ended June 30, 2002 and July
1, 2001 was $69,000 and $95,000, respectively.
For the period ending June 30, 2002, non-cash operating and financing
activities consisted of liquidation of an account payable for equipment by means
of a capital lease agreement in the amount of $35,000, a reclassification from
accounts payable to notes payable amounting to $141,000, and a conversion of two
operating leases into a capital lease for $24,000.
In May 2002, the Company acquired the CO2 laser product line from Reliant for
$75,000 cash and $105,000 in a short term note payable in exchange for
inventories and a commitment to prepay royalties of $250,000 over 18 months in
exchange for certain license rights.
7
4. Inventories:
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost is determined at the latest cost for raw materials and at
production cost (materials, labor and indirect manufacturing cost) for
work-in-process and finished goods.
Inventories at June 30, 2002 and December 30, 2001 were as follows (in thousands
of dollars):
June 30, 2002 December 30, 2001
------------- -----------------
Raw material and work-in-process $1,956 $1,913
Finished goods 1,322 1,093
-----------------------------------------
$3,278 $3,006
=========================================
5. Other Intangible Assets:
Costs to obtain or defend patents are capitalized and amortized over the shorter
of their estimated useful life or eight years. The total costs of license
agreements, including costs to obtain such agreements, are capitalized and
amortized over the shorter of the life of the agreement or eight years.
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
June 30, 2002 December 30, 2001
------------- -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------------------------------------
Amortized intangible assets:
Patents and trademarks $1,074 $788 $1,066 $743
License agreements 298 39 40 35
------------------------------------------------------------------------
Total other intangible assets $1,372 $827 $1,106 $778
========================================================================
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending (in thousands):
2002 $107
2003 98
2004 84
2005 69
2006 46
6. Accrued Liabilities:
In May 2002, the Company acquired the CO2 laser product line from Reliant, which
included a commitment to prepay royalties of $250,000 over 18 months. This
current amount is included in accrued liabilities and long term portion is
included in other liabilities at June 30, 2002. During the first six months of
2002, the Company resumed direct control of $223,000 of funds previously set
aside in July 1999 for the redemption of the Company's subordinated notes and
$31,000 of funds set aside to pay related, accrued interest. These amounts are
also included in accrued liabilities at June 30, 2002.
8
7. 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 ("SFAS") No. 128
"Earnings per Share" as follows (in thousands except for per share amounts):
For the Quarter Ended For the Six Months Ended
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ -------------- ------------
Basic EPS Calculation
Net income (loss) ($69) $36 ($122) ($179)
Denominator:
Common Stock Outstanding 2,328 2,328 2,328 2,328
------------------------------------------------------------------------------
Basic EPS ($0.03) $0.02 ($0.05) ($0.08)
==============================================================================
Diluted EPS Calculation
Net income (loss) ($69) $36 ($122) ($179)
Denominator:
Common Stock Outstanding 2,328 2,328 2,328 2,328
Common Stock Options -- -- -- --
------------------------------------------------------------------------------
Total Shares 2,328 2,328 2,328 2,328
------------------------------------------------------------------------------
Diluted EPS ($0.03) $0.02 ($0.05) ($0.08)
==============================================================================
For the quarter and six months ended June 30, 2002, the Company had 599,000
common stock options and warrants outstanding which were excluded from the
calculation of diluted earnings per share due to the net losses incurred. The
inclusion of these common share equivalents had an anti-dilutive effect when
calculating diluted loss per share under SFAS No. 128. For the quarter and the
six months ended July 1, 2001, the Company had 615,000 common stock options and
warrants outstanding which were excluded from the calculation of diluted
earnings per share because those options' and warrants' exercise prices were
greater than the average market price of the common stock.
