FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 4, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______to_______
Commission file number: 0-17919
SURGICAL LASER TECHNOLOGIES, INC.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1093148
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
147 Keystone Drive
Montgomeryville, PA 18936
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(Address of principal executive offices)
(Zip Code)
(215) 619-3600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ( )
On May 4, 1999 the registrant had outstanding 1,977,878 shares
of Common Stock, $.0l par value.
Page 1
Exhibit Index is on Page 10
<PAGE>
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: PAGE
ITEM 1. Financial Statements:
a. Condensed Consolidated Balance Sheets, 3
April 4, 1999 (unaudited) and January 3, 1999
b. Condensed Consolidated Statements of Operations (unaudited) for the
quarters ended April 4, 1999 and March 29, 1998 4
c. Condensed Consolidated Statements of Cash Flows (unaudited) for the
quarters ended April 4, 1999 and March 29, 1998 5
d. Notes to Condensed Consolidated Financial Statements (unaudited) 6-7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 10
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBITS:
EXHIBIT 27.1 - Financial Data Schedule, April 4, 1999 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
<TABLE>
<CAPTION>
April 4, 1999 Jan. 3, 1999
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted amount of $100) $ 2,081 $ 2,938
Short-term investments 3,325 3,085
Accounts receivable, net of allowance for doubtful accounts of $152 and $138 1,766 1,437
Inventories 2,476 2,540
Other 430 437
-------- --------
Total current assets 10,078 10,437
Property and equipment, net 1,053 1,191
Property held for sale, net 4,288 4,339
Patents and licensed technology, net 531 544
Other assets 156 137
-------- --------
Total assets $ 16,106 $ 16,648
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,174 $ 2,196
Accounts payable 741 763
Accrued liabilities 1,018 1,130
-------- --------
Total current liabilities 3,933 4,089
-------- --------
Long-term debt 3,854 3,965
Stockholders' equity:
Common stock, $.01 par value, 30,000 shares authorized, 1,978 shares
issued and outstanding 20 20
Additional paid-in capital 33,033 33,033
Accumulated deficit (24,715) (24,438)
Deferred compensation (19) (21)
-------- --------
Total stockholders' equity 8,319 8,594
-------- --------
Total liabilities and stockholders' equity $ 16,106 $ 16,648
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
For the Quarter Ended:
April 4, 1999 March 29, 1998
Net sales $ 2,262 $ 2,367
Cost of sales 971 1,041
------- -------
Gross profit 1,291 1,326
------- -------
Operating expenses:
Selling, general and administrative 1,371 1,535
Product development 228 278
------- -------
1,599 1,813
------- -------
Operating loss (308) (487)
Interest expense 139 154
Interest income (72) (85)
Other income (98) (98)
------- -------
Loss before income taxes (277) (458)
Provision for income taxes -- 3
------- -------
Net loss ($ 277) ($ 461)
======= =======
Basic and diluted loss per share ($ 0.14) ($ 0.23)
======= =======
Shares used in calculating basic and
diluted loss per share 1,978 1,978
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
For the Quarter Ended:
April 4, 1999 March 29, 1998
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($ 277) ($ 461)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 285 265
Imputed interest (5) (7)
Provision for bad debts 14 --
(Increase) decrease in assets:
Accounts receivable (343) 264
Inventories 68 61
Other current assets 7 44
Other assets (19) 45
Increase (decrease) in liabilities:
Accounts payable (22) 201
Accrued liabilities (107) (63)
------- -------
Net cash (used in) provided by operating activities (399) 349
------- -------
Cash Flows From Investing Activities:
Purchases of short-term investments (240) (314)
Purchases of property and equipment (71) (34)
Patent costs (13) (42)
Purchase of marketing agreement -- (30)
------- -------
Net cash used in investing activities (324) (420)
------- -------
Cash Flows From Financing Activities:
Payments on long-term debt (134) (121)
------- -------
Net cash used in financing activities (134) (121)
------- -------
Net decrease in cash and cash equivalents (857) (192)
Cash and Cash Equivalents, Beginning of Period 2,938 1,555
======= =======
Cash and Cash Equivalents, End of Period $ 2,081 $ 1,363
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
SURGICAL LASER TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Summary Financial Information and Results of Operations:
In the opinion of Surgical Laser Technologies, Inc. and Subsidiaries (the
"Company" or "SLT"), the accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and with the regulations of the Securities and Exchange Commission
and contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for the interim periods presented.
