UNITED STATES
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 Quarterly Period Ended September 30, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 33-13058-C
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SURGIDYNE, INC.
(Name of small business issuer in its charter)
Minnesota 58-1486040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9909 South Shore Drive, Minneapolis, MN 55441
(Address of principal executive offices)
(612) 595-0665
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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. X YES NO
7,017,085 shares of Common Stock, no par value, outstanding at
November 12, 1998
Transitional Small Business Disclosure Format. YES X NO
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SURGIDYNE, INC.
CONTENTS PAGE
FINANCIAL STATEMENTS
Balance sheets 3
Statements of operations 5
Statements of cash flows 6
Notes to financial statements 7
<PAGE>
SURGIDYNE, INC.
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
ASSETS
Current Assets
Cash $ 20,116 $ 46,724
Accounts receivable, less allowance for
doubtful accounts of $4,200 in 1998 and 1997 51,901 43,024
Inventories (Note 2) 168,056 170,359
Prepaid expenses 9,597 14,405
Total current assets 249,670 274,512
Furniture and Equipment, at cost (Note 3) 333,396 333,396
Less accumulated depreciation 320,235 315,441
Total furniture and equipment 13,161 17,955
Other Assets
Patents and trademarks, net of accumulated
amortization of $16,454 in 1998 and
$14,679 in 1997 5,386 7,161
Deposits 3,529 3,529
Total other assets 8,915 10,690
Total assets $ 271,746 $ 303,157
See Notes to Financial Statements.
<PAGE>
SURGIDYNE, INC.
BALANCE SHEETS (Continued)
(Unaudited)
September 30, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to officers and
directors (Note 4) $ 10,000 $ 10,000
12% demand note payable 11,646 11,646
Non-interest bearing demand note
payable (Note 4) 35,546 35,546
Accounts payable 46,244 42,111
Current maturities of long-term debt 251 3,129
Accrued expenses 34,886 38,243
Total current liabilities 138,573 140,675
Stockholders' Equity
Series A Preferred stock, authorized
1,600,000 shares; $400,000 liquidation
preference 400,000 400,000
Common stock, no par value; authorized
18,400,000 shares; issued and outstanding
7,017,085 in 1998 and 1997 4,472,042 4,472,042
Accumulated deficit (4,738,869) (4,709,560)
Total stockholders' equity 133,173 162,482
Total liabilities and stockholders'
equity $ 271,746 $ 303,157
See Notes to Financial Statements.
<PAGE>
SURGIDYNE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Sept. 30 Sept. 30 Sept. 30 Sept. 30
Three and Nine Months Ended 1998 1997 1998 1997
Net sales $ 151,088 $ 112,913 $ 386,472 $ 363,921
Cost of goods sold 104,647 90,991 268,226 278,746
Gross profit 46,441 21,922 118,246 85,175
Operating expenses
Research and development 3,959 4,888 17,977 15,886
Sales and marketing 7,114 6,879 20,449 19,550
General and administrative 32,521 31,283 109,468 106,333
Total operating expenses 43,594 43,050 147,894 141,769
Operating income (loss) 2,847 (21,128) (29,648) (56,594)
Other income (expense)
Interest income 85 345 559 1,245
Interest expense (1,001) (1,077) (3,277) (3,246)
Other 2,297 2,581 3,057 4,689
Net income (loss) $ 4,228 $ (19,279) $ (29,309)$ (53,906)
Net income (loss) per share $ .00 $ (.00) $ (.00) $ (.01)
Weighted average common
shares outstanding 7,017,085 7,017,085 7,017,085 7,017,085
See Notes to Financial Statements.
<PAGE>
SURGIDYNE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Sept. 30, Sept. 30,
Nine Months Ended 1998 1997
Cash Flows from Operating Activities
Net loss $ (29,309) $ (53,906)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 6,569 7,122
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (8,877) 47,458
Inventories 2,303 5,631
Prepaid expenses 4,808 8,892
Increase (decrease) in:
Accounts payable and accrued expenses 776 (31,911)
Net cash used in operating activities (23,730) (16,714)
Cash Flows from Investing Activities
Capital expenditures - (4,704)
Net cash used in investing activities - (4,704)
Cash Flows from Financing Activities
Payments on capital leases payable (2,878) (2,317)
Net cash used in financing activities (2,878) (2,317)
Decrease in cash (26,608) (23,735)
Cash:
Beginning 46,724 66,941
Ending $ 20,116 $ 43,206
Supplemental Disclosures of Cash Flow
Information Cash payments for interest $ 675 $ 645
See Notes to Financial Statements.
<PAGE>
SURGIDYNE, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
The Balance Sheet as of September 30, 1998, the Statement of Operations for the
three and nine month periods ended September 30, 1998 and September 30, 1997,
and the Statement of Cash Flows for the nine month periods ended September 30,
1998 and September 30, 1997 have been prepared by the Company without audit. In
the opinion of management, all adjustments (consisting solely of normal,
recurring adjustments) necessary to present fairly the financial position at
September 30, 1998; the results of operations for the three and nine
month periods ended September 30, 1998 and September 30, 1997, and the statement
of cash flows for the nine month periods ended September 30, 1998 and September
30, 1997 have been made. The Balance Sheet at December 31, 1997 has been taken
from the audited financial statements at that date. Results of operations for
the interim periods are not necessarily indicative of the full fiscal year.
