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 August 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.)
Olsen Centre
2100 Meridian Park Blvd., Concord, CA 94520
-------------------------------------------
(Address of principal executive offices)
(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 August 31, 1999, 3,660,860 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 3
Sheet as of August 31, 1999
Consolidated Statements 4
of Operations for the three months and six
months ended August 31, 1999 and 1998
Consolidated Statements 5
of Cash Flows for the six months
ended August 31, 1999 and 1998
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and 7 - 11
Analysis of Financial Condition
and Results of Operations
Part II. Other Information and Signatures 12 - 13
2
SPARTA SURGICAL CORPORATION
CONSOLIDATED BALANCE SHEET
August 31, 1999
(Unaudited)
ASSETS
August 31
1999
----
Current Assets:
Cash and cash equivalents 1,000
Accounts receivable - net of allowance
for doubtful accounts of $42,000 513,000
Inventories 2,303,000
Other 52,000
-----------
Total current assets 2,869,000
Property and equipment, at cost:
Equipment 1,118,000
Other 20,000
-----------
1,138,000
Less accumulated depreciation (280,000)
-----------
Net property and equipment 858,000
Other assets:
Intangible assets 890,000
Other 114,000
-----------
Total other assets 1,004,000
-----------
Total assets 4,731,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term obligations 638,000
Account payable - trade 753,000
Accrued expenses 249,000
-----------
Total current liabilites 1,640,000
Revolving Credit Facility and Long-Term Obligations 1,916,000
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,
3,660,860 shares issued and outstanding 5,000
Additional paid in capital 10,373,000
Accumulated deficit (9,835,000)
-----------
Total stockholder's equity 1,175,000
-----------
Total liabilities and stockholder's equity 4,731,000
===========
The accompaning notes are an integral part of these statements.
3
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales $ 965,000 $ 583,000 $ 1,364,000 $ 1,302,000
Cost of Sales 308,000 312,000 493,000 697,000
----------- ----------- ----------- -----------
Gross Profit 657,000 271,000 871,000 605,000
Selling, general and administrative expenses 463,000 208,000 610,000 378,000
Depreciation and amortization expenses 55,000 44,000 114,000 133,000
----------- ----------- ----------- -----------
Income from operations 139,000 19,000 147,000 94,000
Other income (expense):
Interest and other income 12,000 98,000 12,000 304,000
Interest expense (98,000) (99,000) (184,000) (192,000)
----------- ----------- ----------- -----------
Total other income (expense) (86,000) (1,000) (172,000) 112,000
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes 53,000 18,000 (25,000) 206,000
Provision for income taxes 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) 53,000 18,000 (25,000) 206,000
=========== =========== =========== ===========
Preferred stock dividends (4,000) (17,000) (15,000) (21,000)
----------- ----------- ----------- -----------
Net income/(loss) applicable to common stockholders 49,000 1,000 (40,000) 185,000
=========== =========== =========== ===========
Shares used to calculate basic net income (loss) per common share 2,474,835 1,390,233 2,206,351 1,125,852
=========== =========== =========== ===========
Basic net income (loss) per common share $ 0.02 $ 0.00 ($ 0.02) $ 0.16
=========== =========== =========== ===========
Shares used to calculate diluted net income (loss) per common share 4,040,409 1,844,533 2,206,351 1,598,266
=========== =========== =========== ===========
Diluted net income (loss) per common share $ 0.02 $ 0.01 ($ 0.02) $ 0.14
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
August 31,
-------------------------
1999 1998
---- ----
Cash flows from operating activities
Net income (loss) ($ 25,000) $ 206,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 114,000 133,000
Reduction of accrued liabilites -- (275,000)
Gain on lease settlement (12,000) --
Changes in operating assets and liabilities
Accounts receivable (204,000) (49,000)
Inventories 12,000 125,000
Other assets 65,000 (59,000)
Accounts payable and accrued expenses (310,000) (379,000)
----------- -----------
Net cash used in operating activities (360,000) (298,000)
Cash flows from investing activities:
Capital expenditures (57,000) --
Increase in intangible assets (99,000) (11,000)
----------- -----------
Net cash used in investing activities (156,000) (11,000)
Cash flows from financing activities:
Proceeds from borrowings 1,451,000 1,523,000
Principal payments on long-term obligations (1,060,000) (1,214,000)
Proceeds from issuance of common stock 125,000 --
----------- -----------
Net cash provided by financing activities 516,000 309,000
----------- -----------
Net change in cash and cash equivalents -- --
Cash and cash equivalents at beginning of the period 1,000 1,000
----------- -----------
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 $ 214,000 $ 166,000
Income taxes -- --
Supplemental disclosure of non-cash financing activities:
- ---------------------------------------------------------
Conversion of debt into common stock $ -- $ 751,000
Dividends payable on Series A convertible redeemable preferred stock 14,000 17,000
Stock dividends paid on Series A convertible redeemable preferred stock 15,000 21,000
Issuance of common stock in acquisition of subsidiary 800,000 --
The accompanying notes are an integral part of these statements.
