SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended May 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No. 1-11047
SPARTA SURGICAL CORPORATION
(Exact name of small business issuer in its charter)
Delaware 22-2870438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Olsen Centre
2100 Meridian Park Blvd., Concord, Ca 94520
(925) 825-8151
(Issuer's telephone number)
Check whether the issuer(1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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
--- ------
As of July 7, 2000, 8,796,191 shares of Common Stock, 81,783 shares of
Redeemable Convertible Preferred Stock, 28,068 shares of Series A convertible
Redeemable Preferred Stock and 39,938 shares of Series AA Preferred Stock were
outstanding.
SPARTA SURGICAL CORPORATION
Form 10-QSB
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance
Sheet as of May 31, 2000 1
Consolidated Statements of
Operations for the Three Months
Ended May 31, 2000 and 1999 2
Consolidated Statements of
Cash Flows for the Three Months
Ended May 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
And Results of Operations 5 - 8
Part II. Other Information and Signatures 8 - 9
SPARTA SURGICAL CORPORATION
CONSOLIDATED BALANCE SHEET
May 31, 2000
(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 38,000
Accounts Receivable - Net of Allowance
for doubtful accounts of $44,000 $ 444,000
Inventories 2,692,000
Other 31,000
------------
Total Current Assets 3,205,000
------------
Property and Equipment, at cost:
Equipment 1,099,000
Other 18,000
------------
1,117,000
Less Accumulated Depreciation (341,000)
------------
Net Property and Equipment 776,000
------------
Other Assets:
Intangible Assets 1,135,000
Other 43,000
------------
Total Other Assets 1,178,000
------------
Total Assets $ 5,159,000
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long Term Obligations $ 151,000
Accounts Payable - Trade 724,000
Accrued Expenses 235,000
------------
Total Current Liabilities 1,110,000
------------
Revolving Credit Facility and Long Term Obligations 1,941,000
Stockholders' Equity:
Preferred Stock: $4.00 par value, 2,000,000 shares authorized;
1992 Non-Cumulative Convertible Redeemable Preferred Stock:
165,000 Shares Authorized, 82,783 Shares Issued and Outstanding 331,000
Series A Cumulative Convertible Redeemable Preferred Stock:
30,000 Shares Authorized, 28,068 Shares issued and Outstanding 112,000
Series AA Cumulative Convertible Redeemable Preferred Stock:
875,000 Shares Authorized, 39,938 Shares issued and Outstanding 160,000
Common Stock: $0.002 par value, 25,000,000 Shares Authorized,
8,792,735 Shares Issued and Outstanding 14,000
Additional Paid in Capital 13,894,000
Accumulated Deficit (12,403,000)
------------
Total Stockholders' Equity 2,108,000
------------
Total Liabilities and Stockholders' Equity $ 5,159,000
------------
1
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
May 31
--------------------------
2000 1999
---- ----
Net Sales $ 905,000 $ 399,000
Cost of sales 486,000 185,000
----------- -----------
Gross profit 419,000 214,000
Selling, general and administrative expenses 424,000 147,000
Research, development, and engineering 117,000 --
Depreciation and amortization expenses 56,000 59,000
----------- -----------
Income (loss) from Operations (178,000) 8,000
----------- -----------
Other income (expense):
Interest Expense (80,000) (86,000)
----------- -----------
Net Income (loss) (258,000) (78,000)
=========== ===========
Preferred Stock Dividends (4,000) (2,000)
----------- -----------
Net income (loss) applicable
To common stockholders $ (262,000) (80,000)
=========== ===========
Shares used to calculate basic and diluted net income (loss)
per common share 6,309,309 1,937,958
=========== ===========
Basic net income (loss) per common share $ (0.04) $ (0.04)
=========== ===========
2
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
May 31,
--------------------------
2000 1999
---- ----
Cash flows from operating activities:
Net income (Loss) $ (258,000) $ (78,000)
Adjustments to reconcile net income (loss) to net cash used by
Operating activities:
Depreciation and amortization 56,000 59,000
