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, 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 November 30, 1996, 4,575,000 shares of Common Stock, 162,178 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 November 30, 1996 ................. 1 - 2
Condensed Consolidated Statements
of Operations for the three months and
nine months ended November 30, 1996 and 1995 .. 3
Condensed Consolidated Statements
of Cash Flows for the nine months
ended November 30, 1996 and 1995 .............. 4 - 5
Notes to Financial Statements ................. 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations ..................... 7 - 11
Part II. Other Information and Signatures ........................... 12 - 16
<PAGE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
November 30, 1996
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ --
Accounts receivable - trade, net of allowance
for doubtful accounts of $53,642 ......................... 313,422
Inventories ................................................ 2,533,943
Prepaid expenses ........................................... 65,853
-----------
Total Current Assets .................................... 2,913,218
-----------
Property and Equipment, at cost:
Machinery and equipment .................................... 56,400
Other equipment ............................................ 501,451
Leasehold improvements ..................................... 15,733
-----------
573,584
Less accumulated depreciation ............................... (284,210)
-----------
Net Property and Equipment .............................. 289,374
-----------
Other Assets:
Intangible assets, net of
accumulated amortization .................................. 796,774
Deposits and other ......................................... 56,560
Notes receivable - related entities ........................ 566,125
-----------
Total Other Assets ..................................... 1,419,459
-----------
Total Assets ........................................... $ 4,622,051
===========
The accompanying notes are an integral
part of these condensed consolidated financial statements
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<PAGE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
November 30, 1996
(Unaudited)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade ....................................... $ 624,573
Accrued expenses:
Payroll taxes and wages ....................................... 47,623
Interest and other ............................................ 79,722
Dividends payable .............................................. 3,509
Notes payable .................................................. 950,000
Royalties payable .............................................. 22,054
Current portion of long-term debt .............................. 90,521
-----------
Total Current Liabilities .................................. 1,818,002
-----------
Long-Term Debt, net of current portion above:
Obligations under capital leases ............................... 80,084
Financial institutions and other ............................... 1,030,889
-----------
Total Long-Term Debt ..................................... 1,110,973
-----------
Other liabilities ............................................... 364,913
-----------
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, 162,178 shares issued
and outstanding ............................................ 648,712
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,
4,575,000 shares issued and outstanding ...................... 9,150
Additional paid in capital ..................................... 7,909,331
Accumulated deficit ............................................ (7,351,302)
-----------
Total Stockholders' Equity ................................ 1,328,163
-----------
Total Liabilities and Stockholders' Equity ............... $ 4,622,051
===========
The accompanying notes are an integral
part of these condensed consolidated financial statements
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<PAGE>
<TABLE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
------------------------------ ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales .............................................. $ 581,683 $ 1,549,326 $ 1,639,314 $ 5,250,269
Cost of sales .......................................... 245,084 779,242 685,821 2,495,461
----------- ----------- ----------- -----------
Gross Profit ...................................... 336,599 770,084 953,493 2,754,808
Selling, general and administrative
expenses .............................................. 418,890 575,303 1,483,182 1,748,450
Research and development expense ....................... 13,352 5,337 39,852 52,415
Depreciation and amortization .......................... 59,599 123,291 177,826 452,321
Settlement of litigation ............................... 160,000 -- 855,712 --
----------- ----------- ----------- -----------
Income (Loss) From Operations ........................ (315,242) 66,153 (1,603,079) 501,622
----------- ----------- ----------- -----------
Interest and other income ............................ 3,248 1,639 10,597 9,827
Interest expense ..................................... (42,497) (68,900) (170,635) (469,090)
----------- ----------- ----------- -----------
Total Other Income (Expense) ...................... (39,249) (67,261) (160,038) (459,263)
----------- ----------- ----------- -----------
Income (Loss) Before Provision
for Income Taxes ...................................... (354,491) (1,108) (1,763,117) 42,359
Provision for income taxes ............................. 4,703 -- 4,703 --
----------- ----------- ----------- -----------
Net Income (Loss) ...................................... (359,194) (1,108) (1,767,820) 42,359
Preferred stock dividends .............................. (3,509) (5,839) (96,594) (44,184)
----------- ----------- ----------- -----------
Net Income (Loss) Applicable to
Common Stockholders ................................... $ (362,703) $ (6,947) $(1,864,414) $ (1,825)
