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 May 31, 1998
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 July 9, 1998, 1,851,235 shares of Common Stock, 121,783 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
Consolidated Balance
Sheet as of May 31, 1998 1
Consolidated Statements of
Operations for the three months
ended May 31, 1998 and 1997 2
Consolidated Statements of
Cash Flows for the three months
ended May 31, 1998 and 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 5 - 7
Part II. Other Information and Signatures 8 - 9
<PAGE>
SPARTA SURGICAL CORPORATION
CONSOLIDATED BALANCE SHEET
May 31, 1998
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 1,000
Accounts receivable - net of allowance
for doubtful accounts of $34,000 ............................ 407,000
Inventories ................................................... 2,111,000
Other ......................................................... 32,000
-----------
Total current assets ....................................... 2,551,000
-----------
Property and equipment, at cost:
Equipment ..................................................... 490,000
Other ......................................................... 16,000
-----------
506,000
Less accumulated depreciation .................................. (330,000)
-----------
Net property and equipment ................................. 176,000
-----------
Other assets:
Intangible assets ............................................. 607,000
Other ......................................................... 68,000
-----------
Total other assets ........................................ 675,000
-----------
Total assets .............................................. $ 3,402,000
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Curren portion of long term obligations ....................... $ 437,000
Accounts payable - trade ...................................... 720,000
Accrued expenses .............................................. 232,000
-----------
Total current liabilities ................................. 1,389,000
-----------
Revolving credit facility and long term obligations ............ 2,374,000
Stockholders' deficit:
Preferred stock: $4.00 par value, 750,000 shares authorized;
Non-cumulative convertible redeemable preferred stock:
165,000 shares authorized, 121,783 shares issued
and outstanding ........................................... 487,000
Series A cumulative convertible preferred stock:
30,000 shares authorized, 28,068 shares issued
and outstanding ........................................... 112,000
Common stock: $0.002 par value, 8,000,000 shares
authorized, 1,851,235 shares issued and outstanding ........ 4,000
Additional paid in capital .................................... 8,258,000
Accumulated deficit ........................................... (9,222,000)
-----------
Total stockholders' deficit .............................. (361,000)
-----------
Total liabilities and stockholders' deficit .............. $ 3,402,000
===========
The accompanying notes are an integral part of these statements
-1-
<PAGE>
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended May 31,
---------------------------
1998 1997
----------- -----------
Net sales ...................................... $ 719,000 $ 650,000
Cost of sales .................................. 385,000 322,000
----------- -----------
Gross profit .............................. 334,000 328,000
Selling, general and administrative
expenses ...................................... 259,000 491,000
Research and development expense ............... -- 2,000
----------- -----------
Income (Loss) from operations ............. 75,000 (165,000)
Other income (expense):
Interest and other income ..................... 206,000 85,000
Interest expense .............................. (93,000) (65,000)
----------- -----------
Total other income (expense) .............. 113,000 20,000
----------- -----------
Income (Loss) before provision
for income taxes ......................... 188,000 (145,000)
Provision for income taxes ..................... -- --
----------- -----------
Net income (loss) .............................. 188,000 (145,000)
Preferred stock dividends ...................... (4,000) (4,000)
----------- -----------
Net income (loss) applicable to common
shareholders .................................. $ 184,000 $ (149,000)
=========== ===========
Shares used to calculate basic net income
(loss) per common share ....................... 861,499 817,500
=========== ===========
Basic net income (loss) per common share ....... $ 0.21 $ (.18)
=========== ===========
Shares used to calculate diluted net income
(loss) per common share ................ 1,098,523 817,500
=========== ===========
Diluted net income (loss) per common share ..... $ 0.17 $ (.18)
=========== ===========
The accompanying notes are an integral part of these statements
-2-
<PAGE>
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
May 31,
-----------------------
1998 1997
--------- -----------
Cash flows from operating activities:
Net income (loss) .................................. $ 188,000 $ (145,000)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization .................... 67,000 67,000
Settlement related to disposal of product line ... (206,000) (85,000)
Changes in operating assets and liabilities:
Accounts receivable ............................. (192,000) (14,000)
Inventories ..................................... 54,000 12,000
Other assets .................................... (13,000) (56,000)
Accounts payable and accrued expenses ........... 26,000 (232,000)
--------- -----------
Net cash used by operating activities .......... (76,000) (453,000)
--------- -----------
Cash flows from investing activities:
Capital expenditures ............................... (5,000) (6,000)
Increase in intangible assets ...................... (11,000) --
Principal payments received on notes receivable .... -- 578,000
--------- -----------
Net cash provided (used) by investing
activities .................................... (16,000) 572,000
--------- -----------
Cash flows from financing activities:
Proceeds from borrowing ........................... 676,000 1,259,000
Principal payments on long term obligations ........ (584,000) (1,378,000)
--------- -----------
Net cash provided (used) by financing
activities .................................... 92,000 (119,000)
--------- -----------
Net change in cash and cash equivalents ........ -- --
Cash and cash equivalents at beginning of
the period .................................... 1,000 --
--------- -----------
Cash and cash equivalents at end of
the period .................................... $ 1,000 $ --
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ......................................... $ 66,000 $ 45,000
Income taxes ..................................... -- --
Supplemental disclosure of noncash investing and
financing activities:
Conversion of preferred stock into common stock .... $ -- $ 101,000
Dividends payable on Series A convertible
redeemable preferred stock ........................ 4,000 4,000
Issuance of common stock and warrants in payment
of loan costs ..................................... -- 127,000
The accompanying notes are an integral part of these statements
-3-
<PAGE>
SPARTA SURGICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements of the Company as of May
31, 1998 and for the three months ended May 31, 1998 and 1997 have been
prepared on the same basis as the audited financial statements. In the
opinion of management, such unaudited information includes all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of this interim information. Operating results and cash flows
for interim periods are not necessarily indicative of results for the
entire year. The information included in this report should be read in
conjunction with the Company's audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended February 28, 1999 previously filed with the Securities and Exchange
Commission.