Changes in operating assets and liabilities:
Accounts receivable (39,000) (67,000)
Inventories (42,000) 10,000
Other assets 270,000 (91,000)
Accounts payable and accrued expenses (469,000) (127,000)
----------- -----------
Net cash used in operating activities (482,000) (294,000)
Cash flows from investing activities:
Capital expenditures (9,000) (2,000)
----------- -----------
Net cash used in investing activities (9,000) (2,000)
Cash flows from financing activities:
Proceeds from Sale of common stock 381,000
Borrowing on revolving credit facilities 1,156,000 706,000
Principal payments on long-term obligations (1,069,000) (410,000)
----------- -----------
Net cash provided by financing activities 468,000 296,000
----------- -----------
Net change in cash and cash equivalents (23,000) --
----------- -----------
Cash and cash equivalents at beginning of the period 61,000 1,000
----------- -----------
Cash and cash equivalents at end of the period $ 38,000 $ 1,000
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the year for:
- --------------------------------------------------------------------------------
Interest $ 69,000 $ 67,000
Income taxes -- --
Supplemental disclosure of non-cash financing activities:
- ---------------------------------------------------------
Dividends payable on Series A convertible redeemable preferred stock 4,000 2,000
3
SPARTA SURGICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements of the Company
as of May 31, 2000 and for the three months ended May 31, 2000 and 1999
have been prepared on the same basis as the annual audited financial
statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of this interim information. Operating
results and cash flows for interim periods are not necessarily indicative
of results for the entire year. The information included in this report
should be read in conjunction with the Company's audited financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the Fiscal year ended February 29, 2000, previously filed
with the Securities and Exchange Commission.
2. Basic income (loss) per share is based upon weighted average number of
common shares outstanding during the period. Diluted income (loss) per
share is computed using the weighted average number of common shares and
potentially dilutive securities outstanding during the period. Potentially
dilutive securities include incremental common shares issuable upon
conversion of convertible securities (using the if-converted method) and
shares issuable upon the exercise of stock options and warrants (using the
treasury stock method). Potentially dilutive securities are excluded from
the computation if their effect is anti-dilutive. Contingently issuable
shares are included in diluted earnings per share when the related
conditions are satisfied. Potentially dilutive securities, excluded because
of their anti-dilutive effect are 4,879,124 and 1,352,404 at May 31, 2000
and May 31, 1999, respectively. The following table sets forth the
computation of basic and diluted net income (loss) per common share:
Three Months Ended May 31
--------------------------
2000 1999
---- ----
Numerator
Net income (loss) applicable to common stockholders $ (262,000) $ (80,000)
Denominator
Weighted average common shares outstanding
during the period 8,212,295 2,890,944
Less shares subject to escrow agreement (1,902,986) (952,986)
----------- -----------
Shares used in computing basic income (loss)
per common share 6,309,309 1,937,958
Dilutive effect of conversion of preferred stock -- --
----------- -----------
Dilutive effect of options and warrants -- --
----------- -----------
Dilutive effect of convertible debt -- --
----------- -----------
Shares used in computing diluted income
(loss) per common share 6,309,309 1,937,958
----------- -----------
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
from time to time in our periodic reports filed with the Securities and Exchange
Commission, including our Annual Report on Form 10-KSB, Quarterly Reports on
Form 10-QSB and other periodic filings. These forward-looking statements speak
only as of the date hereof. We disclaim any intent or obligation to update these
forward-looking statements.