=========== =========== =========== ===========
Net Income (Loss) Per Share of
Common Stock:
Primary:
Weighted average number of
common shares outstanding .......................... 4,562,022 3,773,853 4,396,540 3,592,508
=========== =========== =========== ===========
Net income (loss) per common share ................. $ (.08) $ -- $ (.42) $ --
=========== =========== =========== ===========
Fully diluted:
Weighted average number of
common shares outstanding .......................... 4,562,022 3,773,853 4,396,540 3,934,631
=========== =========== =========== ===========
Net income (loss) per common share ................. $ (.08) $ -- $ (.42) $ --
=========== =========== =========== ===========
The accompanying notes are an integral
part of these condensed consolidated financial statements
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</TABLE>
<PAGE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
November 30,
--------------------------
1996 1995
---- ----
Cash Flows From Operating Activities:
Net income (loss) ............................... $(1,767,820) $ 42,359
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization ................ 177,826 452,321
Settlement of litigation ..................... 433,212 --
Reduction of expenses on settlement
of Storz claim .............................. -- (135,184)
Changes in assets and liabilities:
(Increase) in accounts receivable ........... (25,005) (42,836)
Decrease in inventories ..................... 75,444 79,596
Decrease in prepaid expenses and other ...... 15,942 39,008
(Increase) in deposits and other ............ (4,351) (66,253)
(Decrease) in accounts payable and
accrued expenses ........................... (284,117) (518,516)
----------- -----------
Net Cash (Used) By Operating Activities ..... (1,378,869) (149,505)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures ............................ (11,131) (18,048)
Increase in intangible assets ................... (31,951) (1,042)
Increase in receivables from related entities ... (6,930) (8,461)
----------- -----------
Net Cash (Used) By Investing Activities ..... (50,012) (27,551)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing ........................ 3,186,542 5,590,030
Principal payments on notes payable ............. (1,834,958) (5,331,230)
Principal payments on accrued royalties ......... (40,203) (87,270)
Issuance of common stock upon exercise
of Warrants .................................... 117,500 --
----------- -----------
Net Cash Provided By Financing Activities ... 1,428,881 171,530
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents ........................... -- (5,526)
Cash and Cash Equivalents at Beginning
of Period .................................. -- 5,526
----------- -----------
Cash and Cash Equivalents at End of Period .. $ -- $ --
=========== ===========
The accompanying notes are an integral
part of these condensed consolidated financial statements
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<PAGE>
SPARTA SURGICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Nine Months Ended
November 30,
----------------------
1996 1995
---- ----
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest ..................................... $ 98,211 $469,090
Income taxes ................................. 4,703 --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Conversion of Preferred Stock into
Common Stock ................................. $522,088 $670,516
Dividends payable on Series A
Convertible Preferred Stock .................. 21,677 31,381
Stock dividends paid on Series A
Convertible Preferred Stock .................. 3,509 6,694
Stock dividends paid on Redeemable
Preferred Stock .............................. 71,409 --
Reduction of note payable due to
settlement of Storz claim .................... -- 400,000
Reduction of royalties payable due
to settlement of Storz claim ................. -- 62,495
Reduction of intangibles due to
settlement of Storz claim .................... -- 223,210
The accompanying notes are an integral
part of these condensed consolidated financial statements
- 5 -
<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 nine months ended
November 30, 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.
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<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 sale 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 nine months ended November 30, 1996
("Nine Months Fiscal 1997") do not reflect the medical product line operations,
whereas for the nine months ended November 30, 1995 ("Nine Months Fiscal 1996")
the results of the medical product line operations are reflected. For the reason
stated above, the results for the Nine Months Fiscal 1997 and the Nine Months
Fiscal 1996 are not strictly comparable.
RESULTS OF OPERATIONS
Three months ended November 30, 1996
as Compared to Three months ended November 30, 1995
Net sales for the three months ended November 30, 1996 ("Third Quarter
Fiscal 1997") were $581,683, a 62.5% decrease from net sales of $1,549,326 for
the three month period ended November 30, 1995 ("Third Quarter Fiscal 1996").
The net sales decrease during the Third Quarter Fiscal 1997 as compared to the
Third Quarter Fiscal 1996 is the result of (i) a decrease of $939,182 in medical
product sales which resulted from the sale of the Company's medical product line
in December 1995; (ii) a decrease of $17,105 or 5.1% in surgical product sales
from $333,072 to $315,967; and (iii) a decrease of $11,356 or 4.1% in
electrotherapy product sales from $277,072 to $265,716. The net loss for the
Third Quarter Fiscal 1997 was $359,194 as compared to net loss of $1,108 for the
Third Quarter Fiscal 1996. The decrease in net income for the Third Quarter
Fiscal 1997 as compared to the Third Quarter Fiscal 1996 is primarily due to the
decrease in net sales and the corresponding decrease in gross profit coupled
with a one time $160,000 expense related to the settlement of the litigation
described below.
