================================================================================
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, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-11047
SPARTA SURGICAL CORPORATION
(Exact name of small business issuer in its charter)
Delaware 22-2870438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Olsen Centre
2100 Meridian Park Blvd., Concord, CA 94520
(Address of principal executive offices)
(925) 825-8151
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
As of November 30, 1999, 5,651,619 shares of Common Stock, 82,783 shares of
Redeemable Convertible Preferred Stock, 28,068 shares of Series A Convertible
Redeemable Preferred Stock, and 39,938 shares of Series AA 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 3
Sheet as of November 30, 1999
Consolidated Statements 4
of Operations for the three months and nine
months ended November 30, 1999 and 1998
Consolidated Statements 5
of Cash Flows for the nine months
ended November 30, 1999 and 1998
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and 7 - 12
Analysis of Financial Condition
and Results of Operations
Part II. Other Information and Signatures 12 - 15
2
<PAGE>
<TABLE>
<CAPTION>
SPARTA SURGICAL CORPORATION
CONSOLIDATED BALANCE SHEET
November 30, 1999
(Unaudited)
ASSETS
Current Assets:
<S> <C>
Cash $ 5,000
Accounts receivable - net 430,000
Inventories 2,414,000
Other 100,000
------------
Total Current Assets 2,949,000
Property and Equipment, at cost:
Equipment 1,148,000
Other 38,000
------------
1,186,000
Less Accumulated Depreciation 309,000
------------
Net Property and Equipment 877,000
Other Assets:
Goodwill - net 715,000
Other intangible assets - net 233,000
Othe noncurrent assets 123,000
------------
Total Other Assets 1,071,000
------------
TOTAL ASSETS $ 4,897,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long Term Obligations $ 1,516,000
Account Payable - Trade 621,000
Accrued Expenses 417,000
------------
Total Current Liabilites 2,554,000
Revolving Credit Facility and Long-Term Obligations 1,687,000
Stockholders' Equity:
Preferred stock: $4.00 par value, 2,000,000 shares authorized;
1992 Non-Cumulative Convertible Redeemable Preferred Stock:
165,000 shares authorized, 89,983 shares issued and outstanding 466,000
Series A Cumulative Convertible Redeemable Preferred Stock:
30,000 shares authorized, 28,068 shares issued and outstanding 112,000
Series AA Cumulative Convertible Redeemable Preferred Stock:
875,000 shares authorized, 39,938 shares issued and outstanding 160,000
Common Stock: $0.002 par value, 8,000,000 shares authorized,
5,601,619 shares issued and outstanding 5,000
Additional Paid in Capital 10,267,000
Accumulated Deficit (10,354,000)
------------
Total Stockholders' Equity 656,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,897,000
============
See accompaning notes to financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 930,000 $ 371,000 $ 2,294,000 $ 1,673,000
Cost of Sales 451,000 181,000 944,000 878,000
----------- ----------- ----------- -----------
Gross Profit 479,000 190,000 1,350,000 795,000
Selling, general and administrative expenses 616,000 200,000 1,218,000 572,000
Research and development expenses 9,000 -- 16,000 --
Depreciation and amortization 103,000 61,000 217,000 200,000
----------- ----------- ----------- -----------
Income (loss) from operations (249,000) (71,000) (101,000) 23,000
Other income (expense):
Interest and other income 0 0 12,000 304,000
Interest expense (157,000) (66,000) (341,000) (258,000)
----------- ----------- ----------- -----------
Total other income (expense) (157,000) (66,000) (329,000) 46,000
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (406,000) (137,000) (430,000) 69,000
Provision for income taxes 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) (406,000) (137,000) (430,000) 69,000
=========== =========== =========== ===========
Preferred stock dividends (4,000) (4,000) (25,000) (25,000)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stockholders $ (410,000) $ (141,000) $ (455,000) $ 44,000
=========== =========== =========== ===========
Shares used to calculate basic net income (loss) per common share 2,504,903 1,923,858 2,258,768 1,413,438
=========== =========== =========== ===========
Basic net income (loss) per common share ($ 0.16) ($ 0.07) ($ 0.20) $ 0.03
=========== =========== =========== ===========
Shares used to calculate diluted net income (loss) per common share 2,504,903 1,923,858 2,258,768 1,638,509
=========== =========== =========== ===========
Diluted net income (loss) per common share ($ 0.16) ($ 0.07) ($ 0.20) $ 0.03
=========== =========== =========== ===========
See accompanying notes to financial statements.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
November 30,
-------------------
1999 1998
---- ----
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (430,000) $ 69,000
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 217,000 200,000
Gain on lease settlement (12,000) --
Reduction of accrued liabilites -- (304,000)
Changes in operating assets and liabilities
Accounts receivable (121,000) (28,000)
Inventories (99,000) 108,000
Other assets 8,000 (85,000)
