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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 November 30, 2001
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.)
849 E. Stanley Blvd.
Livermore, CA 94550
(Address of principal executive offices)
(925) 373-0374
(Issuer's telephone number)
Olsen Centre
2100 Meridian Park Blvd., Concord, CA 94520
(Former address of principal executive offices)
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 November 30, 2001, 11,984,921 shares of Common Stock, 82,533 shares
of Redeemable Convertible Preferred Stock, 27,818 shares of Series A Convertible
Redeemable Preferred Stock.
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SPARTA SURGICAL CORPORATION
Form 10-QSB
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance 3
Sheet as of November 30, 2001
Consolidated Statements 4
of Operations for the three months and nine
months ended November 30, 2001 and 2000
Consolidated Statements 5
of Cash Flows for the nine months
ended November 30, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and 7 - 18
Analysis of Financial Condition
and Results of Operations
Part II. Other Information and Signatures 19 - 20
2
SPARTA SURGICAL CORPORATION
CONSOLIDATED BALANCE SHEET
November 30, 2001
(Unaudited)
ASSETS
Current Assets:
Cash $ --
Accounts receivable, net of allowance for doubtful accounts of $42,000 125,000
Inventories 1,893,000
Other 44,000
------------
Total Current Assets 2,062,000
------------
Property and equipment, at cost-net 115,000
------------
Other Assets:
Intangible assets, net 58,000
Other 6,000
------------
Total Other Assets 64,000
------------
Total Assets $ 2,241,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 618,000
Notes payable 60,000
Accounts payable - trade 887,000
Accrued expenses 144,000
------------
Total Current Liabilities 1,709,000
------------
Long-term debt, net of current portion above 50,000
------------
Stockholder's Equity:
Preferred stock: $ 4.00 par value, 2,000,000 shares authorized;
1992 non-cumulative convertible redeemable preferred stock: 165,000 shares
authorized, 82,533 shares issued and outstanding 330,000
Series A cumulative convertible redeemable preferred stock: 30,000 shares
authorized, 27,818 shares issued and outstanding 111,000
Series AA cumulative convertible redeemable preferred stock: 875,000 shares
authorized, none issued and outstanding --
Common stock: $0.002 par value, 25,000,000 shares authorized, 11,984,921
shares issued and outstanding 15,000
Additional paid in capital 14,527,000
Accumulated deficit (14,501,000)
------------
Total Stockholders' Equity 482,000
------------
Total Liabilities and Stockholders' Equity $ 2,241,000
============
See accompanying notes to consolidated financial statements.
3
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ----------
Net sales $ 501,000 $ 903,000 $ 2,181,000 $ 2,684,000
Cost of sales 204,000 320,000 824,000 1,150,000
--------- --------- --------- ----------
Gross Profit 297,000 583,000 1,357,000 1,534,000
Selling, general and administrative expenses 291,000 585,000 1,359,000 1,557,000
Research, development and engineering 14,000 103,000 197,000 325,000
Depreciation and amortization expenses 57,000 100,000 310,000 380,000
--------- --------- --------- ----------
Income (Loss) From Operations (65,000) (205,000) (509,000) (728,000)
--------- --------- --------- ----------
Other Income (Expense):
Gain on sale of assets 85,000 -- 85,000 --
Forgiveness of debt 132,000 -- 132,000 --
Interest expense (46,000) (91,000) (260,000) (256,000)
--------- --------- --------- ----------
Total Other Income (Expense) 171,000 (91,000) (43,000) (256,000)
--------- --------- --------- ----------
Net Income (Loss) 106,000 (296,000) (552,000) (984,000)
Preferred stock dividends (4,000) (4,000) (25,000) (25,000)
--------- --------- --------- ----------
Net Income (Loss) Applicable to Common Stockholders $ 102,000 $ (300,000) $ (577,000) $(1,009,000)
========= ========= ========= ==========
Weighted average shares used to calculate basic and diluted
net income (loss) per common share 9,964,626 6,978,146 8,608,788 6,607,028
========= ========= ========= ==========
Basic and diluted net income (loss) per common share $ 0.01 $ (0.04) $ (0.07) $ (0.15)
========= ========= ========= ==========
See accompanying notes to consolidated financial statements.
