Filed by Bowne Pure Compliance
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2008
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o |
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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 001-10382
SYNERGETICS USA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-5715943 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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3845 Corporate Centre Drive |
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OFallon, Missouri
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63368 |
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(Address of principal executive offices)
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(Zip Code) |
(636) 939-5100
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of the issuers common stock, $0.001 value per share, as of
December 1, 2008 was 24,440,861 shares.
SYNERGETICS USA, INC.
Index to Form 10-Q
2
Part I Financial Information
Item 1 Unaudited Condensed Consolidated Financial Statements
Synergetics USA, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of October 29, 2008 (Unaudited) and July 31, 2008
(Dollars in thousands, except per share information)
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October 29, 2008 |
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July 31, 2008 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
446 |
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$ |
500 |
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Accounts receivable, net of allowance for
doubtful accounts of $239 and $250,
respectively |
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8,187 |
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8,593 |
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Inventories |
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15,897 |
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14,568 |
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Prepaid expenses |
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494 |
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361 |
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Deferred income taxes |
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530 |
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527 |
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Total current assets |
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25,554 |
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24,549 |
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Property and equipment, net |
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8,043 |
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8,159 |
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Goodwill |
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10,690 |
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10,690 |
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Other intangible assets, net |
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13,744 |
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13,946 |
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Patents, net |
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1,038 |
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991 |
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Deferred expenses |
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6 |
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Cash value of life insurance |
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55 |
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55 |
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Total assets |
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$ |
59,124 |
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$ |
58,396 |
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Liabilities and Stockholders Equity |
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Current Liabilities |
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Lines-of-credit |
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$ |
4,452 |
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$ |
3,287 |
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Current maturities of long-term debt |
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1,831 |
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1,823 |
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Current maturities of revenue bonds payable |
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249 |
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249 |
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Accounts payable |
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2,515 |
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2,776 |
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Accrued expenses |
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2,749 |
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2,659 |
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Income taxes payable |
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489 |
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1,071 |
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Total current liabilities |
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12,285 |
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11,865 |
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Long-Term Liabilities |
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Long-term debt, less current maturities |
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4,048 |
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4,309 |
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Revenue bonds payable, less current maturities |
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3,601 |
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3,642 |
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Deferred income taxes |
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2,122 |
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2,223 |
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Total long-term liabilities |
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9,771 |
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10,174 |
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Total liabilities |
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22,056 |
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22,039 |
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Commitments and contingencies (Note 6) |
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Stockholders Equity |
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Common stock at October 29, 2008 and July 31,
2008, $.001 par value, 50,000,000 shares
authorized; 24,440,861 and 24,354,295 shares
issued and outstanding, respectively |
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24 |
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24 |
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Additional paid-in capital |
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24,392 |
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24,342 |
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Retained earnings |
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12,652 |
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11,991 |
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Total stockholders equity |
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37,068 |
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36,357 |
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Total liabilities and stockholders equity |
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$ |
59,124 |
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$ |
58,396 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
3
Synergetics USA, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
Three Months Ended October 29, 2008 and October 29, 2007
(Dollars in thousands, except per share information)
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Three Months Ended |
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Three Months Ended |
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October 29, 2008 |
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October 29, 2007 |
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Net sales |
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$ |
12,246 |
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$ |
10,469 |
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Cost of sales |
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5,166 |
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3,944 |
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Gross profit |
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7,080 |
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6,525 |
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Operating expenses |
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Research and development |
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652 |
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449 |
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Sales and marketing expenses |
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3,244 |
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3,051 |
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General and administrative |
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2,021 |
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2,240 |
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5,917 |
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5,740 |
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Operating income |
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1,163 |
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785 |
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Other income (expense) |
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Interest income |
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2 |
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1 |
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Interest expense |
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(181 |
) |
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(260 |
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Miscellaneous |
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3 |
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20 |
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(176 |
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(239 |
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Income before provision for income taxes |
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987 |
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546 |
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Provision for income taxes |
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326 |
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149 |
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Net income |
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$ |
661 |
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$ |
397 |
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Earnings per share: |
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Basic |
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$ |
0.03 |
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$ |
0.02 |
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Diluted |
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$ |
0.03 |
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$ |
0.02 |
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Basic weighted-average common shares outstanding |
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24,440,861 |
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24,296,309 |
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Diluted weighted-average common shares outstanding |
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24,578,342 |
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24,433,288 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
4
Synergetics USA, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended October 29, 2008 and October 29, 2007
(Dollars in thousands)
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Three Months Ended |
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Three Months Ended |
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October 29, 2008 |
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October 29, 2007 |
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Cash Flows from Operating Activities |
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Net income |
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$ |
661 |
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$ |
397 |
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Adjustments to reconcile net income to net cash
provided by (used in) operating activities |
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Depreciation and amortization |
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466 |
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485 |
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Provision for doubtful accounts receivable |
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(11 |
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86 |
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Stock-based compensation |
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50 |
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42 |
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Deferred income taxes |
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(104 |
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(72 |
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Change in assets and liabilities |
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(Increase) decrease in: |
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Accounts receivable |
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417 |
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872 |
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Income taxes receivable |
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3 |
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Inventories |
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(1,329 |
) |
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(535 |
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Prepaid expenses |
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(133 |
) |
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(127 |
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(Decrease) increase in: |
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Accounts payable |
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(261 |
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(1,260 |
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Accrued expenses |
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90 |
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47 |
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Income taxes payable |
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(582 |
) |
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224 |
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Net cash provided by (used in) operating
activities |
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(736 |
) |
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162 |
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Cash Flows from Investing Activities |
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Purchase of property and equipment |
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(127 |
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(272 |
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Acquisition of patents and other intangibles |
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(62 |
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(43 |
) |
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Net cash used in investing activities |
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(189 |
) |
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(315 |
) |
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Cash Flows from Financing Activities |
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Excess of outstanding checks over bank balance |
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(382 |
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Net borrowings on lines-of-credit |
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1,165 |
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1,042 |
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Principal payments on revenue bonds payable |
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(41 |
) |
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(62 |
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Principal payments on long-term debt |
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(123 |
) |
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(330 |
) |
Payments on debt incurred for acquisition of trademark |
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(130 |
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(122 |
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Net cash provided by financing activities |
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871 |
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146 |
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Net decrease in cash and cash equivalents |
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(54 |
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(7 |
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Cash and cash equivalents |
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Beginning |
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500 |
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167 |
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Ending |
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$ |
446 |
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$ |
160 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Synergetics USA, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Tabular information reflects dollars in thousands, except share and per share information)
Note 1. General
Nature of business: Synergetics USA, Inc. (Synergetics USA or the Company) is a Delaware
corporation incorporated on June 2, 2005 in connection with the merger of Synergetics, Inc.
(Synergetics) and Valley Forge Scientific Corp. (Valley Forge) and the subsequent
reincorporation of Valley Forge (the predecessor to Synergetics USA) in Delaware. Synergetics USA,
Inc. is a leading medical device company. Through continuous improvement and development of our
people, our mission is to design, manufacture and market innovative microsurgical instruments and
consumables of the highest quality in order to assist and enable microsurgeons around the world to
provide a better quality of life for their patients. The Companys primary focus is on the
microsurgical disciplines of ophthalmology and neurosurgery. Our distribution channels include a
combination of direct and independent sales organizations and important strategic alliances with
market leaders. The Company is located in OFallon, Missouri and Philadelphia, Pennsylvania. During
the ordinary course of its business, the Company grants unsecured credit to its domestic and
international customers.