Accounts payable and accrued expenses (370,000) (345,000)
----------- -----------
Net cash used in operating activities (807,000) (385,000)
Cash flows from investing activities:
Capital expenditures (102,000) (9,000)
Cash acquired in acquisition of subsidiary 14,000 --
----------- -----------
Net cash used in investing activities (88,000) (9,000)
Cash flows from financing activities:
Proceeds from borrowings from revolving credit facility and other long-term obligations 3,038,000 1,918,000
Principal payments on long-term obligations (2,101,000) (1,511,000)
Proceeds from issuance of common stock 125,000 --
Debt issuance costs incurred (163,000) (13,000)
----------- -----------
Net cash provided by financing activities 899,000 394,000
----------- -----------
Net change in cash and cash equivalents 4,000 0
Cash and cash equivalents at beginning of the period 1,000 1,000
----------- -----------
Cash and cash equivalents at end of the period $ 5,000 $ 1,000
=========== ===========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 341,000 $ 258,000
Income taxes -- --
Supplemental disclosure of non-cash investing and financing activities:
- -----------------------------------------------------------------------
Conversion of debt into common stock $ -- $ 751,000
Conversion of preferred stock into common stock -- 8,000
Stock dividends paid on Series A convertible redeemable preferred stock 21,000 21,000
Assets and liabilities acquired in purchase of subsidiary
Cash 14,000 --
Accounts receivable 147,000 --
Inventories 289,000 --
Prepaid expenses 21,000 --
Property and equipment 740000 --
Accounts payable (295,000) --
Accrued and other liabilities (390,000) --
Notes payable (171,000) --
Common Stock Issued (850,000) --
----------- -----------
Goodwill (495,000) --
=========== ===========
See accompanying notes to financial statements.
5
</TABLE>
<PAGE>
SPARTA SURGICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of the Company as of
November 30, 1999 and for the three and nine months ended November 30, 1999
and 1998 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 March 1, 1999, the Company adopted the provisions of Statement
No. 130, "Reporting Comprehensive Income" that modifies the financial
statement presentation of comprehensive income and its components. There
were no additional components of comprehensive income as defined by this
Statement, and as a result, the Company's total comprehensive income for
the periods presented were equal to net income.
3. Basic income (loss) per share is based upon weighted average common shares
outstanding. Diluted income (loss) per share is computed using the weighted
average common shares outstanding plus any potentially dilutive securities.
Dilutive securities include stock options, warrants, convertible debt, and
convertible preferred stock. The following table sets forth the computation
of basic and diluted net income (loss) per common share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Numerator
<S> <C> <C> <C> <C>
Net income (loss) ($ 406,000) ($ 137,000) ($ 430,000) $ 69,000
Preferred stock dividends (4,000) (4,000) (25,000) (25,000)
----------- ----------- ----------- -----------
Net income (loss) used in computing basic income
(loss) per common share (410,000) (141,000) (455,000) 44,000
----------- ----------- ----------- -----------
Preferred stock dividends -- -- -- --
Interest expense on convertible debt -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) used in computing diluted
income (loss) per common share ($ 410,000) ($ 141,000) ($ 455,000) $ 44,000
=========== =========== =========== ===========
Denominator
Weighted average common shares
outstanding during the period 4,783,672 2,876,844 3,705,319 2,366,424
Less: Shares placed in escrow 2,278,769 952,986 1,446,551 952,986
----------- ----------- ----------- -----------
Shares used in computing basic income
(loss) per common share 2,504,903 1,923,858 2,258,768 1,413,438
Dilutive effect of conversion of preferred stock -- -- -- --
----------- ----------- ----------- -----------
Dilutive effect of options and warrants using
the treasury stock method -- -- -- 225,071
----------- ----------- ----------- -----------
Dilutive effect of convertible debt using the
if-converted method -- -- -- --
----------- ----------- ----------- -----------
Shares used in computing diluted income
(loss) per common share 2,504,903 1,923,858 2,258,768 1,638,509
=========== =========== =========== ===========
6
</TABLE>
<PAGE>
4. BUSINESS SEGMENTS
The Company's products are divided into two product groups:
Surgical/Medical Devices and Durable Medical Equipment ("DME") and Supplies. The
Company's reportable product group segments are strategic business units that
offer different ranges of products. Surgical/Medical Devices include
electrosurgical instruments and related supplies, ophthalmic and ENT/Plastics
surgical instruments and specialty disposables used in a wide range of surgical
procedures in hospitals, physicians' offices, outpatient surgery and emergency
room settings. Durable Medical Equipment and supplies includes pain management
devices and accessories used in home healthcare for physical therapy and
rehabilitation procedures.