4
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
November 30,
--------------------------
2001 2000
----------- -----------
Cash Flows From Operating Activities:
Net loss $ (552,000) $ (984,000)
Adjustment to reconcile net loss to net cash (used) by
operating activities:
Depreciation and amortization 310,000 380,000
Forgiveness of debt (132,000) --
Gain on sale of assets (85,000) --
Changes in operating assets and liabilities:
Accounts receivable 294,000 (125,000)
Inventories 3,000 98,000
Other assets (39,000) 258,000
Account payable and accrued expenses 64,000 (336,000)
----------- -----------
Net Cash (Used) By Operating Activities (137,000) (709,000)
----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of Sparta Olsen assets 1,825,000 --
Payment for costs of sale of Sparta Olsen (163,000) --
Capital expenditures (9,000) (17,000)
Increase in intangible assets -- (156,000)
----------- -----------
Net Cash Provided (Used) By Investing Activities 1,653,000 (173,000)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from sale of common stock 170,000 381,000
Repurchase common stock (10,000) --
Borrowing (repayment) on lines of credit, net (1,481,000) 3,193,000
Principal payments on long-term debt (195,000) (2,753,000)
----------- -----------
Net Cash Provided By Financing Activities (1,516,000) 821,000
----------- -----------
Net Change In Cash and Cash Equivalents -- (61,000)
Cash and Cash Equivalents at Beginning of Period -- 61,000
----------- -----------
Cash and Cash Equivalents at End of Period $ -- $ --
=========== ============
Supplemental Disclosure of Cash Flow Information:
- ------------------------------------------------
Cash paid during the period for:
Interest $ 230,000 $ 195,800
Income taxes -- --
Supplemental Disclosure Non-Cash Investing and Financing Activities:
- -------------------------------------------------------------------
Dividends paid on Series A convertible redeemable preferred stock 45,000 63,000
Conversion of debt into common stock -- 200,000
Contributed capital for forgiveness of salary and interest by an officer 171,000 --
5
SPARTA SURGICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements as of November 30, 2001
and for the three and nine months ended November 30, 2001 and 2000 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 our audited financial statements and notes thereto
included in our Annual Report on Form 10-KSB for the year ended February
28, 2001, 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
if-converted 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 4,551,538 options and warrants, and 4,487,540
options and warrants at November 30, 2001 and 2000, respectively. The
following table sets forth the computation of basic and diluted net income
(loss) per common share:
Three Months Ended Nine Months Ended
November 30, November 30,
----------------------- ------------------------
2001 2000 2001 2000
Numerator:
Net income (loss) $ 102,000 $ (300,000) $ (577,000) $(1,009,000
applicable to common shareholders ========== =========== =========== ===========
Denominator:
Weighted average common shares
outstanding during the period 11,867,612 8,881,132 10,511,774 8,510,914
Less shares in escrow 1,902,986 1,902,986 1,902,986 1,902,986
--------- --------- --------- ---------
Shares used in computing basic income
(loss) per common share 9,964,626 6,978,146 8,608,788 6,607,928
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 9,964,626 6,978,146 8,608,788 6,607,928
========== =========== =========== ===========
6
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
that may cause actual results to differ materially. These risks are detailed
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.
These statements relate to future events in future financial performance
and involve known and unknown risks, uncertainties and other factor's that may
cause our or our industry's actual results, performance or achievements to be
materially different from these expressed or implied by any forward-looking
statements. All of these matters are difficult or impossible to predict
accurately and many of which may be beyond our control. Although we believe that
the assumptions underlying our forward-looking statements are reasonable, any of
the assumptions could be inaccurate therefore there can be no assurance that the
forward-looking statements included in this Form 10-QSB will prove to be
accurate. The following discussions should be read in conjunction with the
Financial Statements and notes thereto, appearing elsewhere herein.
Risk Factors Affecting Future Operating Results
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 Reform Act of 1995. The following
information is not intended to limit in any way the characterization of other
statements or information under other caption as cautionary statements for such
purpose. These factors could have a material adverse effect on our business,
operating results and financial condition.
We are engaged in the research, development, manufacturing and marketing of
microsurgical hand instruments and accessories, critical care hospital
disposables and electromedical equipment and supplies worldwide. Our results of
operations vary significantly from year to year and from quarter to quarter, and
in the past have depended on, among other factors, developing new products,
demand for our products and significantly depend on availability of materials
from our suppliers and dependence on our customers including hospital,
physicians, medical distributors and OEM accounts. We have incurred net losses
in prior years and can't assure future profitability. At February 28, 2001 our
accumulated deficit was approximately $13,928,000. At November 30, 2001 our
accumulated deficit was approximately $14,501,000.
7
There can be no assurance that we (i) can predict the market acceptance of
our products, (ii) will not face intense competition and if we are unable to
compete effectively, we may be unable to maintain or expand the base of
purchasers for our devices and we may lose market share or be required to reduce
prices, (iii) will be able to obtain patent protection for our products and
preserve our trade secrets and safeguard the security and privacy of our
confidential technology, (iv) will continue our 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 that
there could be changes in the political, economical, or regulatory healthcare
and may be subject to product liability claims, (vi) will be able to retain or
hire key personnel, and (vii) will not lose a key manufacturer, distributor or a
customer which could result in a significant reduction in the revenue we
generate, (viii) can anticipate unexpected events and if any of these events of
a significant magnitude were to occur, the extent of our losses could exceed the
amount of insurance we carry to compensate us for any losses. In addition, we
sold substantially all of the assets of our wholly owned subsidiary, Sparta
Olsen Electrosurgical Inc. ("Sparta Olsen"), in October 2001 and we will
continue to incur significant operating losses. Sparta Olsen also has
substantial obligations under its long-term lease facility agreement which
expires on July 2004 and other related unsecured debts, including accounts
payable and bank debt which are past due and therefore it will not be able to
service its debts and/or pay its past due obligations including all outstanding
taxes. On November 21, 2001, as a result of the sale of the assets of Sparta
Olsen and its business, the operation ceased and all of Sparta Olsen employees
were terminated. In addition, on December 21, 2001, Allan Korn, Secretary and
Director resigned from his position and is no longer acting in any capacity as
an officer, director and/or agent for Sparta Olsen.