Interim Financial Information:
While the Company believes that the disclosures presented are adequate to
prevent misleading information, it is suggested that the unaudited condensed
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes included in the Company's Form 10-K
report for the fiscal year ended January 3, 1999, as filed with the Securities
and Exchange Commission. Interim results for the quarter ended April 4, 1999 are
not necessarily indicative of the results to be expected for the full year.
2. Supplemental Cash Flow Information:
There were no material income taxes paid for the quarters ended April 4, 1999
and March 29, 1998. Interest paid for the quarters ended April 4, 1999 and March
29, 1998 was $139,000 and $154,000, respectively.
3. Basic and Diluted Loss Per Share:
Basic and diluted loss per share have been computed under the guidelines of
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). The Company had common stock options and common stock warrants
outstanding of 377,000 and 461,000 at April 4, 1999 and March 29, 1998,
respectively. The Company also had subordinated debt convertible into 72,000
shares of common stock at April 4, 1999 and March 29, 1998. Due to the Company's
net loss for the quarters ended April 4, 1999 and March 29, 1998, the inclusion
of these common share equivalents would have had an anti-dilutive effect when
calculating diluted earnings per share under SFAS No. 128 and, as a result,
diluted earnings per share was equivalent to basic earnings per share for those
periods.
4. Bank Borrowings:
At April 4, 1999, the Company had a $2,535,000 line of credit agreement with a
bank, which included a $535,000 sub-line for letters of credit. Under its
sub-line, the Company issued a letter of credit in the amount of $389,000 which
replaced the letter of credit issued in 1997 of $453,000 in favor of the
Montgomery County Industrial Development Corporation ("MCIDC") under the terms
of the Mortgage and Security Agreement for the Company's property in Oaks,
Pennsylvania. Additionally, the Company has an outstanding letter of credit for
$17,510 to its lessor in compliance with the lease agreement for the
Montgomeryville, Pennsylvania facility. Other than for these letters of credit,
there were no borrowings under the line during the quarter ended or at April 4,
1999. Borrowings on the line are secured by the Company's accounts receivable
and inventories and bear interest at the bank's prime rate plus 1/2%. The line
expires on May 31, 1999. The Company's line of credit agreement prohibits the
declaration or payment of any dividends or distributions on any of its capital
stock without the prior written consent of the bank
6
<PAGE>
at any time there are outstanding obligations to the bank. The line is subject
to the Company maintaining certain financial covenants, as defined, with which
the Company was in compliance at April 4, 1999.
5. Income Taxes:
No income tax provision was made for the quarter ended April 4, 1999 due to the
net loss incurred. The tax provision for the quarter ended March 29, 1998 was
for state income taxes.
6. Business Segment and Geographic Data:
Effective January 3, 1999, SLT adopted Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. SFAS No. 131 defines operating segments as "components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance".
SLT is engaged primarily in one business segment: the design, development,
manufacture and marketing of laser products and other instruments for medical
applications. SLT's customers are primarily hospitals and medical centers. For
the quarters ended April 4, 1999 and March 29, 1998, SLT did not have material
net sales to any one individual customer.
SLT reported net sales in the following categories (in thousands of dollars):
<TABLE>
<CAPTION>
For the Quarter Ended:
April 4, 1999 March 29, 1998
------------- --------------
<S> <C> <C>
Disposables and accessories $1,596 $1,698
Laser system sales, service and rental 666 669
------ ------
Total net sales $2,262 $2,367
====== ======
</TABLE>
For the quarters ended April 4, 1999 and March 29, 1998, there were no material
net sales attributed to an individual foreign country. Net sales by geographic
area were as follows (in thousands of dollars)
For the Quarter Ended:
April 4, 1999 March 29, 1998
------------- --------------
Domestic $2,068 $1,923
Foreign 194 444
------ ------
$2,262 $2,367
====== ======
7. Inventories:
Inventories at April 4, 1999 and January 3, 1999 were as follows (in
thousands of dollars)
April 4, 1999 January 3, 1999
------------- ---------------
Raw material and work-in-process $1,647 $1,691
Finished goods 829 849
------ ------
$2,476 $2,540
====== ======
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Historically the Company has generated its net sales from positioning its
technology and products across a wide range of surgical specialties. In an
effort to attain more significant growth in sales, the Company redefined its
strategy for growth during 1997 to include a specific focus in the surgical
specialties of Otolaryngology and Head and Neck surgery and Neurosurgery (ENT
and Neurosurgery). In conjunction with this focused strategy, the Company has
entered and will continue to seek to enter into relationships with other
companies to expand the use of the Company's products in surgical specialties
other than ENT and Neurosurgery, and has sought and will continue to seek to
utilize its strengths in supplying other companies with products that draw on
the Company's expertise and competencies. While refocusing its strategy in ENT
and Neurosurgery, the Company will take these other actions in an effort to
enhance sales and to promote continued utilization of its products and services
in those other surgical specialties.