Reporting period: The Companys year end is July 31 of each calendar year. For interim
periods, the Company uses a 21 business day per month reporting cycle with the exception of leap
year when the extra shipping day is included in the second quarter. As such, the information
presented in the Form 10-Q is for the three month periods August 1, 2008 through October 29, 2008
and August 1, 2007 through October 29, 2007, respectively, and each three month period contains 63
business days.
Basis of presentation: The unaudited condensed consolidated financial statements include the
accounts of Synergetics USA, Inc., and its wholly owned subsidiaries: Synergetics, Synergetics
Development Company, LLC, Synergetics DE, Inc. and Synergetics IP, Inc. All significant
intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring items)
considered necessary for a fair presentation have been included. Operating results for the three
months ended October 29, 2008 are not necessarily indicative of the results that may be expected
for the fiscal year ending July 31, 2009. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements of the
Company for the year ended July 31, 2008, and notes thereto filed with the Companys Annual Report
on Form 10-K filed with the Securities and Exchange Commission on October 14, 2008 (the Annual
Report).
Note 2. Summary of Significant Accounting Policies
The Companys significant accounting policies are disclosed in the Annual Report. In the first
three months of fiscal 2008, no significant accounting policies were changed.
Reclassifications: Certain reclassifications have been made to the prior years quarterly
and annual financial statements to conform with the current quarters presentation. Operating
income and net income were not affected.
6
Note 3. Distribution Agreements
The Company sells a portion of its electrosurgical generators and accessories to a U.S.-based
national and international distributor as described below:
Codman and Shurtleff, Inc. (Codman)
In the neurosurgery market, the bipolar electrosurgical system manufactured by Valley Forge
prior to the merger has been marketed for over 25 years through a series of distribution agreements
with Codman. On January 9, 2006, the Company executed a three-year distribution agreement with
Codman for the continued distribution by Codman of the third generation electrosurgical generator,
certain other generators, related disposables and accessories. In addition, the Company entered
into a three-year license agreement, which provides for the continued licensing of the Companys
Malis® trademark to Codman for use with certain Codman products, including those covered
by the distribution agreement. Both agreements expire on December 31, 2008.
Net sales to Codman amounted to approximately $902,000 for the three month period ended
October 29, 2008, and approximately $1,314,000 for the three month period ended October 29, 2007.
This represented 7.4 and 12.6 percent of net sales for the three months ended October 29, 2008 and
October 29, 2007, respectively.
Note 4. Stock-Based Compensation
Stock Option Plans
The following table provides information about awards outstanding at October 29, 2008:
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Three Months Ended October 29, 2008 |
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Weighted- |
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Average |
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Weighted- |
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Exercise |
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Average |
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Shares |
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Price |
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Fair Value |
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Options outstanding, beginning of period |
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436,735 |
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$ |
2.23 |
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$ |
1.84 |
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For the period from August 1, 2008
through October 29, 2008: |
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Granted |
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Forfeited |
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Exercised |
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Options outstanding, end of period |
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436,735 |
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$ |
2.23 |
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$ |
1.84 |
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Options exercisable, end of period |
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389,797 |
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$ |
2.50 |
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$ |
2.06 |
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There were 40,000 options granted during the second quarter of fiscal 2008 to the independent
directors. These options vest pro-ratably on a quarterly basis over the next year of service on
the Board. Therefore, the Company recorded $25,000 of compensation expense for the three months
ended October 29, 2008, with respect to these options. The Company recorded additional
compensation expense of $2,000 for options granted in prior periods for the three months ended
October 29, 2008. The fair value of options granted during the prior fiscal year was determined at
the date of the grant using a Black-Sholes options-pricing model and the following assumptions:
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Expected average risk-free interest rate |
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3.5 |
% |
Expected average life (in years) |
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5 |
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Expected volatility |
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69.2 |
% |
Expected dividend yield |
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0.0 |
% |
The expected average risk-free rate is based on the 5 year U.S. treasury yield curve in December of
2007. The expected average life represents the period of time that the options granted are
expected to be outstanding giving consideration to vesting schedules, historical exercise and
forfeiture patterns. Expected
volatility is based on historical volatilities of Synergetics USA, Inc.s common stock. The
expected dividend yield is based on historical information and managements plan.
7
Restricted Stock Plans
Under our Amended and Restated Synergetics USA, Inc. 2001 Stock Plan (2001 Plan), our common
stock may be granted at no cost to certain employees and consultants of the Company. Certain plan
participants are entitled to cash dividends and voting rights for their respective shares.
Restrictions limit the sale or transfer of these shares during a vesting period whereby the
restrictions lapse either pro-ratably over a five year vesting period or at the end of the fifth
year. These shares also vest upon a change of control event. Upon issuance of stock under the
2001 Plan, unearned compensation equivalent to the market value at the date of the grant is charged
to stockholders equity and subsequently amortized to expense over the applicable restriction
period. During the three months ended October 29, 2008, 86,566 shares were granted under the
restricted stock plan, and compensation expense associated with all outstanding shares of
restricted stock was $23,000 for the three months ended October 29, 2008. Compensation expense
related to shares granted in previous years was $10,000. As of October 29, 2008, there was
approximately $382,000 of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Companys 2001 Plan. The cost is expected to be
recognized over a weighted-average period of five years.
Note 5. Supplemental Balance Sheet Information
Inventories
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|
October 29, 2008 |
|
|
July 31, 2008 |
|
Raw material and component parts |
|
$ |
5,931 |
|
|
$ |
5,379 |
|
Work-in-progress |
|
|
3,528 |
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|
2,772 |
|
Finished goods |
|
|
6,438 |
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|
|
6,417 |
|
|
|
|
|
|
|
|
|
|
$ |
15,897 |
|
|
$ |
14,568 |
|
|
|
|
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Property and equipment
|
|
|
|
|
|
|
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|
October 29, 2008 |
|
|
July 31, 2008 |
|
Land |
|
$ |
730 |
|
|
$ |
730 |
|
Building and improvements |
|
|
5,720 |
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|
5,720 |
|
Machinery and equipment |
|
|
4,992 |
|
|
|
4,959 |
|
Furniture and fixtures |
|
|
692 |
|
|
|
680 |
|
Software |
|
|
333 |
|
|
|
332 |
|
Construction in process |
|
|
111 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
12,578 |
|
|
|
12,451 |
|
Less accumulated depreciation |
|
|
4,535 |
|
|
|
4,292 |
|
|
|
|
|
|
|
|
|
|
$ |
8,043 |
|
|
$ |
8,159 |
|
|
|
|
|
|
|
|
Other intangible assets
Information regarding the Companys other intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Value |
|
|
Amortization |
|
|
Net |
|
|
|
October 29, 2008 |
|
Proprietary know-how |
|
$ |
4,057 |
|
|
$ |
1,086 |
|
|
$ |
2,971 |
|
Trademark |
|
|
5,923 |
|
|
|
|
|
|
|
5,923 |
|
Licensing agreements |
|
|
5,834 |
|
|
|
984 |
|
|
|
4,850 |
|
Patents |
|
|
1,385 |
|
|
|
347 |
|
|
|
1,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,199 |
|
|
$ |
2,417 |
|
|
$ |
14,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2008 |
|
Proprietary know-how |
|
$ |
4,057 |
|
|
$ |
1,017 |
|
|
$ |
3,040 |
|
Trademark |
|
|
5,923 |
|
|
|
|
|
|
|
5,923 |
|
Licensing agreements |
|
|
5,834 |
|
|
|
851 |
|
|
|
4,983 |
|
Patents |
|
|
1,315 |
|
|
|
324 |
|
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,129 |
|
|
$ |
2,192 |
|
|
$ |
14,937 |
|
|
|
|
|
|
|
|
|
|
|
8
Goodwill of $10,690,000 and proprietary know-how of $4,057,000 are a result of the reverse
merger transaction completed on September 21, 2005. Proprietary know-how consists of the patented
technology which is included in one of the Companys core products, bipolar electrosurgical
generators. As the proprietary technology is a distinguishing feature of the Companys products,
it represented a valuable intangible asset.