We 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 we have encountered with previous
acquisitions. Future acquisitions by us 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 or future
impairment expense. These factors described herein could have an adverse
material effect on our business, operating results and financial condition.
In recent years we have experienced losses from operations and continue to
suffer from a deficiency in available working capital. We had a working capital
of $353,000 as of November 30, 2001. 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, however, there
can be no assurance that it will be successful. We may need to raise additional
funds in order to continue our business plan, to fund 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 rights senior to
those of the holders of common stock.
Our ability to meet our planned growth will require substantial cash
resources. The timing and amount of future capital requirements may vary
significantly depending on numerous factors including regulatory, technical,
8
competitive and other developments in the healthcare industry. Any expansion of
our operations will place a significant strain on management, financial
controls, operating system, personnel and other resources. The success of our
products depends on several uncertain events and factors, including: the
effectiveness of our marketing strategy and efforts, our product and service
differentiation and quality, the extent of our network coverage, our ability to
provide timely, effective customer support, our distribution and pricing
strategies, as compared to our competitors, our failure to adequately protect
our proprietary rights may harm our competitive position.
The following are important factors that could cause actual results to
differ materially from those anticipated in any forward-looking statements made
by or on behalf of us.
We have incurred significant operating losses and may not be profitable in
the future.
We have reported net losses of $2,308,000 and $1,744,000 for the fiscal
years ended February 29, 2000 and February 28, 2001, respectively and $552,000
for the nine months ended November 30, 2001. We cannot assure that we will
report profits in the future.
Our operations continue to be cash flow negative, and we have limited
working capital as of November 30, 2001.
Our current operations continue to be cash flow negative, further straining
our working capital position. In order to continue our current level of
operations, it will be necessary for us to obtain additional working capital,
from either debt or equity sources. Our 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 products, as well
as our distribution and marketing efforts. Our principal working capital needs
are to fund inventory purchases and accounts receivable and to pay our debts in
a timely manner. There can be no assurance we will be able to obtain this
financing or any other financing in the future on terms satisfactory to us.
These factors or others could have a material adverse affect on our business,
operating results and financial condition.
We face intense competition which could reduce our product prices and may
result in a decline in our revenues.
The medical product industry is intensely competitive. We compete in all
aspects of our business with numerous medical products manufacturers and
distributors, many of whom have substantially greater market share and financial
and other resources than we do. We believe that the principal factors in our
market are selection, price, customer service, continuing product quality,
reliability and speed of order fulfillment. We compete with companies such as
Johnson & Johnson and Storz Instruments division of Bausch & Lomb. In addition,
our competitors are often able to offer lower prices to customers. Competition
from these competitors could limit our market penetration and market share.
These factors may have an adverse impact on our business.
9
It is costly for us to comply with government regulations.
Our operations are regulated by the Federal Food and Drug Administrative
and other agencies in California. Compliance with medical product regulations
are costly and time consuming, and if we do not remain in compliance we may be
unable to sell some or all of our products. Legislative proposals continue to be
introduced or proposed in Congress and in state legislature that would effect
major changes in the health care system nationally and on the state level. Among
the proposals are cost controls on hospitals, changes in health insurance
coverages, reduction in reimbursement for medical treatments and the creation of
government health insurance plans. It is not clear what effect such proposals
would have on our business. Certain proposals, such as cutbacks in Medicare and
Medicaid programs, containment of health case costs and permitting states
greater flexibility in the administration of Medicaid, could reduce our revenues
or increase our costs. In addition, concern about proposed reform measures and
their potential effects has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of our common stock.
We depend upon others to manufacture many of our products or product
components on a timely and cost-effective basis.
From time to time, we have experienced difficulties in obtaining some
products or components, and there can be no assurance that our suppliers will be
able to meet our product needs on a timely basis. A lack of availability of
components or products could cause production delays, increase our product
costs, affect our quality control efforts and interfere with our ability to
maintain production and delivery schedules.
We are dependant on our management and key personnel to succeed.
Our ability to manufacture and market our medical products depends upon our
ability to attract, hire and retain qualified personnel. We depend on the
extensive experience in sales of medical products on our principal executive
officers and key personnel. Competition for this personnel is intense, and there
can be no assurance that we will be able to attract and retain such personnel,
which could impede the achievement of our business objectives and have a
material adverse effect on our business. We are also dependent upon the services
of Thomas F. Reiner, our Chairman, Chief Executive Officer and President. The
loss of Mr. Reiner's services would also have a material adverse effect on our
business.
We are faced with significant reduction of revenues and continued ongoing
significant operating expenses as a result of the sale of the assets and the
electrosurgical business by our wholly-owned subsidiary, Sparta Olsen.