8. Bank Borrowings:
The Company has a $3 million credit facility from a bank. The credit facility's
original commitment term of three years expiring June 2003 has been extended
until June 2004. The credit facility permits deferment of principal payments
until the end of the commitment term, and is secured by SLT's business assets,
including collateralization of $2 million of SLT's cash and cash equivalents and
short-term investments. The credit facility has been amended to set the interest
rate at the 30 day LIBOR plus 2.25% and is subject to certain covenants and
borrowing base certificates, as defined. The interest rate on the credit
facility at June 30, 2002 was 4.09%. At June 30, 2002, SLT had $2,505,000 in
outstanding obligations and $495,000 was available under the credit facility.
9. Income Taxes:
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company has
recorded no current provision for income taxes due to the losses incurred for
the quarter and six months ended June 30, 2002 and has recorded no net deferred
provision by reason of the losses 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.
In accordance with SFAS No. 109, the Company has recorded no current provision
for income taxes due to the availability of net operating loss carryforwards in
the quarter ended July 1, 2001 and due to the loss incurred for the six months
ended July 1, 2001. The Company has recorded no benefit from the net loss
inasmuch as any such benefit 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 SLT continues to experience.
9
10. 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 and six months ended June 30,
2002 and July 1, 2001, the Company did not have material net sales to any
individual customer.
The Company reported net sales in the following categories (in thousands of
dollars):
For the Quarter Ended: For the Six Months Ended:
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Disposables and accessories $1,194 $1,307 $2,301 $2,510
Laser system sales and related maintenance 362 323 851 497
Surgical services 1,270 1,055 2,433 1,949
- ------------------------------------------------------------------------------------------------------------------
Total net sales $2,826 $2,685 $5,585 $4,956
==================================================================================================================
For the quarters and six months ended June 30, 2002 and July 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: For the Six Months Ended:
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Domestic $2,674 $2,168 $5,282 $4,183
Foreign 152 517 303 773
- -----------------------------------------------------------------------------------------------------------
$2,826 $2,685 $5,585 $4,956
===========================================================================================================
11. 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 which indicate that goodwill may be
impaired. SFAS No. 141 and SFAS No. 142 are effective for all business
combinations completed after June 30, 2001.
As of December 31, 2001, which is the beginning of fiscal 2002, the Company no
longer amortizes the goodwill which it recognized in connection with the
acquisition of Surgical Innovations & Services, Inc. ("SIS"). During the quarter
and first six months of 2001, the Company had goodwill amortization of $8,000
and $16,000, respectively. The Company's goodwill is subject to a transitional
impairment test as of December 31, 2001 and an annual impairment test, using a
two-step process prescribed by SFAS No. 142. The Company has completed the
transitional impairment test for SIS, the applicable reporting unit, and no
impairment of goodwill was found to exist as of the beginning of fiscal 2002.
During 2002 and in future periods, the Company will evaluate goodwill for
possible impairment at least on an annual basis. The Company has reviewed its
other intangible assets besides goodwill as of the beginning of fiscal 2002 and
has determined that no changes were necessary as to the method by which it
accounts for or amortizes such intangibles.
10
The following table reflects unaudited adjusted results of operations of the
Company, giving effect to SFAS 142 as if it were adopted on January 1, 2001 (in
thousands, except earnings per share):
For the Quarter Ended: For the Six Months Ended:
June 30, 2002 July 1, 2001 June 30, 2002 July 1, 2001
------------- ------------ ------------- ------------
Net income (loss), as reported ($69) $36 ($122) ($179)
Add back: amortization expense,
net of tax -- 8 -- 16
- ---------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) ($69) $44 ($122) ($163)
===============================================================================================================
Basic and diluted net income (loss) per share:
As reported ($0.03) $0.02 ($0.05) ($0.08)
Adjusted ($0.03) $0.02 ($0.05) ($0.07)
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
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 through traditional sales channels as
well as through the provision of fee-based surgical services.
In June 2000, we expanded our surgical service 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
Our net sales are generated primarily by three sources: sales of Contact Laser
Delivery Systems and related accessories; sales of Nd:YAG Laser Systems, 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 sales outside the United States are derived through a network of
distributors. Net sales for the quarter ended June 30, 2002 of $2,826,000
increased $141,000 or 5% from the comparable period in 2001. Net sales for the
six months ended June 30, 2002 of $5,585,000 increased $629,000 or 13% from the
comparable period in 2001.