Nine months ended November 30, 1996
as Compared to Nine months ended November 30, 1995
Net sales for the Nine Months Fiscal 1997 were $1,639,314, a 68.8% decrease
from net sales of $5,250,269 for the Nine Months Fiscal 1996. The net sales
decrease during the Nine Months Fiscal 1997 as compared to the Nine Months
Fiscal 1996 is the result of (i) a decrease of $3,151,932 in medical product
sales which resulted from the disposition of the Company's medical product line
in December 1995; (ii) a decrease of $88,647 or 8.9% in surgical product sales
from $995,157 to $906,510; and (iii) a decrease of $370,376 or 33.6% in
electrotherapy product sales from $1,103,180 to $732,804. 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 Nine Months Fiscal 1996 the Company had
approximately $282,000 in sales to Henley which were not repeated during the
Nine Months Fiscal 1997. 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. In that regard, on November 1, 1996 the Company
entered into a non-binding letter of intent for the acquisition of substantially
all of the operating assets of Orion Life Systems, Inc. and its wholly owned
subsidiary, Orion Medical Products, Inc. ("Orion"). Based in Wheeling, Illinois,
Orion specializes in contract manufacturing, packaging, and sterilization of
medical devices and single-use procedure trays as well as manufacturing and
marketing its own line of urological, respiratory, and I.V. therapy disposable
products. See "Part II. Other Information. Item 6. Reports on Form 8-K."
Gross profit was $953,493 or 58.2% of net sales for the Nine Months Fiscal
1997 as compared to $2,754,808 or 52.5% of net sales for the Nine Months Fiscal
1996. The increase in gross profit percentage is primarily due to the sale of
- 7 -
<PAGE>
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.
Selling, general and administrative ("SG&A") expenses for the Nine Months
Fiscal 1997 were $1,483,182, a 15.2% decrease from SG&A expenses of $1,748,450
for the Nine Months Fiscal 1996. The decrease in SG&A expenses for the Nine
Months Fiscal 1997 as compared to the Nine Months Fiscal 1996 is primarily due
to the overall decrease in operating expenses resulting from the sale of the
medical product line. This decrease is despite an increase in legal expenses for
the Nine Months Fiscal 1997 from approximately $93,000 for the Nine Months
Fiscal 1996 to approximately $190,000 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 Nine Months Fiscal 1997
were $39,852, a 24% decrease from R&D expenses of $52,415 for the Nine Months
Fiscal 1996. The decrease in R&D expenses for the Nine Months Fiscal 1997 as
compared to the Nine Months Fiscal 1996 is primarily due to the elimination of
the R&D efforts related to the medical product line. During the Nine Months
Fiscal 1997 the R&D continues to be focused on the redesign of the Company's
TENS units in an effort to increase the quality and reduce the cost for the
electrotherapy product line.
Depreciation and amortization ("D&A") expenses for the Nine Months Fiscal
1997 were $177,826, a 60.7% decrease from D&A expenses of $452,321 for the Nine
Months Fiscal 1996. During the Nine 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 Nine Months Fiscal 1997 were
$855,712. 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. In
addition, on November 26, 1996 the Company settled a civil action involving
disputes between the Company; Reiner, the Company's Chairman, President and
Chief Executive Officer; and Landino, a former Vice President of Sales of the
Company and concerned Landino's resignation as an employee of the Company. The
Company sued Landino for monies owed to the Company under a promissory note
executed by Landino. Landino cross-complained against the Company alleging
damages for wrongful termination. The Company's management believes that it
would have ultimately prevailed in these lawsuits, but took the opportunity to
settle the litigation before substantial additional legal fees and management
time were expended.
Net interest expense for the Nine Months Fiscal 1997 was $160,038, a 65.2%
decrease from net interest expense of $459,263 for the Nine Months Fiscal 1996.
The decrease in net interest expense is primarily due to the repayment of
certain of its outstanding debt in December 1995 from the cash proceeds of the
sale of the Company's medical product line. 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 Nine Months Fiscal 1997
was $1,767,820, a decrease of $1,810,179 from net income of $42,359 for the Nine
Months Fiscal 1996. The decrease in net income for the Nine Months Fiscal 1997
as compared to the Nine Months Fiscal 1996 is primarily due to the decrease in
net sales and the corresponding decrease in gross profit coupled with a one time
$855,712 expense related to the settlement of the litigation described above and
legal expenses in the approximate amount of $190,000 which were incurred in
connection with the Company's various litigation proceedings.
