e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended July 31, 2010
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or
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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
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For the transition period
from to
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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
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3845 Corporate Centre Drive
OFallon, Missouri
(Address of principal
executive offices)
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63368
(Zip Code)
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Registrants telephone number, including area code
(636) 939-5100
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock
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The Nasdaq Capital Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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 o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant, computed by reference to the
closing sales price as reported by The Nasdaq Stock Market as of
January 29, 2010, the last business day of the
registrants most recently completed second fiscal quarter,
was $23,609,004.
At October 4, 2010, there were 24,774,155 shares of
the registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for its 2010
Annual Meeting of Stockholders, expected to be held on
December 16, 2010, are incorporated by reference into
Part III of this
Form 10-K
where indicated.
SYNERGETICS
USA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 31, 2010
TABLE OF CONTENTS
2
SYNERGETICS
USA, INC.
Overview
Synergetics USA, Inc. (Synergetics USA or the
Company) is a leading supplier of precision
microsurgical devices. 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, handheld devices
and the delivery of various energy modalities for the
performance of minimally invasive microsurgery including:
(i) laser energy, (ii) ultrasonic energy,
(iii) radio frequency energy for electrosurgery and lesion
generation and (iv) visible light energy for illumination,
and where applicable, simultaneous infusion (irrigation) of
fluids into the operative field. Enterprise-wide sales
information is included in Note 16 to the consolidated
audited 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.
We had several developments in fiscal 2010 that we expect will
contribute to the growth of our business in the foreseeable
future.
On April 1, 2010, the Company announced the closing of a
definitive agreement with Stryker Corporation
(Stryker) in conjunction with the acquisition by
Stryker of certain assets from Mutoh Co., Ltd. and its
affiliates (Mutoh), used to produce the Sonopet
Ultrasonic Aspirator control consoles and handpieces (previously
marketed under the
Omni®
brand by Synergetics in the U.S., Canada and several other
countries). The agreement included the sale of accounts
receivable, open sales orders, inventory and certain
intellectual property related to the
Omni®
product line. The gain from the sale of the
Omni®
product line to Stryker was $817,000 in fiscal 2010. In
addition, the agreement provides for the Company to supply
disposable ultrasonic instrument tips and certain other
consumable products used in conjunction with the
Sonopet/Omni®
ultrasonic aspirator console and handpieces, and pursue certain
development projects for new products associated with
Strykers ultrasonic aspirator products. The Stryker
relationship has been proceeding well and is meeting the
Companys expectations for unit and dollar sales volumes.
On November 16, 2009, the Company announced the signing of
an addendum to its three-year agreement (effective as of
January 1, 2009) with Codman & Shurtleff,
Inc. (Codman), a division of Johnson and Johnson.
Under the terms of the revised agreement, Codman will have the
exclusive right to market and distribute the Companys
branded disposable bipolar forceps. Codman began the domestic
distribution of the disposable bipolar forceps on
December 1, 2009 and the international distribution on
February 1, 2010. The Codman relationship has been
proceeding well and is meeting the Companys expectations
for unit and dollar sales volumes.
It is anticipated that once these two new marketing partner
relationships have transitioned and the Company has experienced
a full twelve months of sales under these new agreements with
Stryker and Codman, contribution margins for the products
supplied to these marketing partners should increase, primarily
due to the elimination of commercial expenses associated with
the distribution of these products. However, sales and gross
profit for these
3
products may decrease as the transfer prices to these marketing
partners are lower than the previous average direct selling
prices.
On April 27, 2010, the Company announced that it had
entered into a Settlement and License Agreement with Alcon, Inc.
(Alcon) pursuant to which Alcon agreed to pay the
Company $32.0 million, and the Company agreed to produce
certain products for distribution by Alcon. The net proceeds to
the Company were $21.4 million after contingency payments
to attorneys. The Company recognized a gain from this agreement
of $2.4 million in the third fiscal quarter. The remaining
$19.0 million has been accounted for as deferred revenue on
the balance sheet and will be recognized as earned over a period
of up to fifteen years based upon the units shipped to Alcon
under a Supply Agreement entered pursuant to the settlement.
Shipments to Alcon of the first two products covered by the
agreement are expected to begin in fiscal 2011.
Summary
of Financial Information
The following tables present net sales by category and our
results of operations (dollars in thousands):
NET SALES
BY CATEGORY
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Fiscal Year Ended July 31,
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2010
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Mix
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2009
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Mix
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Ophthalmic
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$
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31,689
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60.9
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%
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$
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29,981
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56.6
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%
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Direct Neurosurgery
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8,175
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15.7
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%
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13,968
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26.4
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%
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Marketing Partners(1)
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4,204
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8.1
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%
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Total Neurosurgery
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12,379
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23.8
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%
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13,968
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26.4
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%
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Original Equipment Manufacturers (OEM)(2)
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7,878
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15.1
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%
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8,538
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16.1
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%
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Other
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129
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0.2
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%
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478
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0.9
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%
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Total
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$
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52,075
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$
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52,965
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(1) |
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Marketing partners sales include disposable bipolar
forceps and disposable ultrasonic instrument tips and
accessories which were previously sold by our direct
neurosurgery sales force and our distribution partners, which
have been transitioned to our marketing partners. |
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(2) |
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Revenues from OEM represent sales of generators, related
accessories and certain laser probes to Stryker, Codman and
Iridex Corporation (Iridex). |
The decrease in sales in fiscal 2010 compared with fiscal 2009
was primarily due to the transition of our direct neurosurgery
sales to our marketing partners, which resulted in a
$1.6 million decrease in our net sales, and a decline in
our capital equipment sales. Sales of capital equipment declined
approximately $3.4 million, or 22.1 percent, due to
hospitals tightly controlling their capital expenditure budgets
during the fiscal year. However, the sales of our disposables
products grew $2.5 million, or 6.7 percent, in fiscal
2010 compared to fiscal 2009.
Information with respect to the breakdown of revenue for the
geographical areas is included in Note 16 to the
consolidated audited financial statements.
RESULTS
OF OPERATIONS
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Fiscal Year Ended July 31,
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Increase
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2010
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2009
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(Decrease)
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Net Sales
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$
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52,075
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$
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52,965
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(1.7
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)%
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Gross Profit(3)
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29,909
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29,415
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1.7
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%
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Gross Profit Margin%
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57.4
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%
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55.5
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%
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3.4
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%
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4
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Fiscal Year Ended July 31,
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Increase
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2010
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2009
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(Decrease)
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Commercial Expenses
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Selling
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11,958
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14,262
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(16.2
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)%
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G&A
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8,903
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9,030
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(1.4
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)%
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R&D
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3,008
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2,998
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0.3
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%
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Operating Income
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6,040
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3,125
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93.3
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%
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Operating Margin
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11.6
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%
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5.9
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%
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96.6
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%
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EBITDA(4)
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11,248
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5,093
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120.9
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%
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EBITDA from Operations(4)
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8,033
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5,093
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57.7
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%
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Net Income
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5,733
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1,595
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259.4
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Net Income from Operations(4)
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3,678
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1,595
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130.6
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%
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Earnings per share
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0.23
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0.07
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228.6
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%
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Earnings per share from Operations(4)
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0.15
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0.07
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114.3
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%
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Operating Return on average equity(4)
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8.9
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%
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4.3
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%
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107.0
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%
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Operating Return on average assets(4)
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6.4
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%
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4.0
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%
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60.0
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%
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(3) |
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In the fourth quarter of fiscal 2009, the Company recorded an
adjustment of approximately $975,000 (or approximately $0.03
earnings per share, net of tax) primarily due to excess and
discontinued inventory which was either contributed to a
charitable organization or was discarded. |
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(4) |
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EBITDA, EBITDA from operations, net income from operations,
earnings per share from operations, operating return on average
equity and operating return on average assets are not financial
measures recognized by U.S. generally accepted accounting
principles (GAAP). EBITDA is defined as net income
before interest expense, income taxes, depreciation and
amortization. EBITDA from operations is defined as net income
(net of one-time events) before interest expense, income taxes,
depreciation and amortization. Net income from operations and
earnings per share from operations are also net of one-time
events. Operating return on equity is defined as net income (net
of one-time events) divided by average equity. Operating return
on assets is defined as net income (net of one-time events) plus
interest expense divided by average assets. See disclosure
following regarding the use of non-GAAP financial measures. |
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Fiscal Year Ended
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July 31,
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July 31,
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2010
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2009
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Net income
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$
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5,733
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$
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1,595
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Interest
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491
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763
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Income taxes
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3,092
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775
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Depreciation
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1,053
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1,052
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Amortization
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879
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908
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EBITDA
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$
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11,248
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$
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5,093
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Pre-Tax Income from One-Time Events
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Income from Stryker Gain
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$
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817
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Income from Alcon settlement
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2,398
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TOTAL Pre-Tax Income from One-Time Events
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3,215
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EBITDA from Operations
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$
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8,033
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$
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5,093
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5
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July 31,
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July 31,
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2010
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2009
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Net income
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$
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5,733
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$
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1,595
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After-Tax Income from One-Time Events
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Income from Stryker Gain
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$
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522
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Income from Alcon Settlement
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1,533
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TOTAL After-Tax Income from One-Time Events
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2,055
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Net Income from Operations
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$
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3,678
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1,595
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Average Equity:
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July 31, 2010
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$
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44,226
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July 31, 2009
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38,130
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$
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38,130
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July 31, 2008
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36,357
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Average Equity
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$
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41,178
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$
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37,243
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Return on Average Equity
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8.9
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%
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4.3
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%
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Net income from Operations
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$
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3,678
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$
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1,595
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Interest
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491
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763
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Net income from Operations + interest expense
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$
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4,169
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$
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2,358
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Average Assets:
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July 31, 2010
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$
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73,095
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July 31, 2009
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58,080
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$
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58,080
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July 31, 2008
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58,396
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Average Assets
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$
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65,588
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$
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58,238
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Return on Average Assets
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6.4
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%
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4.0
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%
|
Non-GAAP Financial
Measures
We measure our performance primarily through our operating
profit. In addition to our audited consolidated financial
statements presented in accordance with GAAP, management uses
certain non-GAAP measures, including EBITDA, return on average
equity and return on average assets, to measure our operating
performance. We provide a definition of the components of these
measurements and reconciliation to the most directly comparable
GAAP financial measure.
These non-GAAP measures are considered by our Board of Directors
and management as a basis for measuring and evaluating our
overall operating performance. They are presented to enhance an
understanding of our operating results and are not intended to
represent cash flow or results of operations. The use of these
non-GAAP measures provides an indication of our ability to
service debt and measure operating performance. We believe these
non-GAAP measures are useful in evaluating our operating
performance compared to other companies in our industry, and are
beneficial to investors, potential investors and other key
stakeholders, including creditors who use this measure in their
evaluation of performance.
EBITDA, however, does have certain material limitations
primarily due to the exclusion of certain amounts that are
material to our results of operations, such as interest expense,
income tax expense, depreciation and amortization. Because of
this limitation, EBITDA should not be considered a measure of
discretionary cash available to us to invest in our business and
should be utilized in conjunction with other information
contained in our consolidated financial statements prepared in
accordance with GAAP.
Strategy
Through continuous improvement and development of our people,
our mission is to design, manufacture and market
innovative microsurgical devices and consumables of the highest
quality in order to assist and enable
6
surgeons who perform microsurgery around the world to provide a
better quality of life for their patients. Based upon this
mission, the Companys key strategy is to enhance
shareholder value through profitable revenue growth in
ophthalmology and neurosurgery markets through the
identification and development of reusable and disposable
instrumentation in conjunction with leading surgeons and
marketing partners and to build out a strong operational
infrastructure and financial foundation within which prudently
financed growth opportunities can be realized and implemented.
At the same time, we will maintain vigilance and sensitivity to
new challenges which may arise from changes in the definition
and delivery of appropriate healthcare in our fields of interest.