Net sales of disposables and related accessories were $1,194,000 or 42% of total
net sales for the quarter ended June 30, 2002. This represented a decrease of
$113,000 or 9% compared to net sales of disposables and related accessories of
$1,307,000 for the quarter ended July 1, 2001. Net sales of disposables and
related accessories were $2,301,000 or 41% of total net sales for the six months
ended June 30, 2002. This represented a decrease of $209,000 or 8% compared to
net sales of disposables and related accessories of $2,510,000 for the six
months ended July 1, 2001. These decreases were due to the lower level of
Contact Laser Delivery System sales and a decrease in sales of non-laser
disposable products.
Net sales of laser systems and related maintenance, which comprised 13% of total
net sales for the quarter ended June 30, 2002, increased $39,000 or 12% from the
quarter ended July 1, 2001. The increase was due to a higher level of domestic
laser sales, which has a higher average selling price for both the Nd:YAG and
the CTH holmium laser systems than prevails in international markets. Net sales
of laser systems and related maintenance, which comprised 15% of total net sales
for the six months ended June 30, 2002, increased $354,000 or 71% from the six
months ended July 1, 2001. This increase was due to domestic sales of the CTH
holmium laser system, which was introduced in June 2001.
11
We provide our customer per-procedure surgical services 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 now 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 $1,270,000 in the second quarter of 2002 or 45% of
total net sales. This represented an increase of $215,000 or 20% compared to the
second quarter of 2001. Surgical services revenue was $2,433,000 for the six
months ended June 30, 2002 or 44% of total net sales. This represented an
increase of $484,000 or 25% compared to the six months ended July 1, 2001. These
increases were the result of both new surgical services contracts and the
expansion of procedural volumes within our existing customer base.
Gross profits of $1,229,000 for the quarter ended June 30, 2002 decreased
$194,000 or 14% from the second quarter of 2001. As a percentage of net sales,
gross profit was 43% and 53% in the quarters ended June 30, 2002 and July 1,
2001, respectively. Gross profits of $2,422,000 for the six months ended June
30, 2002 decreased $92,000 or 4% from the six months ended July 1, 2001. As a
percentage of net sales, gross profit of 43% for the six months ended June 30,
2002 declined 8% when compared to a gross profit percentage for the six months
ended July 1, 2001 of 51%. This decline was due to two main factors: a change in
the sales mix, primarily due to the growth of surgical services revenue which
typically has a lower profit percentage than product sales, and an increase in
surgical service expenses related to the geographic expansion of contract
services.
Operating expenses for the second quarter of 2001 of $1,282,000 decreased by
$98,000 or 7% from the second quarter of 2001. Operating expenses for the first
six months of 2002 of $2,537,000 decreased by $149,000 or 6% from the first six
months of 2001.
Selling, general and administrative expenses of $1,157,000 in the second quarter
of 2002 decreased $67,000 or 5% from the comparable prior year period. Selling,
general and administrative expenses of $2,295,000 for the six months ended June
30, 2002 decreased by $88,000 or 4% from the comparable prior year period. These
decreases were primarily attributable to lower levels of business-related travel
and marketing expenses, commissions and depreciation. These declines were
offset, in part, by higher insurance costs. Also included in expenses for the
quarter and six months ended July 1, 2001 was a reduction of bad debt expense of
$30,000 and $85,000, respectively, related to notes receivable with former
customers, compared to a reduction of bad debt expense of $50,000 for the
quarter and six months ended June 30, 2002.
Product development expenses of $125,000 in the second quarter of 2002 decreased
$31,000 or 20% from the comparable prior year period. Product development
expenses of $242,000 for the six months ended June 30, 2002 decreased $61,000 or
20% from the comparable prior year period. The higher level of expenditures in
the first six months of 2001 related to development of the CTH holmium laser.