Estimated amortization expense on other intangibles for the remaining nine months of the
fiscal year ending July 31, 2009 and the next four years thereafter is as follows:
|
|
|
|
|
Periods Ending July 31: |
|
Amount |
|
Fiscal Year 2009 (remaining 9 months) |
|
$ |
653 |
|
Fiscal Year 2010 |
|
|
842 |
|
Fiscal Year 2011 |
|
|
619 |
|
Fiscal Year 2012 |
|
|
565 |
|
Fiscal Year 2013 |
|
|
563 |
|
Amortization expense for the three months ended October 29, 2008 was $222,000.
Pledged assets; short and long-term debt (excluding revenue bonds payable)
Short-term debt as of October 29, 2008 and July 31, 2008 consisted of the following:
Revolving Credit Facility: The Company has a credit facility with Regions Bank (Regions)
which allows for borrowings of up to $9.5 million with interest at an interest rate based on their
prime lending rate or LIBOR plus 2.25 percent and adjusting each quarter based upon our leverage
ratio. As of October 29, 2008, interest under the facility is charged at prime less 0.75 percent.
The unused portion of the facility is charged at a rate of 0.20 percent. Borrowings under this
facility at October 29, 2008 were $4.5 million. Outstanding amounts are collateralized by the
Companys domestic receivables and inventory. This credit facility expired on December 1, 2008. On
December 1, 2008, the Company amended its Revolving Credit Facility to extend the termination date
through November 30, 2009. As a condition of the extension, Regions removed the Companys option
to borrow at a rate based on their prime lending rate. The Companys borrowings are now priced at
an interest rate of LIBOR plus 2.00 percent and adjusting each quarter based upon our leverage
ratio.
The facility has two financial covenants: a maximum leverage ratio of 3.75 times and a minimum
fixed charge coverage ratio of 1.1 times. As of October 29, 2008, the leverage ratio was 1.90 times
and the minimum fixed charge coverage ratio was 2.13 times. Current collateral availability under
the line was approximately $3.9 million. The facility restricts the payment of dividends if,
following the distribution, the fixed charge coverage ratio would fall below the required minimum.
Non-U.S. Receivables Revolving Credit Facility: The Company has a credit facility with Regions
which allows for borrowings of up to $2.5 million with an interest rate based on their prime
lending rate. The unused portion of the facility is not charged a fee. There were no borrowings
under this facility at October 29, 2008. Outstanding amounts are collateralized by the Companys
non-U.S. receivables. The line matures on June 4, 2009 and has no financial covenants. Current
collateral availability under the line was approximately $1.7 million at October 29, 2008.
9
Equipment Line of Credit: On July 22, 2008, the Company amended this line of credit. The
amendment consolidated all previous outstanding balances into a term note in the amount of
$1,477,000 with monthly payments of approximately $41,000 and extended the equipment line of
credit. The new consolidated note has a maturity date of July 22, 2011. Under this amended credit
facility, the Company may borrow up to $1.0 million, with interest at Regions prime lending rate.
The unused portion of the facility is not charged a fee. There were no borrowings under this
facility as of October 29, 2008. The equipment line of credit has a maturity date of July 22, 2009.
Long-term debt as of October 29, 2008 and July 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
October 29, |
|
|
July 31, |
|
|
|
2008 |
|
|
2008 |
|
Note payable to bank, due in monthly
installments of $41,022 beginning August
2008 plus interest at a rate of 5.0
percent, remaining balance due July 31,
2011, collateralized by substantially all
assets of the Company |
|
$ |
1,354 |
|
|
$ |
1,477 |
|
Note payable to the estate of the late Dr.
Leonard I. Malis, due in quarterly
installments of $159,904 which includes
interest at an imputed rate of 6.00
percent, remaining balance of $2,078,752,
including contractual interest payments,
due December 2011, collateralized by the
Malis® trademark |
|
|
1,876 |
|
|
|
2,006 |
|
Settlement obligation to Iridex
Corporation, due in annual installments of
$800,000 which includes interest at an
imputed rate of 8.00 percent, remaining
balance of $3,200,000 including the
effects of imputing interest, due April
15, 2012 |
|
|
2,649 |
|
|
|
2,649 |
|
|
|
|
|
|
|
|
|
|
|
5,879 |
|
|
|
6,132 |
|
Less current maturities |
|
|
1,831 |
|
|
|
1,823 |
|
|
|
|
|
|
|
|
Long-term portion |
|
$ |
4,048 |
|
|
$ |
4,309 |
|
|
|
|
|
|
|
|
Note 6. Commitments and Contingencies
The Company entered into three-year employment agreements with its Chief Operating Officer and
its Chief Scientific Officer, which expired on September 22, 2008. On August 1, 2007, the Company
entered into a three-year employment agreement with its Executive Vice President and Chief
Financial Officer. In the event any such executive officer is terminated without cause, or if such
executive officer resigns for good reason, such executive officer shall be entitled to her base
salary and health care benefits for fifteen additional months.
On November 8, 2007, the Company entered into a letter agreement with its Executive Vice
President of Sales and Marketing. In the event of termination after a change in control, the
Company shall pay the Executive Vice President of Sales and Marketing his base salary for one year,
and all shares of restricted common stock shall vest.
On July 31, 2008, the Companys Board of Directors formally accepted the resignation of Gregg
Scheller who was the President, Chief Executive Officer and Chairman of the Board. The Company has
been interviewing for a successor to Mr. Scheller. The Company believes the non-compete covenant
contained in Mr. Schellers employment agreement survives for a period of two years and the
non-solicitation covenant survives for a period of one year.
Various claims, incidental to the ordinary course of business, are pending against the
Company. In the opinion of management, after consultation with legal counsel, resolution of these
matters is not expected to have a material effect on the accompanying financial statements.
The Company is subject to regulatory requirements throughout the world. In the normal course
of business, these regulatory agencies may require companies in the medical industry to change
their products or operating procedures, which could affect the Company. The Company regularly
incurs expenses to comply with these regulations and may be required to incur additional expenses.
Management is not able to
estimate any additional expenditure outside the normal course of operations which will be
incurred by the Company in future periods in order to comply with these regulations.
10
Note 7. Entity Wide Information
The following tables present the entity-wide disclosures for net sales:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 29, |
|
|
October 29, |
|
|
|
2008 |
|
|
2007 |
|
Product Line: |
|
|
|
|
|
|
|
|
Ophthalmic |
|
$ |
7,384 |
|
|
$ |
6,365 |
|
Neurosurgery |
|
|
2,953 |
|
|
|
2,561 |
|
OEM (Codman, Stryker and Iridex) |
|
|
1,782 |
|
|
|
1,364 |
|
Other (ENT and Dental) |
|
|
127 |
|
|
|
179 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,246 |
|
|
$ |
10,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Region Specific: |
|
|
|
|
|
|
|
|
Domestic |
|
$ |
8,746 |
|
|
$ |
7,719 |
|
International |
|
|
3,500 |
|
|
|
2,750 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,246 |
|
|
$ |
10,469 |
|
|
|
|
|
|
|
|
Revenues are attributed to countries based upon the location of end-user customers or
distributors.