In fiscal 2010, we focused on the following
strategies:
Improve Profitability and Cash Efficiency through:
Manufacturing Efficiencies
Lean Manufacturing During the fiscal year
ended July 31, 2010, we implemented lean manufacturing in
virtually all of our disposable illumination and laser product
lines. We restructured our production operations from a
traditional departmental model into six value streams. Each
value stream has a dedicated management team to support the
production, technical and quality aspects of our products. Lean
concepts were also implemented within select machining and
instrument value streams with great success. We will continue to
implement our lean initiative throughout the production value
streams and expand into our accounting operations in the coming
fiscal year. We estimate that we realized approximately
$1.4 million of cost savings from these initiatives during
fiscal 2010.
Component Cost Savings The Companys
most recent acquisition, Medimold, Inc. (Medimold),
is producing plastic components which were previously supplied
by outside vendors. In addition to lower costs for certain
parts, we continue to convert select high volume machined parts
to injection molded, plastic parts. Our annual savings from the
continued introduction of new parts to this process was
approximately $200,000 during fiscal year 2010. In addition, the
Company continues to pursue select outsourcing opportunities for
high quality components.
Supply Chain Management During the fiscal
year 2009, the Company implemented Material Requirements
Planning (MRP) in planning and controlling its
production processes. The implementation of MRP helped reduce
days of inventory on hand from 265 days at July 31,
2008 compared with 233 days at July 31, 2009 and
196 days at July 31, 2010. In addition, our fill rate
on our A products (those products which provide over
80 percent of our sales) increased to 98.6 percent in
July of 2010 based upon availability to fulfill customer orders
at the time the order is placed.
Human Resource Rationalization Starting with
a hiring freeze in October 2008 and ending with a reduction in
force in July 2009 of approximately 40 people, including
our direct neurosurgery sales force, the Company redeployed
certain human resources and reduced the number of employees and
temporary workers by 10% during fiscal 2009. These changes were
made possible by the introduction of manufacturing efficiencies
in certain product lines, the implementation of improvements in
our enterprise-wide information system, the implementation of
MRP and supply chain management and related consolidations, and
the shift from direct sales of certain neurosurgery products in
the U.S. to the sales of these same products through
marketing partners. The hiring freeze has continued through
fiscal 2010 year-end and certain positions are only added
based upon a resource need or a replacement hire. At
July 31, 2010, our head count was 356 compared with 380 at
July 31, 2009 and 394 at July 31, 2008, a decrease of
approximately 6.3 percent. However, a fully staffed
operation, including planned replacements, is approximately
360 employees.
Cash Management The Company has been focused
on its debt level which it reduced by $9.1 million to
$4.1 million as of July 31, 2010 and intends to
continue to monitor and reduce its leverage by focusing on the
reduction in days sales in accounts receivable and inventory and
where appropriate, the increase in days in accounts payable.
During the fiscal year ended July 31, 2010, the Company
improved its leverage ratio to 8.4 percent from
25.7 percent at July 31, 2009.
7
Accelerate
growth through:
Research & Development
(R&D) In order to focus resources
on the most important projects, in October 2008, the Company
completed a thorough review of its R&D efforts leading to a
reduction in the number of active projects in the R&D
pipeline to 39 such projects as of July 31, 2009 and 23
active projects as of July 31, 2010. In addition, we
developed a uniform policies and procedures manual for our top
10 R&D initiatives. In July 2009, the Company reorganized
its R&D resources into an advanced technology group which
works on longer-term, highly complex R&D initiatives, a
primary development group which works on strategically targeted
products and a manufacturing engineering group which works on
product line extensions. These three groups focus on projects in
both ophthalmology and neurosurgery. The engineering team at the
King of Prussia, Philadelphia location was also strengthened to
provide capacity for new electrosurgery products.
New Business Development The Companys core
assets, including a history of customer driven innovation,
quality differentiated products and an extensive distribution
network make it a logical component of value-creating business
combinations. We continue to evaluate such potential
combinations and opportunities for potential acquisitions that
can expand the Companys product offerings.
Assess
Distribution Alternatives:
The Company competes in two distinct medical device markets,
ophthalmology and neurosurgery. These markets are very different
in terms of the number and size of the competitors in each and
the size and maturity of their respective distribution networks.
The Company has been actively engaged in pursuing marketing
partner opportunities and during fiscal 2010 expanded both the
Codman and Stryker relationships to include products which it
had previously distributed on a direct basis to end user
customers.
Improve
Sales Force Productivity:
The professionalism of the Companys sales force is one of
its true assets. Significant effort was made in the last year to
align the incentives and promotional direction of our sales
force with those of the Companys interests as a whole. It
is anticipated that this will result in enhanced productivity.
In fiscal 2011, our driving strategic priorities
are:
To drive the Company onto a high growth trajectory. This means
simply new products, some in new categories. The focus on our
top four R&D opportunities will allow us access to
different segments within the vitreoretinal and intracranial
markets to drive organic growth, along with new business
development opportunities that the Company is aggressively
pursuing. We believe that this focus will revitalize the
Companys compound annual growth rate.
To continue to enhance the profitability of our operational
platform by focusing on our manufacturing efficiencies including
lean manufacturing and select outsourcing of high quality
components and cost savings. During fiscal 2010, we enhanced our
operating margins from 5.9 percent to 11.6 percent. By
focusing our efforts on our identified efficiencies, we believe
we can continue to increase our operating margins.
Research
and Development Strategy
Our R&D strategy primarily focuses on developing new
products in conjunction with leading ophthalmologists and
neurosurgeons utilizing our proprietary technology including our
Photontm
technology and our
Malis®
electrosurgical
generator/DualWavetm
technology and our expertise in vitreoretinal surgery and
neurosurgery. We are continually engineering new products and
instrumentation, as well as enhancements to existing products,
to meet the needs of surgeons in ophthalmology and neurosurgery
disciplines. We have entered into consultation arrangements with
leading ophthalmic surgeons, all of whom specialize in
vitreoretinal procedures. In neurosurgery, we have worked
closely with leading neurosurgeons to develop ultrasonic tips
and microsurgical devices.
The Company has historically invested in leading edge R&D
projects. In fiscal 2011, we expect continued development of
Malis®
electrosurgical generators and supporting accessories; the
second generation ultrasonic aspirator and supporting
accessories; 25, 23 and 20 gauge precision devices;
endoillumination and laser probes;
8
Photontm
supporting disposables; and other products used in conjunction
with minimally invasive surgical procedures.
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2010
|
|
|
2009
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|
|
2008
|
|
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R&D Expenditures (in thousands)
|
|
$
|
3,008
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|
|
$
|
2,998
|
|
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$
|
2,654
|
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Percentage of net sales
|
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5.8
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%
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5.7
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%
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5.3
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%
|
We anticipate that we will continue to incur greater R&D
costs in connection with the development of our products. In
July 2009, the Company completed a reorganization of its
R&D resources in OFallon, Missouri by aligning
resources along three different development categories,
including an advanced technology group which works on
longer-term, highly complex R&D initiatives, a primary
development group which works on strategically targeted devices
and a manufacturing engineering group which works on product
line extensions. The primary development group has been
relocated next to marketing and manufacturing engineering. The
realignment of R&D will allow greater flexibility to meet
the ever-changing needs of our customers as well as allow the
Company to focus on those products and technologies that fit
within our strategic plan. In addition, the Company has an
electrosurgery-focused R&D department in King of Prussia,
Pennsylvania.
In order to focus new product development resources on the
highest priority projects, in October 2008, the Company
completed a thorough review and prioritization of its R&D
efforts leading to a reduction in the number of active, major
projects in the R&D pipeline to 39. In addition, the
Company developed a uniform policies and procedures manual for
its R&D initiatives, which included a measurement of the
potential return on investment at various stages in the
development life cycle. At July 31, 2010, the
Companys development pipeline included 23 active projects
in various stages of completion. However, we have identified
four of these projects as being the highest priority projects
which will help to drive the Company to a different growth
trajectory and address larger markets within ophthalmology and
neurosurgery. The Company expects to invest in R&D at rates
of 5 to 7 percent of net sales each fiscal year.
Substantially all of our R&D is conducted internally. In
the 2011 fiscal year, we anticipate that we will fund all of our
R&D with current assets, cash flows from operations and
development revenue from certain new products associated with
next generation products for marketing partners. We continuously
review our R&D initiatives to ensure that they remain
consistent with and supportive of our strategic growth
initiatives.
Marketing
Ophthalmic
and Vitreoretinal
Markets
Vitreoretinal surgery refers to any surgical procedures
involving the posterior portion of the eye. Conditions
associated with vitreoretinal surgery often require surgical
treatment to prevent vision loss. These conditions include
proliferative diabetic retinopathy, retinal detachments, macular
holes, macular puckers and traumatic eye injuries just to name a
few. The retinal surgeon requires a variety of devices and
equipment to perform the surgery, such as a vitrectomy machine
and vitreous cutter to remove the vitreous from the eye, a light
source and endoilluminator to illuminate the eye, a laser and
laser probe which provides focused photocoagulation for the
treatment of diabetic retinopathy and related conditions,
retinal detachment, or mitigate other disease states, and other
microsurgical handheld devices including forceps, scissors and
picks, many of which are offered by the Company.
Based upon a study performed for the Company by Market Scope
LLC, there are approximately 2,200 practicing retinal
specialists in the United States and an additional 9,100
throughout the rest of the world. It is estimated that
approximately 300,000 vitrectomies are performed each year in
the United States and 1.1 million vitrectomies are
performed throughout the world.
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. Synergetics developed a number
of specialized lines of finely engineered microsurgical devices,
which today have grown to
9
comprise a product catalogue of over 1,000 retinal surgical
items including handheld disposable and reusable forceps and
scissors, fiberoptics for both illumination and
photocoagulation, cannulas, scrapers, and other reusable and
disposable surgical devices.
We are a leading supplier of 25, 23 and 20 gauge instrumentation
to the vitreoretinal surgical market. The larger 20 gauge size
remains the industry standard. The 25 and 23 gauge microsurgical
devices enable surgeons to make smaller sutureless incisions.
However, the use of these devices limits the amount of light
that can be delivered to the surgical site using traditional
light sources. In July 2004, we introduced our
Photontm
xenon light source for vitreoretinal illumination to operating
rooms across the world which addressed the light limitation
issues. In addition, we engineered a system solution using
smaller optical fibers that, in combination with other product
functionality, are capable of efficiently delivering more light
to the surgical site than traditional illumination systems. When
used in conjunction with a laser, the ability of the
Photontm
to deliver both laser energy and vitreoretinal illumination
through the same fiber line is unique, as is the number of
accessories which can be attached to the device. These features
distinguish the
Photontm
from other xenon light sources in the marketplace.
Our business continues to grow and evolve as new, minimally
invasive surgical techniques are pioneered by leading
vitreoretinal surgeons. As microsurgical devices become ever
smaller, new endoillumination technology is required to assist
surgeons in this field. The Company was an early developer of
cutting-edge endoillumination products and continues to be an
innovative leader in the marketplace in the design, manufacture
and marketing of laser probes and fiberoptic endoilluminators.
Marketing
and Sales Force
In the United States over a number of years, we have assembled a
dedicated sales team. Our team sells our ophthalmic and
vitreoretinal surgical products directly to end-users employing
a staff of approximately 32 sales and marketing professionals.
We offer over 1,000 separate catalogue items in the ophthalmic
and vitreoretinal surgical market segments. Our ophthalmic and
vitreoretinal products include fiberoptic endoilluminators and
endolaser probes, a variety of disposable and reusable devices
designed for intraocular manipulation of tissues, illumination
equipment under the
Photontm
brand, laser equipment for the United States market under
Quantels
Vitratm
and
Supratm
brands, Volks line of ophthalmic lenses and its
Optiflextm
and
Merlintm
non-contact viewing systems and other
miscellaneous products.
Internationally, we utilize a hybrid sales network comprised of
direct and distributor sales. We have distribution agreements
with independent representatives to sell and distribute our
ophthalmic and vitreoretinal surgical products. At July 31,
2010, we had 11 international direct sales employees and were
represented by approximately 47
non-U.S. distributors
and independent sales representatives. Our ophthalmic and
vitreoretinal surgical products are offered for sale in
approximately 60 countries outside the United States. The terms
of sale to our
non-U.S. distributors
and our
non-U.S. end-user
customers do not differ materially from our terms to our
domestic end-user customers. Selling prices are established
based upon each countrys competitive pricing methodology.