5
SPARTA SURGICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of the Company as of
August 31, 1999 and for the three and six months ended August 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 10-KSB 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 six months ended August 31, 1999 and
1998, representing all changes in stockholders' equity during the period
other than changes resulting from transactions in the Company's stock, was
$(40,000) and $185,000, respectively.
3. Basic income (loss) per share is based upon weighted average common shares
outstanding. Diluted income (loss) per share is computed using the weighted
average common shares outstanding plus any potentially 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 August 31, Six Months Ended August 31,
----------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Numerator
Net income (loss) $ 53,000 $ 18,000 ($ 25,000) $ 206,000
Preferred stock dividends (4,000) (17,000) (15,000) (21,000)
----------- ----------- ----------- -----------
Net income (loss) used in computing income
(loss) per common share 49,000 1,000 (40,000) $ 185,000
----------- ----------- ----------- -----------
Preferred stock dividends 4,000 17,000 -- 21,000
Interest expense on convertible debt 15,000 9,000 -- 14,000
----------- ----------- ----------- -----------
Net income (loss) used in computing diluted
income (loss) per common share $ 68,000 $ 27,000 ($ 40,000) $ 220,000
=========== =========== =========== ===========
Denominator
Weighted average common shares
outstanding during the period 2,474,835 1,390,233 2,206,351 1,125,852
----------- ----------- ----------- -----------
Shares used in computing basic income
(loss) per common share 2,474,835 1,390,233 2,206,351 1,125,852
Dilutive effect of conversion of preferred stock 233,074 63,979 -- 63,979
Dilutive effect of options and warrants using
the treasury stock method 602,812 157,821 -- 175,935
Dilutive effect of convertible debt using the
if-converted method 729,688 232,500 -- 232,500
----------- ----------- ----------- -----------
Shares used in computing diluted income
(loss) per common share 4,040,409 1,844,533 2,206,351 1,598,266
=========== =========== =========== ===========
6
4. BUSINESS SEGMENTS
The Company's products are divided into two product groups: Surgical
Devices and Durable Medical Equipment and Supplies. The Company's
reportable product group segments are strategic business units that offer
different ranges of products. Surgical devices include electrosurgical
instruments and related supplies, ophthalmic and ENT/Plastics surgical
instruments and specialty disposables used in a wide range of surgical
procedures in hospitals, physicians' offices, outpatient surgery and
emergency room settings. Durable Medical Equipment and supplies includes
pain management devices and accessories used in home healthcare for
physical therapy and rehabilitation procedures.