2. Effective January 1, 1998, the Company adopted the provisions of Statement
No. 130, Reporting Comprehensive Income that modifies the financial
statement presentation of comprehensive income and its components. Adoption
of this Statement had no effect on the Company's financial position or
operating results.
Comprehensive income (loss) for the three months ended May 31, 1998 and
1997, representing all changes in Stockholders' deficit during the period
other than changes resulting from the Company's stock, was $188,000 and
$(144,000), respectively.
3. Basic income per share is based upon weighted average common shares
outstanding. Diluted income per share is computed using the weighted
average common shares outstanding plus any potential dilutive securities.
Dilutive securities include stock options, warrants, and convertible
preferred stock. The following table sets forth the computation of basic
and diluted net income per common share:
Three Months Ended May 31,
--------------------------
1998 1997
----------- ----------
Numerator
Net income (loss) ........................... $ 188,000 $(145,000)
Preferred stock dividends ................... (4,000) (4,000)
----------- ---------
Net income (loss) available to shareholders . $ 184,000 $(149,000)
=========== =========
Denominator
Weighted average common shares outstanding
during the period ......................... 861,499 817,500
----------- ---------
Shares used in computing basic income (loss)
per common share .......................... 861,499 817,500
Conversion of preferred stock ............... 63,984 --
Dilutive effect of options and warrants using
the treasury stock method ................. 173,040 --
----------- ---------
Shares used in computing dilutive income
(loss) per common share ................... 1,098,523 817,500
----------- ---------
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended May 31, 1998
as Compared to Three months ended May 31, 1997
Net sales for the three months ended May 31, 1998 ("First Quarter Fiscal
1999") were $719,000, a 10.8% increase from net sales of $650,000 for the three
months ended May 31, 1997 ("First Quarter Fiscal 1998"). The net sales increase
during the First Quarter Fiscal 1998 as compared to the First Quarter Fiscal
1997 is the result of an increase of $51,000 or 14.0% in electrotherapy product
sales from $367,000 to $418,000 coupled with an increase of $18,000 or 6.5% in
surgical product sales from $283,000 to $301,000. The increase in sales for the
electrotherapy product line can be primarily attributed to an increase in sales
to one of its OEM accounts. During the First Quarter Fiscal 1998 the Company had
approximately $265,000 in sales to this OEM account as compared to $135,000
during the same period last year. The loss of any of the Company's OEM accounts
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company intends to continue 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 May 29, 1998 the Company
entered into a non-binding letter of intent for the acquisition of all of the
outstanding common stock of Med-E-Quip Locators, Inc. ("Med-E-Quip") based in
St. Louis, Missouri. The purchase price will be approximately $4,000,000
consisting of $2,750,000 in cash, $500,000 in notes payable over three (3)
years, $100,000 in royalties up to 4.5% of net sales, and $650,000 in Common
Stock. The letter of intent also calls for the Company to issue earn-out common
shares to Med-E-Quip's principals which is subject to Med-E-Quip meeting certain
minimum net sales and net income goals beginning the fiscal year ending February
28, 1999. The closing of the acquisition is subject to several conditions,
including approval by Sparta's Board of Directors; satisfactory completion of
due diligence on Med-E-Quip's business and assets; and completing financing.
Gross profit was $334,000 or 46.4% of net sales for the First Quarter
Fiscal 1999 as compared to $328,000 or 50.4% of net sales for the First Quarter
Fiscal 1998. The decrease in gross profit percentage is primarily due to the
increase in electrotherapy product sales. In general, the electrotherapy product
line generates lower gross profits than the surgical product line.
