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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, 2000
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
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(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, 2000, 8,921,774 shares of Common Stock, 82,533 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.
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<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, 2000
Consolidated Statements 4
of Operations for the three months and nine
months ended November 30, 2000 and 1999
Consolidated Statements 5
of Cash Flows for the nine months
ended November 30, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and 7 - 12
Analysis of Financial Condition
and Results of Operations
Part II. Other Information and Signatures 12 - 13
<PAGE>
<TABLE>
<CAPTION>
SPARTA SURGICAL CORPORATION
CONSOLIDATED BALANCE SHEET
November 30, 2000
(Unaudited)
ASSETS
Current Assets:
<S> <C>
Cash $ --
Accounts receivable net of allowances for doubtful accounts of $44,000 530,000
Inventories 2,552,000
Other 98,000
------------
Total Current Assets 3,180,000
============
Property and Equipment, at cost:
Equipment 1,107,000
Other 18,000
------------
1,125,000
Less Accumulated Depreciation (396,000)
------------
Net Property and Equipment 729,000
============
Other Assets:
Intangible Assets 883,000
Other Assets 143,000
------------
Total Other Assets 1,026,000
------------
TOTAL ASSETS $ 4,935,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long Term Obligations $ 123,000
Account Payable Trade 850,000
Accrued Expenses 264,000
------------
Total Current Liabilites 1,237,000
============
Revolving Credit Facility and LongTerm Obligations 2,317,000
============
Stockholders' Equity:
Preferred stock: $4.00 par value, 2,000,000 shares authorized;
1992 NonCumulative Convertible Redeemable Preferred Stock: 330,000
165,000 shares authorized, 82,533 shares issued and outstanding
Series A Cumulative Convertible Redeemable Preferred Stock: 112,000
30,000 shares authorized, 28,068 shares issued and outstanding
Series AA Cumulative Convertible Redeemable Preferred Stock: 160,000
875,000 shares authorized, 39,938 shares issued and outstanding
Common Stock: $0.002 par value, 25,000,000 shares authorized,
8,921,774 shares issued and outstanding 14,000
Additional Paid in Capital 13,915,000
Accumulated Deficit (13,150,000)
------------
Total Stockholders' Equity 1,381,000
============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,935,000
============
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,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 903,000 $ 930,000 $ 2,684,000 $ 2,294,000
Cost of Sales 320,000 451,000 1,150,000 944,000
----------- ----------- ----------- -----------
Gross Profit 583,000 479,000 1,534,000 1,350,000
Selling, general and administrative expenses 585,000 616,000 1,557,000 1,218,000
Research and development expenses 103,000 9,000 325,000 16,000
Depreciation and amortization 100,000 103,000 380,000 217,000
----------- ----------- ----------- -----------
Income (loss) from operations (205,000) (249,000) (728,000) (101,000)
=========== =========== =========== ===========
Other income (expense):
Interest and other income -- -- -- 12,000
Interest expense (91,000) (157,000) (256,000) (341,000)
----------- ----------- ----------- -----------
Total other income (expense) (91,000) (157,000) (256,000) (329,000)
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (296,000) (406,000) (984,000) (430,000)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) ($ 296,000) ($ 406,000) ($ 984,000) ($ 430,000)
----------- ----------- ----------- -----------
Preferred stock dividends (4,000) (4,000) (25,000) (25,000)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stockholders ($ 300,000) ($ 410,000) ($1,009,000) ($ 455,000)
=========== =========== =========== ===========
Shares used to calculate basic net income (loss) per common share 6,978,146 2,504,903 6,607,928 2,258,768
=========== =========== =========== ===========
Basic net income (loss) per common share ($ 0.04) ($ 0.16) ($ 0.15) ($ 0.20)
=========== =========== =========== ===========
Shares used to calculate diluted net income (loss) per common
share 6,978,146 2,504,903 6,607,928 2,258,768
=========== =========== =========== ===========
Diluted net income (loss) per common share ($ 0.04) ($ 0.16) ($ 0.15) ($ 0.20)
=========== =========== =========== ===========
See accompanying notes to financial statements.