Information by product group segment is set forth below for the six months
ended August 31:
1999 1998
---- ----
Net Sales:
Surgical Devices $1,035,000 $ 515,000
Durable Medical Equipment
and Supplies 329,000 787,000
---------- ----------
$1,364,000 $1,302,000
========== ==========
Gross Profit:
Surgical Devices $ 712,000 $ 312,000
Durable Medical Equipment
and Supplies 159,000 293,000
---------- ----------
$ 871,000 $ 605,000
========== ==========
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 August 31, 1999
as Compared to three months ended August 31, 1998
Net sales for the three months ended August 31, 1999 ("Second Quarter
Fiscal 2000") were $965,000, a 65.5% increase from net sales of $583,000 for the
three months ended August 31, 1998 ("Second Quarter Fiscal 1999"). The net sales
increase of $382,000 is primarily attributed to the Company's recent acquisition
of Olsen Electrosurgical, Inc. and the receipt of various national group
purchasing organization contracts from the Company's Strategic Alliance
Marketing Agreement.
Six months ended August 31, 1999
as Compared to Six months ended August 31, 1998
Net sales for the six months ended August 31, 1999 ("Six Months Fiscal
2000") were $1,364,000, a 4.8% increase from net sales of $1,302,000 for the six
months ended August 31, 1998 ("Six Months Fiscal 1999"). The net sales increase
of $62,000 during the Six Months Fiscal 2000 as compared to the Six Months
Fiscal 1999 is the result of an increase in Surgical Devices sales. The increase
in sales for the surgical device can be primarily attributed to the recent
acquisition of Olsen Electrosurgical, Inc. and receipt of various national group
purchasing organization contracts from the Company's Strategic Alliance
Marketing Agreement.
7
Gross profit was $871,000 or 64% of net sales for the Six Months Fiscal
2000 as compared to $605,000 or 47.0% of net sales for the Six Months Fiscal
1999. The increase in gross profit percentage is primarily due to the higher
margins generated from the increased sales volume in the Surgical Device product
lines and the reduced sales volume of the Durable Medical Equipment and supplies
product line which generated lower gross profit margins during the Six Months
Fiscal 2000 as compared to the Six Months Fiscal 1999.
Selling, general and administrative ("SG&A") expenses for the Six Months
Fiscal 2000 were $610,000, a 61.4% increase from SG&A expenses of $378,000 for
the Six Months Fiscal 1999. The increase in SG&A expenses for the Six Months
Fiscal 2000 as compared to the Six Months Fiscal 1999 is primarily due to the
additional operating expenses resulting from the acquisition of Olsen
Electrosurgical, Inc. ("Olsen"), consulting fees to the former Olsen
shareholders in connection with the acquisition of Olsen, expenses related to
the Sparta's Pleasanton lease termination, legal, accounting, and due diligence
fees related to the termination of the non-binding letter of intent to acquire
Western Medical Services, Inc., debt and equity financing costs and finder's fee
associated with the raising of $325,000 working capital.
Net income for the Second Quarter Fiscal 2000 was $53,000, an increase of
$35,000 from net income of $18,000 for the Second Quarter Fiscal 1999. The net
income increase for the Second Quarter Fiscal 2000 is primarily due to the
increase in sales and gross profits from the acquisition of Olsen and receipt of
various national group purchasing organizations ("GPO") contracts from our
Strategic Alliance Marketing Agreement. During the Second Quarter Fiscal 2000,
the Company incurred certain non-recurring expenses in the approximate amount of
$135,000. The non-recurring expenses were incurred in connection with the
termination of the acquisition of Western Medical Services, Inc. including legal
and accounting fees, due diligence costs, consulting fees to the former Olsen
shareholder in connection with the Olsen acquisition, expenses in connection
with Sparta's lease termination and consolidating headquarters, debt and equity
financing and finder's fees in connection with the raising of $325,000 working
capital.
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. 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 August 31, 1999 was $1,229,000 as compared
to $1,313,000 at February 28, 1999. The Company's working capital position
decreased by $84,000 due to the short term debt obtained in order to complete
the recent acquisition of Olsen.