The Company is also taking actions intended to improve its international
customer relationships, consistent with a focus on a more specific surgical
segment. Additionally, as part of this transition, the Company is exploring
opportunities to expand the utilization of its proprietary technologies by
entering into private label relationships with other companies which will market
products encompassing the Company's core competencies under their product
labeling.
Net sales for the quarter ended April 4, 1999 of $2,262,000 decreased $105,000
or 4% from the comparable period in 1998. Net sales of disposables and related
accessories declined $102,000 or 6% in the first quarter of 1999 from the first
quarter of 1998 due to the lower level of Contact Laser Delivery System sales
primarily within the urology market, which were offset, in part, by increases in
sales within the ENT and Neurosurgery markets where the Company is currently
concentrating its sales efforts.
Net sales of Nd:YAG laser systems, service and rentals of $666,000 in the first
quarter of 1999 was relatively consistent with the comparable net sales of
$669,000 in the first quarter of 1998.
Gross profits of $1,291,000 for the quarter ended April 4, 1999 decreased
$35,000 or 3% from the first quarter of 1998. As a percentage of net sales,
gross profit was relatively consistent for the quarters ended April 4, 1999 and
March 29, 1998 at 57% and 56%, respectively.
Operating expenses for the first quarter of 1999 of $1,599,000 decreased by
$214,000 or 12% from the first quarter of 1998. This decrease was due primarily
to personnel and other expense reductions mainly within the sales and marketing
departments for the purpose of bringing expenses more in line with the sales
revenue being generated.
Selling, general and administrative expenses of $1,371,000 in the first quarter
of 1999 decreased $164,000 or 11% from the comparable prior year period.
Reductions in personnel and associated expenses within sales and marketing
accounted for the majority of the reduced spending level.
Product development expenses of $228,000 in the first quarter of 1999 were
$50,000 or 18% lower than the same period in 1998. The lower level of spending
was principally due to a decrease in laser system development consulting
charges.
Other income primarily consisted of facility related income and expense items.
Other income was $98,000 for the quarters ended April 4, 1999 and March 29,
1998.
Net interest expense for the first quarter of 1999 of $67,000 was relatively
consistent with the net interest expense of $69,000 in the first quarter of
1998.
8
<PAGE>
Liquidity and Capital Resources
The Company had cash, cash equivalents and short-term investments of $5,406,000
at April 4, 1999, of which $100,000 was restricted. In addition, the Company
currently has a $2,535,000 credit facility with a bank. The facility includes a
sub-line for letters of credit of $535,000. Other than for the letter of credit
issued in the amount of $389,000 in favor of the Montgomery County Industrial
Development Corporation ("MCIDC") as a condition of the Mortgage and Security
Agreement for the Company's property in Oaks, Pennsylvania, and one other minor
letter of credit, there were no borrowings outstanding under the line of credit.
Borrowings under the line are secured by the Company's accounts receivable and
inventories. The line is subject to the Company maintaining certain financial
covenants, as defined, with which the Company was in compliance at April 4,
1999. This facility expires on May 31, 1999.
Net cash used in operating activities was $399,000 in the first quarter of 1999
compared to cash provided by operating activities of $349,000 in the comparable
period in 1998. The comparative decrease in the net loss was more than offset by
a comparatively higher change in the level of accounts receivable due to the
timing of sales, other assets and liability payments.
Net cash used in investing activities was $324,000 in the first quarter of 1999,
compared to cash used in investing activities of $420,000 in the first quarter
of 1998. The comparable decrease in cash used in investing activities was due
principally to the lower purchase amount of short-term investments in the first
quarter of 1999 as compared to the first quarter of 1998.
Net cash used in financing activities was $134,000 and $121,000 in the first
quarter of 1999 and 1998, respectively.
Management believes the Company's current cash position and available line of
credit will be sufficient to fund operations and meet commitments for long-term
debt, other commitments and contingencies and capital expenditures.
Management believes that inflation has not had a material effect on operations
for the periods presented.
The Company has analyzed its information technology systems for the "Year 2000"
compliance issues. Management believes that the "Year 2000" issue related to the
Company's hardware and software programs are not likely to result in any
material adverse disruptions in the Company's computer systems or its internal
business operations. The Company has purchased the latest version of its
operating software package to provide remediation for the "Year 2000" issue. The
cost of this new software was $8,000, and testing and implementation is to be
completed by the third quarter of 1999.