Competition
Our ophthalmic and vitreoretinal surgical devices, lasers and
disposables compete against manufacturers of similar products,
including those sold by our major competitors, Alcon, Iridex,
Bausch & Lomb, Inc. and Dutch Ophthalmic Research Corp
(DORC). Our
Photontm
light sources compete with manufacturers of similar products,
including those sold by Alcon, Bausch & Lomb, and
DORC. In addition, our products compete with smaller and larger
specialized companies that do not otherwise focus on ophthalmic
and vitreoretinal surgery. In the future, aggressive
pharmaceutical intervention may adversely affect the use of our
surgical products.
Marketing
Partner and OEM Markets
The Company has marketing partner and OEM relationships with
Codman, Stryker, Iridex and Alcon.
In the neurosurgical 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 April 2,
10
2009, the Company executed a new, three-year distribution
agreement (effective January 1, 2009) with Codman, a
division of Johnson and Johnson, for the continued distribution
by Codman of the third generation electrosurgical generator,
certain other generators, related disposables, accessories and
other options. In addition, the Company entered into a new,
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, 2011.
On November 16, 2009, the Company announced the signing of
an addendum to its three-year agreement with Codman. Under the
terms of the revised agreement, Codman will have the exclusive
right to market and distribute the Companys branded
disposable bipolar forceps. Codman began the domestic
distribution of the disposable bipolar forceps on
December 1, 2009 and the international distribution on
February 1, 2010.
The Codman relationship has been proceeding well and is meeting
the Companys expectations for unit and dollar sales
volumes. Sales to Codman in the fiscal year ended July 31,
2010 comprised approximately 13.1 percent of the
Companys net sales.
The Company supplies a lesion generator used for minimally
invasive pain treatment to Stryker pursuant to a supply and
distribution agreement dated as of October 25, 2004. The
original term of the agreement was for slightly over five years,
commencing on November 11, 2004 and ending on
December 31, 2009. On August 1, 2007, the Company
entered into a one-year extension to the agreement with Stryker.
The extension provided for an increase in the minimum purchase
obligation to 300 units per year for the remaining contract
period. The agreement covers the manufacture and supply of the
lesion generator unit together with certain accessories. The
pain control unit can be utilized for facet denervation,
rhizotomy, percutaneous cordotomy, dorsal root entry zone
lesions, peripheral neuralgia, trigeminal neuralgia and ramus
communications. Pain relief is achieved by the controlled
heating of the area surrounding the electrode tip. A
thermosensor in the probe is used to control tissue temperature.
Impedance values are displayed to guard against unsafe
conditions. The system provides an electrical stimulator for
nerve localization and various coagulating outputs that are
selectable based on the procedures undertaken. The generator is
configured for bipolar output to minimize current spread, as
well as monopolar operation. The agreement also provides Stryker
the right of first refusal for the distribution of other
products for use in the field of pain control or for use in
conjunction with a lesion generator technically the same as the
products distributed under this agreement.
On April 1, 2010, the Company announced the closing of the
definitive agreement with Stryker in conjunction with the
acquisition by Stryker of certain assets from Mutoh used to
produce the Sonopet Ultrasonic Aspirator control consoles and
handpieces (previously marketed under the
Omni®
brand by Synergetics in the U.S., Canada and several other
countries). In addition, the agreement provides for the Company
to supply disposable ultrasonic instrument tips and certain
other consumable products used in conjunction with the
Sonopet/Omni®
ultrasonic aspirator console and handpieces; and pursue certain
development projects for new products associated with
Strykers ultrasonic aspirator products.
The Stryker relationship has been proceeding well and is meeting
the Companys expectations for unit and dollar sales
volumes. Sales to Stryker in the fiscal year ended July 31,
2010 comprised approximately 9.2 percent of the
Companys net sales. This percentage is expected to
increase as sales of ultrasonic aspirator tips and accessories
through Stryker began in April 2010.
In addition, the Company manufactures directional laser probes
for Iridex. In October 2005, Iridex filed a lawsuit against the
Company for infringement of its Patent No. 5,085,492
entitled Optical Fiber with Electrical Encoding.
Pursuant to a settlement of the lawsuit in 2007, the parties
entered into a manufacture and supply agreement in which the
Company obtained the right to manufacture and supply various
laser probes to Iridex. This agreement expires in April of 2012.
On April 27, 2010, the Company announced that it had
entered into a Settlement and License Agreement with Alcon
pursuant to which Alcon agreed to pay the Company
$32.0 million, and the Company agreed to produce certain
products for distribution by Alcon. The net proceeds were
$21.4 million after contingency payments to attorneys. The
Company recognized a gain from this agreement of
$2.4 million in the third fiscal quarter. The remaining
$19.0 million has been accounted for as an up-front license
fee under the Settlement and License Agreement and will be
deferred and recognized as earned over a period of up to fifteen
years based upon the units
11
shipped to Alcon under a Supply Agreement entered pursuant to
the settlement. Shipments to Alcon of the first of the two
products covered by the agreement are expected to begin in
fiscal 2011. We believe the deferred revenue may be recognized
over a shorter timeframe as these products gain market share.
Competition
In field of neurosurgery, we develop, design and manufacture
precision-engineered, microsurgical devices and instruments. In
addition, we believe we are the premier manufacturer of bipolar
electrosurgical systems sold through Codman for use in
neurosurgery. Our neurosurgical bipolar electrosurgical systems
compete against the Valleylab division of Covidien Ltd., Kirwan
Surgical Products, Inc., Erbe Elektromedizin GmbH and Aesculap
including Aesculap Inc., USA and Aesculap GmbH, divisions of B.
Braun Medical Inc.
Omni®
ultrasonic aspirator and accessory tips sold through Stryker
compete against Integra Life Sciences Holdings, Corp., the
manufacturer of the
CUSAtm
and the
Selectortm
ultrasonic systems. Our neurosurgical devices and disposables
compete against manufacturers of similar products, including
those sold by Integra NeuroSciences. Also, we compete with
smaller and larger specialized companies that do not otherwise
focus on neurosurgery. Our products also compete with other
technologies, such as handheld instruments and a variety of
tissue removal systems designed for removing skull-based tumors.
In the future, aggressive pharmaceutical intervention may
adversely affect the demand for our surgical products.
Operations
Manufacturing
and Supplies
We design, manufacture and assemble the majority of our
ophthalmic and certain of our neurosurgical products in our
facility in OFallon, Missouri. The bipolar electrosurgical
generators (including the neurosurgical, pain control and other
generator units) are manufactured in our facility in King of
Prussia, Pennsylvania. The
Vitratm
and
Supratm
laser units and the Volk lenses and
Optiflextm
and
Merlintm
systems are manufactured by their respective manufacturers. Our
products are assembled from raw materials and components
supplied to us by third parties. Most of the raw materials and
components we use in the manufacture of our products are
available from more than one supplier. For some components,
there are relatively few alternate sources of supply. However,
we rely upon single source suppliers or contract manufacturers
for a small portion of our disposable product line and for
several key components of our
Photontm
light sources and our electrosurgical generators.
During the fiscal year ended July 31, 2010, we implemented
lean manufacturing in virtually all of our disposable
illumination and laser product lines. We have recently
restructured our production operations from a traditional
departmental model into six value streams. Each value stream has
a dedicated management team to support the production, technical
and quality aspects of our products. Lean concepts have also
been implemented within our machining and instrument value
streams on a limited basis with great success. We will continue
to implement our lean initiative throughout the production value
streams and expand into our accounting operations in the coming
fiscal year. We estimate that we realized approximately
$1.4 million of cost savings from this initiative during
fiscal 2010.
During fiscal year 2009, the Company formed a Supply Chain
Management department which merged the production planning
department, the warehousing function and customer service
department together. The Supply Chain Manager is responsible for
the utilization of MRP within the information system. The
implementation of MRP helped reduce days in inventory on hand
from 265 days at July 31, 2008 to 233 days at
July 31, 2009 and 196 days at July 31, 2010. In
addition, our fill rate on our A products (those
products which provide over 80 percent of our sales)
increased to 98.6 percent in July of 2010 based upon
availability to fulfill customer orders at the time the order is
placed.
In October 2005, we completed a 27,000 square foot addition
to our 33,000 square foot manufacturing facility and
headquarters in OFallon, Missouri. In July 2005, Valley
Forge moved its Philadelphia manufacturing, engineering and
assembly facility and its Oaks, Pennsylvania selling, general
and administrative offices into a new facility located in King
of Prussia, Pennsylvania. Effective May 1, 2005, Valley
Forge entered into a combination sublease and lease agreement
for this facility of approximately 13,500 square feet of
office, engineering and manufacturing space for a term of four
and one-half years, expiring October 31, 2009. In
12
November of 2008, this lease was extended through
October 31, 2012. In August 2007, we leased approximately
10,000 square feet of additional space adjacent to our
headquarters in OFallon, Missouri for a term of five years.
Government
Regulations
Medical devices manufactured by the Company are subject to
extensive regulation by governmental authorities, including
federal, state and
non-U.S. governmental
agencies. The principal regulator in the United States is the
Food and Drug Administration (the FDA).
FDA regulations are wide ranging and govern the production and
marketing of medical devices, the observance of certain
standards with respect to the design, manufacture, testing,
labeling and promotion of devices, the maintenance and retention
of certain records, the ability to track devices in
distribution, the reporting of potential product defects and
patient incidents, the export of devices and other matters.
All medical devices introduced into the market since 1976, which
include substantially all of our products, are required by the
FDA as a condition of sale and marketing to secure either a
510(k) Premarket Notification clearance or an approved Premarket
Approval Application (PMA). A Premarket Notification
clearance indicates FDA agreement with an applicants
determination that the product for which clearance has been
sought is substantially equivalent to another medical device
that was on the market before 1976 or that has received 510(k)
Premarket Notification clearance since that time. The process of
obtaining a Premarket Notification clearance can take several
months or years and may require the submission of limited
clinical data and supporting information. The PMA process
typically requires the submission of significant quantities of
clinical data and manufacturing information and involves
significant review costs.
Under FDA regulations, after a device receives 510(k) clearance,
any modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in the
intended use of the device, technology, materials or packaging,
requires a new 510(k) clearance. The FDA requires a manufacturer
to make this determination in the first instance, but the FDA
can review any such decision. If the FDA disagrees, it can
require a manufacturer to obtain a new 510(k) clearance or it
can seek enforcement action against the manufacturer.
We are also required to register with the FDA as a device
manufacturer and to maintain compliance with the FDAs
Quality System Regulations (QSRs). The QSRs
incorporate the requirements of Good Manufacturing Practice as
well as other regulatory requirements of the FDA, which mandate
detailed quality assurance and record-keeping procedures and
subject manufacturers to unscheduled periodic quality system
inspections. We conduct internal quality assurance audits
throughout the manufacturing process.
We may not promote or advertise our products for uses not within
the scope of our clearances or approvals or make unsupported
safety or effectiveness claims. Further, we are required to
comply with various FDA regulations for labeling and promotion.
The Medical Device Reporting regulations require that we provide
information to the FDA whenever there is evidence to reasonably
suggest that one of our devices may have caused or contributed
to a death or serious injury. In addition, the FDA prohibits us
from promoting a medical device before marketing clearance has
been received or promoting a cleared device for unapproved
indications. Noncompliance with applicable regulatory
requirements can result in enforcement action, which is more
fully described in Part 1, Item 1A, Risk
Factors section of this Annual Report on
Form 10-K.
Medical device regulations also are in effect in many of the
countries outside the United States in which our products are
sold. These laws range from comprehensive device approval and
quality system requirements for some or all of our medical
device products to simpler requests for product data or
certifications. The number and scope of these requirements are
increasing. In June 1998, the European Union Medical Device
Directive became effective, and all medical devices sold in the
European common market must meet the Medical Device Directive
standards. The Company sells its products in the European
medical device market; as such, we have voluntarily chosen to
subject ourselves to the audits established by the European
Union through which we have obtained CE marking for
many of our products. The Company is subjected to annual audits
at both of our manufacturing facilities for compliance to the
quality system standards established by the International
Standards Organization (ISO) and Medical Device
Directives established by European law. The Company is certified
to ISO 13485:2003, the international standard for quality
systems as applied to medical devices. Failure to correct
deficiencies discovered
13
during an audit could result in the removal of the CE mark on
our products, which would effectively bar the sale of the
Companys products in the European market. Such a result
would have a significant and material negative impact on the
Company and its business. In addition, there are several other
countries that require additional regulatory clearances.