Information by product group segment is set forth below for the nine months
ended November 30:
1999 1998
---------- ----------
Net Sales:
Surgical / Medical Devices $1,835,000 $ 750,000
Durable Medical Equipment and Supplies 459,000 923,000
---------- ----------
$2,294,000 $1,673,000
========== ==========
Gross Profit:
Surgical / Medical Devices $1,142,000 $ 450,000
Durable Medical Equipment and Supplies 208,000 345,000
---------- ----------
$1,350,000 $ 795,000
========== ==========
Due to the shared and integrated resources in personnel and facilities for
the two product group segments, information on assets, operating expenses and
income from operations is not identifiable for each of the two business
segments.
5. Certain reclassifications have been made to fiscal 1999 amounts and
disclosures to conform to fiscal 2000 presentation.
6. On June 8, 1999, the Company completed an agreement to purchase the
outstanding common stock of Olsen Electrosurgical, Inc. ("Olsen"), a
privately held company founded in 1885. Olsen designs, develops,
manufactures and markets electrosurgical devices and accessories. For the
fiscal year ending December 31, 1998, Olsen recorded approximately $2.4
million in net sales. Under the agreement, Sparta issued four hundred
thousand (400,000) shares of the Company's common stock, $0.002 par value
in exchange for all of the outstanding shares of Olsen's common stock. In
addition, the shareholders of Olsen entered into a five-year Non-Compete
and Consulting Agreements valued at approximately $1.3 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters set forth in
this report are forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties that may
cause actual results to differ materially. These risks are detailed from time to
time in 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>
RESULTS OF OPERATIONS
Three months ended November 30, 1999
as compared to three months ended November 30, 1998
Net sales for the three months ended November 30, 1999 ("Third Quarter
Fiscal 2000") were $930,000, a 151% increase from net sales of $371,000 for the
three months ended November 30, 1998 ("Second Quarter Fiscal 1999"). The net
sales increase of $559,000 is primarily attributed to the Company's recent
acquisition of its electrosurgical business and the receipt of various national
group purchasing organization contracts from the Company's Strategic Alliance
Marketing Agreement.
Nine months ended November 30, 1999
as compared to nine months ended November 30, 1998
Net sales for the nine months ended November 30, 1999 ("Nine Months Fiscal
2000") were $2,294,000, a 37% increase from net sales of $1,673,000 for the nine
months ended November 30, 1998 ("Nine Months Fiscal 1999"). The net sales
increase of $621,000 during the Nine Months Fiscal 2000 as compared to the Nine
Months Fiscal 1999 is the result of an increase in surgical device sales and
decrease in durable medical equipment sales. The increase in sales for the
surgical devices can be primarily attributed to the recent acquisition of its
electrosurgical business and receipt of various national group purchasing
organization contracts from the Company's Strategic Alliance Marketing
Agreement.
Gross profit was $1,350,000 or 58.8% of net sales for the Nine Months
Fiscal 2000 as compared to $795,000 or 47.5% of net sales for the Nine Months
Fiscal 1999. The increase in gross profit percentage is primarily due to the
higher margins generated from the increased sales volume in the surgical product
lines.
Selling, general and administrative ("SG&A") expenses for the Nine Months
Fiscal 2000 were $1,218,000, a 113% increase from SG&A expenses of $572,000 for
the Nine Months Fiscal 1999. The increase in SG&A expenses for the Nine Months
Fiscal 2000 as compared to the Nine Months Fiscal 1999 is primarily due to the
additional operating expenses resulting from the acquisition of Olsen
Electrosurgical, Inc., and certain nonrecurring acquisition costs in acquiring
Olsen which included legal and accounting fees, leased termination and
consolidation of the entire Sparta Olsen operation and certain other
nonrecurring expenses including regulatory approvals for the Company's ISO 9001
certification and CE Mark, legal, accounting, and due diligence fees related to
the termination of the acquisition of Western Medical Services, Inc. and ICS of
North America, Inc. and financing cost in connection with the Company's $1.5
million private placement.
