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, 1999
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.)
Bernal Corporate Park
7068 Koll Center Parkway, Suite 425, Pleasanton, CA 94566
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(Address of principal executive offices)
(925) 417-8812
--------------
(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 9, 1999, 3,302673 shares of Common Stock, 89,983 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, 1999 1
Consolidated Statements of
Operations for the three months
ended May 31, 1999 and 1998 2
Consolidated Statements of
Cash Flows for the three months
ended May 31, 1999 and 1998 3
Notes to Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 5 - 7
Part II. Other Information and Signatures 8 - 9
SPARTA SURGICAL CORPORATION
CONSOLIDATED BALANCE SHEET
May 31, 1999
(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents
Accounts Receivable - Net of Allowance 1,000
for doubtful accounts of $34,000 229,000
Inventories 2,016,000
Other 57,000
-----------
Total Current Assets 2,303,000
-----------
Property and Equipment, at cost:
Equipment 419,000
Other 20,000
-----------
439,000
Less Accumulated Depreciation (315,000)
Net Property and Equipment 124,000
-----------
Other Assets:
Intangible Assets 478,000
Other 183,000
-----------
Total Other Assets 661,000
-----------
Total Assets $ 3,088,000
===========
LIABILITIES AND STOCHOLDERS' EQUITY
Current Liabilities
Current Portion of Long Term Obligations $ 571,000
Accounts Payable - Trade 432,000
Accrued Expenses 149,000
-----------
Total Current Liabilities 1,152,000
-----------
Revolving Credit Facility and Long Term Obligations 1,777,000
Stockholders' Equity
Preferred Stock: $4.00 par value, 2,000,000 shares authorized;
1992 Non-Cumulative Convertible Redeemable Preferred Stock:
165,000 Shares Authorized, 89,983 Shares Issued and Outstanding 360,000
Series A Cumulative Convertible 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, 8,000,000 Shares Authorized,
2,902,673 Shares Issued and Outstanding 4,000
Additional Paid in Capital 9,395,000
Accumulated Deficit (9,878,000)
-----------
Total Stockholders' Equity 159,000
-----------
Total Liabilities and Stockholder's Equity $ 3,088,000
===========
The accompanying notes are an integral part of these statements.
1
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
May 31,
--------------------------
1999 1998
---- ----
Net sales $ 399,000 $ 719,000
Cost of sales 185,000 385,000
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Gross profit 214,000 334,000
Selling, general and administrative expenses 147,000 192,000
Depreciation and amortization expenses 59,000 67,000
----------- -----------
Income from Operations 8,000 75,000
----------- -----------
Other income (expense):
Interest and Other Income -- 206,000
Interest Expense (86,000) (93,000)
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Total other income (expense) (86,000) 113,000
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Income Before Provision for Income Taxes (78,000) 188,000
Provision for Income Taxes -- --
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Net Income (Loss) $ (78,000) $ 188,000
=========== ===========
Preferred Stock Dividends (2,000) (4,000)
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Net Income Applicable
to Common Stockholders Income (Loss) (80,000) 184,000
=========== ===========
Shares Used to Calculate Basic Net Income (Loss) Per Common Share $ 1,937,958 $ 861,499
=========== ===========
Basic Net Income (Loss) Per Common Share $ (0.04) $ 0.21
=========== ===========
Shares Used to Calculate Diluted Net Income (Loss) Per Common Share $ 1,937,958 $ 1,471,708
=========== ===========
Diluted Net Income (Loss) Per Common Share $ (0.04) $ 0.13
=========== ===========
The accompanying notes are an integral part of these statements.
2
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
May 31,
---------------------
1999 1998
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Cash flows from operating activities:
Net income (Loss) (78,000) $ 188,000
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 59,000 67,000
Settlement related to disposal of product line -- (206,000)
Changes in operating assets and liabilities:
Accounts receivable (67,000) (192,000)
Inventories 10,000 54,000
Other assets (91,000) (24,000)
Accounts payable and accrued expenses (127,000) 26,000
--------- ---------
Net cash used in operating activities (294,000) (87,000)
Cash flows from investing activities:
Capital expenditures (2,000) (5,000)
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Net cash used in investing activities (2,000) (5,000)
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Cash flows from financing activities:
Proceeds from borrowings 706,000 676,000
Principal payments on long-term obligations (410,000) (584,000)
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Net cash provided by financing activities 296,000 92,000
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Net change in cash and cash equivalents -- --
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Cash and cash equivalents at beginning of the period 1,000 1,000
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Cash and cash equivalents at end of the period $ 1,000 $ 1,000
========= =========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 67,000 $ 66,000
Income taxes -- --
Supplemental disclosure of non-cash financing activities:
- ---------------------------------------------------------
Dividends payable on Series A convertible redeemable preferred stock $ 2,000 $ 4,000
The accompanying notes are an integral part of these statements.