Note 8. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS 157) which
related to the definition of fair value, the methods used to estimate fair value and the
requirement of expanded disclosures about estimates of fair value. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. In February 2008, the FASB issued FASB Staff Positions (FSP) FSP 157-1
and FSP 157-2. FSP 157-1 amends SFAS No. 157 to exclude FASB Statement No. 13, Accounting for
Leases and other accounting pronouncements that address fair value measurements of leases from the
provision of SFAS 157. FSP 157-2 delays the effective date of SFAS 157 for most non-financial
assets and non-financial liabilities to fiscal years beginning after November 15, 2008. In October
2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. FSP No. 157-3 clarifies the application of SFAS No. 157 in an
inactive market and illustrates how an entity would determine fair value when the market for a
financial asset is not active. SFAS No. 157 will be adopted by the Company on August 1, 2009. At
this time, we have not completed our review and assessment of the impact of adoption of SFAS No.
157.
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations (SFAS 141 (R)),
which replaced SFAS No. 141, Business Combinations. SFAS 141 (R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, any non-controlling interests in the acquiree
and the goodwill acquired. SFAS 141 (R) also establishes disclosure requirements that will enable
users of the financial statements to better evaluate the nature and financial effects of the
business combination. SFAS No. 141 (R) is effective as of the beginning of an entitys fiscal year
that begins after December 15, 2008 and will be applied if we consummate an acquisition.
In December 2007, the FASB issued SFAS No. 160, Non-controlling interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting
and reporting standards for ownership interest in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the non-controlling
interest, changes in a parents ownership interest and the valuation of retained non-controlling
equity investments when a subsidiary is deconsolidated. The statement also establishes reporting
standards that require the provision
of sufficient disclosures that clearly identify and distinguish between the interests of the
parent and the interest of the non-controlling owners. SFAS 160 is effective for fiscal years as
of the beginning of an entitys fiscal year that begins after December 15, 2008. We have not
completed our evaluation of the potential impact, if any, of the adoption of SFAS 160 on our
consolidated financial position, results of operations and cash flows.
11
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and provides a
consistent framework, or hierarchy, for selecting the accounting principles to be used in preparing
financial statements that are presented in conformity with U.S. generally accepted accounting
principles for nongovernmental entities. The hierarchy of accounting principles within SFAS 162 is
consistent with that previously defined in the AICPA Statement on Auditing Standards (SAS)
No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
(SAS 69). SFAS 162 is effective 60 days following the United States Securities and Exchange
Commissions approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company has previously utilized the guidance within SAS 69, and, therefore, we do
not expect the adoption of SFAS 162 to have a material effect on our financial statements.
In May 2008, FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion. The FSP required entities with cash settled convertibles to
bifurcate the securities into a debt component and an equity component and accrete the debt
component to par over the expected life of the convertible. Early adoption will not be permitted,
and the FSP must be applied retrospectively to all instruments. We have not completed our
evaluation of the potential impact, if any, of the adoption of FSP APB 14-1 on our consolidated
financial position, results of operations and cash flows.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share Based Payment Transactions are Participated Securities. This FSP states that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods within those years.
Upon adoption, a company is required to retrospectively adjust its earnings per share data
(including any amounts related to interim periods, summaries of earnings and selected financial
data) to conform with the provisions in this FSP. Earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of adoption of FSP EITF 03-6-1 on our
consolidated financial position, results of operations and cash flows.
We have reviewed all other recently issued, but not yet effective, accounting pronouncements
and do not believe any such pronouncements will have a material impact on our financial statements.
12
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act), provide a safe harbor for forward-looking
statements made by or on behalf of the Company. The Company and its representatives may from time
to time make written or oral statements that are forward-looking, including statements contained
in this report and other filings with the Securities and Exchange Commission (SEC) and in our
reports to stockholders. In some cases forward-looking statements can be identified by words such
as believe, expect, anticipate, plan, potential, continue or similar expressions. Such
forward-looking statements include risks and uncertainties and there are important factors that
could cause actual results to differ materially from those expressed or implied by such
forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A,
Risk Factors section of the Companys Form 10-K for the fiscal year ended July 31, 2008.
Although we believe the expectations reflected in our forward-looking statements are based
upon reasonable assumptions, it is not possible to foresee or identify all factors that could have
a material effect on the future financial performance of the Company. The forward-looking
statements in this report are made on the basis of managements assumptions and analyses, as of the
time the statements are made, in light of their experience and perception of historical conditions,
expected future developments and other factors believed to be appropriate under the circumstances.
In addition, certain market data and other statistical information used throughout this report
are based on independent industry publications. Although we believe these sources to be reliable,
we have not independently verified the information and cannot guarantee the accuracy and
completeness of such sources.
Except as otherwise required by the federal securities laws, we disclaim any obligation or
undertaking to publicly release any updates or revisions to any forward-looking statement contained
in this quarterly report on Form 10-Q and the information incorporated by reference in this report
to reflect any change in our expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
Overview
Synergetics USA, Inc. (Synergetics USA or the Company) is a leading medical device
company. Through continuous improvement and development of our people, our mission is to design,
manufacture and market innovative microsurgical instruments and consumables of the highest quality
in order to assist and enable microsurgeons around the world to provide a better quality of life
for their patients. The Companys primary focus is on the microsurgical disciplines of
ophthalmology and neurosurgery. Our distribution channels include a combination of direct and
independent sales organizations and important strategic alliances with market leaders. The
Companys product lines focus upon precision engineered, microsurgical, hand-held instruments and
the microscopic delivery of laser energy, ultrasound, electrosurgery, illumination and irrigation,
often delivered in multiple combinations. Entity wide information is included in Note 7 to the
unaudited condensed consolidated financial statements.
The Company is a Delaware corporation incorporated on June 2, 2005 in connection with the
reverse merger of Synergetics, Inc. (Synergetics) and Valley Forge Scientific Corp. (Valley
Forge). Synergetics was founded in 1991. Valley Forge was incorporated in 1980 and became a
publicly-held company in November 1989. Prior to the merger of Synergetics and Valley Forge, Valley
Forges common stock was listed on The NASDAQ Small Cap Market (now known as The NASDAQ Capital
Market) and the Boston Stock Exchange under the ticker symbol VLFG. On September 21, 2005,
Synergetics Acquisition Corporation, a wholly-owned Missouri subsidiary of Valley Forge, merged
with and into Synergetics, and Synergetics thereby became a wholly-owned subsidiary of Valley
Forge. On September 22, 2005, Valley Forge reincorporated from a Pennsylvania corporation to a
Delaware
corporation and changed its name to Synergetics USA, Inc. Upon consummation of the merger, the
Companys securities began trading on The NASDAQ Capital Market under the ticker symbol SURG, and
its shares were voluntarily delisted from the Boston Stock Exchange.
13
Revenues from our ophthalmic products constituted 60.3 percent and 56.0 percent of our total
revenues for the three months ended October 29, 2008, and for the fiscal year ended July 31, 2008,
respectively. Revenues from our neurosurgical products represented 24.1 percent and 25.8 percent
for the three months ended October 29, 2008, and for the fiscal year ended July 31, 2008,
respectively. Revenues from our Original Equipment Manufacturer (OEM) relationships represented
14.6 percent and 16.7 percent of our total revenues for the three months ended October 29, 2008,
and the fiscal year ended July 31, 2008, respectively. In addition, other revenue was 1.0 percent
of our total revenues for the three months ended October 29, 2008, and 1.5 percent of our total
revenues for the fiscal year ended July 31, 2008.