Mr. Reiner provided the Company with a Working Capital Line of Credit
Facility ("WCLCF") of up to $500,000, bearing 12% interest per annum. On June
13, 1999, the Company requested Mr. Reiner to increase the Working Capital Line
of Credit Facility from $500,000 to $750,000 and to further extend the terms of
8
such line through June 2000, due to the recent acquisition of Olsen
Electrosurgical, Inc. The advances made under the Working Capital Credit
Facility and any accrued and unpaid interest are due at 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 August 31, 1999, the
amount due, including accrued interest, to Mr. Reiner under the Working Capital
Credit Facility was approximately $467,000. In June 1999, Mr. Reiner agreed to
increase the Company's WCLCF from $500,000 to $750,000 due to the working
capital needs as a result of the Company's acquisition of Olsen Electrosurgical,
Inc. on June 8, 1999. For the consideration, Mr. Reiner was issued 300,000
shares of the Company's Common Stock, par value $0.002, with such shares to be
held in escrow and released to the Company upon full payment of the principal
and accrued interest and in the event the principal and interest is not repaid
at the end of the forth year, then, at the option of Mr. Reiner, the shares
shall be released to him.
On July 25, 1997, Bank of America (B of A) provided the Company with a
48-month Revolving Line of Credit of up to $2,500,000 (the "Loan"). The Company
agreed to pay B of A interest on the average outstanding principal amount of the
Loan at a per annum rate of prime 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 October 7, 1999, the outstanding
balance on the Loan was $1,190,000 and approximately $126,000 in credit was
available. The Loan is being used to provide working capital for current
operations.
On August 11, 1999, a private investor purchased from the Company 100,000
shares of the Company's restricted Common Stock, par value $0.002, at a price of
$1.25 per share. On September 2, 1999, Spags Investment Group, Inc. and its
affiliates ("Spags") agreed to make a bridge loan in the principal sum of
$485,000, due on March 2, 2002, together with interest in the unpaid principal
balance outstanding at the rate of 7% per annum; interest is computed monthly
and shall be payable in arrears in full on March 2, 2000. At the same time,
Sparta repaid its outstanding Note dated July 9, 1999 due to Spags, in the
amount of $200,000. In consideration for the $485,000 bridge loan made by Spags
and its affiliates, the Company agreed to issue 342,000 shares of Common Stock
to Spags and a finder's fee of 28,500 shares of Common Stock to Spag's affiliate
Royce Walker & Co., LTD. In addition, under the terms of the bridge loan, Spags
also has an irrevocable option to purchase an additional 965,000 shares of the
Company's common shares at a price of $1.00 per share, exercisable on the
following terms, (i) 465,000 shares at $1.00 per shares ten (10) days from the
submission of the Company's 10QSB filing for the period ended August 31, 1999,
and (ii) 500,000 shares at a price of $1.00 per share, within ten (10) days from
the submission of any of the Company's QSB filing and submission of due
diligence material for any targeted acquisition by the Company.
During the period from March 1999 through July 9, 1999, the Company raised
$550,000 of debt financing from various individual investors. The individual
loans range from $25,000 to $200,000, with interest ranging from 7% to 12%. The
net proceeds from these loans were designated primarily for working capital,
legal and accounting expenses related to various acquisition candidates that the
Company targeted which included 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 (2) months to six (6) months from
the date of the Notes and the repayment of the principal amounts was
subsequently amended no earlier than March 1, 2000, or the closing of $25.0
million secondary public stock offering. In addition, as a consideration for the
loans made by the individual investors, the Company will be required to issue
certain number of shares of the Company's Common Stock. In addition, in
connection with this financing, the Company retained a financial consultant and
the Company paid certain finder's fee and also issued warrants to purchase
300,000 shares of the Company's Common Stock at $0.95 per share until September
16, 2002 and warrants to purchase 100,000 shares of the Company's Common Stock
at $1.75 per share until September 16, 2002 with piggyback registration rights.
The Company is registered with the FDA as a medical device establishment.