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Form 10-QSB, or presented elsewhere by management from time to time. We
wish to caution stockholders and investors that the following important factors,
among others, in some cases have affected, and in the future could affect, our
actual results and could cause our actual results to differ materially from
those expressed in any forward looking statements made by us. The statements
under this caption are intended to serve as cautionary statements within the
scope of the Private Securities Litigation Reformation Act of 1995. The
following information is not intended to limit in any way the characterization
of other statements or information under other captions as cautionary statements
for such purpose. These factors could have a material adverse effect on our
business, operating results and financial condition. There can be no assurance
that we (i) can predict the market acceptance of our products, (ii) will not
face intense competition, (iii) will be able to obtain patent protection for our
products and preserve our trade secrets, (iv) will continue the operations, as
we may need additional financing and such financing may not be available as we
are highly leveraged and may be unable to service our debt, (v) will be
successful because we are subject to stringent and continuing applicable federal
regulations and may be subject to product liability claims, (vi) will be able to
retain or hire key personnel, and (iv) will successfully generate sufficient
revenue to achieve profitability from our new subsidiary, Sparta E*Med, Inc.
Our results of operations vary significantly from year to year and from quarter
to quarter, and we depend on, among other factors, developing new products,
demand for our products and significantly depend on availability of materials
from our suppliers, and we also depend on our customers including hospitals,
physicians, distributors and OEM private label accounts. We have incurred net
losses in the past and can't assure future profitability.
RESULTS OF OPERATIONS
Three Months Ended May 31, 2000
As Compared to Three Months Ended May 31, 1999
Net sales for the three months ended May 31, 2000 ("First Quarter Fiscal
2001") were $905,000, an increase of $506,000, or 127% from net sales of
$399,000 for the three months ended May 31, 1999 ("First Quarter Fiscal 2000").
The increase in net sales during the First Quarter Fiscal 2001 as compared to
the First Quarter Fiscal 2000 is the result of (i) the acquisition of the Olsen
Electrosurgical business in June 1999, (ii) the approval of ISO 9001
certification for Quality System Regulations under the FDA's Good Manufacturing
Practices (GMP) along with CE Mark approval for marketing and distribution in
Europe, and (iii) cross channel distribution of the surgical, medical and
electrosurgical devices to a larger distribution network acquired with the Olsen
acquisition.
5
Gross profit was $419,000 or 46% of net sales for the First Quarter Fiscal
2001 as compared to $214,000 or 54% of net sales for the First Quarter Fiscal
2000. The decrease in gross profit percentage is primarily due to the
electrosurgical equipment generating lower gross profit margins and certain
price concessions that were made in the electrosurgical product line with our
international distributors.
Selling, general and administrative ("SG&A") expenses for the First Quarter
Fiscal 2001 were $424,000, a $277,000, or 188% increase from SG&A expenses of
$147,000 for the First Quarter Fiscal 2000. The increase in SG&A expenses for
the First Quarter Fiscal 2001 as compared to the First Quarter Fiscal 2000 is
primarily attributed to the acquisition of the Olsen operation.
Research, Development and Engineering expenses for the First Quarter Fiscal
2001 were $117,000 as compared to no expenses in the First Quarter Fiscal 2000.
The increase in research, development and engineering is primarily attributed to
(i) the continued development of a Manually Extendable Electrosurgical
Apparatus, a patented electrosurgical device for use in cutting tissue and
cauterization procedures. We have been appointed by Hemitek, LLC, the patent
holder, to a 10-year exclusive licensing agreement to manufacture and market the
medical device worldwide, (ii) our development of a new subsidiary Sparta E*Med,
Inc., an early stage development company, since February 2000. Sparta E*Med,
Inc. has not completed development, produced any revenue or sublicensed any
technology. Sparta E*Med, Inc. is subject to all of the risks associated with a
start-up development stage and technology company. In addition, the development
of the technology and services of Sparta E*Med, Inc. will require a commitment
of additional substantial funds to pursue the completion of this technology and
business development.
