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, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number 1-11047
SPARTA SURGICAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 22-2870438
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Bernal Corporate Park
7068 Koll Center Parkway, Pleasanton, CA 94566
(Address of principal executive offices)
(510) 417-8812
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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, 1996, 4,538,751 shares of Common Stock, 164,723 shares of
Redeemable Convertible Preferred Stock and 28,068 shares of Series A Convertible
Redeemable Preferred Stock were outstanding.
<PAGE>
SPARTA SURGICAL CORPORATION
Form 10-QSB
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet as of August 31, 1996 ................ 1 - 2
Condensed Consolidated Statements
of Operations for the three months and
six months ended August 31, 1996 and 1995 .. 3
Condensed Consolidated Statements
of Cash Flows for the six months
ended August 31, 1996 and 1995 ............. 4
Notes to Financial Statements .............. 5
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations .................. 6 - 9
Part II. Other Information and Signatures ........................ 10 - 13
<PAGE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
August 31, 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ --
Accounts receivable - trade, net of allowance
for doubtful accounts of $32,559 ......................... 256,722
Inventories ................................................ 2,555,689
Prepaid expenses ........................................... 84,727
-----------
Total Current Assets .................................... 2,897,138
-----------
Property and Equipment, at cost:
Machinery and equipment .................................... 56,000
Other equipment ............................................ 492,425
Leasehold improvements ..................................... 15,733
-----------
564,158
Less accumulated depreciation ............................... (265,255)
-----------
Net Property and Equipment .............................. 298,903
-----------
Other Assets:
Intangible assets, net of
accumulated amortization .................................. 841,904
Deposits and other ......................................... 55,507
Notes receivable - related entities ........................ 562,888
-----------
Total Other Assets ..................................... 1,460,299
-----------
Total Assets ........................................... $ 4,656,340
===========
The accompanying notes are an integral
part of these condensed consolidated financial statements
- 1 -
<PAGE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
August 31, 1996
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade ....................................... $ 707,190
Accrued expenses:
Payroll taxes and wages ....................................... 67,363
Interest and other ............................................ 84,597
Dividends payable .............................................. 17,543
Notes payable .................................................. 650,000
Royalties payable .............................................. 22,054
Current portion of long-term debt .............................. 59,637
-----------
Total Current Liabilities .................................. 1,608,384
-----------
Long-Term Debt, net of current portion above:
Obligations under capital leases ............................... 85,337
Financial institutions and other ............................... 916,185
-----------
Total Long-Term Debt ..................................... 1,001,522
-----------
Other liabilities ............................................... 373,111
-----------
Commitments and contingencies ................................... --
Stockholders' Equity:
Preferred stock: $4.00 par value, 5,000,000 shares authorized;
Non-cumulative Convertible Redeemable Preferred Stock:
1,500,000 shares authorized, 164,723 shares issued
and outstanding ............................................ 658,892
Series A Cumulative Convertible Preferred Stock:
250,000 shares authorized, 28,068 shares issued
and outstanding ............................................ 112,272
Common Stock: $.002 par value, 30,000,000 shares authorized,
4,538,751 shares issued and outstanding ...................... 9,078
Additional paid in capital ..................................... 7,881,681
Accumulated deficit ............................................ (6,988,600)
-----------
Total Stockholders' Equity ................................ 1,673,323
-----------
Total Liabilities and Stockholders' Equity ............... $ 4,656,340
===========
The accompanying notes are an integral
part of these condensed consolidated financial statements
- 2 -
<PAGE>
<TABLE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
------------------------------ ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales .............................................. $ 472,678 $ 1,931,481 $ 1,057,631 $ 3,700,943
Cost of sales .......................................... 198,086 854,171 440,737 1,716,219
----------- ----------- ----------- -----------
Gross Profit ...................................... 274,592 1,077,310 616,894 1,984,724
Selling, general and administrative
expenses .............................................. 552,051 686,657 1,064,292 1,173,147
Research and development expense ....................... 8,525 10,314 26,500 47,078
Depreciation and amortization .......................... 60,638 165,879 118,227 329,030
Settlement of litigation .............................. 695,712 -- 695,712 --