The Company's office and distribution facilities in California are subject to
various state and local regulations such as zoning requirements, health and fire
9
codes and the like. All of the Company's products must be approved, registered
and/or licensed by the FDA and other domestic and foreign regulatory
authorities. These authorities also regulate labeling, advertising and other
forms of product claims. Subject to completion of internal quality
documentation, on August 1999, Sparta Olsen, the Company's wholly owned
subsidiary, was approved for ISO 9001 and EN 46001 Quality System Certification
(International).
Under the Federal Food, Drug and Cosmetic Act, the Company is required to
file with the FDA a new device description and obtain FDA approval for any new
medical device which the Company proposes to manufacture and market. The
procedure for obtaining such approval differs depending upon the uniqueness of
the device, with devices similar to those marketed prior to 1976 being eligible
for expedited approval and those devices which represent significant departures
from devices on the market in 1976 requiring pre-marketing approval. The devices
are also subject to inspection by the FDA after approval, with devices that are
potentially life-threatening being subject to more stringent standards. The FDA
has established manufacturing and sterilization standards for medical devices
known as "Good Manufacturing Practices" which require the Company's distribution
facility and its suppliers to be registered annually and subject to regular
inspections by the FDA. The Company follows Occupational Safety and Health
Administration (OSHA) guidelines as mandated by state and federal regulations.
The Company provides training for all employees to ensure that all aspects of
the manufacturing process are performed in an environmentally safe manner.
On June 8, 1999, the Company acquired Olsen Electrosurgical, Inc.
("Olsen"), and subsequently, Mr. Reiner was asked to personally guarantee
certain obligations, including certain lease contracts for computers, telephones
and for an unsecured working capital line of credit with Wells Fargo Bank. Mr.
Reiner agreed to provide his guarantee on behalf of Olsen. For providing
guarantee for the Olsen's obligations and as the guarantee is beneficial to the
Company's shareholders and overall business and operations, on September 2,
1999, Mr. Reiner was issued 250,000 shares of the Company's Common Stock, par
value $0.002, which shares are to be held in escrow until the Company
obligations are fully paid in one year, or unless extended, at the option of Mr.
Reiner, the shares shall be released to him after one year.
On June 8, 1999, the Company acquired all of the outstanding common stock
of Olsen Electrosurgical, Inc. ("Olsen") and subsequently, the Company's
Chairman of the Board, President and CEO, Thomas F. Reiner was asked to
personally guarantee certain obligations, including certain lease contracts for
computers and telephone, and a $125,000 unsecured working capital line of credit
with Wells Fargo Bank. Mr. Reiner agreed to provide his personal guarantee on
behalf of the Company, even though he was not required to do so. For providing
such guarantee, as the guarantee is beneficial to the Company's shareholder and
overall business and operations, on September 1999, Mr. Reiner was issued
550,000 shares of the Company's Common Stock, par value $0.002, which such
shares are to be held in escrow until the Company obligations are fully paid in
one year, or unless extended at the option of Mr. Reiner, the shares shall be
released to him after one year.
In May 1999, the Company entered into a non-binding asset purchase
agreement (subject to completion of financing and due diligence) to acquire
substantially all of the assets and business operations of Western Medical
Services, Inc., a provider of home health care staffing. On August 12, 1999, the
Company terminated its non-binding letter of intent with Western Medical
Services, Inc.
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. In addition, the failure to finalize and close the
acquisition could result in additional extending expenses to the operation of
the business. These factors could have a material adverse effect on the
10
Company's business, operating results and financial condition. Although
applicable government regulations vary in their provisions, they are stringent
and continuing. The cost of compliance with these regulations is difficult to
determine, but such cost is and will continue to be a significant expense for
the Company. The Company believes that it has obtained all applicable government
and regulatory approvals for its existing products, facilities and processes and
expects that all of its current license will be renewed on a regular basis.
There can be no assurance that the Company will continue to be in compliance
with all current regulations or that it will be able to comply with all future
regulations.