-4-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARTA SURGICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended
November 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($ 984,000) ($ 430,000)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 380,000 217,000
Gain on lease settlement -- (12,000)
Changes in operating assets and liabilities
Accounts receivable (125,000) (121,000)
Inventories 98,000 (99,000)
Other assets 258,000 8,000
Accounts payable and accrued expenses (336,000) (370,000)
----------- -----------
Net cash used in operating activities (709,000) (807,000)
=========== ===========
Cash flows from investing activities:
Capital expenditures (17,000) (102,000)
Increase in intangible assets (156,000) 14,000
----------- -----------
Net cash used in investing activities (173,000) (88,000)
=========== ===========
Cash flows from financing activities:
Proceeds from borrowings from revolving credit facility and other longterm obligations 3,193,000 3,038,000
Principal payments on longterm obligations (2,753,000) (2,101,000)
Proceeds from issuance of common stock 381,000 125,000
Debt issuance costs incurred -- (163,000)
----------- -----------
Net cash provided by financing activities 821,000 899,000
=========== ===========
Net change in cash and cash equivalents (61,000) 4,000
----------- -----------
Cash and cash equivalents at beginning of the period 61,000 1,000
----------- -----------
Cash and cash equivalents at end of the period $ -- $ 5,000
=========== ===========
Supplemental disclosure of cash flow information:
-------------------------------------------------
Cash paid during the period for:
Interest $ 195,800 $ 341,000
Income taxes -- --
Supplemental disclosure of noncash investing and financing activities:
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Dividends payable on Series A Convertible redeemable preferred stock 25,000 --
Conversion of debt into common stock 200,000 --
Stock dividends paid on Series A Convertible redeemable preferred stock 38,000 15,000
Issuance of Common Stock in acquisition of subsidiary -- 800,000
See accompanying notes to financial statements.
-5-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARTA SURGICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements is as of November 30,
2000 and for the three and nine months ended November 30, 2000 and 1999
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 our audited financial statements and notes thereto
included in our Annual Report on Form 10-KSB for the year ended February
29, 2000, previously filed with the Securities and Exchange Commission.
2. Basic income (loss) per share is based upon weighted average number of
common shares outstanding during the period. Diluted income (loss) per
share is computed using the weighted average number of common shares and
potentially dilutive securities outstanding during the period. Potentially
dilutive securities include incremental common shares issuable upon
conversion of convertible securities (using the if-converted method) and
shares issuable upon the exercise of stock options and warrants (using the
if-converted method). Potentially dilutive securities are excluded from the
computation if their effect is anti-dilutive. Contingently issuable shares
are included in diluted earnings per share when the related conditions are
satisfied. Potentially dilutive securities, excluded because of their
anti-dilutive effect, are 4,487,540 options and warrants, and 230,621
equivalent common shares of convertible preferred stock at November 30,
2000. The following table sets forth the computation of basic and diluted
net income (loss) per common share:
Three Months Ended Nine Months Ended
November 30, November 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator
Net income (loss) (300,000) ($ 410,000) (1,009,000) ($ 455,000)
applicable to common shareholders
Denominator
Weighted average common shares
outstanding during the period 8,881,132 4,783,672 8,510,914 3,705,319
Less shares in escrow 1,902,986 2,278,769 1,902,986 1,446,551
=========== =========== =========== ===========
Shares used in computing basic income
(loss) per common share 6,978,146 2,504,903 6,607,928 2,258,768
=========== =========== =========== ===========
Dilutive effect of conversion of preferred stock -- -- -- --
Dilutive effect of options and warrants -- -- -- --
Dilutive effect of convertible debt -- -- -- --
Shares used in computing diluted income
(loss) per common share 6,978,146 2,504,903 6,607,928 2,258,768
=========== =========== =========== ===========
-6-
</TABLE>
<PAGE>
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
from time to time in our periodic reports filed with the Securities and Exchange
Commission, including our 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. We disclaim any intent or obligation to update these
forward-looking statements. Some of the statements that we make under
Management's discussion and analysis, results of operations liquidity and
capital resources, and elsewhere in this Form 10-QSB constitutes forward-looking
statements.