----------- ----------- ----------- -----------
Income (Loss) From Operations ........................ (1,042,334) 214,460 (1,287,837) 435,469
----------- ----------- ----------- -----------
Other Income (Expense):
Interest and other income ............................ 3,164 3,581 7,349 8,188
Interest expense ..................................... (96,359) (200,096) (128,138) (400,190)
----------- ----------- ----------- -----------
Total Other Income (Expense) ...................... (93,195) (196,515) (120,789) (392,002)
----------- ----------- ----------- -----------
Income (Loss) Before Provision
for Income Taxes ...................................... (1,135,529) 17,945 (1,408,626) 43,467
Provision for income taxes ............................. -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) ...................................... (1,135,529) 17,945 (1,408,626) 43,467
Preferred stock dividends .............................. (88,951) (31,381) (93,085) (38,345)
----------- ----------- ----------- -----------
Net Income (Loss) Applicable to
Common Stockholders ................................... $(1,224,480) $ (13,436) $(1,501,711) $ 5,122
=========== =========== =========== ===========
Net Income (Loss) Per Share of
Common Stock:
Primary:
Weighted average number of
common shares outstanding .......................... 4,489,039 3,665,307 4,314,586 3,502,826
=========== =========== =========== ===========
Net income (loss) per common share ................. $ (.27) $ -- $ (.35) $ --
=========== =========== =========== ===========
Fully diluted:
Weighted average number of
common shares outstanding .......................... 4,489,039 3,889,574 4,314,586 3,871,297
=========== =========== =========== ===========
Net income (loss) per common share ................. $ (.27) $ -- $ (.35) $ --
=========== =========== =========== ===========
The accompanying notes are an integral
part of these condensed consolidated financial statements
- 3 -
</TABLE>
<PAGE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
August 31,
--------------------------
1996 1995
---- ----
Cash Flows From Operating Activities:
Net income (loss) ............................... $(1,408,626) $ 43,467
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization ................ 118,227 329,030
Settlement of litigation ..................... 433,212 --
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable .. 31,695 (216,521)
(Increase) Decrease in inventories .......... 53,698 (87,549)
(Increase) Decrease in prepaid expenses
and other .................................. (2,932) 21,945
(Increase) in deposits and other ............ (3,298) (12,796)
(Decrease) in accounts payable and
accrued expenses ........................... (168,687) (214,801)
----------- -----------
Net Cash (Used) By Operating Activities ..... (946,711) (137,225)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures ............................ (1,705) (15,358)
Increase in intangible assets ................... (36,438) (1,042)
Increase in receivables from related entities ... (3,693) (5,616)
----------- -----------
Net Cash Provided (Used) By
Investing Activities ....................... (41,836) (22,016)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing ........................ 2,092,969 3,807,768
Principal payments on notes payable ............. (1,181,719) (3,581,676)
Principal payments on accrued royalties ......... (40,203) (46,953)
Issuance of common stock upon exercise
of Warrants .................................... 117,500 --
----------- -----------
Net Cash Provided By Financing Activities ... 988,547 179,139
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents ........................... -- 19,898
Cash and Cash Equivalents at Beginning
of Period .................................. -- 5,526
----------- -----------
Cash and Cash Equivalents at End of Period .. $ -- $ 25,424
=========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest ..................................... $ 52,522 $ 362,036
Income taxes ................................. -- --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Conversion of Preferred Stock into
Common Stock ................................. $ 511,908 $ 599,316
Dividends payable on Series A
Convertible Preferred Stock .................. 17,543 31,381
Stock dividends paid on Series A
Convertible Preferred Stock .................. 4,134 6,964
Stock dividends paid on Redeemable
Preferred Stock .............................. 71,409 --
The accompanying notes are an integral
part of these condensed consolidated financial statements
- 4 -
<PAGE>
SPARTA SURGICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial information of the Company is prepared in
accordance with the rules prescribed for filing condensed interim financial
statements and, accordingly, does not include all disclosures that may be
necessary for complete financial statements prepared in accordance with
generally accepted accounting principles. The disclosures presented are
sufficient, in management's opinion, to make the interim information
presented not misleading. All adjustments, consisting of normal recurring
adjustments, which are necessary so as to make the interim information not
misleading, have been made. Results of operations for the six months ended
August 31, 1996 are not necessarily indicative of results of operations
that may be expected for the year ending February 28, 1997. It is
recommended that this financial information be read with the complete
financial statements included in the Company's Annual Report on Form 10-KSB
for the year ended February 29, 1996 previously filed with the Securities
and Exchange Commission.