Net loss for the First Quarter Fiscal 2001 was $258,000, an increase of
$180,000 from a net loss of $78,000 for the First Quarter Fiscal 2000. The net
loss for the First Quarter Fiscal 2001 as compared to net income in the First
Quarter Fiscal 2000 is primarily due to (i) the increase expense in the
research, development and engineering relating to the continued product
development of the Manually Extendable Electrosurgical Apparatus (ii) the
further development of our new subsidiary, Sparta E*Med, Inc., a
business-to-business website platform technology, e-Med/Surg Plus Sites, which
will further expand our distribution channels for our electrosurgical and
microsurgical medical devices, and (iii) expenses relating to covenants not to
compete and consulting fees paid to former shareholders in connection with the
acquisition of Olsen Electrosurgical.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have been undercapitalized and have experienced
financial difficulties. Our primary sources of working capital have been
revenues from operations, bank and private party loans and proceeds from the
sale of securities. Many of the bank and private party loans and certain of our
other obligations have required personal guarantees from Thomas F. Reiner, our
President, Chairman and CEO, for which he has been compensated by us. In
addition, from time to time, Mr. Reiner has provided us with the working capital
in order to continue to operate our business.
As of February 29, 2000, we had federal and state net operating loss carry
forwards of approximately $10,458,000. Our net operating loss carry forwards, if
not utilized, will expire at various dates through the year 2019.
Our working capital at May 31, 2000 was $2,048,000 as compared to
$1,633,000 at February 29, 2000, an increase of $415,000, which is primarily due
to the higher level of sales and the recently completed private equity
placement.
6
On March 20, 2000 Bank of America Commercial provided us with an amended
24-month Revolving Line of Credit of up to $2,500,000 (the "Loan"). We agreed to
pay Bank of America Commercial interest on the average outstanding principal
amount of the Loan at a per annum rate of prime plus 3%. The Loan is advanced to
us based on a percentage of eligible assets and is secured by a first position
security interest on all our assets. In addition, $250,000 of the Loan is
personally guaranteed by Mr. Reiner. As of July 7, 2000, the outstanding balance
on the Loan was $1,616,000 and approximately $15,000 in credit was available.
The Loan is being used to provide working capital for current operations. In
connection with the financing, we issued Bank of America Commercial a warrant to
purchase up to 10,000 shares of our Common Stock exercisable at $1.90 per share
at any time until March 20, 2003.
From March 1999 through April 2000, we significantly improved our
Stockholders Equity by adding equity through the combined conversion of
$1,285,000 of debt into shares of Common Stock and the purchase of Common Stock
in the amount of $1,263,125 under private placement memorandum, and also
$181,000 through employee stock option exercises. From Fiscal Year Ended
February 28, 1999 to First Quarter Fiscal 2001, our Stockholders Equity
increased from $222,000 to $2,108,000. We incurred expenses of approximately
$450,000 for finders and consultant fees, and legal and accounting fees in
connection with registration of securities issued under the private placement
memorandum and stock option exercises. In connection with the private placement,
we also issued warrants to Spags Investment Group, N.V. to purchase 1,000,000
shares of Common Stock $0.002 par value, consisting of 500,000 warrants
exercisable at $1.00 per share, and 500,000 warrants exercisable at $5.00 per
share, all of which expire at September 1, 2000. The registration statement,
declared effective on April 21, 2000, registered 3,974,665 shares of Common
Stock, and such shares were immediately eligible for sale into the open market.
On June 11, 1998, subject to the terms and conditions of the May 31, 1997
Working Capital Credit Facility ("WCCF"), Mr. Reiner agreed to increase the WCCF
up to $500,000 and subsequently on June 3, 1999, Mr. Reiner increased the WCCF
to $750,000. On July 8, 2000, Mr. Reiner further agreed to extend the WCCF for a
period of an additional 12 months, to June 30, 2001. As of May 31, 2000, the
amount due to Mr. Reiner under the WCCF was approximately $223,894 plus accrued
interest of $2,375. Interest during the First Fiscal Quarter 2001 under the WCCF
totaled approximately $9,900.