Selling, general and administrative ("SG&A") expenses for the First Quarter
Fiscal 1999 were $259,000, a 52.7% decrease from SG&A expenses of $491,000 for
the First Quarter Fiscal 1998. The decrease in SG&A expenses for the First
Quarter Fiscal 1999 as compared to the First Quarter Fiscal 1998 is primarily
due to the continuing reduction of personnel, salaries, and the containment of
operating costs. Depreciation and amortization expenses for the First Quarter
Fiscal 1999 and 1998 remained constant at $67,000.
Total other income for the First Quarter Fiscal 1999 was $113,000, an
increase of $93,000 from total other income of $20,000 for the First Quarter
Fiscal 1998. The increase in total net income is primarily due to the reduction
of $206,000 in accrued liabilities during the First Quarter Fiscal 1999 as
compared to the reduction of $85,000 in accrued liabilities during the First
Quarter Fiscal 1998. The increase of $121,000 resulting from the reduction of
accrued liabilities is offset by an increase of $28,000 in net interest expense
resulting primarily from higher loan balances and banking expenses to
NationsCredit, the Company's primary lender. During the First Quarter Fiscal
1998, the Company reduced its accrued liabilities by $206,000 which were
originally accrued in connection with the lease termination costs relating to
the sale of the wound care product line in December 1995. See "Item 1 - Legal
Proceedings."
-5-
<PAGE>
As a result of the foregoing, the net income for the First Quarter Fiscal
1999 was $188,000, an increase of $333,000 from a net loss of $145,000 for the
First Quarter Fiscal 1998. The increase in net income for the First Quarter
Fiscal 1999 as compared to the First Quarter Fiscal 1998 is primarily due to the
decrease in SG&A expenses coupled with an increase in total other income as
discussed above.
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 28, 1998, the Company had net operating loss carry forwards
of approximately $9,450,000. Availability of the Company's net operating loss
carry forwards, if not utilized, will expire at various dates through the year
2013.
The Company's working capital at May 31, 1998 was $1,162,000 as compared to
$1,122,000 at February 28, 1998. The Company's working capital position
increased by $40,000.
Mr. Reiner, provided the Company with a Working Capital Credit Facility of
up to $500,000, bearing 12% interest per annum. The advances made under the
Working Capital Credit Facility and any accrued and unpaid interest are due the
earlier of (i) June 1999; (ii) upon the closing of a minimum of $1,000,000
equity or debt financing by the Company; or (iii) at the option of Mr. Reiner,
with five (5) day notice to the Company. In addition, Mr. Reiner has the option
to convert all amounts under the Working Capital Credit Facility into the
Company's Common Stock at 75% of the average closing bid prices as reported on
Nasdaq for the five (5) trading days preceding the conversion date. As of July
9, 1998, the amount due to Mr. Reiner under the Working Capital Credit Facility
was approximately $280,000.
On July 25, 1997, NationsCredit Commercial Funding Division of
NationsCredit Commercial Corporation, A NationsBank Company ("NationsCredit")
provided the Company with a 48-month Revolving Line of Credit of up to
$2,500,000 (the "Loan"). The Company agreed to pay NationsCredit interest on the
average outstanding principal amount of the Loan at a per annum rate of prime
plus 3%. The Loan is advanced to the Company based on a percentage of eligible
assets and is secured by a first position security interest on all of the assets
of the Company. In addition, $250,000 of the Loan is personally guaranteed by
Thomas F. Reiner, the Company's Chairman, President and Chief Executive Officer.
As of July 9, 1998, the outstanding balance on the Loan was $1,530,000 and
approximately $3,000 in credit was available. The Loan is being used to provide
working capital for current operations.
On February 23, 1998, the Nasdaq Stock Market materially increased the
financial and other criteria necessary to qualify for continued listing on the
Nasdaq National and SmallCap Markets. As of that date the Company was not in
compliance with any of the new net tangible, market capitalization or net income
requirements for continued listing on the Nasdaq SmallCap Market. On February
25, 1998, the Nasdaq Stock Market, Inc. notified the Company that its securities
would be delisted from the Nasdaq SmallCap Market effective with the close of
business on March 4, 1998. The Company appealed Nasdaq's decision and a hearing
was scheduled for April 9, 1998. On May 1, 1998, Nasdaq delisted the Company's
securities from the Nasdaq SmallCap Market. Trading in the Company's securities
is currently being conducted in the Nasdaq OTC Bulletin Board which could
substantially reduce the markets for the Company's securities.