Primary loss per share was $.42 for the Nine Months Fiscal 1997 as compared
to a primary loss per share of $-- for the Nine 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 $.42 for the
Nine Months Fiscal 1997 as compared to fully diluted loss of $-- per share for
the Nine Months Fiscal 1996. The primary and fully diluted income per share
computation for the Nine Months Fiscal 1997 reflect dividends on the Series A
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<PAGE>
Convertible Preferred Stock and on the Redeemable Preferred Stock which were
paid in Common Stock during the Nine Months Fiscal 1997 and accrued dividends on
the Series A Convertible Preferred Stock which were paid in Common Stock in
December 1996.
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 $1,095,216 at November 30, 1996. The Company's working capital
position decreased by $151,254 primarily due to a decrease in inventories
coupled with an increase in notes payable.
On December 7, 1995, the Company sold its impregnated wound care gauze
dressings product line to a subsidiary of 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. Since the Company could not determine if the conditions
for payment of the $665,000 note would be met prior to September 1997, it
established a reserve for the entire amount of the note receivable. 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 November 30,
1996, the outstanding balance on the Loan was $847,798 and $35,000 in credit was
available. The Loan is being used to provide 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
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<PAGE>
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. On November 11, 1996, the
Company borrowed $400,000 from Halstead LLC ("Halstead"), a company controlled
by Charles C. Johnston, a principal stockholder of the Company, evidenced by a
$600,000 promissory note bearing 12% interest per annum due in December 1997.
The $600,000 promissory note was delivered to Halstead in consideration for the
cancellation of a promissory note in the principal amount of $200,000 owing from
the Company to Asset Factoring and the receipt by the Company of $400,000 from
Halstead.
On September 27, 1996, the Company was served with a complaint filed by
Storz Instrument Company ("Storz") 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. On
November 27, 1996, the Company paid Storz $100,000 and entered into an agreement
pursuant to which Storz would take no further action on its complaint in
exchange for payment of $350,000, on or before April 15, 1997, together with all
accrued interest thereon through the date of payment, plus $5,000 as a fixed sum
for attorneys' fees. If payment is not made by April 15, 1997, a judgement will
automatically be entered against the Company for the aforesaid amount.
On November 19, 1996, the Company was served with a complaint filed by
plaintiff, Robert M. Rubin ("Rubin") in connection with the Company's
acquisition of Medical Designs, Inc. ("MDI") from Star Bank, N.A. of Cincinnati,
Ohio ("Star Bank") in December 1992 through a bankruptcy proceeding initiated by
MDI. The complaint alleges three causes of action against the Company: (i)
breach of an alleged agreement with Rubin , as the assignee of the claims of
MDI, to purchase the assets of MDI; (ii) conspiracy, or actions in concert, with
Star Bank to induce the Company to breach the foregoing alleged agreement; and
(iii) breach of duty of good faith and fair dealing in connection with that
alleged agreement. Rubin seeks damages to be proved at trial, which appear to be
in excess of $50,000, and possibly as much as $4,000,000, based upon these
claims. The Company intends vigorously to oppose the claims alleged in this
lawsuit which it considers to have been filed in bad faith and to be baseless in
law and fact. Trial counsel is also evaluating, and intends to assert, any
available counterclaims or other sanctions, against Rubin in the matter for
damages, or losses the Company may incur as the result of the filing of this
suit.
On or about November 20, 1996, Tecnol initiated against the Company an
arbitration action before the American Arbitration Association in San Francisco,
California ("AAA"). Tecnol asserted claims allegedly arising out of Tecnol's
purchase of the Company's medical product line by Tecnol in December 1995
totaling $117,000. The Company believes that it is not liable for the majority
these claims. On or about December 17, 1996, Tecnol supplemented its arbitration
claim, with additional claims many of which did not specify an amount of
damages, and others which collectively seek a dollar amount of damages which
exceeds $250,000, bringing the total amount of Tecnol's specified claims to
approximately $367,000. The Company believes these latter claims to be frivolous
and without basis or merit. The Company further believes that they were asserted
by Tecnol in bad faith primarily to excuse non-payment of the $665,000
promissory note from Tecnol to the Company which recently became due and
payable. On January 6, 1997, the Company filed an answer and counterclaim for,
among other things, damages to its New Jersey plant which it had subleased to
Tecnol, as well as other claims in tort, contract and conversion. The Company
believes that, except as otherwise noted above, Tecnol's claims are without
merit, and intends vigorously to contest the same.