Net loss for the Third Quarter Fiscal 2000 was $406,000, an increase of
$269,000 from net loss of $137,000 for the Third Quarter Fiscal 1999. The net
loss increase for the Third Quarter Fiscal 2000 is primarily due to the increase
in operating expenses including depreciation and amortization and interest
expenses resulting from the acquisition of Olsen and certain nonrecurring
acquisition costs in acquiring Olsen which included legal and accounting fees,
lease termination and consolidation of the entire Sparta Olsen operation and
certain other nonrecurring expenses including regulatory approvals for the
Company's ISO 9001 certification and CE Mark, legal, accounting, and due
diligence fees related to the termination of the acquisition of Western Medical
Services, Inc. and ICS of North America, Inc. and financing cost in connection
with the Company's $1.5 million private placement.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has experienced losses from operations and has
suffered from a deficiency in available working capital. In Fiscal 1999, the
Company substantially improved its operating performance, principally as a
result of significant reductions in operating expenses. However, revenues from
existing product lines have not been sufficient to generate adequate working
capital. Management intends to continue the steps it has taken to improve
operations and aggressively pursue capital for its acquisition program through
debt and equity securities offerings. Management has retained the services of
investment advisors to pursue capital through such private equity or debt
offerings. Management believes its actions will be sufficient to fund
operations, however, there can be no assurance that the Company will be able to
complete planned debt or equity offerings or targeted acquisitions.
8
<PAGE>
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. In addition, the failure to finalize and close an
acquisition could result in additional extending expenses to the operation of
the business. These factors could have a material adverse effect on the
Company's business, operating results and financial condition.
At February 28, 1999, the Company had approximately $7,530,000 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire from 2007 to 2019.
Additionally, the Company has approximately $1,680,000 of state net operating
loss carryforwards for tax reporting purposes which will expire through 2004.
The Company's working capital at November 30, 1999 was $395,000 as compared
to $1,313,000 at February 28, 1999. The Company's working capital position
decreased by $918,000 due to the short-term debt obtained in order to complete
the recent acquisition of Olsen and to facilitate other pending target
acquisitions.
Thomas F. Reiner, Chairman, President and CEO ("Reiner"), provided the
Company with a Working Capital Line of Credit Facility ("WCLCF") of up to
$500,000, bearing 12% interest per annum. On June 13, 1999, the Company
requested Reiner to increase the Working Capital Line of Credit Facility from
$500,000 to $750,000, and to further extend the terms of such line through June
2000, due to the recent acquisition of Olsen Electrosurgical, Inc. The advances
made under the Working Capital Credit Facility and any accrued and unpaid
interest are due at the earlier of (i) July 2000; (ii) upon the closing of a
minimum of $1,000,000 equity or debt financing by the Company; or (iii) upon
default at the option of Reiner, with five (5) day notice to the Company. In
addition, Reiner has the option to convert all amounts under the Working Capital
Credit Facility into the Company's Common Stock at 100% of the average closing
bid prices as reported on NASDAQ for the five (5) trading days preceding the
conversion date. As of November 30, 1999, the amount due, including accrued
interest, to Reiner under the Working Capital Credit Facility was approximately
$410,000. In June 1999, Reiner agreed to increase the Company's WCLCF from
$500,000 to $750,000 due to the working capital requirements needed as a result
of the Company's recent acquisition of Olsen Electrosurgical, Inc. For the
consideration of increasing the WCLCF, Reiner was issued 300,000 shares of the
Company's Common Stock, par value $0.002, with such shares to be held in escrow
and released to the Company upon full payment of the principal and accrued
interest or in the event the principal and interest is not repaid at the end of
the first year, then, at the sole option of Reiner, the shares shall be released
to him upon his written notice anytime thereafter to the Company. Upon release
of shares for the escrow, the contingent charge is approximately $235,000.
On July 25, 1997, Bank of America ("B of A") provided the Company with a
48-month Revolving Line of Credit of up to $2,500,000 (the "Line"), which was
subsequently amended to a $1,500,000 line of credit for Sparta Surgical and a
$1,000,000 line of credit for its subsidiary, Sparta Olsen Electrosurgical. The
Company agreed to pay B of A interest on the average outstanding principal
amount of the Line at a per annum rate of prime plus 3%. The Line 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 Line for the Company is personally guaranteed by Thomas F.