Due to the sale of the assets of Sparta Olsen, our consolidated annual
revenues will decline significantly during fiscal year ended 2002. However, with
the sale of the assets and elimination of all of the Sparta Olsen revenues,
Sparta Olsen will continue to have significant ongoing operating expenses and
obligations, including certain equipment and facilities leases under long-term
leasing agreements and other certain unsecured debts and related general and
administrative expenses. On December 17, 2001 a demand notice for payment of a
loan was made by Wells Fargo Bank to Sparta Olsen and Mr. Reiner as guarantors
of our unsecured Note in the approximate amount of $45,000.
10
Shares of our Common Stock which are eligible for future sale by our
stockholders may decrease the price of our common stock.
As of November 30, 2001, we had 11,984,921 shares of our common stock
outstanding. If holders of our securities sell substantial amounts of our common
stock, the market price of our common stock could decrease. We have a
significant number of stock options, warrants and convertible securities
outstanding, which could significantly depress our common stock price if they
were exercised and sold.
As of November 30, 2001, we have outstanding options and warrants to
purchase approximately 4,551,538 shares of our common stock and other securities
convertible into shares of common stock. The holders of these securities may
exercise or convert them at any time at exercise or conversion price ranging
from $0.15 per share to $13.50 per share. Although restrictions under federal
securities laws limit the ability of the shares of our common stock issuable
upon exercise or conversion of these securities to be resold in the public
market upon issuance, these restrictions may not apply or may only apply for a
period of one year from the date on which these securities are exercised or
converted. The sale of shares underlying these stock options, warrants and
convertible securities could significantly depress the common stock market
price.
There is no significant trading market for our common stock.
Our common stock was not eligible for trading on any national or regional
exchange as we were delisted from the OTC Bulletin Board ("OTC BB") on July 21,
2001. Our common stock had no trading activity on the non NASDAQ Other OTC (Pink
Sheet unqualified) pursuant to Rule 15c2-11 of the Securities Exchange Act of
1934. On December 10, 2001 Wien Securities, on our behalf, applied to NASDAQ for
re-listing of our Common Stock on the NASDAQ: OTC BB. On January 3, 2002, NASDAQ
approved the application and we are now re-listed and trading on the NASDAQ: OTC
BB. However, there can be no assurance that we will continue to be listed on the
OTC BB. This market tends to be highly illiquid, in part because there is not a
national quotation system by which potential investors can trace the market
price of shares except through information received or generated by a limited
number of broker-dealers that make a market in that particular stock. There is a
greater chance of market volatility for securities that trade on the Pink Sheets
or OTC BB as opposed to a national exchange or quotation systems. This
volatility may be caused by a variety of factors, including:
o the lack of readily available price quotations;
o the absence of consistent administrative supervision of "bid" and "ask"
quotations;
o lower trading volume;
o and market conditions.
Because our common stock is classified as "penny stock", trading is
limited, and the common stock price could decline.
11
Because our common stock falls under the definition of "penny stock," the
trading in our common stock is limited because broker-dealers are required to
provide their customers with disclosure documents prior to allowing them to
participate in transactions involving our common stock. These disclosure
requirements are burdensome to broker-dealers and may discourage them from
allowing their customers to participate in transactions involving our common
stock.
"Penny stocks" are equity securities with a market price below $5.00 per
share other than a security that is registered on a national exchange; included
for quotation in the NASDAQ system; or whose issuer has set tangible assets of
more than $2,000,000 and has been in continuous operation for greater than three
years. Issuers who have been in operation less than three years must have net
tangible assets of at least $5,000,000.
Rules promulgated by the Securities and Exchange Commission under Section
15(g) of the Exchange Act require broker-dealers engaging in transactions in
"penny stocks," to first provide to their customers a series of disclosures and
documents including:
o a standard risk disclosure document identifying the risks inherent in
investment in "penny stocks;
o all compensation received by the broker-dealer in connection with the
transaction;
o current quotation prices and other relevant market data; and,
o monthly account statements reflection the fair market value of the
securities.
In addition, these rules require that a broker-dealer obtain financial and
other information from a customer, determine that transactions in "penny stock"
are suitable for such customer and deliver a written statement to such customer
setting forth the basis for this determination.
Our preferred stock and status as a Delaware corporation may make a third
party acquisition of our company more difficult.
Our certificate of incorporation authorizes our Board of Directors to issue
up to 2,000,000 shares of preferred stock having such rights as may be
designated by our Board of Directors, without stockholder approval. This
issuance of preferred stock could inhibit a change in control by making it more
difficult to acquire the majority of our voting stock. In addition, the Delaware
General Corporation law restricts certain business combinations with interested
stockholders. This statute may have the effect of inhibiting a non-negotiated
merger or other business combination.
We do not anticipate paying dividends
We have not paid any cash dividends on our common stock since our inception
and we do not anticipate paying cash dividends in the foreseeable future. Any
dividends which we may pay in the future will be at the discretion of our Board
of Directors and will depend on our future earnings, any applicable regulatory
considerations, our financial requirements and other similarly unpredictable
factors. For the foreseeable future, we anticipate that we will retain any
earnings we may generate from our operations to finance and develop our growth.