- 5 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On December 7, 1995, the Company sold its medical product line, which
consisted primarily of wound care gauze dressings, to Tecnol Medical Products,
Inc. ("Tecnol"), which resulted in the Company's elimination of the medical
product line from its business operations approximately three months before the
year ended February 29, 1996 ("Fiscal 1996"). Following this disposition of
assets, the Company implemented a restructuring plan involving a reduction of
personnel, the reorganization of the sales department, and the consolidation of
operating facilities. Therefore, the results for the six months ended August 31,
1996 ("Six Months Fiscal 1997") do not reflect the medical product line
operations, whereas for the six months ended August 31, 1995 ("Six Months Fiscal
1996") the results of the medical product line operations are reflected. For the
reason stated above, the results for the Six Months Fiscal 1997 and the Six
Months Fiscal 1996 are not strictly comparable.
RESULTS OF OPERATIONS
Three months ended August 31, 1996
as Compared to Three months ended August 31, 1995
Net sales for the three months ended August 31, 1996 ("Second Quarter
Fiscal 1997") were $472,678, a 75.5% decrease from net sales of $1,931,481 for
the three month period ended August 31, 1995 ("Second Quarter Fiscal 1996"). The
net sales decrease during the Second Quarter Fiscal 1997 as compared to the
Second Quarter Fiscal 1996 is the result of (I) a decrease of $1,223,364 in
medical product sales which resulted from the disposition of the Company's
medical product line in December 1995; (ii) a decrease of $41,812 or 13.18% in
surgical product sales from $317,216 to $275,404; and (iii) a decrease of
$193,627 or 49.5% in electrotherapy product sales from $390,901 to $197,274. The
net loss for the Second Quarter Fiscal 1997 was $1,135,529 as compared to net
income of $17,945 for the Second Quarter Fiscal 1996. The decrease in net income
for the Second Quarter Fiscal 1997 as compared to the Second Quarter Fiscal 1996
is primarily due to the decrease in net sales and the corresponding decrease in
gross profit coupled with a one time $695,712 expense related to the settlement
of the litigation described below and legal expenses in the approximate amount
of $100,000 which were incurred in connection with the Company's various
litigation proceedings.
Six months ended August 31, 1996
as Compared to Six months ended August 31, 1995
Net sales for the Six Months Fiscal 1997 were $1,057,631, a 71.4% decrease
from net sales of $3,700,943 for the Six Months Fiscal 1996. The net sales
decrease during the Six Months Fiscal 1997 as compared to the Six Months Fiscal
1996 is the result of (I) a decrease of $2,221,529 in medical product sales
which resulted from the disposition of the Company's medical product line in
December 1995; (ii) a decrease of $62,763 or 9.6% in surgical product sales from
$653,306 to $590,543; and (iii) a decrease of $359,020 or 43.5% in
electrotherapy product sales from $826,108 to $467,088. The decrease in sales
for the electrotherapy product line can be primarily attributed to the
completion in July 1995 of a one year, non-cancelable $500,000 contract with
Henley Healthcare ("Henley") in which the Company provided Henley with its
Spectrum Max-SD TENS unit. During the Six Months Fiscal 1996 the Company had
approximately $282,000 in sales to Henley which were not repeated during the Six
Months Fiscal 1997. However, the Company is expecting to enter into a new
contract with Henley as Henley continues to satisfy a three year contract with
its customer. The Company intends to concentrate its efforts on increasing its
level of sales to achieve profitable operations. In addition, the Company
intends to consider growth through selective strategic acquisitions in
complementary lines of business.