Reiner, the Company's Chairman, President and Chief Executive Officer. As of
January 4, 2000, the outstanding balance on the Line was $1,216,000 and
approximately $210,000 in credit was available. The Line is being used to
provide working capital for current operations.
9
<PAGE>
On March 4, 1999, the Company entered into a Consulting Agreement and was
subsequently amended on September 16, 1999. The Company appointed IGC of New
York, Inc. ("IGC") as its financial advisor. In its role as a financial advisor,
IGC shall provide the Company assistance in connection with securing debt and
equity financing, render advice on merger and acquisitions and coordinate
various meetings with the Company's market makers and brokers. For providing
these services, IGC has been retained a monthly consulting fee at $6,000 per
month in the form of equal monthly installments over 30 months. In its role as a
financial advisor, the Company also issued warrants to purchase 400,000 shares
of its common stock, $0.002 par value, exercisable at $0.95 per share at any
time until March 3, 2002, and the warrants shall have piggyback registration
rights. In addition, IGC shall, upon the closing and funding of private
placement financing in the gross amount of $7,000,000, IGC shall receive an
additional 500,000 warrants to purchase shares of the Company's common stock at
an exercisable price of $0.95 per share. In the event the Company completes a
secondary public stock offering and IGC was the introducing party which results
in the Company's raising gross proceeds in the amount of up to 7,000,000, IGC
shall be paid (i) $150,000 at the closing, (ii) 500,000 warrants to purchase
shares of the Company's common stock at an exercisable price of $0.95 per share,
(iii) $192,000, payable $8,000 per month in the form of equal monthly
installments over the twenty-four (24) month period post secondary public
offering.
On August 11, 1999, a private investor purchased from the Company 100,000
restricted shares of the Company's Common Stock, par value $0.002, at a price of
$1.25 per share. On September 2, 1999, Spags Investment Group, Inc. and its
affiliates ("Spags") agreed to make a bridge loan to the Company in the
principal sum of $485,000, due on March 2, 2000, together with interest on the
unpaid principal balance outstanding at the rate of 7% per annum; interest is
computed monthly and shall be payable in arrears in full on March 2, 2000. At
the same time, Sparta repaid its outstanding note dated July 7, 1999 due to
Spags, in the amount of $200,000. In addition, under the terms of the bridge
loan, Spags also has an irrevocable option to purchase an additional 965,000
shares of common stock at a price of $1.00 per share, within ten (10) days from
the submission of any of the Company's 10 QSB filings or submission of due
diligence material for any targeted acquisition by the Company. On November 9,
1999, the Company borrowed $350,000 from Spags for working capital purposes.
Under the terms of the loan, the note bears interest at a rate of seven percent
(7%) per annum, and shall become due and payable on May 5, 2000.
On September 6, 1999, the Company entered into a Financial Consulting
Services ("Agreement") with Royce Walker, LLC., which was subsequently amended
on January 3, 2000. Under the Agreement as amended, Royce is to provide certain
financial services including, but not limited to Royce's assistance in the (i)
securing of certain financing and (ii) development and marketing product lines
outside the United States. For the consideration, the Company issued a total of
98,500 shares of Common Stock, par value $0.002, which have been placed in
escrow for the benefit of Royce. The shares shall continue to be held in escrow
until such time as any one or more of the following conditions shall occur: (i)
the shares have achieved a fair market value of $7.00 per share, (ii) Sparta
performs a formal registration of all or a portion of its stock on or after May
1, 2000, in which the shares shall have piggyback rights, (iii) an order is
entered for relief against Sparta or declaring that Sparta is insolvent, or
Sparta voluntarily files for bankruptcy. Upon release of shares from escrow, the
contingent charge is approximately $123,125.
On September 7, 1999, the Company entered into a Financial Consulting
Services ("FCS") agreement with Coridal, N.V., which was subsequently amended on
January 3, 2000. Under the FCS, Coridal is to provide certain financial services
including, but not limited, to Coridal's assistance in the (i) securing of
certain financing and (ii) development and marketing product lines outside the
United States. For the consideration, the Company issued a total of 932,000
shares of Common Stock, par value $0.002, which have been placed in escrow for
the benefit of Coridal. The shares shall continue to be held in escrow until
such time as any one or more of the following conditions shall occur: (i) the
shares have achieved a fair market value of $7.00 per share, (ii) Sparta
performs a formal registration of all or a portion of its stock on or after May
1, 2000, in which the shares shall have piggyback rights, (iii) an order is
entered for relief against Sparta or declaring that Sparta is insolvent, or
Sparta voluntarily files for bankruptcy. Upon release from escrow, the
contingent charge will be approximately $952,000.