3
SPARTA SURGICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements of the Company
as of May 31, 1999 and for the three months ended May 31, 1999 and 1998
have been prepared on the same basis as the 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 10KSB for the year
ended February 28, 1999 previously filed with the Securities and Exchange
Commission.
2. Effective March 1, 1999, the Company adopted the provisions of Statement
No. 130, Reporting Comprehensive Income that modifies the financial
statement presentation of comprehensive income and its components. Adoption
of this Statement had no effect on the Company's financial position or
operating results.
Comprehensive income (loss) for the three months ended May 31, 1999 and
1998, representing all changes in Stockholder' equity during the period
other than changes resulting from the Company's stock, was $(78,000) and
$188,000, respectively.
3. Basic income (loss) per share is based upon weighted average common shares
outstanding. Diluted income per share is computed using the weighted
average common shares outstanding plus any potential dilutive securities.
Dilutive securities include stock options, warrants, convertible debt, and
convertible preferred stock. The following table sets forth the computation
of basic and diluted net income (loss) per common share:
Three Months Ended May 31,
--------------------------
1999 1998
---- ----
Numerator
Net income (loss) applicable to common stockholders $ (80,000) $ 184,000
Interest expense on convertible debt -- 6,000
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Net income (loss) used in computing diluted
income (loss) per common share $ (80,000) $ 190,000
=========== ===========
Denominator
Weighted average common shares outstanding
during the period 2,890,944 1,814,485
Less: shares subject to escrow agreement (952,986) (952,986)
----------- -----------
Shares used in computing basic income (loss)
per common share 1,937,958 861,499
Dilutive effect of conversion of preferred stock -- 63,984
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Dilutive effect of options and warrants using
the treasury stock method -- 176,892
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Dilutive effect of convertible debt using the
if-converted method -- 369,333
----------- -----------
Shares used in computing diluted income
(loss) per common share 1,937,958 1,471,708
=========== ===========
4. BUSINESS SEGMENTS
The Company's products are divided into two product groups: Surgical
Specialty Products and Electrotherapy DME Products. The Company's
reportable product group segments are strategic business units that offer
different ranges of products. Surgical Specialty Products consist of
microsurgical hand held instruments and accessories, critical care hospital
disposable products and oral maxillofacial implant plating systems.
Electrotherapy DME Products consist of transcutaneous electrical nerve
stimulators, electrodes and related accessories.
4
Information by product group segment is set forth below for the three
months ended May 31:
1999 1998
---- ----
Net sales:
Surgical Specialty Products $206,000 $301,000
Electrotherapy DME Products 193,000 418,000
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$399,000 $719,000
======== ========
Gross profit:
Surgical Specialty Products $142,000 $182,000
Electrotherapy DME Products 72,000 152,000
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$214,000 $334,000
======== ========
Due to the shared and integrated resources in personnel and facilities for
the two product group segments, information on assets, operating expenses
and income from operations is not identifiable for each of the two business
segments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended May 31, 1999
as Compared to Three months ended May 31, 1998
Net sales for the three months ended May 31, 1999 ("First Quarter Fiscal
2000") were $399,000, a 45% decrease from net sales of $719,000 for the three
months ended May 31, 1998 ("First Quarter Fiscal 1999"). The net sales decrease
during the First Quarter Fiscal 2000 as compared to the First Quarter Fiscal
1999 is the result of a decrease of $225,000 or 54% in electrotherapy product
sales from $418,000 to $193,000 coupled with a decrease of $95,000 or 32% in
surgical product sales from $301,000 to $206,000. The decrease in sales for the
electrotherapy product line can be primarily attributed to the completion of
standing purchase orders in the approximate amount of $650,000 from various OEM
accounts. In April 1999, the Company received a standing purchase order of
approximately $140,000 from one of its OEM accounts. The further loss of any of
the Company's OEM account could have a material adverse effect on the Company's
business, operating results and financial condition. The decrease in surgical
sales is primarily attributed to the reduction in the number of the Company's
independent manufacturing sales representatives, and the decision by the Company
not to attend various trade shows as a result of the lack of working capital.