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
- 10 -
<PAGE>
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 future capital
requirements will depend on numerous factors, including the acquisition of new
product lines and/or other business operations and the continued development of
existing product sales, distribution and marketing capabilities. In order to
continue its current level of operations, it will be necessary for the Company
to obtain additional working capital, from either debt or equity sources. If the
Company is unable to obtain such additional working capital, it may be necessary
for the Company to restructure its operations to reduce its ongoing
expenditures.
Except for the historical information contained herein, the matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks are detailed
from time to time in the Company's periodic reports filed with the Securities
and Exchange Commission, including the Company's Annual Report on Form 10KSB,
Quarterly Reports on Form 10QSB and other periodic filings. These
forward-looking statements speak only as of the date hereof. The Company
disclaims any intent or obligation to update these forward-looking statements.
- 11 -
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On September 27, 1996, the Company was served with a complaint filed
by Storz Instrument Company ("Storz") entitled Storz Instrument
Company v. Sparta Maxillofacial Products, Inc., et al., Docket No.
4-96-CV-01920-CDP, U.S. District Court in St. Louis, Missouri, 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. On November 27,
1996, the Company paid Storz $100,000 and entered into an agreement
pursuant to which Storz would take no further action on its complaint
in exchange for payment of $350,000, on or before April 15, 1997,
together with all accrued interest thereon through the date of
payment, plus $5,000 as a fixed sum for attorneys' fees. If payment is
not made by April 15, 1997, a judgement will automatically be entered
against the Company for the aforesaid amount.
On November 19, 1996, the Company was served with a complaint filed by
plaintiff, Robert M. Rubin ("Rubin") entitled Robert M. Rubin v.
Sparta Surgical Corporation, Case No. C2 96-988, United States
District Court, Southern District of Ohio, Eastern Division. The
complaint is in connection with the Company's acquisition of Medical
Designs, Inc. ("MDI") from Star Bank, N.A. of Cincinnati, Ohio ("Star
Bank") in December 1992 through a bankruptcy proceeding initiated by
MDI. The complaint alleges three causes of action against the Company:
(i) breach of an alleged agreement with Rubin , as the assignee of the
claims of MDI, to purchase the assets of MDI; (ii) conspiracy, or
actions in concert, with Star Bank to induce the Company to breach the
foregoing alleged agreement; and (iii) breach of duty of good faith
and fair dealing in connection with that alleged agreement. Rubin
seeks damages to be proved at trial, which appear to be in excess of
$50,000, and possibly as much as $4,000,000, based upon these claims.
The Company intends vigorously to oppose the claims alleged in this
lawsuit which it considers to have been filed in bad faith and to be
baseless in law and fact. Trial counsel is also evaluating, and
intends to assert, any available counterclaims or other sanctions,
against Rubin in the matter for damages, or losses the Company may
incur as the result of the filing of this suit.
On or about November 20, 1996, Tecnol initiated against the Company an
arbitration action before the American Arbitration Association in San
Francisco, California ("AAA"), Case No. 74 Y 181 01129 96. Tecnol
asserted claims allegedly arising out of Tecnol's purchase of the
Company's medical product line by Tecnol in December 1995 totaling
$117,000. The Company believes that it is not liable for the majority
these claims. On or about December 17, 1996, Tecnol supplemented its
arbitration claim, with additional claims many of which did not
specify an amount of damages, and others which collectively seek a
dollar amount of damages which exceeds $250,000, bringing the total
amount of Tecnol's specified claims to approximately $367,000. The
Company believes these latter claims to be frivolous and without basis
or merit. The Company further believes that they were asserted by
Tecnol in bad faith primarily to excuse non-payment of the $665,000
promissory note from Tecnol to the Company which recently became due
and payable. On January 6, 1997, the Company filed an answer and
counterclaim for, among other things, damages to its New Jersey plant
which it had subleased to Tecnol, as well as other claims in tort,
contract and conversion. The Company believes that, except as
otherwise noted above, Tecnol's claims are without merit, and intends
vigorously to contest the same.