These statements relate to future events in future financial performance
and involve known and unknown risks, uncertainties and other factor's that may
cause our or our industry's actual results, each of actively, performance or
achievements to be materially different from these expressed or implied by any
forward-looking statements. All of these matters are difficult or impossible to
predict accurately and many of which may be beyond our control. Although we
believe that the assumptions underlying its forward-looking statements are
reasonable, any of the assumptions could be inaccurate therefore there can be no
assurance that the forward-looking statements included in this form 10-QSB will
prove to be accurate. The following discussions should be read in conjunction
with the Financial Statements and notes thereto, appearing elsewhere herein.
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Form 10-QSB, or presented elsewhere by management from time to time. We
wish to caution stockholders and investors that the following important factors,
among others, in some cases have affected, and in the future could affect, our
actual results and could cause our actual results to differ materially from
those expressed in any forward looking statements made by us. The statements
under this caption are intended to serve as cautionary statements within the
scope of the Private Securities Litigation Reformation Act of 1995. The
following information is not intended to limit in any way the characterization
of other statements or information under other captions as cautionary statements
for such purpose. These factors could have a material adverse effect on our
business, operating results and financial condition.
There can be no assurance that we (i) can predict the market acceptance of
our products, (ii) will not face intense competition and if we are unable to
compete effectively, we may be unable to maintain or expand the base of
purchasers for our devices and we may lose market share or be required to reduce
prices, (iii) will be able to obtain patent protection for our products and
preserve our trade secrets and safeguard the security and privacy of our
confidential technology, (iv) will continue the operations, as we may need
additional financing and such financing may not be available as we are highly
leveraged and may be unable to service our debt, (v) will be successful because
we are subject to stringent and continuing applicable federal regulations that
there could be changes in the political, economical, or regulatory healthcare
and may be subject to product liability claims, (vi) will be able to retain or
hire key personnel, and (vii) will successfully generate sufficient revenue to
achieve profitability from our new subsidiary, Sparta E*Med, Inc., (viii) will
not lose a key manufacturer, distributor or a customer which could result in a
significant reduction in the revenues we generate, (ix) can anticipate
unexpected events and if any of these events of a significant magnitude were to
occur, the extent of our losses could exceed the amount of insurance we carry to
compensate us for any losses.
Our results of operations vary significantly from year to year and from
quarter to quarter, and we depend on, among other factors, developing new
products, demand for our products and significantly depend on availability of
materials from our suppliers, and we also depend on our customers including
hospitals, physicians, distributors and OEM private label accounts. We have
incurred net losses in the past and can't assure future profitability. At
November 30, 2000, our accumulated deficit was approximately $13,150,000.
-7-
<PAGE>
RESULTS OF OPERATIONS
Three months ended November 30, 2000
as compared to three months ended November 30, 1999
Net sales for the three months ended November 30, 2000 ("Third Quarter
Fiscal 2001") were $903,000, a 3% decrease or $27,000 from net sales of $930,000
for the three months ended November 30, 1999 ("Third Quarter Fiscal 2000"). The
decrease in net sales during the Third Quarter Fiscal 2001 is compared to the
Second Quarter Fiscal 2000 is primarily due to the decrease of sales in the
surgical business.
Nine months ended November 30, 2000
as compared to nine months ended November 30, 1999
Net sales for the nine months ended November 30, 2000 ("Nine Months Fiscal
2001") were $2,684,000, a 17%, increase from net sales of $2,294,000 for the
nine months ended November 30, 1999 ("Nine Months Fiscal 2000"). The net sales
increase of $390,000 during the Nine Months Fiscal 2001 as compared to the Nine
Months Fiscal 2000 can be primarily attributed to electrotherapy sales generated
from our recent ISO9001 and CE Mark approval to distribute certain of our
electrosurgical products to the European market and from surgical sales from new
distributors in U.S. and international markets and direct to hospital accounts.
Gross profit was $1,534,000 or 57% of net sales for the Nine Months Fiscal
2001 as compared to $1,350,000 or 58.8% of net sales for the Nine Months Fiscal
2000. The increase in gross profit is primarily due to increase in sales volume
and the higher margins generated from the sale of our specialty disposable
surgical product lines.