12
One of our current stockholders has significant influence over our
management and operations.
Thomas F. Reiner, our Co-Founder, Chairman, CEO and President beneficially
owns approximately 74% of our common stock as of November 30, 2001. Therefore,
Mr. Reiner will be able among other things, to elect directors.
Our quarterly results could fluctuate and may negatively affect our stock
price.
The Company's quarterly operating results could fluctuate due to a number
of factors. These factors include the degree to which we encounter competition
in our markets, as well as other general economic conditions. We may experience
variability in our net sales and operating profit on a quarterly basis as a
result of many factors, including, among other things, the buying habits of our
customers, size and timing of orders by certain customers, technological changes
and industry announcements of new products. If revenues do not meet expectations
in any given quarter and year, our stock price may be materially adversely
affected.
RESULTS OF OPERATIONS
Three Months Ended November 30, 2001
as Compared to Three Months Ended November 30, 2000
Net sales for the Three Months Ended November 30, 2001 ("Third Quarter
Fiscal 2002") were $501,000, a decrease of $402,000 from net sales of $903,000
for the Three Months Ended November 30, 2000 ("Third Quarter Fiscal 2001"). The
decrease in net sales during the Third Quarter Fiscal 2002 as compared to the
Third Quarter Fiscal 2001 is primarily due to the sale of the assets of our
wholly-owned subsidiary Sparta Olsen and its electrosurgical business in October
2001.
Gross profit for the Three Months Ended November 30, 2001 ("Third Quarter
Fiscal 2002") was $297,000 or 59% of net sales as compared to $583,000 or 65% of
net sales for the Three Months Ended November 30, 2000 ("Third Quarter Fiscal
2001"). The decrease in gross profit is primarily due to the sale of the assets
of our wholly-owned Sparta Olsen and its electrosurgical business which
generated a higher gross profit than other product lines.
Selling, general and administrative ("SG&A") expenses for the Third Quarter
Fiscal 2002 were $291,000, a decrease of $294,000 as compared to $585,000 for
the Third Quarter Fiscal 2001. The decrease in SG&A expenses for the Third
Quarter Fiscal 2002 is primarily due to the sale of the assets and
electrosurgical business of Sparta Olsen.
Research, development and engineering ("RD&E") expenses for the Third
Quarter Fiscal 2002 were $14,000, a decrease of $89,000 as compared to $103,000
for the Third Quarter Fiscal 2001.
Depreciation and Amortization ("D&A) expenses for the Third Quarter Fiscal
2002 were $57,000, a decrease of $43,000 from D&A expenses of $100,000 for the
Third Quarter Fiscal 2001 due to the reduction of D&A expenses resulting from
the sale of the Sparta Olsen assets and its electrosurgical business.
13
Total Other Income for the Third Quarter Fiscal 2002 was $171,000, an
increase of $262,000 from Total Other Expenses of $91,000 for the Third Quarter
Fiscal 2001. The decrease in Total Other Expenses is primarily due to the payoff
of the credit facility with BofA in October 2001 and the gain on sale of the
assets and electrosurgical business of Sparta Olsen.
As a result of the foregoing, the net income for the Third Quarter Fiscal
2002 was $106,000 an increase of $402,000 as compared to net loss of $296,000
for the Third Quarter Fiscal 2001. The increase in net income for the Third
Quarter Fiscal 2002 as compared to the Third Quarter Fiscal 2001, is primarily
due to the reduction in operating and other expenses as discussed above and the
gain on sale of the assets of Sparta Olsen and forgiveness of debt recognized
upon the payoff of the credit facility with BofA.
Nine Months Ended November 30, 2001
as Compared to Nine Months Ended November 30, 2000
Net sales for the Nine Months Ended November 30, 2001 ("Nine Months Fiscal
2002") were $2,181,000, a decrease of $503,000 from net sales of $2,684,000 for
the Nine Months Ended November 30, 2000 ("Nine Months Fiscal 2001"). The
decrease in net sales during the Nine Months Fiscal 2002 as compared to the Nine
Months Fiscal 2001 can be primarily attributed to the sale of substantially all
of the assets and electrosurgical business of Sparta Olsen.
Gross profit was $1,357,000, or 62% of net sales for the Nine Months Fiscal
2002 as compared to $1,534,000 or 57% of net sales for the Nine Months Fiscal
2001. The increase in gross profit is primarily due to the increased margin from
the electrosurgical business product line.
Selling, general and administrative ("SG&A") expenses for the Nine Months
Fiscal 2002 were $1,359,000, a decrease of $198,000, as compared to $1,557,000
for the Nine Months Fiscal 2001. The decrease in SG&A expenses for the Nine
Months Fiscal 2002 as compared to the Nine Months Fiscal 2001 is primarily
attributed to the sale of substantially all of the assets and electrosurgical
business of Sparta Olsen.