Gross profit was $616,894 or 58.3% of net sales for the Six Months Fiscal
1997 as compared to $1,984,724 or 53.6% of net sales for the Six Months Fiscal
1996. The increase in gross profit percentage is primarily due to the
disposition of the medical product line in December 1995. In general, the
medical product line generated lower gross profits than the surgical and
electrotherapy product lines. The decrease in gross profit is primarily due to
the overall decrease in net sales resulting from the disposition of the medical
product line.
- 6 -
<PAGE>
Selling, general and administrative ("SG&A") expenses for the Six Months
Fiscal 1997 were $1,064,292, a 9.3% decrease from SG&A expenses of $1,173,147
for the Six Months Fiscal 1996. The decrease in SG&A expenses for the Six Months
Fiscal 1997 as compared to the Six Months Fiscal 1996 is primarily due to the
overall decrease in operating expenses resulting from the disposition of the
medical product line. This decrease is despite an increase in legal expenses for
the Six Months Fiscal 1997 from approximately $75,000 for the Six Months Fiscal
1996 to approximately $208,000 incurred in connection with the Company's various
litigation proceedings. In addition, the Company has increased its sales and
marketing efforts to broaden its customer base and target distributors for each
of our product lines.
Research and development ("R&D") expenses for the Six Months Fiscal 1997
were $26,500, a 43.7% decrease from R&D expenses of $47,078 for the Six Months
Fiscal 1996. The decrease in R&D expenses for the Six Months Fiscal 1997 as
compared to the First Quarter Fiscal 1996 is primarily due to the elimination of
the R&D efforts related to the medical product line. During the Six Months
Fiscal 1997 the R&D continues to be focused on the redesign of the Company's
TENS units in an effort to reduce the product cost for the electrotherapy
product line.
Depreciation and amortization ("D&A") expenses for the Six Months Fiscal
1997 were $118,227, a 64.1% decrease from D&A expenses of $329,030 for the Six
Months Fiscal 1996. During the Six Months Fiscal 1997, D&A expenses decreased
due to the elimination of the depreciation expense on the medical product line
manufacturing equipment sold to Tecnol in December 1995. As a result of the sale
of the medical product line, the Company's D&A expenses will be substantially
reduced for the fiscal year ending February 28, 1997 ("Fiscal 1997").
Settlement of litigation expenses for the Six Months Fiscal 1997 were
$695,712. On August 6, 1996 the Company settled three related civil actions
involving disputes between the Company; Thomas F. Reiner, the Company's
Chairman, President and Chief Executive Officer; and Gerald S. Kramer, a former
officer and Chairman of the Company's Board of Directors which concerned Mr.
Kramer's termination as an officer and director, disputes regarding his
employment agreement and various monetary obligations between the parties. Under
the settlement, the Company paid to Mr. Kramer $262,500 and issued to him a
promissory note in the amount of $62,500, payable over five years. In addition,
the parties exchanged general releases and forgave all debts to each other which
included obligations from Mr. Kramer to the Company in the amount of
approximately $371,000. The Company's management believes that it would have
ultimately prevailed in the lawsuit, but took the opportunity to settle the
litigation before substantial additional legal fees and management time were
expended.
Net interest expense for the Six Months Fiscal 1997 was $120,789, a 69.2%
decrease from net interest expense of $392,002 for the Six Months Fiscal 1996.
The decrease in net interest expense is primarily due to the repayment of most
of its outstanding debt in December 1995 from the cash proceeds of the medical
product line sale. The repayment of debt in December 1995 should result in
substantially reduced interest expenses in Fiscal 1997.
As a result of the foregoing, the net loss for the Six Months Fiscal 1997
was $1,408,626, a decrease of $1,452,093 from net income of $43,467 for the Six
Months Fiscal 1996. The decrease in net income for the Six Months Fiscal 1997 as
compared to the Six Months Fiscal 1996 is primarily due to the decrease in net
sales and the corresponding decrease in gross profit coupled with a one time
$695,712 expense related to the settlement of the litigation described above and
legal expenses in the approximate amount of $208,000 which were incurred in
connection with the Company's various litigation proceedings.