Management believes that we are in material compliance with the
government regulations governing our business.
Safety
Approvals
The majority of our capital equipment products also require
electrical safety testing, and in some cases electromagnetic
compatibility testing, either as a product registration
requirement
and/or to
gain market acceptance.
Intellectual
Property
Our ability to effectively compete in our product markets
depends in part on developing, improving, and maintaining
proprietary aspects of our technology platforms. To maintain the
proprietary nature of our technology, we rely on patents and
patent applications, trade secrets, trademarks and know how.
Patented and patent pending technology is used in most of our
product lines, including our
Malis®
line of bipolar electrosurgical generators and accessories, our
Photontm
and
Lumentm
lines of illumination technology with complimentary accessories,
the ultrasonic bone cutting tips, and various other reusable and
disposable devices.
Currently, the Company owns 38 unexpired United States patents,
the oldest of which was issued in 1994, and none of which will
expire before 2012. We do not believe that the expiration of any
one patent, or the expiration over time of all of our currently
unexpired patents, will have a material, adverse effect on our
business. The Company also has multiple pending U.S. patent
applications, which we believe will, in due course, issue as
patents. However, other companies and entities have filed patent
applications or have obtained issued patents relating to
devices, laser probes, endoillumination, light sources,
monopolar and bipolar electrosurgical methods and devices, any
of which may impact our ability to obtain patents in the future.
When deemed appropriate for our business success, we will
enforce and defend our patent rights.
We generally seek patent protection in the U.S. on
technological advancements used or likely to be used in our
products and product improvements, and may seek patent
protection on such technology in select
non-U.S. countries.
We do not, however, rely exclusively on our patents to provide
us with competitive advantages with respect to our existing
product lines. We also rely upon trade secrets, know-how,
continuing technological innovations and superior engineering to
develop and maintain our competitive advantage.
In an effort to protect our trade secrets, we require our
consultants, advisors and most of our employees to execute
confidentiality agreements and, when appropriate, invention
assignment agreements upon commencement of employment, or a
consulting or advising relationship with us. These agreements
typically provide that all confidential information developed or
made known to the subject person during the course of that
persons relationship with us must be kept confidential and
cannot be used, except in specified circumstances. When
appropriate, these agreements also contain provisions requiring
these individuals to assign to us, without additional
consideration, any inventions conceived or reduced to practice
by the subject person while employed or retained by the Company,
subject to customary exceptions.
The Malis, Bi-Safe, Gentle Gel, Finest Energy Source Available
for Surgery and Bident are our registered trademarks.
Synergetics, Photon, Photon I, Photon II, P1, P2, DualWave,
COAG, Advantage, Burst, Microserrated, Microfiber, Solution,
TruMicro, DDMS, Kryoptonite, Diamond Black, Bullseye, One-Step,
Pinnacle, Barracuda, aXcess, Flexx, Lumen, Lumenators, Veritas
and Vivid product names are our trademarks. All other trademarks
or tradenames appearing in this Annual Report on
Form 10-K
are the property of their respective owners.
Backlog
We generally do not maintain a high level of backlog. As a
result, we do not believe that our backlog at any particular
time is indicative of future sales levels.
14
Employees
In October 2010, we had approximately 348 employees, of
which 342 were full-time employees. However, a fully staffed
operation, including planned replacements, is approximately
360 employees. From time to time, we retain part-time
employees, engineering consultants, scientists and other
consultants. All full-time employees are eligible to participate
in our health benefit plan. None of our employees are
represented by a union or covered by a collective bargaining
agreement. We consider our relationship with our employees to be
satisfactory.
Executive
Officers of the Registrant
The following table sets forth certain information, as of the
date of this annual report on
Form 10-K,
with respect to the executive officers of the Company.
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Name
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Age
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Position(s) with the Company
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David M. Hable
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55
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President, Chief Executive Officer & Director
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Kurt W. Gampp, Jr.
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50
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Executive Vice President, Chief Operating Officer & Director
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Jerry L. Malis
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78
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Executive Vice President, Chief Scientific Officer &
Director
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Pamela G. Boone
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47
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Executive Vice President, Chief Financial Officer, Treasurer
& Secretary
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David M. Hable joined the Company as its President and CEO in
January 2009. Prior to joining the Company, Mr. Hable
served as President and CEO of Afferent Corporation, a venture
capital backed medical device company focused on neuro
stimulation therapies. Previously, he was Chairman of the Board
of ONI Medical Systems, Inc., a developer and marketer of
magnetic resonance imaging equipment for extremity applications
in non-hospital settings. Mr. Hable also spent over
20 years with Codman, which develops and markets a wide
range of diagnostic and therapeutic products for the treatment
of central nervous system disorders. Mr. Hable was engaged
at Codman in several sales and marketing positions. From 1998 to
2003, Mr. Hable served as Codmans Worldwide President
leading all functions in the company, both domestically and
internationally. Mr. Hable has overall responsibility for
the management of the Company.
Kurt W. Gampp, Jr. is the Companys Executive Vice
President and Chief Operating Officer and has served in these
positions and as a director since 2005. Immediately prior to the
merger with Valley Forge, Mr. Gampp served as the Executive
Vice President and Chief Operating Officer of Synergetics and
had served in this position since Synergetics was founded in
1991. Mr. Gampp coordinates and supervises the
manufacturing of the Companys products and is in charge of
the daily production operations of the Company.
Jerry L. Malis is the Companys Executive Vice President
and Chief Scientific Officer and has served in these positions
and as director since 2005. Immediately prior to the
consummation of the merger with Valley Forge, Dr. Malis
served as Valley Forges Chief Executive Officer, President
and Chairman of the Board of Valley Forge. He has published over
50 articles in the biological science, electronics and
engineering fields, and has been issued ten United States
patents. Dr. Malis coordinates and supervises the
scientific developments of the Company.
Pamela G. Boone joined the Company as its Chief Financial
Officer in May 2005. Prior to this, Ms. Boone served as
Vice President and Chief Financial Officer of Maverick Tube
Corporation from 2001 until January 2005 and as Vice President,
Treasurer and acting Chief Financial Officer until May 2005.
Maverick Tube Corporation (Maverick), a
Missouri-based company, was a leading North American producer of
welded tubular steel products used in energy and industrial
applications. From 1997 to 2001, Ms. Boone served as
Mavericks Corporate Controller. Ms. Boone coordinates
and supervises the financial, accounting, human resources,
information technology, and quality aspects of the Company.
Available
Information
We make available free of charge our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished as required
by Section 13(a) or 15(d) of the
15
Exchange Act, through our internet website at
www.synergeticsusa.com as soon as reasonably practicable
after we electronically file such material with, or furnish it
to, the Securities and Exchange Commission (SEC).
Special
Note Regarding Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 and
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, 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
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.
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 Annual Report on
Form 10-K
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.
In addition to the other information contained in this Annual
Report on
Form 10-K,
we have identified the following risks and uncertainties that
may have a material adverse effect on our business, financial
condition or results of operations. You should carefully
consider the risks described below before making an investment
decision.
We are
exposed to risks associated with world-wide economic slowdowns
and related political uncertainties.
We are subject to macro-economic fluctuations in the United
States economy. Concerns about consumer and investor confidence,
volatile corporate profits and reduced capital spending,
international conflicts, terrorist and military activity, civil
unrest and pandemic illness could cause a slowdown in customer
orders or cause customer order cancellations. In addition,
political and social turmoil related to international conflicts
and terrorist acts may put further pressure on economic
conditions in the United States and abroad.
Recent macro-economic issues involving the broad financial
markets, including the housing and credit system and general
liquidity issues in the securities markets have negatively
impacted the economy and may have negatively affected our
growth, and such issues may continue to affect growth in the
future. In addition, weak economic conditions and declines in
consumer spending and consumption may harm our operating
results. Although purchases of our products are not often
discretionary, the lack of health care insurance may cause some
procedures to be delayed or postponed as long as possible. If
the economic climate deteriorates further, some follow-on
effects could impact our business, including insolvency of key
suppliers resulting in product delays, delays in customer
payments of outstanding accounts receivable and customer
insolvencies, counterparty failures
16
negatively impacting our operations and increased expense or
inability to obtain future financing. We believe these issues
have impacted the sales of our capital equipment during the
fiscal year.
If any
of our single source suppliers were to cease providing
components, we may not be able to produce certain
products.
Our products are assembled from raw materials and components
supplied to us by third parties. Most of the raw materials and
components we use in the manufacture of our products are
available from more than one supplier. For some components,
there are relatively few alternate sources of supply. However,
we rely upon single source suppliers or contract manufacturers
for a small portion of our disposable product line and for
several key components of our
Photontm
light sources and our electrosurgical generators. Our profit
margins and our ability to develop and deliver products on a
timely basis may be adversely affected by the lack of
alternative supply in the required timeframe.
The
medical device industry is highly competitive, and we may be
unable to compete effectively with other
companies.
The medical technology industry is characterized by intense
competition. We compete with established medical technology
companies and early stage companies that have alternative
solutions for the markets we serve or intend to serve. Many of
our competitors have access to greater financial, technical,
R&D, marketing, manufacturing, sales, distribution services
and other resources than we do. Furthermore, our competitors may
be more effective at implementing their technologies to develop
commercial products. Certain of the medical indications that can
be treated by our devices can also be treated by other medical
devices or by medical practices that do not include a device,
including pharmacology. The medical community widely accepts
many alternative treatments and certain of these other
treatments have a long history of use.
Our competitive position depends on our ability to achieve
market acceptance for our products, develop new products,
implement production and marketing plans, secure regulatory
approvals for products under development and protect our
intellectual property. We may need to develop new applications
for our products to remain competitive. Technological advances,
including pharmacology, by one or more of our current or future
competitors could render our present or future products obsolete
or uneconomical. Our future success depends upon our ability to
compete effectively against current technology, as well as
respond effectively to technological advances, and upon our
ability to successfully implement our marketing strategies and
execute our R&D plan.
Our
future results are dependent, in part, upon the successful
transition of our neurosurgical products to our marketing
partners.
During July 2009, the Company completed a reduction in personnel
of approximately 10 percent of our workforce, including
most of our direct neurosurgical sales force. The distribution
of our neurosurgical products will continue through a
combination of our existing marketing partners and potentially
new, marketing partners or indirect distributors. The successful
distribution will be dependent in part on:
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their acceptance by our marketing partners;
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their acceptance by the surgeon;
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our ability to respond to our marketing partners
needs; and
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the reaction of our marketing partners competitors in this
market.
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Our
industry is experiencing greater scrutiny and regulation by
governmental authorities, which may lead to greater governmental
regulation in the future.
Medical device companies are subject to rigorous regulation,
including by the FDA and numerous other federal, state and
foreign governmental authorities. These authorities and members
of United States Congress have been increasing their scrutiny of
our industry. In addition, certain states have recently passed
or are considering legislation restricting our interactions with
health care providers and requiring disclosure of payments to
them.
17
Also, while recent case law has clarified that the FDAs
authority over medical devices preempts state tort laws,
legislation has been introduced at the Federal level to allow
state intervention. We anticipate that the government will
continue to closely scrutinize our industry, and additional
regulations by governmental authorities may increase compliance
costs, exposure to litigation and other adverse effects to our
operations.
A
significant part of our neurosurgical products sales comes from
a single customer, which makes us vulnerable to the loss of that
customer.
Codman currently accounts for most of our total revenue from
sales of our bipolar electrosurgical generators. During the
fiscal year ended July 2010, revenue from sales of our bipolar
electrosurgical generators, disposable bipolar forceps, cord
tubing sets and royalty payments from Codman represented
approximately 13.1 percent of the Companys total net
sales. Under our existing agreement with Codman, Codman
distributes the third generation generator trademarked as the
CMCtm
III on an exclusive basis. Our existing agreement with Codman
will expire by its own terms on December 31, 2011, unless
extended by mutual agreement of the parties. During fiscal 2010,
we delivered new prototypes of the
CMCtm
V to be released during fiscal 2011. In addition, we continue to
develop new generators and additions to the disposable forceps
line which will expand their reach to additional markets.