International revenues of $3.5 million constituted 28.6 percent of our total revenues for the
three months ended October 29, 2008, as compared to 28.4 percent as of the fiscal year ended July
31, 2008. We expect that the relative revenue contribution of our international sales will continue
to rise for the remainder of fiscal 2009 and fiscal 2010 as a result of our continued efforts to
expand our international distribution and direct sales force.
The Company initially engineered and produced prototype instruments designed to assist retinal
surgeons in treating acute subretinal pathologies such as histoplasmosis and age-related macular
degeneration. The Company developed a number of specialized lines of finely engineered
microsurgical instruments, which today have grown to comprise a product catalogue of over 1,400
retinal surgical items including scissors, fiberoptics, cannulas, forceps and other reusable and
disposable surgical instruments.
The Company has an integrated neurosurgical product line which includes the Omni®
ultrasonic aspirator, a Malis® electrosurgical generator and precision neurosurgical
instruments. Our neurosurgery product catalogue consists of over 300 neurosurgical items including
energy source devices, disposable and reusable instruments and other disposable accessories.
The primary use of the Companys Omni® ultrasonic aspirator in neurosurgery is
tumor removal. The Company distributes the Omni® control module, handpieces and
accessory tips in the United States, Canada, Australia, New Zealand, a portion of Latin and South
Americas and all but two countries in Europe, Spain and Portugal. The control module and handpieces
are manufactured by Miwatec Co., Ltd., a wholly-owned subsidiary of Mutoh Co. Ltd. of Japan. The
accessory tips are manufactured by the Company. The Omni® system uses ultrasonic waves
to cause vibration of a tip that emulsifies bone and tissue for removal and then may utilize
suction to aspirate these bone and tissue fragments. The Omni® system is unique in its
ability to cause the tip to oscillate torsionally allowing the surgeon to remove bone, a feature
that is a safer alternative to a rotating drill in removing bone in or near critical anatomical
structures in intracranial and spine surgery. The tips and disposable packs are manufactured at the
Companys facility in OFallon, Missouri.
In intracranial neurosurgery, a bipolar electrosurgical system is the modality of choice for
tissue coagulation as compared to monopolar products. The popularity of the bipolar system is
largely due to the efforts of the late Dr. Leonard I. Malis, who designed and developed the first
commercial bipolar coagulator in 1955 and pioneered the use of bipolar electrosurgery for use in
the brain.
The Companys sales of its core neurosurgical products grew 15.3 percent during the three
months ended October 29, 2008, compared to the prior year period. We anticipate that the Company is
strategically positioned for future growth of our neurosurgical product line.
14
Recent Developments
On October 9, 2008, Alcon Research, Ltd. filed a lawsuit against the Company and Synergetics
in the Northern District of Texas, Case No. 4-08CV-609-Y, alleging infringement of United States
Patent No. 5,603,710; as such patent is amended by the Reexamination Certificate issued July 19,
2005. Alcon Research, Ltd. has requested enhanced damages based on an allegation of willful
infringement, and has requested an injunction to stop the alleged acts of infringement. Because the
complaint fails to identify a single product as infringing, at this stage the Company is left to
guess at the basis for the suit. Aggregate sales revenue of products which may have any similarity
with the referenced patent was approximately $400,000 for the last six fiscal years. The Company
expects to raise meritorious defenses to the infringement suit.
On December 1, 2008, the Company amended its Revolving Credit Facility to extend the
termination date through November 30, 2009. In addition, the bank removed the Companys option to
borrow at the banks prime lending rate. The Companys borrowings are now priced at an interest
rate of the LIBOR plus 2.00 percent and adjusting each quarter based upon our leverage ratio.
New Product Sales
The Companys business strategy has been, and is expected to continue to be, the development,
manufacture and marketing of new technologies for micro-surgery applications including the
ophthalmic and neurosurgical markets. New products, which management defines as products first
available for sale within the prior 24-month period, accounted for approximately 21 percent of
total sales for the Company for the three months ended October 29, 2008, or approximately
$2.5 million. This continued growth was primarily in our capital equipment products both in the
ophthalmic and neurosurgery markets. Synergetics past revenue growth has been closely aligned with
the adoption by surgeons of new technologies introduced by Synergetics. In the last 24-month
period, Synergetics has introduced 73 new items to the ophthalmic and neurosurgery markets. We
expect adoption rates for the Companys new products in the future to have a similar effect on its
operating performance.
Growth in Minimally Invasive Surgery Procedures
Minimally invasive surgery is surgery performed without making a major incision or opening.
Minimally invasive surgery generally results in less patient trauma, decreased likelihood of
complications related to the incision and a shorter recovery time. A growing number of surgical
procedures are performed using minimally invasive techniques, creating a multi-billion dollar
market for the specialized devices used in the procedures. Based on our micro-instrumentation
capability, we believe we are ideally positioned to take advantage of this growing market. The
Company has developed scissors having a single activating shaft as small as 30 gauge (0.012 inch,
0.3 millimeter in diameter). We also believe that we are the world leader in microfiber
illumination technology as our PhotonTM, PhotonTM II and LumenTM
light sources can transmit more light through a fiber of 300 micron diameter or smaller than any
other light source in the world. These products were developed for ophthalmology and neurosurgery
but have wide ranging minimally invasive surgical applications. The Companys Malis®
line of electrosurgical bipolar generators is the market share leader in neurosurgical
generators worldwide. These generators produce a unique and patented waveform that has been
developed and refined over many decades and has proven to cause less collateral tissue damage as
compared to other competing generators. The Omni® power ultrasound system technology
provides a new method for the minimally invasive removal of soft and fibrotic tissue, as well as
bone removal. This technology is in its infancy, and we anticipate that, once fully developed, it
will become a standard of care in multiple minimally invasive surgical applications. The Company
has benefited from the overall growth in this market and expects to continue to benefit as it
continues to introduce new and improved technologies targeting this market.
15
Demand Trends
Increased volume, product mix improvements and price contributed to the majority of sales
growth for the Company during the three months ended October 29, 2008. Ophthalmic and
neurosurgical procedures volume on a global basis continues to rise at an estimated 5.0 percent
growth rate driven by an aging global population, new technologies, advances in surgical techniques
and a growing global market resulting from ongoing improvements in healthcare delivery in third
world countries, among other factors. In addition, the demand for high quality products and new
technologies, such as the Companys innovative instruments and disposables, to support growth in
procedures volume continues to positively impact growth. The Company believes innovative surgical
approaches will continue to significantly impact the ophthalmic and neurosurgery market. Further,
economic conditions may negatively impact capital expenditures at both the hospital and doctor
level.
Pricing Trends
Through its strategy of delivering new and higher quality technologies, the Company has
generally been able to maintain the average selling prices for its products in the face of downward
pressure in the healthcare industry. However, increased competition in the market for the
AdvantageTM electrosurgical generator has negatively impacted the Companys selling
prices on these devices. Further, economic conditions may be negatively impacting the Companys
selling prices for the Omni® ultrasonic aspirator.