Primary loss per share was $.35 for the Six Months Fiscal 1997 as compared
to a primary loss per share of $-- for the Six Months Fiscal 1996. Fully diluted
loss per share, which assumes all dilutive preferred share conversions and the
exercise of all dilutive stock options and warrants, was $.35 for the Six Months
Fiscal 1997 as compared to fully diluted loss of $-- per share for the Six
Months Fiscal 1996. The primary and fully diluted income per share computation
for the Six Months Fiscal 1997 reflect dividends on the Series A Convertible
Preferred Stock and on the Redeemable Preferred Stock which were paid in Common
Stock in June and July 1996 and accrued dividends on the Series A Convertible
Preferred Stock which were paid in Common Stock in September 1996.
- 7 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's primary sources of working capital have been
revenues from operations, bank and private party loans and proceeds from the
sale of securities.
As of February 29, 1996, the Company had net operating loss carry forwards
of approximately $5,000,000. Availability of the Company's net operating loss
carry forwards, if not utilized, will expire at various dates through the year
2011.
The Company's working capital at February 29, 1996 was $1,246,470 as
compared to $1,288,754 at August 31, 1996. The Company's working capital
position increased by $42,284 primarily due to the receipt of a Revolving Line
of Credit from FINOVA Capital Corporation and the subsequent elimination of
certain current liabilities.
On December 7, 1995, the Company sold its impregnated wound care gauze
dressings product line to Tecnol Medical Products, Inc., a medical products
manufacturer headquartered in Fort Worth, Texas (the "Tecnol Sale"). The
purchase price was $5,675,000, of which approximately $5,010,000 was paid in
cash, with the balance being paid primarily in the form of a promissory note
bearing interest at prime rate and due in September 1997 upon certain conditions
being met. In addition to wound care inventory, equipment and other assets, the
Company's operations in Hammonton, New Jersey were included in the sale.
The Company has used the cash proceeds of the Tecnol Sale to repay most of
its outstanding debt including (I) $2,282,505 owed to Congress Financial
Corporation under a revolving credit facility; (ii) $111,602 owed for the
purchase of certain manufacturing equipment which was subject to a lease; (iii)
$469,710 owed to Asset Factoring, Inc., consisting of the principal due on
certain promissory note plus accrued interest; (iv) $600,000 owed to Storz
Instrument Company relating to a $1,050,000 note payable in connection with the
Company's acquisition of certain assets of Storz' Oral Maxillofacial product
line; and (v) $1,000,000 to Arbora, A.G. ("Arbora"), which together with the
return of a $809,500 promissory note issued to the Company by an affiliate of
Arbora, served as principal consideration to redeem and cancel 4,761,842 shares
of the Company's Common Stock. The 4,761,842 shares were issued to Arbora on
December 4, 1995 in consideration of the conversion of a $1,000,000 note into
equity and the issuance to the Company of a promissory note in the amount of
$809,500 by an affiliate of Arbora pursuant to an agreement reached between it
and the Company. In connection with this transaction, the Company also canceled
a warrant to purchase 1,000,000 shares of the Company's Common Stock at $1.40
per share held by Arbora and issued Arbora and its affiliated parties warrants
to purchase up to 750,000 shares of the Company's common stock at $.47 per share
at any time until November 8, 1998. In addition, a voting trust was entered into
which provided the Company's Chairman, President and Chief Executive Officer,
Thomas F. Reiner, with voting rights as to such shares. On April 22, 1996,
250,000 shares of Common Stock were issued to Arbora in connection with the
exercise of 250,000 Common Stock purchase warrants.
On March 11, 1996, FINOVA Capital Corporation ("FINOVA") provided the
Company with a 36-month Revolving Line of Credit of up to $1,500,000 (the
"Loan"). The Company agreed to pay FINOVA interest on the average outstanding
principal amount of the Loan at a per annum rate of prime plus 4%. The Loan is
advanced to the Company based on a percentage of eligible assets and is secured
by a first lien on all of the assets of the Company. Accordingly, the amount of
available funds under the Loan may be substantially less than $1,500,000. In
addition, $450,000 of the Loan is personally guaranteed by Thomas F. Reiner, the
Company's Chairman, President and Chief Executive Officer. As of August 31,
1996, the outstanding balance on the Loan was $820,976 and no credit was
available. The Loan is being used to provide additional working capital for
current operations and growth.