During the First Quarter Fiscal 2000, the Company was awarded a three year
contract for surgical products from a large national hospital buying group.
The Company intends to continue to concentrate its efforts on increasing
its level of sales to achieve profitable operations. In addition, the Company
intends to consider growth through selective strategic acquisitions in
complementary lines of business. In that regard, on June 8, 1999, the Company
completed an agreement to purchase all of the outstanding common stock of Olsen
Electrosurgical, Inc. ("Olsen"), a privately held company founded in 1885. Olsen
designs, develops, manufactures and markets electrosurgical devices and
accessories. For the fiscal year ending December 31, 1998, Olsen recorded
approximately $2.4 million in net sales. Under the agreement, Sparta issued four
hundred thousand (400,000) shares of the Company's common stock, $0.002 par
value in exchange for all of the outstanding shares of Olsen's common stock.
Gross profit was $214,000 or 46% of net sales for the First Quarter Fiscal
2000 as compared to $334,000 or 54% of net sales for the First Quarter Fiscal
1999. The decrease in gross profit percentage is primarily due to the
electrotherapy products generates lower gross profits and certain price
concessions were made in the surgical product line with the Company's
distributors.
5
Selling, general and administrative ("SG&A") expenses for the First Quarter
Fiscal 2000 were $147,000, a 23% decrease from SG&A expenses of $192,000 for the
First Quarter Fiscal 1999. The decrease in SG&A expenses for the First Quarter
Fiscal 2000 as compared to the First Quarter Fiscal 1999 is primarily due to the
continuing reduction of personnel, salaries, and the containment of operating
costs. Depreciation and amortization expenses for the First Quarter Fiscal 2000
and 1999 were $59,000 and $67,000 respectively.
Net loss for the First Quarter Fiscal 2000 was $78,000, a decrease of
$266,000 from a net income of $188,000 for the First Quarter Fiscal 1999. The
net loss for the First Quarter Fiscal 2000 as compared to net income in the
First Quarter Fiscal 1999 is primarily due to lower sales and gross profit which
was the result of the completion of various OEM standing purchase orders in the
approximate amount of $650,000 during Fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has experienced losses from operations and has
suffered from a deficiency in available working capital. In Fiscal 1999, the
Company substantially improved its operating performance, principally as a
result of significant reductions in operating expenses. However, revenues from
existing product lines have not been sufficient to generate adequate working
capital. Management intends to continue the steps it has taken to improve
operations and aggressively pursue capital for its acquisition program through
debt and equity securities offerings. Management has retained the services of an
investment advisor to pursue capital through such private equity or debt
offering. Management intends to continue to pursue viable acquisition candidates
and currently has three non-binding letters of intent with target companies, in
addition to the acquisition agreement with Olsen Electrosurgical, Inc. signed in
June 1999. Management believes its actions will be sufficient to fund
operations, however, there can be no assurance that the Company will be able to
complete planned debt or equity offerings or targeted acquisitions.
At February 28, 1999, the Company had approximately $7,530,000 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire from 2007 to 2019.
Additionally, the Company has approximately $1,680,000 of state net operating
loss carryforwards for tax reporting purposes which will expire through 2004.
The Company's working capital at May 31, 1999 was $1,151,000 as compared to
$1,313,000 at February 28, 1999. The Company's working capital position
decreased by $162,000 as the result of bridge financing costs.
Mr. Reiner, provided the Company with a Working Capital Credit Facility of
up to $750,000, bearing 12% interest per annum. The advances made under the
Working Capital Credit Facility and any accrued and unpaid interest are due the
earlier of (i) July 2000; (ii) upon the closing of a minimum of $1,000,000
equity or debt financing by the Company; or (iii) upon default at the option of
Mr. Reiner, with five (5) day notice to the Company. In addition, Mr. Reiner has
the option to convert all amounts under the Working Capital Credit Facility into
the Company's Common Stock at 100% of the average closing bid prices as reported
on NASDAQ for the five(5) trading days preceding the conversion date. As of July
7, 1999, the amount due to Mr. Reiner under the Working Capital Credit Facility
was approximately $503,000.