Research, development and engineering ("R&D") expenses for the Nine Months
Fiscal 2002 were $197,000, a decrease of $128,000, as compared to $325,000 for
the Nine Months Fiscal 2001.
Depreciation and Amortization ("D&A") expenses for the Nine Months Fiscal
2002 were $310,000, a decrease of $70,000 from D&A expenses of $380,000 for the
Nine Months Fiscal 2001 is due to the reduction of D&A expenses resulting from
the sale of Sparta Olsen assets and its electrosurgical business.
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Total Other Expenses for the Nine Months Fiscal 2002 were $43,000, a
decrease of $213,000, as compared to $256,000 for the Nine Months Fiscal 2001.
The decrease in Total Other Expenses is primarily due to the payoff of the
credit facility with BofA in October 2001 and the gain on sale of the assets and
electrosurgical business of Sparta Olsen.
As a result of the foregoing, the net loss for the Nine Months Fiscal 2002
was $552,000, a decrease of $432,000, as compared to a loss of $984,000 for the
Nine Months Fiscal 2001. The decrease in the net loss for the Nine Months Fiscal
2002, as compared to Nine Months Fiscal 2001, is primarily as discussed above.
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 Mr. Reiner, for which
he has been compensated by us. In addition, from time to time, the Reiner
Facility has provided us with a working capital credit facility up to a maximum
amount of $800,000 in order to continue to operate our business. In recent
years, we have experienced losses from operations and suffer from a deficiency
in available working capital. In addition, we are subject to pending litigation
relating to an alleged product liability claim and complaint for alleged breach
of contract. Revenues from existing product lines have historically not been
sufficient to generate adequate working capital. On October 9, 2001, Sparta
Olsen sold substantially all of its assets and electrosurgical business in order
to pay-off our senior bank debt and other obligations in order to settle our
disputes with our senior lender. Thomas F. Reiner, our Chairman, President and
CEO at his sole discretion agreed to reimburse us for approximately $141,000 of
salary previously paid to him, and such amount was offset against amounts owed
by us under the Reiner Facility. Therefore, Mr. Reiner has not been paid a
salary since July 1, 2001. Mr. Reiner also returned approximately $30,000
consisting of interest paid to him. The forgiveness of these amounts is
reflected as a contribution to capital in the financial statements as of
November 30, 2001. Mr. Reiner also agreed to reduce his annual salary to $60,000
per annum and to defer future salary payments until further notice. Mr.Reiner
further agreed to cancel approximately 1,073,385 stock options granted to him in
order to reduce possible dilution of shares.
Management has retained the services of a financial advisor to pursue
capital through private equity and debt offerings. Management also intends to
continue to pursue viable acquisition candidates. There can be no assurance that
we will be able to complete planned debt or equity offerings or targeted
acquisitions. We will need to generate cash flows from operations and/or raise
additional funds in order to maintain our operations at current levels. The
failure to finalize additional financing and other factors, could have a
material adverse effect on our business, operating results and financial
condition.
Since inception, our primary sources of working capital have been from
operations, bank and private party loans and proceeds from the sale of
securities. At February 28, 2001, we had federal net operating loss carry
forwards of approximately $11,200,000 which will expire from 2007 to 2021. We
also had $2,300,000 of state net operating loss carry forwards for tax reporting
purposes which will expire from 2002 to 2006. Our net operating loss carry
forwards, if not utilized, will expire at various dates through the year 2019.
15
Our working capital at February 28, 2001 was ($744,000) as compared to
$1,633,000 at February 29, 2000, a decrease of $2,377,000 due to
reclassification of (i) our long term bank debt to short term debt and (ii)
Reiner Facility term debt which is due February 27, 2002. We had working capital
at November 30, 2001 in the amount of $353,000.
Our current operations continue to be cash flow negative, further straining
our working capital resources, even though we eliminated our debts with our
primary lender. Our 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 market
capabilities. In order to continue our current level of operations, it will be
necessary for us to obtain additional working capital, from either debt or
equity sources. If we are unable to obtain additional working capital, it may be
necessary for us to restructure our operations to reduce our ongoing
expenditures. Our principal capital requirements have been to fund working
capital needs to support officers' salaries, internal growth for acquisition and
for capital expenditures.
Our principal working capital needs are for inventory, accounts receivable
and payment of accounts payable. Management attempts to control inventory levels
in order to minimize carrying costs and maximize purchasing opportunities. We
sell 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 management monitors the credit worthiness of its
customers, management cannot assume that we will not incur some collection loss
on customer accounts receivables or loss in customer base in the future.
On March 6, 2001, we completed an equity and debt financing from a group of
investors. The equity financing consisted of the sale of our 484,034
unregistered shares of Common Stock. In addition, we also completed a debt
financing in the amount of $150,000 ("Note"). The subordinated secured Note is
at 8% interest per annum, and is due and payable on August 20, 2001. On August
20, 2001, we extended the Note and on October 11, 2001, we paid the Note in
full. On October 12, 2001, we completed an additional debt financing in the
amount of $60,000. The subordinated secured Note is at 8% interest per annum,
and is due and payable on April 12, 2002. At our option, we may also extend the
Note for an additional six months.