On April 17, 1998, the Company entered into an agreement with Nova Bancorp,
USA ("Nova") to act as its exclusive financial advisor. In its role as a
financial advisor, Nova Bancorp will advise Sparta on the targeting, planning
and execution as to provide on a best efforts basis $3.5 million private
placement. The proposed private placement financing is to be issued to finance
potential acquisitions, and to provide financing for repayment of debts, working
-6-
<PAGE>
capital, sales and marketing expenses and research and development. In
consideration for providing these services, the Company agreed to issue to Nova
an option to purchase 150,000 shares of the Company's Common Stock at $1.00 per
share at any time until January 16, 2000. In addition, upon completion of the
$3.5 million financing, the Company agreed to issue to Nova an option to
purchase up to 10% of the outstanding shares of the Common Stock of the Company
on a fully-diluted basis at an exercise price equal to 110% of the fair market
value price of the Common Stock at the time of the Closing of the financing.
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.
The Company is currently evaluating the potential impact of the year 2000
on the processing of date-sensitive information by the Company's computerized
information system. The year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable year.
Any of the Company's computer programs that have time-sensitve software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. Based on preliminary
information, the costs of addressing the potential problems are not currently
expected to have a material adverse effect on the Company's financial position,
liquidity or results of operations in future periods. However, if the Company,
or its customers or vendors, are unable to resolve such processing issues in a
timely manner, it could pose a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant year 2000
issues in a timely manner.
Except for the historical information contained herein, the matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks are detailed
from time to time in the Company's periodic reports filed with the Securities
and Exchange Commission, including the Company's Annual Report on Form 10-KSB,
Quarterly Reports on Form 10-QSB and other periodic filings. These
forward-looking statements speak only as of the date hereof. The Company
disclaims any intent or obligation to update these forward-looking statements.
-7-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On June 15, 1998, the Superior Court of New Jersey, Law Division,
Atlantic County (the "Court"), Docket No. ATL-L-430-98 entered into a
final judgement in the amount of $385,000 in favor of the Company. On
February 2, 1998, the Company had filed suit in the Court against the
Company's former landlord, River Road Associated, L.P. ("RRA") and
RRA's general partner Jerome Raifman. In this suit the Company claimed
that RRA had breached the lease agreement between it and the Company
respecting property located in Hammonton, New Jersey due to RRA's
failure to maintain and make repairs to the demised premises. The
Company alleged that because of RRA's failure to maintain the demised
premised that the Company could not sublet such premises and suffered
damages as a result. The Company also alleged that it has been
constructively evicted from the demised premises and that the lease
with RRA was therefore terminated. On March 2, 1998, RRA instituted
proceedings to enforce a confession of judgement against the Company in
the approximate amount of $361,000 for unpaid rent and other charges
allegedly due under the lease through the end of the lease term in May,
2000. On April 6, 1998, the Court set asside the enforcement of the
confession of judgement seeked by RRA and consolidated both
proceedings. In the event the Company does not prevail in the suit
brought on by RRA the Company will seek to offset any amounts due with
the judgement it received.
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. Exhibit No.
27 Financial Data Schedule.
B. Reports on Form 8-K
The Registrant filed a Form 8-K dated March 24, 1998 which reported
that it had filed suit in the Superior Court of New Jersey, Law
Division, Atlantic County on February 2, 1998, Docket No. ATL-L-430-98
against Registrant's former landlord, River Road Associates, L.P.
("RRA"). In addition the Registrant reported that on March 2, 1998, RRA
instituted proceedings to enforce a confession of judgment against the
Registrant in the approximate amount of $361,400 for unpaid rent and
other charges allegedly due under the lease through the end of the
lease term in May, 2000.
The Registrant filed a Form 8-K dated April 1, 1998 which reported
Nasdaq's notification to the Registrant that it was not in compliance
with the new SmallCap Market continued listing requirements and that
its securities would be delisted on April 9, 1998.
The Registrant filed a Form 8-K dated May 1, 1998 which reported
Nasdaq's notification to the Registrant that its securities would be
delisted from the Nasdaq SmallCap Market effective with the close of
business on May 1, 1998.
-8-
<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 and CEO
H. Dale Biggs
- ---------------------------
H. Dale Biggs
Controller and Chief Financial Officer
(Principal Accounting Officer)
July 15, 1998
-9-
<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 MAY 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Feb-28-1999
<PERIOD-START> Mar-01-1998
<PERIOD-END> May-31-1998
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 441,000
<ALLOWANCES> 34,000
<INVENTORY> 2,111,000
<CURRENT-ASSETS> 2,551,000
<PP&E> 506,000
<DEPRECIATION> 330,000
<TOTAL-ASSETS> 3,402,000
<CURRENT-LIABILITIES> 1,389,000
<BONDS> 2,374,000
0
599,000
<COMMON> 4,000
<OTHER-SE> (964,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,402,000
<SALES> 719,000
<TOTAL-REVENUES> 719,000
<CGS> 385,000
<TOTAL-COSTS> 385,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,000
<INCOME-PRETAX> 188,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 188,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 188,000
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.17
</TABLE>