The Company has analyzed and determined that the "Year 2000" issue related to
its non-information technology, such as its telephone and security system, are
not likely to result in any material disruption of its business operations.
The Company is currently in the process of evaluating its relationships with
third parties, such as banks, service providers and suppliers, with which the
Company has a direct and material relationship to determine whether they are
"Year 2000" compliant. The responses received to date from such third parties to
inquiries made by the Company indicate that these third parties either are or
expect to be compliant by the Year 2000.
Even assuming that all material third parties confirm that they are or expect to
be "Year 2000" compliant by December 31, 1999, it is not possible to state with
certainty that such parties will be so compliant, or that the operations of such
third parties will not be materially impacted by other parties with whom they
themselves have a material relationship, and who fail to timely become "Year
2000" compliant. Consequently, it is not possible to predict whether or to what
extent the "Year 2000" issues may have an adverse material impact on the Company
as a result of the impact of this issue on the operations of the third parties
with whom the Company has a material relationship. For example, the failure to
be "Year 2000" compliant by a bank with whom the Company has a material banking
relationship could cause significant disruption in the Company's ability to make
payments, deposit funds and make investments, which could have a material
adverse effect on the Company's financial condition.
9
<PAGE>
The Company has not established a contingency plan in case of failure of its
information technology systems since it expects to have its new software system
in place by the third quarter of 1999. The Company will continually monitor its
relationships with banks, service providers and suppliers to ensure they expect
to be "Year 2000" compliant. If the Company learns that one of these third
parties will not be "Year 2000" compliant, the Company's contingency plan would
include replacing such third party.
Risk Factors
For information regarding certain risk factors that could cause actual results
to differ materially from those suggested in forward-looking statements
contained herein or otherwise made from time to time by the Company, reference
is made to the Company's Form 10-K, Item 7, "Risk Factors," for the fiscal year
ended January 3, 1999, which is incorporated herein by reference. The risk
factors described in such report continue to be applicable at April 4, 1999.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
For information regarding certain pending legal matters, reference is made to
the Company's Form 10-K, Item 3, for the fiscal year ended January 3, 1999.
On April 29, 1999, the Company entered a Settlement and Release Agreement with
Trimedyne, Inc. and Royice Everett, MD. Trimedyne had brought a patent
infringement action against the Company in January 1995. After a series of
summary judgments in the Company's favor and an appeal by Trimedyne, the
appellate court affirmed the trial court's grant of summary judgment that the
Company's contact probes do not infringe any Trimedyne patents. The only issue
remaining in the case was whether a single SLT product, the SFB 1.0 Probe,
infringed a single Trimedyne patent, the 5,380,317 patent.
Given that the SFB Probe is used primarily in urological applications and the
Company's sales in urology have been declining, the Company determined to settle
the suit rather than incur prohibitive costs of litigation that would not be
matched by the benefits from the action, even if concluded successfully. The
settlement provides, among its other terms, for a mutual release of claims, a
license to the Company in five of Trimedyne's patents, a covenant by Trimedyne
not to sue the Company over the SFB Probe, an immaterial payment by the Company
and a royalty going forward on Company sales of the SFB Probe. While the Company
does not admit infringement of the `317 patent, it has acknowledged its
validity.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits: Exhibit 27.1 - Financial Data Schedule, April 4, 1999
b. Reports on Form 8-K: none
10
<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 thereunto duly authorized.
SURGICAL LASER TECHNOLOGIES, INC.
Date: May 5, 1999 By /s/ Michael R. Stewart
------------------------------
Michael R. Stewart
Vice President, Finance and
Chief Financial Officer
Signing of behalf of the
Registrant and as principal
financial officer.
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT APRIL 4, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE QUARTER ENDED APRIL 4, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> APR-04-1999
<CASH> 2,081
<SECURITIES> 3,325
<RECEIVABLES> 1,918
<ALLOWANCES> (152)
<INVENTORY> 2,476
<CURRENT-ASSETS> 10,078
<PP&E> 13,303
<DEPRECIATION> (7,962)
<TOTAL-ASSETS> 16,106
<CURRENT-LIABILITIES> 3,933
<BONDS> 6,028
0
0
<COMMON> 20
<OTHER-SE> 8,299
<TOTAL-LIABILITY-AND-EQUITY> 16,106
<SALES> 2,262
<TOTAL-REVENUES> 2,262
<CGS> 971
<TOTAL-COSTS> 971
<OTHER-EXPENSES> 1,540
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (277)
<INCOME-TAX> 0
<INCOME-CONTINUING> (277)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (277)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