Results Overview
During the fiscal quarter ended October 29, 2008, we had net sales of $12.2 million, which
generated $7.1 million in gross profit, operating income of $1.2 million and net income of
approximately $661,000, or $0.03 earnings per share. The Company had approximately $446,000 in cash
and $14.2 million in interest-bearing debt and revenue bonds as of October 29, 2008. Management
anticipates that cash flows from operations, together with available borrowings under our existing
credit facilities, will be sufficient to meet working capital, capital expenditure and debt service
needs for the next twelve months.
Our Business Strategy
Our mission is to design, manufacture and market innovative microsurgical instruments and
consumables of the highest quality in order to assist and enable microsurgeons around the world to
provide a better quality of life for their patients. Our goal is to become a global leader through:
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continuous improvement and development of our people, |
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continuous improvement and development of our manufacturing facilities, |
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continuous improvement of our systems; and |
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continuous improvement of our research and development initiatives. |
During July 2008, the Company realigned its field sales operations. The realignment was
designed to position the Company to attain increased revenues and market share. A comprehensive
study of the Companys sales and marketing structure was undertaken, and as a result, a new and
improved sales training system is being developed, higher recruitment standards are being
implemented, individual and corporate objectives were linked with changes to the compensation
structures and a defined sales process has been initiated.
During August 2008, the Company has begun to introduce lean manufacturing philosophies into
the production environment. These philosophies were applied to our largest volume disposable
product family where we were able to cut manufacturing times approximately in half. We plan to
continue to apply the
lean philosophy to one value stream at a time according to the financial importance to the
Company. We will also be applying this philosophy to other departments in our organization,
including purchasing, accounting and administration. In addition, the Companys most recent
acquisition, Medimold, is producing components which were previously supplied by outside vendors.
Over the next fiscal year, select high volume plastic components will be introduced to this lower
cost process. Our annual savings from this process is now projected to be over $300,000.
16
During August 2008, the Company has begun to utilize its Material Requirements Planning
(MRP) within its information system to more efficiently schedule production work flow and
priorities in its vertically integrated manufacturing processes. The Company is beginning to
utilize this capability to manage its inventory more efficiently and gain benefits from its master
production plan. In addition, the Company is continuing to work on establishing a standard cost
system during fiscal year 2009. These improvements to the information system will give the Company
the tools to measure its manufacturing performance against standards, provide enhanced budgeting
capabilities and build more effective monitoring controls over inventory.
In October 2008, the Company initiated a thorough review and reprioritization of its research
and development projects, leading to a decision to focus available resources on high priority
projects with a concurrent reduction in the total number of projects from approximately 63 projects
at the end of fiscal year 2008 to 38 projects as of October 29, 2008, a reduction of approximately
40 percent. In addition, it has begun to develop a uniform policies and procedures manual for its
research and development initiatives.
Results of Operations
Three Month Period Ended October 29, 2008 Compared to Three Month Period Ended October 29, 2007
Net Sales
The following table presents net sales by category (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
October 29, 2008 |
|
|
October 29, 2007 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmic |
|
$ |
7,384 |
|
|
$ |
6,365 |
|
|
|
16.0 |
% |
Neurosurgery |
|
|
2,953 |
|
|
|
2,561 |
|
|
|
15.3 |
% |
OEM (Codman, Stryker and Iridex) |
|
|
1,782 |
|
|
|
1,364 |
|
|
|
30.6 |
% |
Other |
|
|
127 |
|
|
|
179 |
|
|
|
(29.1 |
%) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,246 |
|
|
$ |
10,469 |
|
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
Ophthalmic sales grew 16.0 percent in the first quarter of fiscal 2009 compared to the first
quarter of fiscal 2008. Domestic ophthalmic sales increased 7.1 percent, while international sales
increased 34.8 percent. Domestic ophthalmic sales management was recently reorganized. The
Company continues to train its new, recently added territory managers and is beginning to see a
return on its investment in a direct sales force in certain countries. Additionally, the Company
expects that the VitraTM laser and the initial shipments of the SupraTM
laser, which are expected to commence in the second quarter of fiscal 2009, will have positive
impacts on net sales for the remainder of fiscal 2009.
Neurosurgery sales growth for the three months ended October 29, 2008 increased 15.3 percent
as compared to the three months ended October 29, 2007. Domestic neurosurgery sales increased 20.1
percent and international sales increased 2.6 percent. The Company expects that sales of the
Malis® AdvantageTM electrosurgical generator and the Omni®
ultrasonic aspirator and their related disposables will continue to have a positive impact on net
sales for the remainder of fiscal 2009.
OEM sales during the first fiscal quarter of 2009 increased 30.6 percent compared to the first
fiscal quarter of 2008. Sales to Codman decreased 31.3 percent compared to the first fiscal
quarter of 2008. This decrease was impacted by the decision to defer the consolidation of the
Philadelphia operations into the OFallon operations, as this changed the timing of requested
inventory deliveries. In addition, sales to
Stryker increased considerably during the first quarter of fiscal 2009 compared to the first
fiscal quarter of 2008, as the new generator we now produce for Stryker had not been released in
the first quarter of 2008 and was not available until April of 2008. Sales to Stryker of the new
generator are expected to positively impact revenue for the remainder of fiscal 2009 and fiscal
2010. Sales to Iridex Corporation (Iridex) of $77,000 added to the OEM sales growth.
17
The following table presents domestic and international net sales (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended October 29, |
|
|
|
2008 |
|
|
2007 |
|
|
% Increase |
|
United States (including OEM sales) |
|
$ |
8,746 |
|
|
$ |
7,719 |
|
|
|
13.3 |
% |
International (including Canada) |
|
|
3,500 |
|
|
|
2,750 |
|
|
|
27.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,246 |
|
|
$ |
10,469 |
|
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
Domestic sales for the first quarter of fiscal 2009 compared to the same period of fiscal 2008
increased 13.3 percent as sales of domestic ophthalmology have increased due to higher
vitreoretinal instrument sales and disposables, and sales of domestic neurosurgery have increased
due to higher electrosurgical generator sales and their related disposables. The ophthalmology
product line primarily contributed to the international sales growth of 27.3 percent for the first
quarter of fiscal 2009 compared to the first quarter of fiscal 2008.
Gross Profit
Gross profit as a percentage of net sales was 57.8 percent in the first quarter of fiscal
2009, compared to 62.3 percent for the same period in fiscal 2008. Gross profit as a percentage of
net sales for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008
decreased approximately five percentage points, primarily due to the change in mix toward higher
international sales, pricing pressure on both ophthalmic and neurosurgical capital equipment and
additional scrap costs experienced in manufacturing some of the Companys products. The Company
has implemented a scrap reduction initiative during the second quarter of fiscal 2009.
Operating Expenses
Research and development (R&D) as a percentage of net sales was 5.3 percent and 4.3 percent
for the first quarter of fiscal 2009 and 2008, respectively. R&D costs increased to $652,000 in the
first quarter of fiscal 2009 from $449,000 in the same period in fiscal 2008, reflecting an
increase in spending on active, new product development projects focused on areas of strategic
significance, partially offset by a decrease in costs associated with new products. The Companys
pipeline included approximately 38 active, major projects in various stages of completion as of
October 29, 2008. The Companys R&D headcount increased by 40.0 percent from October 29, 2007 to
October 29, 2008. The Company has strategically targeted R&D spending as a percentage of net sales
to be approximately 5.0 to 7.0 percent.