Selling, general and administrative ("SG&A") expenses for the Nine Months
Fiscal 2001 were $1,557,000 a 28%, or $339,000 increase from SG&A expenses of
$1,218,000 for the Nine Months Fiscal 2000. The increase in SG&A expenses for
the Nine Months Fiscal 2001 as compared to the Nine Months Fiscal 2000 is
primarily due to the additional operating expenses resulting from the
acquisition of Olsen and certain related consulting fees to the former
shareholder of Olsen, the further development of Sparta E*Med.com and attendance
at various trade items to promote our products.
Research, development and engineering ("R&D") expenses for the Nine Months
Fiscal 2001 were $325,000, an increase of over $309,000 from R&D expense of
$16,000 for the Nine Months Fiscal 2000. The increase in R&D expenses for the
Nine Months Fiscal 2001 as compared to the Nine Months Fiscal 2000 is primarily
due to our ongoing extensive research and product development consisting of: (i)
MEESA, a manually extendable electrosurgical apparatus used for tissue cutting
and cauterization, (ii) Microvasive Cable Adapter(R), a reusable bipolar cable
accessory to connect directly to an endostat generator, (iii) Silverglide(R)
Bipolar Forceps, a surface finish that minimizes sticking of tissue and eschar,
on electrosurgical instrument, (iv) B2B website technology, under Sparta
E*Med.com.
Depreciation and Amortization ("D&A") expenses for the Nine Months Fiscal
2001 were $380,000, a 80% increase or $163,000 from D&A expenses of $217,000 for
the Nine Months Fiscal 2000. The increase of D&A expenses during the Nine Months
Fiscal 2001 is due to the amortization of approximately $207,000 relating to a
non-compete agreement to the former shareholder of Olsen and goodwill charges in
connection with the acquisition of Olsen Electrosurgical in June 1999, of which
$139,000 is an adjustment to reflect a change in the estimated life of the
covenant not to compete.
Total other expenses for the Nine Months Fiscal 2001 was $256,000, a
decrease of $85,000 from total other expenses of $341,000 for the Nine Months
Fiscal 2000. The decrease in total other expenses is primarily due to lower
banking expenses and financing costs.
-8-
<PAGE>
As a result of the foregoing, the net loss for the Nine Months Fiscal 2001
was $984,000, an increase of $554,000. The increase in net loss for the Nine
Months Fiscal 2001 as compared to Nine Months Fiscal 2000 is primarily due to
the increase of Research, development and engineering, and Selling, general and
administrative expenses, increase in depreciation and amortization relating to
the purchase of Olsen Electrosurgical and decrease in total other expenses as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have been undercapitalized and have experienced
financial difficulties. Our primary sources of working capital have been
revenues from operations, bank and private party loans and proceeds from the
sale of securities. Many of the bank and private party loans and certain of our
other obligations have required personal guarantees from Mr. Reiner, for which
he has been compensated by us. In addition, from time to time, Mr. Reiner has
provided us with the working capital in order to continue to operate our
business.
In recent years, we have experienced losses from operations and have
suffered from a deficiency in available working capital and 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 a
financial advisor to pursue capital through such private equity or debt
financing. However, there can be no assurance that we will be able to complete
planned debt or equity offerings or targeted acquisitions. We do not have the
cash, working capital or commitments for additional equity or debt financing to
sustain our current level of operations. We will need to generate cash flows
from operations and/or raise additional funds in order to maintain operation at
current levels.
Our current operations continue to be cash flow negative, further straining
our working capital resources. Our 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 our current level
of operations, it will be necessary for us to obtain additional working capital,
from either debt or equity sources. If we are unable to obtain additional
working capital, it may be necessary for us to restructure our operations to
reduce our ongoing expenditures. Our principal capital requirements have been to
fund working capital needs to support internal growth for acquisitions and for
capital expenditures. Our 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. We sell to our
customers on various payment terms. This requires significant working capital to
finance inventory purchases and entails accounts receivable expenses in the
event any of our major customers encounters financial difficulties. Although
management monitors the creditworthiness of its customers, management cannot
assume that we will not incur some collection loss on customer accounts
receivable or loss in customer base in the future.
We rely on outside suppliers for many components of our products. From time
to time we have experienced difficulties in obtaining some components, and there
can be no assurance that our manufacturing sources will be able to meet our
product needs on a timely basis. At present we obtain our TENS units and certain
of its surgical disposables from single sources. The lack of availability of
these and other products from its current supplier due to our current operations
being cash flow negative or for any other reasons would have a material adverse
effect on our operations.