In July 1996, the Company borrowed $200,000 from Asset Factoring
International, Inc. ("Asset Factoring'), a company controlled by Charles C.
Johnston, a principal stockholder of the Company, evidenced by a promissory note
bearing 12% interest per annum due in July 1997. The promissory note is
subordinated to FINOVA and is personally guaranteed by Mr. Reiner. In connection
with the financing, the Company issued Asset Factoring a warrant to purchase up
to 125,000 shares of its Common Stock exercisable at $.50 per share at any time
until July 18, 1999. The Company also entered into a one year consulting
agreement with Asset Factoring in which the Company is required to pay Asset
Factoring $25,000 for one year of consulting services.
- 8 -
<PAGE>
On September 27, 1996, the Company was served with a complaint filed by
Storz Instrument Company seeking to collect the remaining balance of $450,000
relating to a $1,050,000 note payable in connection with the Company's
acquisition of certain assets of Storz' Oral Maxillofacial product line. The
Company has not yet filed its answer in this proceeding.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which the
Company will adopt prospectively as required in Fiscal 1997. Pursuant to this
Statement, companies are required to investigate potential impairments of
long-lived assets, certain identifiable intangibles, and associated goodwill, on
an exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. The adoption of SFAS 121 is
not expected to have a significant impact on the Company's financial position or
result of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation," SFAS 123 will be adopted by the Company as required for its
Fiscal 1997 financial statements and is not expected to have a material effect
on the Company's financial position or results of operations. Upon adoption of
SFAS 123, the company will continue to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and will provide pro forma disclosures of net income and earnings per share as
if the fair value-based method prescribed by SFAS 123 had been applied in
measuring compensation expense.
The Company may make additional acquisitions of companies, divisions of
companies or products in the future. Acquisitions entail numerous risks,
including difficulties or an inability to successfully assimilate acquired
operations and products, diversion of management's attention and loss of key
employees of acquired businesses, all of which the Company has encountered with
previous acquisitions. Future acquisitions by the Company may require dilutive
issuances of equity securities and the incurrence of additional debt, and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The Company's 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, whether from debt or equity sources. If
the Company is unable to obtain additional working capital from the placement of
debt or equity instruments or the sale of some of its assets, it may be
necessary for the Company to restructure its operations to reduce its ongoing
expenditures.
Statements, either written or oral, which express the Company's expectation
for the future with respect to financial performance or operating strategies can
be identified as forward-looking statements. These statements are made to
provide the public with management's assessment of the Company's business.
Caution must be taken to consider these statements in light of the following
factors: the Company assumes that key customers will continue to make purchases;
the Company will be able to secure long-term contracts for the sale of its
products; the Company will make acquisitions which contribute to profitability;
and the Company will continue its implementation of cost reduction measures. In
the event any of the above factors do not occur as management anticipates,
actual results could differ materially from the expectations expressed in the
forward-looking statements.
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<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On August 6, 1996, the Company settled three related civil actions
entitled Sparta Surgical Corporation v. Gerald S. Kramer ("Kramer"),
Docket No. 94-0372, Plymouth County Superior Court, Massachusetts;
Gerald S. Kramer v. Sparta Surgical Corporation and Thomas F. Reiner
("Reiner"), Civil Action No. 94-CO-6337T, United States District
Court, Western District, New York; and Sparta Surgical Corporation
v. Gerald S. Kramer, Docket No. 96-10716-RGS, United States District
Court, Eastern District, Massachusetts. These actions involved
disputes between the Company; Reiner, the Company's Chairman,
President and Chief Executive Officer; and Kramer, a former officer
and Chairman of the Company's Board of Directors and concerned
Kramer's termination as an officer and director, disputes regarding
his employment agreement and various monetary obligations between
the parties. Under the settlement, the Company paid to Kramer
$262,500 and issued to him a promissory note in the amount of
$62,500, payable over five years. In addition, the parties exchanged
general releases and forgave all debts to each other which included
obligations from Kramer to the Company in the amount of
approximately $371,000.