On November 26, 1996, the Company settled a civil action entitled
Sparta Surgical Corporation v. John P. Landino ("Landino") and
cross-complaint, Docket No. 752611-8, Superior Court of California,
County of Alameda. This action involved disputes between the Company;
Reiner, the Company's Chairman, President and Chief Executive Officer;
and Landino, a former Vice President of Sales of the Company and
concerned Landino's resignation as an employee of the Company. The
Company sued Landino for monies owed to the Company under certain
promissory note executed by Landino. Landino cross-complained against
the Company alleging damages for wrongful termination. Under the
settlement, the Company paid to Landino $35,000 and issued to him a
promissory note in the amount of $125,000, payable monthly over three
years. In addition, the parties exchanged general releases and the
Company forgave approximately $12,000 in debts from Landino. The
- 12 -
<PAGE>
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.
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 14)
Computation of Fully Diluted Earnings Per Share (Page 15)
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K
The Company filed a Form 8-K dated November 8, 1996 to report that on
November 1, 1996, the Company entered into a non-binding letter of
intent for the acquisition of substantially all of the operating
assets of Orion Life Systems, Inc. and its wholly owned subsidiary,
Orion Medical Products, Inc. (collectively, "Orion"). The purchase
price to be paid for the assets will be approximately $3 million
consisting of $450,000 in cash, $100,000 in notes payable over five
years, $550,000 in royalties payable as 1.5% of net sales, the
assumption of approximately $1,100,000 in bank debt, and assumption of
approximately $800,000 in other liabilities. The letter of intent also
calls for the Company to issue earn-out shares of common stock to
Orion's president upon Orion's meeting certain net sales and pre-tax
profit goals during the fiscal years ending February 28, 1998 through
February 28, 2001. The closing of the acquisition is subject to
several conditions, including the determination by the Company that
the results of its due diligence investigation of Orion's business and
assets are satisfactory; approval of the Board of Directors of both
companies; the execution of a mutually acceptable definitive purchase
agreement; and completing the Company's financing. Based in Wheeling,
Illinois, Orion specializes in contract manufacturing, packaging, and
sterilization of medical devices and single-use procedure trays as
well as manufacturing and marketing its own line of urological,
respiratory, and I.V. therapy disposable products.
- 13 -
<PAGE>
<TABLE>
SPARTA SURGICAL CORPORATION
COMPUTATION OF PRIMARY EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period ...................... 4,538,751 3,892,279 3,846,826 3,228,408
Shares issued during the period (weighted average) ............. 23,271 69,074 549,714 551,600
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 ........................................... 4,562,022 3,773,853 4,396,540 3,592,508
=========== =========== =========== ===========
Net Income (Loss) Applicable to Common Stockholders ............ $ (362,703) $ (6,947) $(1,864,414) $ (1,825)
=========== =========== =========== ===========
Net Income (Loss) Per Primary Share ............................ $ (.08) $ -- $ (.42) $ --
=========== =========== =========== ===========
- 14 -
</TABLE>
<PAGE>
<TABLE>
SPARTA SURGICAL CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
---------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period ....................... 4,538,751 3,892,279 3,846,826 3,228,408
Shares issued during the period (weighted average) .............. 23,271 69,074 549,714 706,223
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) ................................ -- (187,500) -- --
----------- ----------- ----------- -----------
Total Fully Diluted Shares ...................................... 4,562,022 3,773,853 4,396,540 3,934,631
=========== =========== =========== ===========
Net Income (Loss) Applicable To Common Stockholders ............. $ (362,703) $ (6,947) $(1,864,414) $ (1,825)
=========== =========== =========== ===========
Net Income (Loss)per Fully Diluted Share ........................ $ (.27) $ -- $ (.35) $ --
=========== =========== =========== ===========
- 15 -
</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
January 14, 1997
- 16 -
<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
NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Feb-28-1997
<PERIOD-START> Mar-01-1996
<PERIOD-END> Nov-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 367,064
<ALLOWANCES> 53,642
<INVENTORY> 2,533,943
<CURRENT-ASSETS> 2,913,218
<PP&E> 573,584
<DEPRECIATION> 284,210
<TOTAL-ASSETS> 4,622,051
<CURRENT-LIABILITIES> 1,818,002
<BONDS> 1,110,973
0
760,984
<COMMON> 9,150
<OTHER-SE> 558,029
<TOTAL-LIABILITY-AND-EQUITY> 4,622,051
<SALES> 1,639,314
<TOTAL-REVENUES> 1,639,314
<CGS> 685,821
<TOTAL-COSTS> 685,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,635
<INCOME-PRETAX> (1,767,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,767,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,767,820)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