Our
products may not be accepted in the market.
We cannot be certain that our current products or any other
products we may develop or market will achieve or maintain
market acceptance. We cannot be certain that our devices and the
procedures they perform will be able to replace established
treatments or that physicians or the medical community in
general will accept and utilize our devices or any other medical
products that we may develop.
Market acceptance of our products depends on many factors,
including our ability to:
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convince third-party distributors and customers that our
technology is an attractive alternative to other technologies;
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manufacture products in sufficient quantities and at acceptable
costs; and
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supply and service sufficient quantities of our products
directly or through marketing alliances.
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If we
do not introduce new commercially successful products in a
timely manner, our products may become obsolete over time,
thereby decreasing our revenue and profitability.
Demand for our products may change because of evolving customer
needs, the introduction of new products and technologies, the
discovery of cures for certain medical problems, including
pharmacology, evolving surgical practices and evolving industry
standards. Without the timely introduction of new commercially
successful products and enhancements, our products may become
obsolete over time causing our sales and operating results to
suffer. The success of our new products will depend on several
factors, including our ability to:
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properly identify and anticipate customer needs;
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obtain regulatory approval for new products;
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achieve positive clinical outcomes;
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commercialize new products in a cost-effective and timely manner;
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manufacture and deliver products in sufficient volumes on time;
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differentiate our products from those of our competitors;
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satisfy the increased demands by health care payers, providers
and patients for lower-cost procedures and shorter hospital
stays and recovery times;
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innovate and develop product designs and surgical
techniques; and
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provide adequate medical
and/or
customer education relating to new products and attract key
surgeons to advocate these new products.
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New products and enhancements usually require a substantial
investment in R&D before we can determine the viability of
the product. Our R&D process entails considerable
uncertainty. Moreover, new products and enhancements may not
produce revenues in excess of the R&D costs, and they may
become obsolete by changing customer preferences or the
introduction by our competitors of new technologies or features.
Failure to develop our manufacturing capability may mean that
even if we develop promising new products, we may not be able to
produce them profitably, as a result of delays and additional
capital investment costs.
Quality
problems with our processes, goods and services could harm our
reputation for producing high quality products and erode our
competitive advantage.
Quality is extremely important to us and our customers due to
the serious and costly consequences of product failure. Our
quality certifications are critical to the marketing success of
our goods and services. If we fail to meet these standards, our
reputation could be damaged, we could lose customers and our
revenue could decline. Aside from specific customer standards,
our success depends generally on our ability to manufacture to
exact tolerances precision engineered components,
sub-assemblies
and finished devices from multiple materials. If our components
fail to meet these standards or fail to adapt to evolving
standards, our reputation as a manufacturer of high quality
components will be harmed, our competitive advantage could be
damaged and we could lose customers and market share.
Our
operating results may fluctuate.
Our operating results have fluctuated in the past and can be
expected to fluctuate from time to time in the future. Some of
the factors that may cause these fluctuations include, but are
not limited to:
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general economic uncertainties and political concerns;
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timing of customer capital availability and other selling and
general expenditures;
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receipt of necessary regulatory approvals;
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the introduction of new products or product lines;
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product modifications;
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the level of market acceptance of new products;
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the timing of R&D and other expenditures;
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timing of the receipt of orders from, and product shipments to,
distributors and customers;
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changes in the distribution arrangements for our products;
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manufacturing or supply delays;
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the time needed to educate and train additional sales personnel;
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costs associated with product introductions;
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costs associated with defending our intellectual property; and
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product returns.
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The
recent U.S. healthcare reform legislation could adversely affect
our revenue and financial condition.
In March 2010, Congress approved, and the President signed into
law, the Patient Protection and Affordable Care Act and the
Health Care and Education Reconciliation Act (collectively the
Healthcare Reform Acts). Among other things, the
Healthcare Reform Acts seek to expand health insurance coverage
to approximately 32 million uninsured Americans. Many of
the significant changes in the health care industry resulting
from the enactment of the Healthcare Reform Acts do not take
effect until 2014, including a requirement that most Americans
carry health insurance. We expect expansion of access to health
insurance to increase the demand for our products and services,
but other provisions of the Healthcare Reform Acts could affect
us adversely. The Healthcare
19
Reform Acts contain many provisions designed to generate the
revenues necessary to fund the coverage expansions and to reduce
costs of Medicare and Medicaid. Beginning in 2013, each medical
device manufacturer will have to pay a tax in an amount equal to
2.3 percent of the price for which the manufacturer sells
its medical devices in the United States. We manufacture and
sell devices that will likely be subject to this tax. We could
be adversely affected by, among other things, changes in the
delivery or pricing of or reimbursement for medical devices.
Change in government legislation or regulation, trends toward
managed care, health care cost containment and other changes in
government and private sector initiatives in the United States
and other countries in which we do business are placing
increased emphasis on the delivery of more cost-effective
medical therapies that could adversely affect the sale or the
prices of our products.
For example:
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There has been a consolidation among health care facilities and
purchasers of medical devices in the United States who
prefer to limit the number of suppliers from whom they purchase
medical products and these entities may decide to stop
purchasing their products or demand discounts on our prices.
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Major third-party payers of hospital services, including
Medicare, Medicaid and private health care insurers, are
currently scrutinizing and challenging the coverage of new
products and the level of reimbursement for covered products
that could create downward price pressure on our products.
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Recently, there has been an FDA-provided incentive for surgeons
to move certain procedures from hospitals to ambulatory surgical
centers, which may impact the demand for and distribution of our
surgical products.
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Numerous legislative proposals have been adopted which will
result in major reforms in the United States health care system
that could have an adverse effect on our business.
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There is economic pressure to contain health care costs in
international markets.
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There have been initiatives by third-party payers to challenge
the prices charged for medical products that could affect our
ability to sell products on a competitive basis.
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Both the pressures to reduce prices for our products in response
to these trends and the decrease in the size of the market as a
result of these trends could adversely affect our levels of
revenues and profitability of our sales.
Delays in the receipt or failure to receive regulatory
clearances or approvals, the loss of previously received
clearances or approvals, or failure to comply with existing or
future regulatory requirements could have a material adverse
effect on our business, financial condition, results of
operations and future growth prospects.
Our R&D activities and the manufacturing, labeling,
distribution and marketing of our existing and future products
are subject to regulation by governmental agencies in the United
States and in other countries. The FDA and comparable agencies
in other countries impose mandatory procedures and standards for
the conduct of clinical trials and the production and marketing
of products for diagnostic and human therapeutic use.
Products we have under development are subject to FDA approval
or clearance before marketing for commercial use. The process of
obtaining necessary FDA approvals or clearances can take years,
is expensive and the outcome may be uncertain. Our inability to
obtain required regulatory approval or clearance on a timely or
acceptable basis could harm our business. Further, approval or
clearance may place substantial restrictions on the indications
for which the product may be marketed or to whom it may be
marketed. Additional studies may be required to gain approval or
clearance for the use of a product for clinical indications
other than those for which the product was initially approved or
cleared or for significant changes to the product.
Furthermore, another risk relates to the regulatory
classification of new products or proposed new uses for existing
products. In the filing of each application, we are required to
make a judgment about the appropriate form and content of the
application. If the FDA disagrees with our judgment in any
particular case and, for example, requires us to file a PMA
rather than allowing us to market for approved uses while we
seek broader approvals or requires extensive additional clinical
data, the time and expense required to obtain the approval might
be significantly increased or approval might not be granted.
Approved and cleared products are subject to continuing
20
FDA requirements relating to quality control and quality
assurance, maintenance of records, reporting of adverse events
and product recalls, documentation and labeling and promotion of
medical devices.
There can be no assurance that we will be able to obtain
necessary clearances or approvals to market any other products,
or existing products for new intended uses, on a timely basis,
if at all.
We may
be subject to penalties and may be precluded from marketing our
products if we fail to comply with extensive governmental
regulations.
The FDA and
non-U.S. regulatory
authorities require that our products be manufactured according
to rigorous standards. These regulatory requirements may
significantly increase our production costs and may even prevent
us from making our products in amounts sufficient to meet market
demand. If we change our approved manufacturing process, the FDA
may need to review the process before it may be used. Failure to
comply with applicable regulatory requirements discussed
throughout this Annual Report on
Form 10-K
could subject us to enforcement actions, including:
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warning letters;
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fines, injunctions and civil penalties against us;
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recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of
our production;
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refusing our requests for premarket clearance or approval of new
products;
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withdrawing product approvals already granted; and
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criminal prosecution.
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Federal, state and
non-U.S. regulations,
regarding the manufacture and sale of medical devices are
subject to future changes. The complexity, timeframes and costs
associated with obtaining marketing clearances are unknown.
Although we cannot predict the impact, if any, these changes
might have on our business, the impact could be material.
We may
be unable to maintain our ISO certification or CE mark which
allows us to sell our products in the European medical
market.
Pursuant to the Medical Device Directive, the Company is audited
annually. A negative audit could result in the removal of the CE
marking on our products, which would effectively bar the sale of
many of the Companys products in the European market. Such
a result would have a significant and material negative impact
on the Company and its business. In addition, there are several
other countries that require additional regulatory clearances.
We may
be unable to obtain electrical safety approval to market our
applicable products under development.
The majority of our capital equipment products require
electrical safety testing, and in some cases, electromagnetic
compatibility testing, as either a product registration or to
gain market acceptance. The electrical safety testing and
electromagnetic compatibility testing requirements may change
and require us to redesign and retest our products. The
complexity, timeframes and costs associated with potential
redesign and retesting are unknown. Required redesign and
retesting could have a material adverse effect on our business
and results of operations.
Our
intellectual property rights may not provide meaningful
commercial protection for our products, which could adversely
affect our ability to compete in the market.
Our ability to compete effectively depends, in part, on our
ability to maintain the proprietary nature of our technologies
and manufacturing processes, which includes the ability to
obtain, protect and enforce patents on our technology and to
protect our trade secrets. We own patents that cover significant
aspects of our products. Certain
21
patents of ours have expired and others will expire in the
future. In addition, challenges may be made to our patents and,
as a result, our patents could be narrowed, invalidated or
rendered unenforceable. Competitors may develop products similar
to ours that our patents do not cover. In addition, our current
and future patent applications may not result in the issuance of
patents in the United States or
non-U.S. countries.
Further, there is a substantial backlog of patent applications
in the U.S. PTO, and the approval or rejection of patent
applications may take several years. We may become subject to
patent infringement claims or litigation or interference
proceedings declared by the U.S. PTO to determine the
priority of invention.
Our competitive position depends, in part, upon unpatented trade
secrets, which can be difficult to protect. Others may
independently develop substantially equivalent proprietary
information and techniques or gain access to our trade secrets.
In an effort to protect our trade secrets, we require
consultants, advisors and most of our employees to execute
confidentiality agreements and certain of them to sign invention
assignment agreements upon commencement of employment or a
consulting relationship with us. These agreements typically
provide that, except in specified circumstances, all
confidential information developed or made known to the
individual during the course of his or her relationship with us
must be kept confidential. They typically contain provisions
requiring these individuals to assign to us, without additional
consideration, any inventions conceived or reduced to practice
by them while employed or retained by us, subject to customary
exceptions. Some jurisdictions limit the enforceability and
scope of these agreements and these agreements may not provide
meaningful protection for our trade secrets or other proprietary
information in the event of the unauthorized use or disclosure
of confidential information.
The
intellectual property rights of others may adversely affect our
ability to introduce new products or continue to sell existing
products.