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. Exhibits
Computation of Primary Earnings Per Share (Page 11)
Computation of Fully Diluted Earnings Per Share (Page 12)
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
The Company filed a Form 8-K dated August 6, 1996, to report that
the Company settled three related civil actions entitled Sparta
Surgical Corporation v. Gerald S. Kramer ("Kramer"); Gerald S.
Kramer v. Sparta Surgical Corporation and Thomas F. Reiner
("Reiner"); and Sparta Surgical Corporation v. Gerald S. Kramer.
- 10 -
<PAGE>
<TABLE>
SPARTA SURGICAL CORPORATION
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
---------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period ...................... 4,403,523 3,837,983 3,846,826 3,228,408
Shares issued during the period (weighted average) ............. 85,514 14,824 467,760 461,918
Dilutive shares contingently issuable upon exercise of
options and warrants(weighted average) ......................... -- -- -- --
Less shares assumed to have been purchased for treasury
with assumed proceeds of stock warrants and options
(weighted average) ............................................. -- -- -- --
Less shares placed in escrow which are issuable only if
certain income or stock price criteria are met
(weighted average) ............................................. -- (187,500) -- (187,500)
----------- ----------- ----------- -----------
Total Primary Shares ........................................... 4,489,039 3,665,307 4,314,586 3,502,826
=========== =========== =========== ===========
Net Income (Loss) Applicable to Common Stockholders ............ $(1,224,480) $ (13,436) $(1,501,711) $ 5,122
=========== =========== =========== ===========
Net Income (Loss) Per Primary Share ............................ $ (.27) $ -- $ (.35) $ --
=========== =========== =========== ===========
- 11 -
</TABLE>
<PAGE>
<TABLE>
SPARTA SURGICAL CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
---------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period ....................... 4,403,525 3,837,983 3,846,826 3,228,408
Shares issued during the period (weighted average) .............. 85,514 51,591 467,760 642,889
Dilutive shares contingently issuable upon exercise of
options and warrants (weighted average) ......................... -- -- -- --
Less shares assumed to have been purchased for treasury
with assumed proceeds of stock warrants and options
(weighted average) .............................................. -- -- -- --
Less shares placed in escrow which are issuable only if
certain income or stock prices are met, as they are
anti-dilutive (weighted average) ................................ -- -- -- --
----------- ----------- ----------- -----------
Total Fully Diluted Shares ...................................... 4,489,039 3,889,574 4,314,586 3,871,297
=========== =========== =========== ===========
Net Income (Loss) Applicable To Common Stockholders ............. $(1,224,480) $ (13,436) $(1,501,711) $ 5,122
=========== =========== =========== ===========
Net Income (Loss)per Fully Diluted Share ........................ $ (.27) $ -- $ (.35) $ --
=========== =========== =========== ===========
- 12 -
</TABLE>
<PAGE>
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
Thomas F. Reiner
- ---------------------------
Thomas F. Reiner
Chairman of the Board
President & CEO
Wm. Samuel Veazey
- ---------------------------
Wm. Samuel Veazey
Vice President of Finance
and Administration
October 15, 1996
- 13 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-QSB FOR SPARTA SURGICAL CORPORATION FOR THE QUARTER ENDED
AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Feb-28-1997
<PERIOD-START> Mar-01-1996
<PERIOD-END> Aug-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 289,281
<ALLOWANCES> 32,559
<INVENTORY> 2,555,689
<CURRENT-ASSETS> 2,897,138
<PP&E> 564,158
<DEPRECIATION> 265,255
<TOTAL-ASSETS> 4,656,340
<CURRENT-LIABILITIES> 1,608,384
<BONDS> 1,001,522
0
771,164
<COMMON> 9,078
<OTHER-SE> 893,081
<TOTAL-LIABILITY-AND-EQUITY> 4,656,340
<SALES> 1,057,631
<TOTAL-REVENUES> 1,057,631
<CGS> 440,737
<TOTAL-COSTS> 440,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,138
<INCOME-PRETAX> (1,408,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,408,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,408,626)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