Sales and marketing expenses increased by approximately $193,000 to $3.2 million, or
26.5 percent of net sales, for the first fiscal quarter of 2009, compared to $3.1 million, or
29.1 percent for the first fiscal quarter of 2008. The decrease in sales and marketing expenses as
a percentage of net sales, was primarily due to the 17.0 percent increase in sales, partially
offset by an increase in sales and marketing headcount by 17.5 percent from October 29, 2007 to
October 29, 2008.
General and administrative (G&A) expenses decreased by $219,000 during the first fiscal
quarter of 2009 and as a percentage of net sales were 16.5 percent for the first fiscal quarter of
2009 as compared to 21.4 percent for the first fiscal quarter ended October 29, 2007. The Companys
legal expenses decreased by $118,000, as the costs associated with the Iridex lawsuit and
subsequent settlement are no longer a significant factor. The Company also experienced a decrease
of approximately $105,000 in outside consulting costs on the Companys Sarbanes-Oxley compliance
efforts, primarily due to efforts that further internalize the documentation processes and
procedures.
18
Other Expenses
Other expenses for the first quarter of fiscal 2009 decreased 26.4 percent to $176,000 from
$239,000 for the first quarter of fiscal 2008. The decrease was due primarily to a lower interest
rate, as well as a reduced average balance on the Companys working capital line of credit
borrowings.
Operating Income, Income Taxes and Net Income
Operating income for the first quarter of fiscal 2009 was $1.2 million, as compared to
operating income of $785,000 in the comparable 2008 fiscal period. The increase in operating income
was primarily the result of 17.0 percent more net sales and $219,000 in decreased G&A expenses,
partially offset by an approximate five percentage point decrease in gross profit margin, a
$193,000 increase in sales and marketing expenses and a $203,000 increase in R&D expenditures.
The Company recorded a $326,000 provision on pre-tax income of $987,000, a 33.0 percent tax
provision, in the quarter ended October 29, 2008. In the quarter ended October 29, 2007, the
Company recorded an $189,000 tax provision on pre-tax income of $546,000, a 34.6 percent tax
provision. In addition, the Company recorded a $40,000 increase in the research and experimentation
credit during the quarter ended October 29, 2008.
Net income increased by $264,000 to $661,000 for the first quarter of fiscal 2009, from
$397,000 for the same period in fiscal 2008. Basic and diluted earnings per share for the first
quarter of fiscal 2009 increased to $0.03 from $0.02 for the first quarter of fiscal 2008. Basic
weighted-average shares outstanding increased from 24,296,309 at October 29, 2007 to 24,440,861 at
October 29, 2008.
Liquidity and Capital Resources
The Company had $446,000 in cash and total interest-bearing debt and revenue bonds payable of
$14.2 million as of October 29, 2008.
Working capital, including the management of inventory and accounts receivable, is a key
management focus. At October 29, 2008, the Company had an average of 61 days of sales outstanding
(DSO) for the three month period ending October 29, 2008, unfavorable to July 31, 2008 by seven
days. However, the 61 days of sales outstanding is one day favorable to October 29, 2007. The
Company utilized the three month period to calculate DSO as it included the current growth in
sales. The collection time for non-U.S. receivables is generally longer than comparable U.S.
receivables, and as such, the increase in non-U.S. sales of 27.3 percent is unfavorably impacting
the DSO calculation.
At October 29, 2008, the Company had 281 days of cost of sales in inventory on hand,
unfavorable to July 31, 2008 by 63 days. However, the 281 days of sales in inventory is 15 days
favorable to October 29, 2007. The 281 days of sales in inventory on hand at October 29, 2008 is
slightly higher than what the Company considers reasonable and is based on anticipated levels of
250 to 275 days of sales. The Company utilized the three month period to calculate inventory on
hand as it included the current growth in cost of goods sold.
Cash flows used in operating activities were $737,000 for the three months ended October 29,
2008, compared to cash flows provided by operating activities of approximately $162,000 for the
comparable fiscal 2008 period. The decrease of $899,000 was attributable to net decreases
applicable to net receivables, inventories and income taxes payable of $2.2 million offset by net
increases applicable to net income, accounts payable and accrued expenses and other of $1.3
million.
Cash flows used in investing activities was $188,000 for the three months ended October 29,
2008, compared to cash used in investing activities of $315,000 for the comparable fiscal 2008
period. During the three months ended October 29, 2008, cash additions to property and equipment
were $126,000, compared
to $272,000 for the first three months of fiscal 2008. Decreases in cash additions in fiscal
2009 to property and equipment were lower as the Company completed its purchases of machinery and
equipment for the R&D space in fiscal 2008.
19
Cash flows provided by financing activities were $871,000 for the three months ended October
29, 2008, compared to cash provided by financing activities of $146,000 for the three months ended
October 29, 2007. The increase of $725,000 was attributable primarily to a decrease in the balance
of excess of outstanding checks over the bank balance of $382,000, the increase in net borrowing on
the lines-of-credit of $123,000 and decrease in payments of the revenues bonds and the long-term
debt of $227,000.
The Company had the following committed financing arrangements as of October 29, 2008:
Revolving Credit Facility: The Company has a credit facility with Regions Bank (Regions)
which allows for borrowings of up to $9.5 million with interest at an interest rate based on their
prime lending rate or LIBOR plus 2.25 percent and adjusting each quarter based upon our leverage
ratio. As of October 29, 2008, interest under the facility is charged at prime less 0.75 percent.
The unused portion of the facility is charged at a rate of 0.20 percent. Borrowings under this
facility at October 29, 2008 were $4.5 million. Outstanding amounts are collateralized by the
Companys domestic receivables and inventory. This credit facility expired on December 1, 2008. On
December 1, 2008, the Company amended its Revolving Credit Facility to extend the termination date
through November 30, 2009. As a condition of the extension, Regions removed the Companys option
to borrow at a rate based on their prime lending rate. The Companys borrowings are now priced at
an interest rate of the LIBOR plus 2.00 percent and adjusting each quarter based upon our leverage
ratio.
The facility has two financial covenants: a maximum leverage ratio of 3.75 times and a minimum
fixed charge coverage ratio of 1.1 times. As of October 29, 2008, the leverage ratio was 1.90 times
and the minimum fixed charge coverage ratio was 2.13 times. Current collateral availability under
the line was approximately $3.9 million. The facility restricts the payment of dividends if,
following the distribution, the fixed charge coverage ratio would fall below the required minimum.
Non-U.S. Receivables Revolving Credit Facility: The Company has a credit facility with Regions
which allows for borrowings of up to $2.5 million with an interest rate based on their prime
lending rate. The unused portion of the facility is not charged a fee. There were no borrowings
under this facility at October 29, 2008. Outstanding amounts are collateralized by the Companys
non-U.S. receivables. The line matures on June 4, 2009 and has no financial covenants. Current
collateral availability under the line was approximately $1.7 million at October 29, 2008.
Equipment Line of Credit: On July 22, 2008, the Company amended this line of credit. The
amendment consolidated all previous outstanding balances into a term note in the amount of
$1,477,000 with monthly payments of approximately $41,000 and extended the equipment line of
credit. The new consolidated note has a maturity date of July 22, 2011. Under this amended credit
facility, the Company may borrow up to $1.0 million, with interest at Regions prime lending rate.
The unused portion of the facility is not charged a fee. There were no borrowings under this
facility as of October 29, 2008. The equipment line of credit has a maturity date of July 22, 2009.
Management believes that cash flows from operations, together with available borrowings under
its new credit facilities, will be sufficient to meet the Companys working capital, capital
expenditure and debt service needs for the next twelve months.