On November 5, 1999, the Company issued 400,000 shares of the Company's
restricted Common Stock, par value $0.002, to Thomas F. Reiner, the Company's
Chairman of the Board, President and CEO. The shares issued were in
consideration of Mr. Reiner agreeing to personally guaranty a Loan Facility to
Sparta Olsen Electrosurgical, Inc., a wholly owned subsidiary of the Company
being offered by Bank of America Commercial Financing, even though he is not
required to do so, in an amount of $250,000. The Company designated Mr. Reiner
as the escrow agent pursuant to a certain Escrow Agreement dated November 17,
1999 by and between Thomas F. Reiner, Sparta Surgical Corporation and Sparta
Olsen Electrosurgical, Inc., and the shares shall be released from the escrow
upon an event of default by the Company under the Loan facility with Bank of
America that causes Mr. Reiner's guarantee to be used. Upon release of the
shares from escrow, assuming use of the fair market value for Sparta's common
stock on November 5, 1999, the charge to earnings would be approximately
$387,500.
10
<PAGE>
On November 15, 1999, the Company paid an aggregate amount of $190,000 to
Sheldon S. Kabaker, M.D., Trustee, Sheldon S. Kabaker Profit Sharing Plan
("Kabaker"), and its assignee in connection with certain Notes due by the
Company. On November 17, 1999, the Company borrowed $250,000 from Kabaker. Under
the terms of the loan, the note bears interest at the rate of ten percent (10%)
per annum and shall be due and payable on May 17, 2000. Upon default of the
note, the Company has the option to extend the Note for an additional twelve
(12) months.
On November 1, 1999, the Company entered into a Medical Advisory Consulting
Agreement with Dr. Sheldon S. Kabaker. Under the Agreement, the Company
appointed Dr. Kabaker as the Company's Medical Advisory Consultant for a period
of twelve months to (i) render medical advice and research on various medical
procedures and technologies as it relates to the Company's existing and new
products, (ii) assist in the new product development for the Company's E.N.T.
and Plastic and General Electrosurgical products, (iii) attend medical trade
shows and seminars, and (iv) assist in securing financing from the medical
community. For these considerations and for being the introducing party to the
$250,000 loan made by Kabaker, 210,000 shares of the Company's Common Stock, par
value $0.002 was issued into escrow on behalf of Kabaker and its assignee. The
shares issued to escrow shall be released upon completion of the medical
advisory consulting agreement or if the shares have achieved a fair market value
of $10 per share. Upon release of the shares from escrow, assuming use of the
fair market value for Sparta's common stock on November 1, 1999, the charge to
earnings would be approximately $203,457.
During the period from March 1999 through November 30, 1999, the Company
raised $1,550,000 financing from various individual investors. The individual
loans range from $25,000 to $350,000, with interest ranging from 7% to 12%. The
net proceeds from these loans were designated primarily for working capital,
legal and accounting expenses related to various acquisition candidates the
Company targeted which included its recent acquisition of Olsen Electrosurgical,
Inc. In accordance with the terms of the loans, the principal is to be repaid by
the Company upon the closing of $25.0 million secondary public stock offering,
or March 1, 2000.
On June 8, 1999, the Company acquired all of the outstanding common stock
of Olsen Electrosurgical, Inc. ("Olsen"), and subsequently, Mr. Reiner was asked
to personally guarantee certain obligations, including certain lease contracts
for computers, telephones and for an unsecured working capital line of credit
with Wells Fargo Bank. Mr. Reiner agreed to provide his guarantee on behalf of
Olsen. For providing guarantee of the Olsen obligations and, as the guarantee is
beneficial to the Company's shareholders and overall business and operations, on
September 2, 1999, Mr. Reiner was issued 550,000 restricted shares of the
Company's Common Stock, par value $0.002, which shares are to be held in escrow
until the Company obligations are fully paid, or unless extended. In addition,
Mr. Reiner was further asked to personally guarantee certain obligations,
including certain lease contracts for computers and telephone, and a $125,000
unsecured working capital line of credit with Wells Fargo Bank. Mr. Reiner
agreed to provide his personal guarantee on behalf of Olsen, even though he was
not required to do so. Upon release of the shares from escrow, assuming use of
the fair market value for Sparta's common stock on June 8, 1999, the charge to
earnings would be approximately $495,000.