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 ("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 was being used to
provide working capital for our operations. The Loan was advanced to us based on
a percentage of eligible assets and was secured by a first position security
interest on all of our assets. As of October 9, 2001, the outstanding Loan
balance was approximately $1,721,000 and we paid all amounts owed to Bank of
America pursuant to the Settlement Agreement. The Loan was being used to provide
working capital for our operations. On October 10, 2001, Sparta Olsen completed
the sale of substantially all of the assets of the electrosurgical business (the
"Sale"), including inventory, machinery and equipment and all intangible assets
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(excluding cash and accounts receivable) for the amount of $1,815,528 in cash to
Kentucky Packaging Service LP, DBA Q2 Medical ("Q2 Medical"). At the same time
we entered into a Transition Agreement whereby Q2 Medical agreed to reimburse us
on a monthly basis approximately $70,830 for expenses relating to the transfer
of the business. Sparta Olsen remains obligated under a long-term lease for our
facility, which expires on July of 2004. Sparta Olsen has retained a broker to
sublet its facility. There can be no assurance that Sparta Olsen will be
successful in subleasing its facility and be able to stay current with its
substantial rent obligations and pay all of the accounts payable and all related
taxes which are past due as a result of the sale of Sparta Olsen's assets and
all of its business.
In connection with the Sale, we paid to Bank of America ("BofA") all
amounts required pursuant to a Settlement Agreement ("Parties") BofA released
all security interests in all of our assets, and also released the personal
guarantee of Thomas F. Reiner, our Chairman, CEO and President. The Settlement
Agreement also contained customary releases and forever discharges each other
from any and all claims and demands of every kind and nature. The Parties
dismissed their suits initiated against each other.
On May 23, 1997, we entered into the $200,000 Working Capital Credit
Facility ("Reiner Facility") and subsequently was increased to $400,000 by
Thomas F. Reiner and his Assignee E. Reiner ("Reiner"). On August 2, 2001, we
amended the Reiner Facility. Under the terms of the amended Reiner Facility, the
credit facility amount was increased up to a maximum of $700,000. Under the
Reiner Facility, we are able to draw on the credit facility based only upon the
sole discretion and approval of Reiner. The Reiner Facility is secured by a
first position security interest in all of our assets. The Reiner Facility bears
interest at 14% per annum, and is payable monthly in arrears. However, due to
our limited working capital, we have been unable to pay some of the accrued
interest due under the Reiner Facility. As of November 2, 2001, the Reiner
Facility was over advanced and in default, however, the default was waived by
Reiner and the Reiner Facility amount was increased up to a maximum of $800,000.
The borrowings under the Reiner Facility are used primarily for working capital,
including payroll, inventory, purchases and rent payments. The Reiner Facility
expires on February 27, 2002, and it is due and payable on demand upon the
earlier of (i) February 27, 2002, or (ii) upon demand by Reiner with a five day
notice to us, or (iii) if an order is entered for relief against us or we are
insolvent, or if we voluntarily file for bankruptcy, or (iv) if we default in
any other terms, or in any other obligations, or agreements between the parties,
or (v) if a receiver, trustee, custodian is appointed, or (vi) if a proceeding
is brought under the federal bankruptcy code, and we fail to file proper answer
thereto within 30 days of receipt of notice of proceedings, or (vii) upon an
event of default, as set forth under the Note, the whole unpaid principal
balance of the loan and accrued interest thereon shall become due and payable
immediately without demand, notice or protest. The Reiner Facility is
convertible at any time at the option of Reiner into shares of Common Stock at
$0.16 per share subject to adjustments as defined under the Amended Reiner
Facility dated August 2, 2001
At November 30, 2001, the Reiner Facility loan balance was approximately
$522,000. On November 29, 2001, in an effort to provide some assistance with our
continued negative cash flow position and to further improve our overall
financial condition, Reiner returned approximately $30,000 consisting of
17
interest paid due under the Reiner Facility. Mr. Reiner also agreed to reimburse
and cancel approximately $141,000 of his previously paid salary through November
30, 2001. As a result, the forgiveness of salary and interest by Mr. Reiner
contributed $171,000 to our capital. He further agreed to reduce his annual
salary to $60,000 per annum and to defer future salary payments until further
notice. On November 30, 2001, Mr. Reiner agreed to cancel approximately
1,073,335 stock options previously granted to him in order to reduce possible
dilution of shares. On December 21, 2001, Reiner agreed to extend the Reiner
Facility until February 27, 2002.