Interest expense of $35,000 for the second quarter of 2002 was $11,000 or 24%
lower than in the second quarter of 2001. Interest expense of $68,000 for the
six months ended June 30, 2002 was $25,000 or 27% lower from the comparable
prior year period. These decreases were due to a lower amount of outstanding
obligations under the credit facility and a lower interest rate on the credit
facility.
Interest income of $19,000 and $61,000 for the quarter and six months ended June
30, 2002 declined $20,000 and $25,000, respectively, from the quarter and six
months ended July 1, 2001 due to the lower levels 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 earned by
funds set aside in July 1999 for the payment of our subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at June 30, 2002 were
$2,027,000, an increase of $11,000 from the December 31, 2000 balance of
$2,016,000. We invest our excess cash in high-quality, liquid, short-term
investments.
12
Net cash provided by operating activities was $575,000 for the first six months
of 2002 compared to cash used in operating activities of $361,000 in the
comparable period in 2001. The comparative increase was due principally to a
reduction of inventory purchases compared to the prior year period of $396,000
and to an increase in accrued liabilities of $423,000. The increase in accrued
liabilities resulted from the restoration to us of the direct control of 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 6).
Net cash provided by investing activities was $3,000 for the first six months of
2002, compared to cash used in investing activities of $556,000 in the
comparable period of 2001. The increase in cash provided by investing activities
was due principally to proceeds from the sale of short-term investments of
$104,000 in the first six months of 2002 as compared to purchases of short-term
investments of $425,000 in the first six months of 2001.
Net cash used in financing activities was $452,000 in the first six months of
2002 compared to cash provided by financing activities of $274,000 in the first
quarter six months of 2001. The decrease was due to net payments of $268,000 on
the line of credit in the first six months of 2002 compared to net advances of
$338,000 in the first six months of 2001.
Our liquidity requirements arise primarily from the funding of working capital
needs and debt obligations. At June 30, 2002, we had working capital of $5.5
million compared to $5.8 million at December 30, 2001. $2 million of this
working capital in each period was pledged in the form of cash, cash equivalents
and short-term investments as collateral for the $3 million credit facility.
We have a $3 million credit facility from a bank. The credit facility's original
commitment term of three years expiring June 2003 has been extended until June
2004. The credit facility 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 been amended to set the interest rate at
the 30 day LIBOR plus 2.25% and is subject to certain covenants and borrowing
base certificates, as defined. The interest rate on the credit facility at June
30, 2002 was 4.09%. At June 30, 2002, we had $2,505,000 in outstanding
obligations and $495,000 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 the Company, reference
is made to the Company's 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 June 30, 2002.
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ITEM 6. Exhibits and Reports of Form 8-K
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Exhibit 10.25 Second Amendment to Revolving Loan Agreement, dated June
26, 2002, between Surgical Laser Technologies, Inc and AmSouth
Bank.
Exhibit 10.26 Note for Business and Commercial Loans, dated June 26,
2002, made by Surgical Laser Technologies, Inc. in favor of
AmSouth Bank.
Exhibit 10.27 Addendum to Note for Business and Commercial Loans LIBOR
Rate, dated June 26, 2002, made by Surgical Laser Technologies,
Inc. in favor of AmSouth Bank.
Exhibit 10.28 License and Development Agreement, dated May 22, 2002,
between Surgical Laser Technologies, Inc. and Reliant
Technologies, Inc.
Exhibit 10.29 Secured Promissory Note, dated May 22, 2002, between
Surgical Laser Technologies, Inc. and Reliant Technologies, Inc.
Exhibit 10.30 Security Agreement, dated May 22, 2002, between Surgical
Laser Technologies, Inc. and Reliant Technologies, Inc.
Exhibit 10.31 Agreement as to Collateral, dated May 22, 2002, among
Surgical Laser Technologies, Inc., Reliant Technologies, Inc.
and AmSouth Bank.
Exhibit 99.1 Statement of Chief Executive Officer Pursuant to Section
1350 of Title 18 of U.S. Code.
Exhibit 99.2 Statement of Chief Financial Officer Pursuant to Section
1350 of Title 18 of U.S. Code.
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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: August 13, 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.
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