On September 17, 1999, the Company issued to Sparta Olsen Electrosurgical,
Inc. ("Olsen") employees Employee Stock Options ("ESOP") to purchase a total of
259,000 shares of the Company's Common Stock, par value $0.002, at $1.00 per
share, vested over 3 years from the date of issuance. The options issued to key
Olsen employees were primarily due to the merger with Olsen on June 8, 1999.
11
<PAGE>
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. The
Company's principal capital requirements have been to fund working capital needs
to support internal growth for acquisitions and for capital expenditures. The
Company's principal working capital needs are for inventory and accounts
receivable. Management attempts to control inventory levels in order to minimize
carrying costs and maximize purchasing opportunities. The Company sells to its
customers on various payment terms. This requires significant working capital to
finance inventory purchases and entails accounts receivable expenses in the
event any of the Company's major customers encounters financial difficulties.
Although management monitors the creditworthiness of its customers, management
cannot assume that the Company will not incur some collection loss on customer
accounts receivable or loss in customer base in the future. If the Company is
unable to obtain additional working capital, it may be necessary for the Company
to restructure its operations to reduce its ongoing expenditures.
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings
- -------------------------
None.
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
- -------------------------
The Company is registered with the FDA as a medical device establishment.
The Company's office and distribution facilities in California are subject to
various state and local regulations such as zoning requirements, health and fire
codes and the like. All of the Company's products must be approved, registered
and/or licensed by the FDA and other domestic and foreign regulatory
authorities. These authorities also regulate labeling, advertising and other
forms of product claims. Subject to completion of internal quality
documentation, on August 1999, Sparta Olsen, the Company's wholly owned
subsidiary, was approved for ISO 9001 certification and has further applied for
EN 46001 Quality System (CE Mark) Certification.
Under the Federal Food, Drug and Cosmetic Act, the Company is required to
file with the FDA a new device description and obtain FDA approval for any new
medical device which the Company proposes to manufacture and market. The
procedure for obtaining such approval differs depending upon the uniqueness of
the device, with devices similar to those marketed prior to 1976 being eligible
for expedited approval and those devices which represent significant departures
from devices on the market in 1976 requiring pre-marketing approval. The devices
are also subject to inspection by the FDA after approval, with devices that are
potentially life-threatening being subject to more stringent standards. The FDA
has established manufacturing and sterilization standards for medical devices
known as "Good Manufacturing Practices" which require the Company's distribution
facility and its suppliers to be registered annually and subject to regular
inspections by the FDA. The Company follows Occupational Safety and Health
Administration (OSHA) guidelines as mandated by state and federal regulations.
The Company provides training for all employees to ensure that all aspects of
the manufacturing process are performed in an environmentally safe manner.
12
<PAGE>
Although applicable government regulations vary in their provisions, they
are stringent and continuing. The cost of compliance with these regulations is
difficult to determine, but such cost is and will continue to be a significant
expense for the Company. The Company believes that it has obtained all
applicable government and regulatory approvals for its existing products,
facilities and processes and expects that all of its current licenses will be
renewed on a regular basis. There can be no assurance that the Company will
continue to be in compliance with all current regulations or that it will be
able to comply with all future regulations.
The Company sells its products under a variety of trademarks, some of which
the Company has registered in the United States and various foreign countries.
The Company currently holds two patents granted by the United States Patent
Office relating to its Durable Medical Equipment and Accessories which was
obtained through the acquisition of Medical Design, Inc. in 1992.
Notwithstanding the trademarks and patents held by the Company, there can be no
assurance that competitors will not develop similar trademarks outside the
Company's trademark protection or functionally similar products outside the
Company's patent protection. There also can be no assurance that any patents
issued to or licensed by others, that others will not obtain patents that the
Company will need to license or design around, that the Company's patents will
not inadvertently infringe upon the patents of others, or that others will not
use the Company's patents upon expiration of such patents. There can be no
assurance that existing or future patents will not be invalidated or that the
Company will have adequate funds to finance the high cost of prosecuting or
defending patent validity or infringement issues. Therefore, the scope or
enforceability of claims allowed in the patents on which the Company will rely
cannot be predicted with any certainty.