On May 31, 2001 we entered into a non-binding letter of intent for the sale
of certain assets of the electrosurgical business for approximately $1,811,000
in cash and subsequently we executed an Asset Purchase Agreement subject to
certain conditions. The assets to be sold include substantially all the assets
of the electrosurgical business (excluding cash and accounts receivable),
including inventory, machinery and equipment and all intangible assets of the
electrosurgical business. On October 10, 2001, all of the conditions of the
Asset Purchase Agreement were met by and between Kentucky Packaging Service LP,
DBA Q2 Medical ("Q2 Medical") and Sparta Olsen. Under the terms of the Asset
Purchase Agreement, Sparta Olsen made certain customary representation and
warranties and Sparta Surgical Corporation also guaranteed these obligations,
and further Sparta Olsen agreed to indemnify, defend and hold Q2 Medical and its
shareholders, directors and officers, harmless, from any and all judgments as
the result of or arising from any material breaches, misstatement, inaccuracy,
error or omission of any of the representation and warranties made by Sparta
Olsen contained in the Asset Purchase Agreement which either singly or in
aggregate exceed $25,000 in amount as the result of or arising from any suits,
claims, damages of any kind or nature, known or unknown which are asserted
against Q2 Medical, including the failure of Sparta Olsen to assume, pay,
perform or discharge any or all of the excluded liabilities, and or employee
obligations and to comply with bulk transfers in connection with the transfer of
the Sparta Olsen assets to Q2 Medical of which there can be no assurance that we
will not incur additional expenses or liabilities under the Asset Purchase
Agreement in the future. In addition, as a result of the sale of the Sparta
Olsen assets and its electrosurgical business, we further downsized and
relocated our current operation to a smaller facility, due to our lack of
working capital.
On January 4, 2002, we entered into a non-binding letter of intent ("LOI")
to merge with Shepard Medical Products Inc., ("Shepard") a leading manufacturer
and marketer of premium infection control disposable and biodegradable glove
products and accessories worldwide since 1986. For its most recent 12 months
ended December 31, 2001, Shepard's revenues were approximately $12.2 million.
The LOI is subject to completion of due diligence and preparation of a Stock
Exchange Agreement and Irrevocable Voting Trust Agreement which will be entered
into when all due diligence and other conditions are satisfied. Sparta will
acquire 100% of the outstanding common stock of Shepard in exchange for common
stock of Sparta and $500,000 in cash. Following the restructuring, Sparta common
stock will be held by the former shareholders of Shepard and the shareholders of
Sparta in the ratio of 55% and 45% respectively. The Stock Exchange Agreement
will specify the amount of Sparta Common Stock to be issued to the prior
shareholders of Shepard. Under the Stock Exchange Agreement, Thomas F. Reiner,
our Co-Founder, Chairman and CEO, and the Shareholders of Shepard shall enter
into an Irrevocable Voting Trust Agreement which shall provide, among other
18
things, that the common stock of Sparta beneficially owned or controlled by the
Shepard shareholders after the Exchange, would be held in trust, over which Mr.
Reiner would have voting authority as trustee. Mr. Reiner shall remain Chairman
and CEO upon completion of the merger.
Part II. Other Information
-----------------
Item 1. Legal Proceedings
On September 25, 2001, we were served with a complaint in a civil action
titled Nancy Perlman, M.D. ("Plaintiff") vs. Virtua Health, Inc., Tyco
International Ltd., Valleylab Inc., General Electric Medical Systems Information
Technologies, Inc., Sparta Surgical Corporation and Sparta Olsen Electrosurgical
Inc., et al, filed in the U.S. District Court of New Jersey (Case # No.
01-00651SHO). The complaint alleges product liability and the relief sought
exceeds $75,000. On December 21, 2001, the Plaintiff agreed to dismiss Sparta
Surgical Corporation for the action as it has been wrongfully joined in the
suit.
On November 5, 2001, we were served with a complaint in civil action titled
Eugene Olsen ("Olsen") vs. Thomas Reiner, Sparta Surgical Corp. and. Sparta
Olsen Electrosurgical Company, filed in the U.S. District Northern California
(Case #CO14053 MEJ). The complaint alleges breach of contract relating to the
cancellation of a Consulting Agreement. We believe the claim has no merit and
accordingly we intend to vigorously defend it.
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. Reports on Forms 8-K
We filed a Form 8-K dated October 11, 2001 and October 16, 2001 in
connection with the sale of substantially all of the assets of Sparta Olsen
and we also entered into a Settlement Agreement with B/A and repaid all
amounts owed to B/A.
We filed a Form 8-K dated December 12, 2001 in connection with Thomas F.
Reiner and his Assignee E. M. Reiner reimbursing salary and returning
interest previously paid or accrued to the Company in order to provide
assistance with our negative cash flow and to further improve our overall
financial condition.
19
We filed a Form 8-K dated November 5, 2001 in connection with a complaint
filed by Eugene Olsen against Thomas F. Reiner, Sparta Surgical
Corporation, and Sparta Olsen Electrosurgical, Inc., et al for alleged
breach of contract.
We filed a Form 8-K dated January 6, 2002 in connection with entering into
a non-binding letter of intent to merge with Shepard Medical Products,
Inc., which is also subject to completion of due diligence and other
conditions.
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/ Joseph A. Salim
-------------------------------
Joseph A. Salim
Director of Finance
(Principal Accounting Officer)
January 18, 2002
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