The medical device industry is characterized by frequent
litigation regarding patent and other intellectual property
rights. Companies in the medical device industry have employed
intellectual property litigation to gain a competitive
advantage. Numerous patents are held by others, including
academic institutions and our competitors. Until recently,
patent applications were maintained in secrecy in the United
States until after the time the patent had been issued. Patent
applications filed in the United States after November 2000
generally will be published 18 months after the filing
date. However, since patent applications continue to be
maintained in secrecy for at least some period of time, we
cannot assure you that our technology does not infringe any
patents, patent applications held by third parties or prior
patents. We have, from time to time, been notified of, or have
otherwise been made aware of, claims that we are infringing upon
patents or other proprietary intellectual property owned by
others. If it appears necessary or desirable, we may seek
licenses under such patents or proprietary intellectual
property. Although patent holders may offer such licenses,
licenses under such patents or intellectual property may not be
offered or the terms of any offered licenses may not be
reasonable.
Any infringement claims, with or without merit, and regardless
of whether we are successful on the merits, could be
time-consuming, result in costly litigation and diversion of
technical and management personnel, cause shipment delays or
require us to develop non-infringing technology or enter into
royalty or licensing agreements. An adverse determination could
prevent us from manufacturing or selling our products, which
could have a material adverse effect on our business, results of
operations and financial condition.
We may
have product liability claims, and our insurance may not cover
all claims.
The development, manufacture, sale and use of medical products
entail significant risk of product liability claims. We maintain
product liability coverage at levels we have determined are
reasonable. We cannot assure you that such coverage limits are
adequate to protect us from any liabilities we might incur in
connection with the development, manufacture, sale or use of our
products. In addition, we may require increased product
liability coverage as our sales increase in their current
applications and new applications. Product liability insurance
is expensive and in the future may not be available on
acceptable terms, if at all. A successful product liability
claim or series of claims brought against us in excess of our
insurance coverage could adversely affect our business.
22
The
loss of key personnel could harm our business.
Our future success depends upon the continued service of key
management, technical sales and other critical personnel,
including Messrs. Hable, Gampp and Malis and
Ms. Boone, our Chief Executive Officer, our Chief Operating
Officer, our Chief Scientific Officer and our Chief Financial
Officer, respectively. We maintain key person life insurance for
Messrs. Hable, Gampp and Malis. Our officers and other key
personnel are
employees-at-will,
and we cannot assure you that we will be able to retain them.
The loss of any key employee could result in a disruption to our
operations and could materially harm our business. In addition,
the integration of replacement personnel could be time
consuming, may cause additional disruptions to our operations,
and may be unsuccessful.
If we
are unable to hire, train and retain additional sales,
marketing, manufacturing, engineering and finance personnel, our
growth could be impaired.
To grow our business successfully and maintain a high level of
quality, we will need to recruit, retain and motivate
highly-skilled sales, marketing, engineering, manufacturing and
finance personnel. If we are not able to hire, train, and retain
a sufficient number of qualified employees, our growth may be
impaired. In particular, we will need to expand our sales and
marketing organizations in order to increase market awareness of
our products and to increase revenues. In addition, as a Company
focused on the development of complex products, we will need to
hire additional engineering staff of various experience levels
in order to meet our product development strategy. Competition
for skilled employees is intense.
We
plan to expand our international sales and distribution
operations, and the success of our international operations is
subject to significant uncertainties.
We believe that we must expand our international sales and
distribution operations to have continued growth. In fiscal
2010, our sales to countries outside the U.S. represent
approximately 32 percent of our total sales. In addition,
we believe a similar proportion of products sold to marketing
partners in the U.S. are distributed by these partners to
their
non-U.S. affiliates.
We expect to sell an increasing portion of our products to
customers overseas. In attempting to conduct and expand business
internationally, we are exposed to various risks that could
adversely affect our international operations and, consequently,
our operating results, including:
|
|
|
|
|
difficulties and costs of staffing and managing international
operations;
|
|
|
|
fluctuations in currency exchange rates;
|
|
|
|
unexpected changes in international or local market regulatory
requirements, including imposition of currency exchange controls;
|
|
|
|
longer accounts receivable collection cycles;
|
|
|
|
import or export licensing requirements;
|
|
|
|
potentially adverse tax consequences;
|
|
|
|
political and economic instability;
|
|
|
|
obtaining regulatory approvals for our products;
|
|
|
|
end-market
and/or
regional competition that may have competitive advantages;
|
|
|
|
potentially reduced protection for intellectual property
rights; and
|
|
|
|
subjectivity of
non-U.S. laws.
|
We
have international suppliers of various products.
We have suppliers that are located outside the United States,
subjecting us to risks generally associated with contracting
with
non-U.S. suppliers,
including quality concerns, adverse changes in
non-U.S. economic
conditions, import regulations, duties, tariffs, quotas,
economic and political instability, burdens of complying with a
wide variety of
non-U.S. laws
and embargoes. Our reliance on international suppliers may cause
us to experience
23
problems in the timeliness and the adequacy or quality of
product deliveries. In addition, we continue to sell the Quantel
lasers under an expired distribution agreement.
Our
cash is maintained with a regional bank which may not be fully
insured.
We maintain significant amounts of cash and cash equivalents at
a financial institution that is in excess of federally insured
limits. Given the current instability of financial institutions,
we cannot be assured that we will not experience losses on these
deposits.
Efforts
to acquire additional companies or product lines may consume
managerial resources and we may incur or assume additional
liabilities or experience integration problems.
We seek to acquire additional businesses or product lines for
strategic reasons, including adding new products, new customers
and increasing penetration with existing customers, adding new
manufacturing capabilities or expanding into new geographic
markets. Our ability to successfully grow through additional
acquisitions depends upon our ability to identify, negotiate,
complete and integrate suitable acquisitions and to obtain any
necessary financing. If we were to complete additional
acquisitions, we may also experience:
|
|
|
|
|
difficulties integrating any acquired products into our existing
business;
|
|
|
|
delays in realizing the benefits of the acquired
products; or
|
|
|
|
diversion of our managements time and attention to ongoing
business.
|
The
market price of our stock may be highly volatile.
The market price of our common stock could fluctuate
substantially due to a variety of factors, including:
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|
|
|
|
our ability to successfully commercialize our products;
|
|
|
|
the execution of new agreements and material changes in our
relationships with companies with whom we contract;
|
|
|
|
quarterly fluctuations in results of operations;
|
|
|
|
announcements regarding technological innovations or new
commercial products by us or our competitors or the results of
regulatory filings;
|
|
|
|
market reaction to trends in sales, marketing and R&D and
reaction to acquisitions;
|
|
|
|
sales of common stock by existing shareholders;
|
|
|
|
changes in key personnel;
|
|
|
|
economic and political conditions, including worldwide
geopolitical events; and
|
|
|
|
fluctuations in the United States financial markets.
|
Synergetics
USA has anti-takeover defenses that could delay or prevent an
acquisition and could adversely affect the price of its common
stock.
Provisions of our certificate of incorporation, bylaws and
Delaware law may have the effect of deterring hostile takeovers
or delaying or preventing changes in the control of the Company,
including transactions in which our shareholders might otherwise
receive a premium for their shares over then current market
prices. In addition, these provisions may limit the ability of
our shareholders to approve transactions that they may deem to
be in their best interest. Also, our Board of Directors is
divided into three classes, as nearly equal in size as
practicable, with three-year staggered terms. This provision may
deter a potential acquirer from engaging in a transaction with
us because it will be unable to gain control of our Board of
Directors until at least two annual meetings have been held in
which directors are elected by our shareholders.
24
Material
increases in interest rates could potentially be a detriment to
sales.
Many of our products are sold to
non-U.S. distributorships
which purchase our products via funds secured through assorted
financing arrangements with third party financial institutions,
including credit facilities and short-term loans. Increased
interest rates could ultimately increase the overall cost of
owning our products for the end user and, thereby, reduce
product demand.
We
face risks associated with our collaborative and marketing
partner relationships.
Our collaborators may not pursue further development and
commercialization of products resulting from collaborations with
us or may not devote sufficient resources to the marketing and
sales of such products. We cannot provide assurance that these
types of relationships will continue over a longer period of
time. Further, our collaborative partners may develop or pursue
alternative technologies either on their own or in collaboration
with others. If a collaborator elects to terminate its agreement
with us, our ability to develop, introduce, market and sell the
product may be significantly impaired and we may be forced to
discontinue altogether the product resulting from the
collaboration. We may not be able to negotiate alternative
collaboration agreements on acceptable terms, if at all. The
failure of any current or future collaboration efforts could
have a material adverse effect on our ability to introduce new
products or applications and therefore could have a material
adverse effect on our business, results of operations and
financial condition.
Because
we do not require training for users of our products, there
exists a potential for misuse of our products, which could harm
our reputation and our business.
Our products may be purchased or operated by physicians with
varying levels of training. Outside the United States, many
jurisdictions do not require specific qualifications or training
for purchasers or operators of our products. We do not supervise
the procedures performed with our products, nor do we require
that direct medical supervision occur. We, and our distributors,
generally offer but do not require purchasers or operators of
our products to attend training sessions. In addition, we
sometimes sell our systems to companies that rent our systems to
third parties and that provide a technician to perform the
procedure. The lack of training may result in product misuse and
adverse treatment outcomes, which could harm our reputation and
expose us to costly product liability litigation.
If our
facilities were to experience catastrophic loss, our operations
would be seriously harmed.
Our facilities could be subject to catastrophic loss such as
fire, flood, tornados or earthquake. A substantial portion of
our R&D and manufacturing activities, our corporate
headquarters and other critical business operations are located
near major earthquake faults in OFallon, Missouri. Any
such loss at any of our facilities could disrupt our operations,
delay production, shipments and revenue and result in large
expense to repair and replace our facilities.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our primary office and manufacturing operations are conducted in
a 60,000 square foot building owned by our wholly owned
subsidiary, Synergetics Development Company, LLC, a Missouri
limited liability company. The facility is located in
OFallon, Missouri, approximately 25 miles west of
St. Louis, Missouri. In August 2007, we leased
approximately 10,000 square feet of additional space
adjacent to our headquarters in OFallon, Missouri, for a
term of five years expiring July 31, 2012. The additional
space houses the Advanced Technology R&D Group and
Medimold, originally a St. Peters, Missouri-based injection
molding company that we purchased in June of 2008.
Effective May 1, 2005, we leased 13,500 square feet of
office, assembly and manufacturing space in King of Prussia,
Pennsylvania. The sublease and lease agreement for this facility
is for a term of four and one-half years,
25
which serves as office, engineering, and manufacturing space. In
November of 2008, this lease was extended through
October 31, 2012.
We believe that these facilities are suitable and adequate for
our operations. Given our lean manufacturing initiative, we
believe that we have the ability to generate additional
production capacity using our existing manufacturing facilities.
|
|
Item 3.
|
Legal
Proceedings
|
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 July 31, 2010,
the Company has no litigation reserve recorded.
|
|
Item 4.
|
[Removed
and Reserved]
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock is listed on The NASDAQ Capital
Market under the ticker symbol SURG. The table below
sets forth the range of high and low sales prices per share of
the Companys common stock as reported by The NASDAQ
Capital Market for each of the quarterly periods within the
fiscal years ended July 31, 2010 and 2009. None of the
prices shown reflect retail
mark-ups,
mark-downs or commissions. For current price information, you
are urged to consult publicly available sources.
|
|
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|
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|
High
|
|
Low
|
|
Year ended July 31, 2009
|
|
|
|
|
|
|
|
|
Quarter ended October 29, 2008
|
|
$
|
3.24
|
|
|
$
|
1.06
|
|
Quarter ended February 3, 2009
|
|
$
|
1.59
|
|
|
$
|
0.70
|
|
Quarter ended May 4, 2009
|
|
$
|
1.17
|
|
|
$
|
0.74
|
|
Quarter ended July 31, 2009
|
|
$
|
1.80
|
|
|
$
|
0.97
|
|
Year ended July 31, 2010
|
|
|
|
|
|
|
|
|
Quarter ended October 31, 2009
|
|
$
|
1.83
|
|
|
$
|
1.15
|
|
Quarter ended January 31, 2010
|
|
$
|
1.63
|
|
|
$
|
1.19
|
|
Quarter ended April 30, 2010
|
|
$
|
3.19
|
|
|
$
|
1.15
|
|
Quarter ended July 31, 2010
|
|
$
|
3.02
|
|
|
$
|
2.27
|
|
The number of shareholders of Synergetics USA, Inc. as of
October 4, 2010, was approximately 3,288 and included
153 shareholders of record and approximately
3,135 shareholders in nominee accounts.