If we issue additional securities to raise funds, these securities may have
rights, preferences or privileges senior to that of the rights of our Common
Stock and our Stockholders may experience significant dilution. We cannot be
certain that additional financing will be available to us on favorable terms
when required, or at all. Our operating results are volatile and difficult to
predict, and if we fail to meet the expectations of investors or securities
analyst, the market price of our stock would likely decline significantly.
-9-
<PAGE>
We 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 we have encountered with previous
acquisitions. Future acquisitions by us 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 or financing
activities could result in additional expenses to the operation of the business.
These factors could have a material adverse effect on our business, operating
results and financial condition.
As of February 29, 2000, we had federal and state net operating loss carry
forwards of approximately $10,458,000. Our net operating loss carry forwards, if
not utilized, will expire at various dates through the year 2019.
Our working capital at November 30, 2000 was $1,900,000 as compared to
$1,633,000 at February 29, 2000, an increase of $267,000, which is primarily due
to the recently completed private equity financing.
On March 20, 2000 Bank of America Commercial provided us with an amended
24-month Revolving Line of Credit of up to $2,500,000 (the "Loan"). We agreed to
pay Bank of America Commercial interest on the average outstanding principal
amount of the Loan at a per annum rate of prime plus 3%. The Loan is advanced to
us based on a percentage of eligible assets and is secured by a first position
security interest on all our assets. As of January 3, 2001, the outstanding
balance on the Loan was $1,719,000. The Loan is being used to provide working
capital for current operations. In connection with the financing, we issued Bank
of America Commercial a warrant to purchase up to 10,000 shares of our Common
Stock exercisable at $1.90 per share at any time until March 20, 2003.
On November 1, 2000 we amended our September 22, 2000 private placement
memorandum to raise $2.5 million through the sale of 10% Subordinated Notes due
April 1, 2002, with interest payable June 1, 2001, and December 1, 2001 and June
1, 2002. Under the memorandum, the investor will receive warrants to purchase
one share of Sparta Surgical common stock, par value $0.002, at $0.50 per share
for each dollar of note purchased. The warrants are for a period of three years
with certain registration rights. In addition, the investor will receive
warrants to purchase 0.40 of one share of common stock of Sparta E*Med, Inc., (a
wholly owned subsidiary) at $0.50 per share for each dollar of note purchased.
The warrants are for a period of three years with certain registration rights.
The proceeds of the private placement will be used for working capital and
certain targeted acquisitions. In addition, under the terms of the private
placement, we have the option to convert the principal balance owing under the
notes into our common stock at $0.50 per share providing the closing ask price
of our common stock is at or above $1.25 per share for ten consecutive trading
days. There can be no assurance that this private placement will be completed
and funded.
On May 23, 1997, Mr. Reiner and his Assignee provided us with a Working
Capital Credit Facility ("Reiner Facility") of up to $200,000 bearing 12%
interest per annum. The Reiner Facility was subsequently increased to a maximum
amount of $400,000. The advances and accrued interest made under the Reiner
Facility was due the ending of (i) May 1998, subsequently extended until June
30, 2001, or (ii) upon the closing of a minimum of $1,000,000 equity or debt
financing by us, or (iii) upon default by us, or (iv) upon demand by Mr. Reiner
with five days notice to us. In addition, Mr. Reiner has the option to convert
any portion of the outstanding loan balance into common stock, par value $0.002,
at 75% discount of the average of the closing NASDAQ bid price of the five
trading days preceding the conversion date. Mr. Reiner has a junior lien on all
of the assets and is subordinated to its senior lender, Bank of America. As of
January 4, 2001, the amount due to Mr. Reiner under the Reiner Facility was
approximately $540,000 plus accrued interest of $700. On December 13, 2000, Mr.
Reiner agreed to convert $18,455 of the outstanding loan balance into 123,034
shares of Common Stock.