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. In particular, the services of Thomas
F. Reiner, the Company's Co-founder, Chairman of the Board, President and CEO
would be difficult to replace. The Company has entered into an Employment
Agreement with Mr. Reiner. The loss of the services of Mr. Reiner, any of its
executive officers or other key employees could have a material adverse effect
on the business, results of operations and financial condition of the Company.
On April 28, 1996, the Company entered into an Employment Agreement through
February 28, 2003 ("Agreement") with Mr. Reiner, and subsequently the Agreement
was amended on September 2, 1999. The Agreement provides for a base salary of
$195,000 per year and shall continue until September 2, 2006. Mr. Reiner shall
also participate in the Company's Management Bonus Program, whole and term life
insurance, and automobile allowance. In addition, significant termination
payments is to be paid to Mr. Reiner in the event the Agreement is canceled for
any reason other than cause. Mr. Reiner also participates in a Sales and Net
Income Performance Bonus and Options Program under the Agreement.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
A. Exhibit No.
27 Financial Data Schedule.
B. Reports on Form 8-K
On August 26, 1999, the Company issued 100,000 restricted shares of
the Company's Common Stock, par value $0.002, at $1.25 per share to an
individual investor.
On September 2, 1999, the Company borrowed $485,000 from Spags
Investment Group, N.V.
On September 3, 1999, the Company issued 550,000 shares of the
Company's Common Stock, par value $0.002, to Thomas F. Reiner, the
Company's Chairman, President and CEO. The shares issued are for providing
a guarantee for certain of the Company's obligations by Mr. Reiner. The
shares issued are subject to escrow conditions.
On November 9, 1999, the Company borrowed $350,000 from Spags, N.V.
for working capital purposes.
13
<PAGE>
On November 5, 1999, the Company issued 400,000 shares of the
Company's restricted Common Stock, par value $0.002, to Thomas F. Reiner,
the Company's, Chairman of the Board, President and CEO. The shares issued
were in consideration of Mr. Reiner agreeing to personally guaranty a
$1,000,000 Loan Facility to Sparta Olsen Electrosurgical, Inc., a wholly
owned subsidiary of the Company being offered by Bank of America Commercial
Financing.
On August 13, 1999, the Company terminated its non-binding letter of
intent dated March 22, 1999 to purchase all or substantially all of the
assets of Western Medical Services, Inc. On October 18, 1999, the Company
terminated its non-binding letter of intent to purchase all or
substantially all of the assets of ICS of North America, Inc.
On November 15, 1999, the Company paid an aggregate amount of $190,000
to Sheldon S. Kabaker, M.D., Trustee, in connection with certain Notes due
by the Company. On November 17, 1999, the Company borrowed $250,000 from
Sheldon S. Kabaker, M.D., Trustee and its Assignee.
On November 23, 1999, the Company signed a non-binding letter of
intent to purchase all or substantially all of the assets of Home Med-Equip
Co. ("Home Med-Equip") subject to several conditions, including approval by
Sparta's Board of Directors and the determination by Sparta that the
results of its due diligence investigation of Home Med-Equip's business and
assets are satisfactory and completion of financing.
On December 16, 1999, the Company signed a non-binding letter to
purchase all of the outstanding Common Stock of HomeTech Medical Services,
Inc. ("HomeTech"). The non-binding letter of intent provides for a purchase
price of $12 million consisting of Cash and Common Stock.
On December 30, 1999, 250,000 shares of the Registrant's Common Stock,
par value $0.002, was purchased by Flyn, von Schubert and Associates, s.a.
("Flyn") for $210,875.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Sparta Surgical Corporation
/s/ Thomas F. Reiner
- --------------------
Thomas F. Reiner
Chairman of the Board
President & CEO
January 19, 2000
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 5,000
<SECURITIES> 0
<RECEIVABLES> 430,000
<ALLOWANCES> 0
<INVENTORY> 2,414,000
<CURRENT-ASSETS> 2,949,000
<PP&E> 877,000
<DEPRECIATION> 217,000
<TOTAL-ASSETS> 4,897,000
<CURRENT-LIABILITIES> 2,554,000
<BONDS> 0
466,000
112,000
<COMMON> 5,601,619
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 656,000
<SALES> 2,294,000
<TOTAL-REVENUES> 0
<CGS> 944,000
<TOTAL-COSTS> 1,218,000
<OTHER-EXPENSES> 16,000
<LOSS-PROVISION> (430,000)
<INTEREST-EXPENSE> (341,000)
<INCOME-PRETAX> (430,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (430,000)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