On July 25, 1997, NationsCredit Commercial Funding Division of
NationsCredit Commercial Corporation, A NationsBank Company ("NationsCredit")
provided the Company with a 48-month Revolving Line of Credit of up to
$2,500,000 (the "Loan"). The company agreed to pay NationsCredit interest on the
average outstanding principal amount of the Loan at a per annum rate of prime
(7.75% at May 31, 1999) plus 3%. The Loan is advanced to the Company based on a
percentage of eligible assets and is secured by a first position security
interest on all of the assets of the Company. In addition, $250,000 of the Loan
is personally guaranteed by Thomas F. Reiner, the Company's Chairman, President
and Chief Executive Officer. As of July 7, 1999, the outstanding balance on the
Loan was $1,315,000 and approximately $20,000 in credit was available. The Loan
is being used to provide working capital for current operations.
6
During the period from March 1999 through July 9, 1999, the Company raised
$550,000 of financing from various individual investors. These individual loans
range from $25,000 to $200,000, with interest ranging from 7% to 12%. The
proceeds from these loans are designated to be used primarily for working
capital, legal and accounting expenses related to the various acquisitions that
the Company has targeted including the completion of the recent acquisition of
Olsen Electrosurgical, Inc. In accordance with the terms of the loans, the
principal is to be repaid by the Company at the earlier of ranging from two
months to six months from the date of issuance of the loans or the closing of a
$25 million secondary public offering. In addition, as a consideration for the
loans made by the individual investors, the Company also will be required to
issue certain number of shares of the Company's common stock. In addition, in
connection with the financing, in March 1999, the Company signed a consulting
agreement with a financial advisor and as a result the Company issued warrants
to purchase 300,000 shares of the Company's common stock at $0.95 per share
until March 8, 2002. In addition, the financial advisor also receives a finder's
fee.
In March 1999, the Company entered into a non-binding letter of intent to
purchase substantially all of the assets of a company that manufactures and
markets intra-oral camera imaging system equipment for the dental industry. In
May 1999, the Company entered into a non-binding asset purchase agreement to
acquire substantially all of the assets and business operations of Western
Medical Services, Inc., a provider of home health care staffing.
The Company may make additional acquisitions of companies, divisions of
companies or products in the future. Acquisitions entail numerous risks,
including difficulties or an inability to successfully assimilate acquired
operations and products, diversion of management's attention and loss of key
employees of acquired businesses, all of which the Company has encountered with
previous acquisitions. Future acquisitions by the Company may require dilutive
issuances of equity securities and the incurrence of additional debt, and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The Company's future capital
requirements will depend on numerous factors, including the acquisition of new
product lines and/or other business operations and the continued development of
existing product sales, distribution and marketing capabilities. In order to
continue its current level of operations, it will be necessary for the Company
to obtain additional working capital, from either debt or equity sources. If the
Company is unable to obtain such additional working capital, it may be necessary
for the Company to restructure its operations to reduce its ongoing
expenditures.
The Company is currently evaluating the potential impact of the year 2000
on the processing of date-sensitive information by the Company's computerized
information system. The year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable year.
Any of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. Based on preliminary
information, the costs of addressing the potential problems are not currently
expected to have a material adverse effect (estimated not to exceed $25,000) on
the Company's financial position, liquidity or results of operations in future
periods. However, if the Company, or its customers or vendors, are unable to
resolve such processing issues in a timely manner, it could pose a material
financial risk. Accordingly, the Company plans to devote the necessary resources
to resolve all significant year 2000 issues in a timely manner.
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.
7
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit No.
27 Financial Data Schedule.
b. Reports on Form 8-K
The Registrant filed a Form 8-K dated June 23, 1999 which reported that it
has acquired, in exchange for 400,000 shares of the Registrant's common
stock, all of the outstanding common stock of Olsen Electrosurgical, Inc.,
a research and developer, manufacturer, marketer and distributor of
reusable and disposable electrosurgical instruments and accessories for use
in cutting tissues and cauterization during surgical procedures. For its
most recent fiscal year ended December 31, 1998, Olsen recorded net sales
of approximately $2.4 million and employs 20 full-time employees.
8
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
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Thomas F. Reiner
Chairman of the Board
President & CEO and
Acting CFO
July 15, 1999
9