In addition, from March 1999 through May 2000 we issued to Mr. Reiner
1,100,000 options, at exercise prices ranging from $0.59 to $2.35 in
consideration of the substantial efforts undertaken by Mr. Reiner, including
increasing sales from prior fiscal year, completing a private placement of $2.5
million of equity, his providing personal guarantees to our senior lender, his
capital equipment leases and loan guarantees in connection with the Olsen
acquisition, and securing ISO 9001 and CE Mark certification for certain of the
electrosurgical products which will permit us to expand our distribution network
into the European Market.
In February 2000, we formed a new subsidiary, Sparta E*Med, Inc., to
develop a global business-to-business (B2B) website and to market our
electrosurgical and microsurgical instruments, equipment and supplies to the
healthcare professionals, including hospitals, physicians offices, rehab
clinics, and surgery centers. Sparta E*Med, Inc., an online source of specialty
medical and surgical devices, will link buyers and suppliers with "one stop
shop" to research and purchase the best medical devices. The technology and
development program of Sparta E*Med, Inc. are at an early stage and must be
evaluated in light of the uncertainties and complications present in a young
technology company such as ours. Our new subsidiary has only been in existence
since February 2000 and we have not completed development, produced any revenue
or sublicensed any technology. There can be no assurance that Sparta E*Med's
technology and services will produce revenue or that any development efforts
will be successfully completed. Sparta E*Med, Inc. is subject to all risks
associated with a start-up development stage and technology company. We will
require substantial additional funds to pursue the completion of this technology
and business development.
7
On April 21, 2000 under the 1987 Employee Stock Option Plan, Mr. Reiner
exercised 50,000 options at an exercise price of $0.59. In addition, certain key
employees also exercised 170,000 options at an exercise price ranging from $0.75
to $1.00 per share.
We continue to look for opportunities to increase our level of sales to
achieve profitable operations. On June 22, 2000, we signed a non-binding letter
of intent to purchase all or substantially all of the assets of the Weck
Electrosurgical business from Weck Closure Systems, Inc., a wholly owned
subsidiary of Teleflex Corporation [NYSE:TFX]. For its most recent fiscal year
ended December 31, 1999, Weck Electrosurgical recorded net sales of
approximately $3.9 Million. The parties are working toward the execution of a
binding agreement, which will be subject to several conditions, including the
determination by us that the results of our due diligence investigation of
Weck's Electrosurgical business and assets are satisfactory, and the completion
of financing.
In recent years, we have experienced losses from operations and continue to
suffer from a deficiency in available working capital. We may need to raise
additional funds in order to implement the business plan, to find more
aggressive marketing programs or to acquire complementary businesses,
technologies or services. Any required additional funding may be unavailable on
terms satisfactory to us, or at all. If we raise additional funds by issuing
equity securities, we may experience significant dilution and such securities
may have no rights senior to those of the holders of Common Stock. In addition,
we provide no assurance that our Common Stock will not become delisted from
trading or ineligible for quotation due to changes in NASD listing requirements,
or if we fail to comply with any rules and regulations pursuant to NASD rule
6530.
Except for the historical information contained herein, the matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks are detailed
from time to time in the Company's periodic reports filed with the Securities
and Exchange Commission, including the Company's Annual Report on Form 10-KSB,
Quarterly Reports on Form 10-QSB and other periodic filings. These
forward-looking statements speak only as of the date hereof. The Company
disclaims any intent or obligation to update these forward-looking statements.
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
8
Item 4. Submission of Matters to a Vote of Security Holders
On June 16, 2000, a special Meeting of our Shareholders was held for the
purpose of amending our Articles of Incorporation in order to increase our
authorized number of shares of common stock from 8,000,000 to 25,000,000. The
shareholders initiative was accepted by 81% of the votes cast.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit No.
27 Financial Data Schedule.
B. Reports on Forms 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Sparta Surgical Corporation
/s/ Thomas F. Reiner
--------------------
Thomas F. Reiner
Chairman of the Board
President & CEO
/s/ John O'Hanlon
-----------------
John O'Hanlon, CPA
Chief Financial Officer
(Principal Accounting Officer)
July 14, 2000
9