The Company has not paid a dividend to holders of its common
stock since 1996. We currently intend to retain earnings to
finance growth and development of our business and do not
anticipate paying cash dividends in the near future.
26
STOCK
PERFORMANCE GRAPH
The following graph is not soliciting material,
is not deemed filed with the SEC, and is not to be incorporated
by reference into any of the Companys filings under the
Securities Act of 1933 or the Securities Exchange Act of 1934,
as amended, respectively.
The graph below compares the cumulative total stockholder return
on an investment in our common stock, and the stocks of The
NASDAQ Composite Stock Market and an index of a peer group of
medical companies selected by the Company (the Peer
Group) for the five-year period ended July 31, 2010.
The Peer Group is composed of seven small companies with sales
ranging from approximately $27 million to $91 million
and whose primary business is medical devices: Bovie Medical
Corporation, Endologix, Inc., Iridex, Micrus Endovascular
Company, STAAR Surgical Company, Stereotaxis, Inc. and Vascular
Solutions, Inc. The graph assumes the value of an investment of
$100 in the common stock of each group or entity at
August 1, 2005 and that all dividends were reinvested.
27
|
|
Item 6.
|
Selected
Financial Data
|
The selected financial data set forth below should be read in
conjunction with the Managements Discussion and Analysis
of Financial Condition and Results of Operations and
consolidated financial statements and notes thereto appearing
elsewhere in this Annual Report on
Form 10-K.
The statements of income data for the years ended July 31,
2010, 2009 and 2008 and the balance sheet data as of
July 31, 2010 and 2009 have been derived from audited
consolidated financial statements of the Company included
elsewhere in this report. The consolidated statements of income
for the years ended July 31, 2007 and 2006 and the balance
sheets data as of July 31, 2008, 2007 and 2006 have been
derived from audited consolidated financial statements that are
not included in this report. The historical results are not
necessarily indicative of the results of operations to be
expected in the future.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended July 31,
|
|
|
2010
|
|
2009*
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands, except per share data)
|
|
Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
52,075
|
|
|
$
|
52,965
|
|
|
$
|
50,063
|
|
|
$
|
45,945
|
|
|
$
|
38,246
|
|
Cost of Sales
|
|
|
22,166
|
|
|
|
23,550
|
|
|
|
20,101
|
|
|
|
18,943
|
|
|
|
14,238
|
|
Gross profit
|
|
|
29,909
|
|
|
|
29,415
|
|
|
|
29,962
|
|
|
|
27,002
|
|
|
|
24,008
|
|
Operating Income
|
|
|
6,040
|
|
|
|
3,125
|
|
|
|
5,208
|
|
|
|
1,518
|
|
|
|
5,004
|
|
Net income
|
|
|
5,733
|
|
|
|
1,595
|
|
|
|
2,663
|
|
|
|
845
|
|
|
|
3,081
|
|
Earnings per common share Basic
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
$
|
0.03
|
|
|
$
|
0.15
|
**
|
Earnings per common share Diluted
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
$
|
0.03
|
|
|
$
|
0.15
|
**
|
|
|
|
* |
|
In the fourth quarter of fiscal 2009, the Company recorded an
adjustment of approximately $975,000 or approximately $0.03
earnings per share, net of tax, primarily due to excess and
discontinued inventory which was either contributed to a
charitable organization or was discarded. |
|
** |
|
The fiscal year 2006 has not been adjusted to reflect the
4.59 shares received by the private company shareholders
for each share of private company stock at the time of the
reverse merger between Valley Forge and Synergetics forming
Synergetics USA, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of Fiscal Years Ended July 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
|
Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,669
|
|
|
$
|
160
|
|
|
$
|
500
|
|
|
$
|
167
|
|
|
$
|
243
|
|
Current assets
|
|
|
41,066
|
|
|
|
25,358
|
|
|
|
24,549
|
|
|
|
24,010
|
|
|
|
21,594
|
|
Total assets
|
|
|
73,095
|
|
|
|
58,080
|
|
|
|
58,396
|
|
|
|
58,616
|
|
|
|
51,329
|
|
Current liabilities
|
|
|
6,349
|
|
|
|
11,948
|
|
|
|
11,865
|
|
|
|
13,657
|
|
|
|
8,996
|
|
Long-term liabilities
|
|
|
22,520
|
|
|
|
8,002
|
|
|
|
10,174
|
|
|
|
11,524
|
|
|
|
10,028
|
|
Retained earnings
|
|
|
19,319
|
|
|
|
13,586
|
|
|
|
11,991
|
|
|
|
9,328
|
|
|
|
8,483
|
|
Stockholders equity
|
|
|
44,226
|
|
|
|
38,130
|
|
|
|
36,357
|
|
|
|
33,435
|
|
|
|
32,305
|
|
28
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations, commonly
referred to as MD&A, is intended to help the reader
understand Synergetics USA, its operations and its business
environment. MD&A is provided as a supplement to, and
should be read in conjunction with, our consolidated audited
financial statements and accompanying notes. This overview
summarizes the MD&A, which includes the following sections:
|
|
|
|
|
Our Business a general description of the key
drivers that affect our business and the industries in which we
operate.
|
|
|
|
Our Business Strategy a description of the
strategic initiatives on which we focus and the goals we seek to
achieve.
|
|
|
|
Results of Operations an analysis of the
Companys results of operations for the three years
presented in our financial statements.
|
|
|
|
Liquidity and Capital Resources an analysis
of cash flows, sources and uses of cash, currency exchange and
an overview of our financial position.
|
|
|
|
Contractual Obligations an analysis of
contracts entered into in the normal course of business that
will require future payments.
|
|
|
|
Use of Estimates and Critical Accounting
Policies a description of critical accounting
policies including those that affect the more significant
judgments and estimates used in the preparation of our
consolidated financial statements.
|
Our
Business
The Company is a medical device company. Through continuous
improvement and development of our people, our mission is
to design, manufacture and market innovative microsurgical
devices and consumables of the highest quality in order to
assist and enable surgeons who perform microsurgery 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, handheld devices and the microscopic
delivery of laser energy, ultrasound, electrosurgery,
aspiration, illumination and irrigation, often delivered in
multiple combinations. Enterprise-wide sales information is
included in Note 16 to the consolidated audited financial
statements.
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 microsurgery 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 $2.0 million, or
3.8 percent, of total sales for the Company for fiscal
2010. For fiscal 2009, new products accounted for approximately
$3.6 million, or 6.8 percent, of total sales for the
Company. These new product sales were primarily in our
disposable products both in the ophthalmic and marketing
partners markets. The Companys past revenue growth
has been closely aligned with the adoption by surgeons of new
technologies introduced by the Company. Since August 1,
2009, the Company has introduced 40 new catalogue items to the
ophthalmic and neurosurgical markets. We expect adoption rates
for the Companys new products in the future to have a
positive 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
29
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). This product was developed for
ophthalmology but has 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 Sonopet power ultrasound system technology now
owned by Stryker provides a different method for the minimally
invasive removal of soft and fibrotic tissue, as well as bone
removal through the use of ultrasonic tips provided by the
Company to Stryker. The Company has benefited from the overall
growth in this market and expects to continue to benefit as
Stryker introduces new and improved technologies targeting this
market.
Demand
Trends
The Companys sales declined 1.7 percent during the
fiscal year ended July 31, 2010 compared with the previous
fiscal year. The two most significant factors impacting this
decrease were a $1.6 million decrease in sales due to the
transitioning of our neurosurgery sales to our marketing
partners and a $3.4 million, or 22.1 percent, decrease
in capital equipment sales. These decreases were primarily
offset by the growth in our disposable product sales of
$2.5 million, or 6.7 percent.
A study performed for the Company by Market Scope LLC predicts a
steady growth of 3.4 percent per year in vitrectomy surgery
worldwide. Neurosurgical procedures on a global basis continue
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 devices 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
neurosurgical market.
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 Companys capital
equipment market segments, in combination with customer budget
constraints and capital scarcity, has in some instances
negatively impacted the Companys selling prices on these
devices.
Economic
Trends
Economic conditions may continue to negatively impact capital
expenditures at the hospital or surgical center and doctor
level. Further, economic conditions in the United States
negatively impacted the volume of the Companys capital
equipment sales during fiscal 2010. This was a contributing
factor in the Companys 1.7 percent decrease in sales
during the 2010 fiscal year as compared to a growth rate of
approximately 5.8 percent in the 2009 fiscal year.
Our
Business Strategy
The Companys key strategy is to enhance shareholder value
through profitable revenue growth in ophthalmology and
neurosurgery markets through the identification and development
of reusable and disposable devices in conjunction with leading
surgeons and marketing partners and to build out a strong
operational infrastructure and financial foundation within which
prudently financed growth opportunities can be realized and
implemented. At the same time, we will maintain vigilance and
sensitivity to new challenges which may arise from changes in
the definition and delivery of appropriate healthcare in our
fields of interest. In fiscal 2011, our driving
strategic priorities are to drive the Company onto a
different growth trajectory and to continue to enhance the
profitability of our operational platform by focusing on
manufacturing efficiencies. For additional detail on the
Companys Strategy, see Part I, Item 1,
Business Strategy.
30
Results
of Operations
Year
Ended July 31, 2010 Compared to Year Ended July 31,
2009
Net
Sales
The following table presents net sales by category (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
July 31,
|
|
|
% Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Ophthalmic
|
|
$
|
31,689
|
|
|
$
|
29,981
|
|
|
|
5.7
|
%
|
Direct Neurosurgery
|
|
|
8,175
|
|
|
|
13,968
|
|
|
|
(41.5
|
)%
|
Marketing Partners
|
|
|
4,204
|
|
|
|
|
|
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Neurosurgery
|
|
|
12,379
|
|
|
|
13,968
|
|
|
|
(11.4
|
)%
|
OEM
|
|
|
7,878
|
|
|
|
8,538
|
|
|
|
(7.7
|
)%
|
Other
|
|
|
129
|
|
|
|
478
|
|
|
|
(73.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,075
|
|
|
$
|
52,965
|
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmic sales grew 5.7 percent in fiscal 2010 compared
to fiscal 2009. Domestic ophthalmic sales decreased
1.9 percent, while international ophthalmic sales increased
16.9 percent primarily due to sales of disposable products.
Direct neurosurgery sales fell $5.8 million, or
41.5 percent, to $8.2 million in fiscal 2010 compared
with fiscal 2009. This decline in neurosurgery sales was the
result of the transition to Codman and Stryker under new
marketing partner agreements during fiscal 2010. New sales to
our domestic marketing partners comprised $4.2 million of
sales in fiscal 2010, partially offsetting the loss in
neurosurgery sales. Total neurosurgery sales including marketing
partners declined $1.6 million, or 11.4 percent. Total
OEM sales fell 7.7 percent to $7.9 million compared
with $8.5 million in fiscal 2009.
The two most significant factors impacting the decrease in our
sales during fiscal 2010 were the transition of our direct
neurosurgery sales to our marketing partners which resulted in a
$1.6 million decrease in our net sales and the significant
decline in our capital equipment sales of approximately
$3.4 million, or 22.1 percent, which came from
hospitals tightly controlling their capital expenditure budgets
during the fiscal year.. These decreases were primarily offset
by the growth in our disposable product sales of
$2.5 million, or 6.7 percent.
The following table presents domestic and international net
sales (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Decrease
|
|
|
United States (including sales to marketing partners)
|
|
$
|
35,417
|
|
|
$
|
36,047
|
|
|
|
(1.7
|
)%
|
International (including Canada)
|
|
|
16,658
|
|
|
|
16,918
|
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,075
|
|
|
$
|
52,965
|
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic and international sales decreased 1.7 and
1.5 percent, respectively. Sales of domestic ophthalmology
decreased 1.9 percent, while international ophthalmology
sales increased 16.9 percent. Domestic neurosurgery sales
decreased 38.4 percent and international neurosurgery sales
decreased 47.4 percent. Sales to our marketing partners
represented $4.2 million in sales during fiscal 2010,
partially offsetting the loss of neurosurgery sales. Our
international ophthalmic sales force at July 31, 2010
included 11 direct employees and approximately 47
non-U.S. distributors
and independent sales representatives covering 60 countries.