Note 2 Inventories
Inventories consisted of the following:
September 30, December 31,
1998 1997
Component parts and
subassemblies $ 93,733 $ 97,767
Work in process 15,269 18,561
Finished goods 79,054 64,031
Less obsolescence reserve (20,000) (10,000)
$ 168,056 $ 170,359
Note 3. Furniture and Equipment
Furniture and equipment consisted of the following:
Sepember 30, December 31,
1998 1997
Furniture, fixtures and
equipment $ 232,244 $ 232,244
Tooling and molds 101,152 101,152
$ 333,396 $ 333,396
Note 4. Notes Payable
Notes payable to related parties: The Company has short-term notes payable
outstanding with a certain officer and director which bears interest at an
interest rate of prime plus two percent. The interest rate will be adjusted
every six months on June 30 and December 31. Currently the interest rate is
10.25% annually. The $10,000 is due in annual installments limited to 50% of
the audited net income each year until paid in full.
Other note payable: In 1995, the Company converted an accounts payable balance
of $35,546 into a non-interest bearing unsecured note payable due in a single
installment on January 1, 1997. The Company did not pay-off the note on January
1, 1997 and as a result the note is due on demand.
Note 5. Net Earnings/Loss Per Share
The Company has adopted "Statement of Financial Accounting Standards No. 128,
Earnings Per Share." Statement No. 128 requires the presentation of earnings
per share by all entities that have common stock or potential common stock, such
as options, warrants and convertible securities, outstanding that trade in a
public market. Those entities that have only common stock outstanding are
required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations.
As required by the Statement, the Company has restated all prior year per-share
information for the interim periods to conform to the Statement. Because the
Company has incurred a loss in three of the periods presented, the inclusion of
potential common shares would have an anti-dilutive effect. In all periods
presented Basic and Diluted loss per share are the same.
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operations
Results of Operations
Sales. Sales revenues for the three and nine month periods ended September 30,
1998 were $151,088 and $386,472, respectively, or approximately 34% and 6% more
than sales for the same three and nine month periods in 1997.
The three month increase is attributed to increases from both the Company's
international product line revenue and contract manufacturing revenue. These
increases were 72% and 117% respectively for the three month period ended
September 30, 1998. The nine month increase is attributed to a 49% increase in
international product line revenues partially offset by a 26% decrease in
contract manufacturing revenues for the nine months ended September 30, 1998.
The Company is experiencing a resurgence of international sales due to obtaining
the CE mark allowing the Company's product line to be marketed in participating
European nations. The CE mark certification accompanied with a new pricing
structure has allowed the Company's European distributors to competitively
market the Company's product line. As a result the Company is experiencing
increases on Discrete Drain revenues, which increased 9% and 29% respectively
for the three and nine month periods ended September 30, 1998 and Bulb Evacuator
Kit revenues, which increased 118% and 26% respectively for the three and nine
months ended September 30, 1998.
The nine month decrease in contract manufacturing revenues is a result of the
completion of a contract with a major Original Equipment Manufacturer (OEM)
customer in the second quarter of 1997.
Gross profit. Gross profit expressed as a percentage of sales increased from
approximately 19% for the three month period ended September 30, 1997 to
approximately 31% for the same period in fiscal 1998 due primarily to increases
in product and OEM sales resulting in a more efficient overhead absorption for
the period.
Gross profit expressed as a percentage of sales increased from approximately 23%
for the first nine months of fiscal 1997 to approximately 31% for the same
period in 1998 for the same reason.
Operating Expenses. Operating expenses were comparable for the three month
period ended September 30, 1997 and the same period in 1998. Operating expenses
increased from $141,769 for the nine month period ended September 30, 1997 to
$147,894 for the same period in 1998. The nine month increase was primarily
attributed to increases in outside services due to the audit expenses to obtain
the CE Mark certification required for international marketing of the Company's
product line to the European community.
The Year 2000
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1998, the Company developed a program for Y2K issues. Phase I is to
identify those systems with which the Company has exposure to Y2K issues. Phase
II is the development and implementation of action plans to be Y2K compliant in
all areas by June 30, 1999. Phase III, to be completed by September 30, 1999,
is the final testing of each major area of exposure to ensure compliance. The
Company has identified three major areas determined to be critical for
successful Y2K compliance: (1) financial and informational system applications,
(2) manufacturing applications and (3) third-party relationships.
The Company, in accordance with Phase I of the program has conducted an internal
review of all systems and is receiving contract bids from software and hardware
suppliers for the replacement or upgrade of required systems to limit exposure
to Y2K issues. Replacement and upgrades are scheduled for completion in July
1999. In the manufacturing area the Company is in the process of identifying
areas of exposure. In the third-party area, the Company is in the process of
contacting most of its major third parties.
The Company has estimated that no more than $10,000 in costs will be incurred in
connection with the financial system Y2K compliance. The Company has yet to
determine what costs, if any, will be incurred in connection with the
manufacturing and third-party areas.
Liquidity and Capital Resources
At September 30, 1998 the Company had working capital of $111,097 compared to
$133,837 at December 31, 1997.
Cash flows used in operating activities for the first nine months of fiscal 1998
were $23,730, primarily due to the net loss of $29,309 combined with an increase
in accounts receivable of $8,877, partially offset by decreases in inventories
and prepaid expenses of $2,303 and $4,808 respectively.
The Company is planning to expand its line of related wound drainage products by
sourcing new products from low cost manufacturers. These products are expected
to be available for marketing during the first quarter of 1999. These efforts
will require additional debt and/or equity financing for inventory and marketing
expenses in 1999.
Long-term liquidity is dependent upon the attainment of the short-term factors
discussed above accompanied with continued growth in sales volumes that generate
profitable operations. Continued increases in sales volumes for the remainder
of 1998 and into the first quarter of 1999, depend largely on increased business
from contract manufacturing, and increased sales from existing products.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the nine month period
ended September 30, 1998.
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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.
SURGIDYNE, INC.
(Registrant)
Date November 12, 1998 /s/ Vance D. Fiegel
Vance D. Fiegel
President and Principal Accounting
Officer
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