Critical Accounting Policies
The Companys significant accounting policies which require managements judgment are
disclosed in our Annual Report on Form 10-K for the year ended July 31, 2008. In the first three
months of fiscal 2008, there were no changes to the significant accounting policies.
20
Item 3 Quantitative and Qualitative Disclosures about Market Risk
The Companys primary market risks include fluctuations in interest rates and exchange rate
variability.
The Company has two revolving credit facilities and an equipment line of credit facility in
place. The primary revolving credit facility had an outstanding balance of $4.5 million at October
29, 2008 bearing interest at the prime rate less 0.75 percent. The non-U.S. revolving credit
facility had no outstanding balance at October 29, 2008. Balances on this credit facility bear
interest at the banks prime lending rate. The equipment line of credit facility had no outstanding
balance at October 29, 2008, bearing interest at an effective interest rate at the prime rate. As a
condition of the extension, Regions removed the Companys option to borrow at a rate based on their
prime lending rate. The Companys borrowings are now priced at an interest rate of LIBOR plus 2.00
percent and adjusting each quarter based upon our leverage ratio. Interest expense from these
credit facilities is subject to market risk in the form of fluctuations in interest rates. Assuming
the current levels of borrowings at variable rates and a two-percentage-point increase in the
average interest rate on these borrowings, it is estimated that our interest expense would have
increased by approximately $90,000. The Company does not perform any interest rate hedging
activities related to these three facilities.
Additionally, the Company has exposure to non-U.S. currency fluctuations through export sales
to international accounts. As only approximately 5.0 percent of our sales revenue is denominated in
non-U.S. currencies, we estimate that a change in the relative strength of the dollar to non-U.S.
currencies would not have a material impact on the Companys results of operations. The Company
does not conduct any hedging activities related to non-U.S. currency.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive
officer and chief financial officer, has reviewed and evaluated the effectiveness of the Companys
disclosure controls and procedures as of October 29, 2008. Based on such review and evaluation, our
principal executive officer and chief financial officer have concluded that, as of October 29,
2008, the disclosure controls and procedures were effective to ensure that information required to
be disclosed by the Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and (b) is accumulated and communicated to the
Companys management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Based on this evaluation,
management has concluded that its disclosure controls and procedures were effective at the
reasonable assurance level as of October 29, 2008.
Changes in Internal Control over Financial Reporting
During the first fiscal quarter ended October 29, 2008, there was no change in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
21
Part II Other Information
Item 1 Legal Proceedings
On April 17, 2008, the Company filed a lawsuit in the United States District Court for the
Southern District of New York against Swiss-based Alcon, Inc. and its primary operating subsidiary
in the U.S., Alcon Laboratories, Inc. (collectively Alcon). This suit is captioned Synergetics
USA, Inc. v. Alcon Laboratories, Inc. and Alcon, Inc., Case No. 08-CIV-003669. The Companys
attorneys in this matter have
agreed to represent the Company on a contingency-fee basis. In the complaint, the Company
alleges that Alcon has used its monopoly power in the market for vitrectomy machines to control its
customers purchasing decisions in favor of Alcons surgical illumination sources and associated
accessories, for example by tying sales of its light pipes to sales of its patented fluid
collection cassettes, which are required for each vitreoretinal surgery using Alcons
market-dominant vitrectomy machine. The complaint describes further anti-competitive behaviors,
which include commercial disparagement of the Companys products; payment of grant monies to
surgeons, hospitals and clinics in order to influence purchasing decisions; the maintenance of a
large surgeon advisory board, many of the surgeons on which receive benefits far beyond their
advisory contributions and are required to buy Alcons products; predatory pricing; an unlawful
rebate program; and a threat to further lock out the Company from an associated market unless
granted a license to use some of our key patented technologies. The Company requested both monetary
damages and injunctive relief. On June 23, 2008, Alcon filed a pleading responsive to the
complaint, denying all counts, asserting affirmative defenses, and stating a counterclaim in which
Alcon alleges that the Company misappropriated trade secrets from Infinitech, a company acquired by
Alcon in 1998. At present, deadlines for pre-trial activities in this suit are scheduled through
January 2010. Pending before the court is a motion by Alcon to dismiss the Companys compliant.
The Company believes its complaint presents a sufficient basis to continue the proceedings on its
claims.
On October 9, 2008, Alcon Research, Ltd. filed a lawsuit against the Company and Synergetics
in the Northern District of Texas, Case No. 4-08CV-609-Y, alleging infringement of United States
Patent No. 5,603,710, as such patent is amended by the Reexamination Certificate issued July 19,
2005. Alcon Research, Ltd. has requested enhanced damages based on an allegation of willful
infringement, and has requested an injunction to stop the alleged acts of infringement. Because the
complaint fails to identify a single product as infringing, at this stage the Company is left to
guess at the basis for the suit. Aggregate sales revenue of products which may have any similarity
with the referenced patent was approximately $400,000 for the last six fiscal years. On November
11, 2008, the Company answered the complaint with a general denial of infringement claims, as well
as affirmative defenses and a request for the Court to make a declaration of non-infringement. The
Company expects to raise meritorious defenses to the infringement suit.
In addition, from time to time we may become subject to litigation claims that may greatly
exceed our product liability insurance limits. An adverse outcome of such litigation may adversely
impact our financial condition, results of operations or liquidity. We record a liability when a
loss is known or considered probable and the amount can be reasonably estimated. If a loss is not
probable, a liability is not recorded. As of October 29, 2008, the Company has no litigation
reserve recorded.
Item 1A Risk Factors
The Companys business is subject to certain risks and events that, if they occur, could
adversely affect our financial condition and results of operations and the trading price of our
common stock. For a discussion of these risks, please refer to the Risk Factors section of the
Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2008. In connection with
its preparation of this quarterly report, management has reviewed and considered these risk factors
and has determined that, except as otherwise disclosed in this Item 1A, there have been no material
changes to the Companys risk factors since the date of filing the Annual Report on Form 10-K for
the fiscal year ended July 31, 2008.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
22
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
There have been no material changes to the procedures by which security holders may recommend
nominees to the Companys Board of Directors since the filing of the Companys Annual Report on
Form 10-K for the fiscal year ended July 31, 2008.
Item 6 Exhibits
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Exhibit No. |
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Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Trademark Acknowledgements
Malis, the Malis waveform logo, Omni, Bident, Bi-Safe, Gentle Gel and Finest Energy Source for
Surgery are our registered trademarks. Synergetics, the Synergetics logo, PHOTON, DualWave, COAG,
Advantage, Microserrated, Microfiber, Solution, Tru-Micro, DDMS, Kryptonite, Diamond Black,
Bullseye, Spetzler Claw, Spetzler Micro Claw, Spetzler Open Angle Micro Claw, Spetzler Barracuda,
Spetzler Pineapple, Axcess, Veritas, Lumen and Lumenator product names are our trademarks. All
other trademarks or tradenames appearing in this Form 10-Q are the property of their respective
owners.
23
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.
|
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|
SYNERGETICS USA, INC.
(Registrant) |
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|
|
December 8, 2008
|
|
/s/Robert Dick
Robert Dick, Chairman of the Board of Directors
|
|
|
|
|
(Principal Executive Officer and Director) |
|
|
|
|
|
|
|
December 8, 2008
|
|
/s/ Pamela G. Boone
Pamela G. Boone, Executive Vice
|
|
|
|
|
President, Chief Financial Officer, Secretary |
|
|
|
|
and Treasurer (Principal Financial and |
|
|
|
|
Principal Accounting Officer) |
|
|
24
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
25