The Company sells its products under a variety of trademarks, some of which
the Company has registered in the United States and various foreign countries.
The Company currently holds two patents granted by the United States Patent
Office relating to its Durable Medical Equipment and Accessories which was
obtained through the acquisition of Medical Design, Inc. Notwithstanding the
trademarks and patents held by the Company, there can be no assurance that
competitors will not develop similar trademark outside the Company's trademark
protection or functionally similar products outside the Company's patent
protection. There also can be no assurance that any patents issued to or
licensed by others, that others will not obtain patents that the Company will
need to license or design around, that the Company's patents will not
inadvertently infringe upon the patents of others, or that others will not use
the Company's patents upon expiration of such patents. There can be no assurance
that existing or future patents will not be invalidated or that the Company will
have adequate funds to finance the high cost of prosecuting or defending patent
validity or infringement issues. Therefore, the scope or enforceability of
claims allowed in the patents on which the Company will rely cannot be predicted
with any certainty.
The Company's performance is substantially dependent on the performance of its
executive officers and key employees. In particular, the services of Thomas F.
Reiner, the Company's Co-founder, Chairman of the Board, President and CEO would
be difficult to replace. The Company has entered into an Employment Agreement
with Mr. Reiner. The loss of the services of Mr. Reiner, any of its executive
officers or other key employees could have a material adverse effect on the
business, results of operations or financial condition of the Company.
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. Our
principal capital requirements have been to fund working capital needs to
support internal growth for acquisitions and for capital expenditures. Our
principal working capital needs are for inventory and accounts receivable.
Management attempts to control inventory levels in order to minimize carrying
costs and maximize purchasing opportunities. We sell inventory to our customers
on various payment terms. This requires significant working capital to finance
inventory purchases and entails accounts receivable expenses in the event any of
our major customers encounters financial difficulties. Although we monitor the
creditworthiness of our customers, we cannot assume that we will not incur some
collection loss on customer accounts receivable or loss in customer base in the
future. 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.
11
Part II. Other Information
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Item 1. Legal Proceedings
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None.
Item 2. Changes in Securities.
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None.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
Item 5. Other Information
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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 September 3, 1999 which reported that
on September 2, 1999, the Company borrowed $485,000 from Spags Investment
Group, N.V. and its affiliate, Coridal, N.V. Under the terms of the Note,
the principal sum of $485,000 is due on March 2, 2000 together with
interest on the unpaid principal balance outstanding until paid in full at
the rate of seven percent (7%) per annum. At the same time, the Registrant
paid in full its $200,000 Note dated July 7, 1999. In consideration of
Spags making a $485,000 loan, the Registrant issued 342,000 shares of the
Common Stock, par value $0.002. In connection with this transaction, 28,500
shares of the Company's Common Stock, par value $0.002 and certain finder's
fee was paid to Royce Walker, LLC, and to the Registrant's Consultant.
The Registrant filed a Form 8-K dated July 19, 1999. The Registrant
borrowed $200,000 from Spags, N.V. for working capital. The Note bears
interest at a rate of seven percent (7%) per annum, and shall become due
and payable on September 3, 1999. In consideration of Spags making the
$200,000 loan, the Registrant issued 260,000 restricted shares of the
Company's common stock, par value $0.002 to Spags and its affiliate. On
September 2, 1999, the Registrant paid its Note in full.
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 Company's Common Stock,
par value $0.002, all of the outstanding Common Stock of Olsen
Electrosurgical Instruments, Inc ("Olsen"). Olsen researches, develops,
manufactures and markets reusable and disposable electrosurgical
instruments and accessories for use in cutting tissues and cauterization
during general surgical procedures. For its most recent fiscal year ended
December 31, 1998, Olsen recorded net sales of approximately $2.4 million
and employs 25 full-time employees.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Sparta Surgical Corporation
/s/ Thomas F. Reiner
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Thomas F. Reiner
Chairman of the Board
President & CEO
October 12, 1999
13