-10-
<PAGE>
In May 1998, we agreed to place into escrow 952,986 shares of common stock,
par value $0.002 for the benefit of Mr. Reiner and these shares would be
released from escrow to Mr. Reiner upon certain conditions specifically set
forth in the Escrow Agreement dated May 8, 1998. These shares were placed into
escrow as a consideration for Mr. Reiner agreeing to provide, (i) a personal
guarantee in an amount of $250,000 as to the obligations to its secured lender,
Bank of America, under its $2.5 million revolving credit facility, (ii) a
personal guarantee of approximately $715,000 of additional indebtedness relating
to certain leases and bridge loans, (iii) a $400,000 Working Capital Credit
Facility ("Reiner Facility").
As of October 12, 2000, none of the conditions set forth in the Escrow
Agreement for the release of the shares from escrow have been met. Therefore,
the shares remain in escrow. Mr. Reiner has voting authority over the shares and
the shares are considered outstanding as of February 29, 2000, although for the
purposes of calculating the net loss per share, these shares are excluded. There
can be no assurance that the release from escrow and the issuance of these
shares to Mr. Reiner will not have a material adverse effect on our earnings.
Upon release of these shares from escrow to Mr. Reiner, assuming use of the fair
market value of our common stock on January 2, 2001, the charge to earnings
would be approximately $190,597. Between September 1999 and November 1999, we
agreed to place 950,000 shares into escrow for the benefit of Mr. Reiner, as a
condition of Mr. Reiner providing (i) his personal guarantee of certain lease
obligations and bank debt in connection with our acquisition of Olsen
Electrosurgical, Inc. in June 1999, (ii) a further extension of the repayment of
the Reiner Facility due June 30, 1999, to June 30, 2000. On June 30, 2000, we
requested Mr. Reiner to further extend the repayment of the Reiner Facility for
a period of 12 months until June 30, 2001. There can be no assurance that the
impact of these shares being placed into escrow and the release of these shares
to Mr. Reiner will not have a material adverse effect on our earnings. Upon
release of these shares from escrow to Mr. Reiner, assuming use of the fair
market value of our common stock on January 2, 2001, the charge to earnings
would be approximately $190,000.
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
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We are registered with the FDA as a medical device establishment. Our
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 our medical devices 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. In
addition, we are approved for ISO 9001 certification and CE Mark for certain of
our electrosurgical devices.
Under the Federal Food, Drug and Cosmetic Act, we are required to file with
the FDA a new device description and obtain FDA approval for any new medical
device which we propose 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
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as "Good Manufacturing Practices" which require our distribution facility and
suppliers to be registered annually and subject to regular inspections by the
FDA. We follow Occupational Safety and Health Administration (OSHA) guidelines
as mandated by state and federal regulations. We provides training for all
employees to ensure that all aspects of the manufacturing process are performed
in an environmentally safe manner.
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 to us. We believe 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 we will continue to be in compliance with all
current regulations or that it will be able to comply with all future
regulations.
We sell our products under a variety of trademarks, some of which have been
registered in the United States and various foreign countries. We currently
holds two patents granted by the United States Patent Office relating to its
electrosurgical equipment and accessories. Notwithstanding the trademarks and
patents held by us, there can be no assurance that competitors will not develop
similar trademarks outside of our trademark protection or functionally similar
products outside our patent protection. There also can be no assurance that any
patents issued to or licensed by others, that others will not obtain patents
that we will need to license or design around, that our patents will not
inadvertently infringe upon the patents of others, or that others will not use
our patent upon expiration of such patents. There can be no assurance that
existing or future patents will not be invalidated or that we 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 we will rely cannot be predicted with any certainty.
Item 6. Exhibits and Reports on Form 8-K
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A. Exhibit No.
27 Financial Data Schedule.
B. Reports on Form 8-K
On October 2, 2000, upon the recommendations of our Audit Committee,
we reported the termination of Grant Thorton, LLP and the appointment of
Angell and Deering, LLP as our new independent accountants.
On October 23, 2000, we reported that John O'Hanlon, CFO, resigned
from his position to pursue other opportunities. Tamatha Frandsen was
appointed Controller and Principal Accounting Officer.
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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
By: /s/ Thomas F. Reiner By: /s/ Tamatha Frandsen
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Thomas F. Reiner Tamatha Frandsen
Chairman of the Board Controller
President & CEO Principal Accounting Officer
January 15, 2001
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