Gross
Profit
Gross profit as a percentage of net sales was 57.4 percent
in fiscal 2010, compared to 55.5 percent in fiscal 2009.
Gross profit as a percentage of net sales for fiscal 2010
compared to fiscal 2009 increased approximately
2.0 percentage points. There were several factors which
impacted the gross profit margin increase in fiscal 2010: the
elimination of a non-recurring $826,000 fourth quarter write-off
in fiscal 2009 of inventory primarily due to excess
31
and discontinued inventory, and improved absorption of both
labor and overhead deriving from our lean manufacturing
initiative, partially offset by the change in our sales mix
arising from the increase in our international ophthalmic sales
and from transitioning our neurosurgery product sales to our
marketing partners. The Company continues to realize incremental
savings from the lean manufacturing initiative and will continue
to develop its internal resources to expand the lean initiative
throughout the entire organization.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
July 31, 2010
|
|
|
July 31, 2009
|
|
|
July 31, 2008
|
|
|
R&D Expenditures (in thousands)
|
|
$
|
3,008
|
|
|
$
|
2,998
|
|
|
$
|
2,654
|
|
Percentage of net sales
|
|
|
5.8
|
%
|
|
|
5.7
|
%
|
|
|
5.3
|
%
|
R&D costs remained flat at $3.0 million when compared
to fiscal 2009. As of July 31, 2010, there were 23 active,
major projects in various stages of completion. The
Companys R&D investment is driven by the
opportunities to develop new products to meet the needs of its
surgeon customers, and reflecting the need to keep such spending
in line with what the Company can afford to spend. This results
in an investment rate that is comparable to such spending by
other medical device companies. The Company expects over the
next few years to invest in R&D at a rate of approximately
5 to 7 percent of net sales. However, in fiscal 2011, the
R&D investment rate may decline as development revenue from
certain new products being developed with Strykers
ultrasonic aspirator products will offset some of the
Companys internal R&D expenses.
Selling expenses, which consist of salaries, commissions and
direct expenses, decreased approximately $2.3 million to
$12.0 million, or 23.0 percent of sales, for the
fiscal year ended July 31, 2010, compared to
$14.3 million, or 26.9 percent of net sales, for the
fiscal year ended July 31, 2009. In July 2009, the Company
completed a reduction in personnel of approximately
10 percent of its workforce including most of its direct
neurosurgical sales force. This realignment was designed to
position the Company to attain increased profitability through
the elimination of a substantial portion of its commercial
expenses associated with direct distribution of these
neurosurgical products. During the fourth quarter of fiscal
2010, the Company eliminated the remaining expenses associated
with the direct distribution of its neurosurgical products and
as such expects to see another decline in its selling expenses
of approximately $1.4 million during fiscal 2011.
General and administrative expenses (G&A)
decreased by approximately $127,000 during the fiscal year ended
July 31, 2010 and as a percentage of net sales were
17.1 percent for the fiscal year ended July 31, 2010
as compared to 17.0 percent for the fiscal year ended
July 31, 2009. The Companys legal expenses decreased
by $391,000 during the fiscal year ended July 31, 2010
compared to the fiscal year ended July 31, 2009 primarily
due to elimination of the cost associated with the Alcon patent
and trademark infringement lawsuit. The legal expense decrease
was partially offset by various other increases.
Stock-based compensation cost is measured at the grant date,
based on the fair value of the award calculated using the
Black-Scholes option pricing model, and is recognized over the
directors and employees requisite service period.
The Company will continue to grant options to its independent
directors and officers but has begun to use restricted stock to
provide incentive compensation for its non-officer employees. As
of July 31, 2010, the future compensation cost expected to
be recognized is approximately $50,000 in fiscal 2011, $22,000
in fiscal 2012, $19,000 in fiscal 2013, $23,000 in fiscal 2014,
and $3,000 in fiscal 2015. However, the major portion of our
compensation cost arises from our stock option grants to our
directors, which is recognized pro-ratably over the year as the
options vest. As of July 31, 2010, there was approximately
$368,000 of total unrecognized compensation cost related to
non-vested restricted-stock based compensation arrangements
granted under a stock option plan adopted by Valley Forge in
2001. The cost is expected to be recognized over a weighted
average period of five years, which is generally the vesting
period.
Other
Income/Expense
Other income in fiscal 2010 increased significantly to
$2.8 million compared to an expense of $755,000 in fiscal
2009. The increase was primarily due to the one-time impact of
the $817,000 gain from sale of the
Omni®
product line to Stryker and the $2.4 million in settlement
gain from Alcon. In addition, interest expense decreased
32
$272,000 as the Company was able to pay down its lines of credit
and other debt with the reductions in the carrying value of
inventory, the proceeds from the sale of the
Omni®
product line and the settlement proceeds from Alcon.
Operating
Income, Income Taxes and Net Income
Operating income for fiscal 2010 was $6.0 million, as
compared to operating income of $3.1 million in the
comparable 2009 fiscal period. The increase in operating income
was primarily the result of a 1.7 percent decrease in net
sales offset by a 5.9 percent decrease in cost of goods
sold for a net increase in gross profit of $494,000. In
addition, operating income was favorably impacted by a decrease
of $2.3 million in sales and marketing expenses and a
$127,000 decrease in G&A costs, partially offset by a
slight increase in R&D costs.
For the fiscal year ended July 31, 2010, the Company
recorded a $3.1 million income tax provision on a pre-tax
income of $8.8 million, or 35.0 percent effective tax
rate. For the fiscal year ended July 31, 2009, the Company
recorded a $775,000 income tax provision on pre-tax income of
$2.4 million, or 32.7 percent effective tax rate. The
Companys effective tax rate increased for the fiscal year
ended July 31, 2010 due to the increase in pre-tax income,
causing the relative portion of the provision that is made up by
the research and experimentation credit and the manufacturing
deduction to decrease. In addition, the research and
experimentation credit expired as of December 31, 2009.
Net income increased by $4.1 million to $5.7 million
for the fiscal year ended July 31, 2010, from
$1.6 million for the same period in fiscal 2009. Basic and
diluted earnings per share for the fiscal year ended
July 31, 2010 increased to $0.23 from $0.07 for the fiscal
year ended July 31, 2009. Basic weighted average shares
outstanding increased from 24,459,749 at July 31, 2009 to
24,618,403 at July 31, 2010.
Year
Ended July 31, 2009 Compared to Year Ended July 31,
2008
Net
Sales
The following table presents net sales by category (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
July 31,
|
|
|
% Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Ophthalmic
|
|
$
|
29,981
|
|
|
$
|
28,019
|
|
|
|
7.0
|
%
|
Direct Neurosurgery
|
|
|
13,968
|
|
|
|
12,925
|
|
|
|
8.1
|
%
|
OEM (Codman, Stryker and Iridex)
|
|
|
8,538
|
|
|
|
8,347
|
|
|
|
2.3
|
%
|
Other
|
|
|
478
|
|
|
|
772
|
|
|
|
(38.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,965
|
|
|
$
|
50,063
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmic sales growth for fiscal 2009 was led by growth in
sales of disposable products which includes illumination
products, laser probes and sales of new disposable packs. When
comparing neurosurgery, net sales during the fiscal year ended
2009 were 8.1 percent greater than 2008, primarily
attributable to the sales of disposable products related to
electrosurgical generators and power ultrasonic aspirators.
Sales to our OEM customers were up 2.3 percent to
$8.5 million for the fiscal year ending July 31, 2009
primarily due to disposable products sold to Codman and Iridex
and sales of pain control generators to Stryker, partially
offset by a decrease in capital equipment sold to Codman due to
the economic environment during fiscal 2009.
The following table presents domestic and international net
sales (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Increase
|
|
|
United States (including sales to OEM customers)
|
|
$
|
36,047
|
|
|
$
|
35,838
|
|
|
|
0.6
|
%
|
International (including Canada)
|
|
|
16,918
|
|
|
|
14,225
|
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,965
|
|
|
$
|
50,063
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
U.S. sales remained relatively flat as the increase in
sales of the Companys disposable products were offset by
decreased sales of its capital products due to the economic
recession experienced in fiscal 2009. International sales grew
18.9 percent in the Companys core technology areas,
including sales of ophthalmic products in direct sales markets,
the ultrasonic aspirator, electrosurgical generator and their
related disposables.
Gross
Profit
Gross profit as a percentage of net sales was 55.5 percent
in fiscal 2009, compared to 59.8 percent in fiscal 2008.
The decrease in gross profit as a percentage of net sales from
fiscal 2009 to fiscal 2008 was attributable primarily to an
increase in sales of 5.8 percent compared to a cost of
goods sold increase of 17.2 percent. Gross profit as a
percentage of net sales from fiscal 2008 to fiscal 2009
decreased by approximately four percentage points primarily due
to the change in mix toward our international products, reduced
absorption of both labor and overhead on our capital equipment
product lines and a $826, 000 fourth quarter write-off primarily
due to excess and discontinued inventory which was either
contributed to a charitable organization or was discarded.
Operating
Expenses
R&D costs as a percentage of net sales were
5.7 percent and 5.3 percent for the fiscal years ended
July 31, 2009 and 2008, respectively. R&D costs
increased approximately $344,000 to $3.0 million in 2009
compared to $2.7 million in 2008. The increase in R&D
costs was primarily due to the direct costs associated with 39
active, major projects in various stages of completion at
July 31, 2009.
Selling expenses, which consist of salaries, commissions and
direct expenses, increased approximately $1.7 million to
$14.3 million, or 26.9 percent of sales, for the
fiscal year ended July 31, 2009, compared to
$12.6 million, or 25.2 percent of net sales, for the
fiscal year ended July 31, 2008. The increase in sales
expenses as a percentage of net sales was primarily due to
commissions paid on a 6.5 percent increase in
commissionable sales which excludes sales to our OEM customers.
In March 2009, the Company eliminated two positions within sales
and marketing. In July 2009, the Company completed a reduction
in personnel of approximately 10 percent of our workforce
including most of our direct neurosurgical sales force. This
realignment was designed to position the Company to attain
increased profitability through the elimination of a substantial
portion of our commercial expenses associated with direct
distribution of these neurosurgical products.
G&A decreased by approximately $469,000 during the fiscal
year ended July 31, 2009 and as a percentage of net sales
were 17.0 percent for the fiscal year ended July 31,
2009 as compared to 19.0 percent for the fiscal year ended
July 31, 2008. The Company experienced a decrease of
approximately $388,000 in outside consulting costs on its
Sarbanes-Oxley compliance efforts, primarily due to efforts to
further internalize documentation processes and procedures. The
Company also experienced a decrease of approximately $100,000 in
audit costs, as its external auditors were not required to
attest to the Companys internal control over financial
reporting due to the Companys qualification as a smaller
reporting company. The Companys legal expenses increased
by $331,000 during the fiscal year ended July 31, 2009
compared to the fiscal year ended July 31, 2008 primarily
due to the cost associated with the Alcon patent and trademark
infringement lawsuit. Directors fees increased $176,000
due to each independent director serving as the principal
executive officer of the Company on a weekly rotating basis for
the first six months of the fiscal year while the Board was
conducting a search for a new CEO. In addition, the directors
serving as the principal executive officer also caused salaries
and benefits to decrease by approximately $150,000.
Other
Expense
Other expense for the 2009 fiscal year decreased
31.7 percent to $755,000 from $1.1 million for the
fiscal year ended July 31, 2008. The decrease was primarily
due to decreased interest expense for the decreased borrowings
on the Companys working capital line during the year
partially offset by the annual interest expense associated with
the Iridex settlement.
Operating
Income, Income Taxes and Net Income
Operating income for fiscal 2009 was $3.1 million, as
compared to an operating income of $5.2 million in fiscal
2008. The decrease in operating income was primarily the result
of a decrease in gross profit margin of
34
approximately four percentage points on 5.8 percent more
net sales, and an increase in R&D expenses and selling
costs of $344,000 and $1.7 million, respectively, which was
partially offset by a $469,000 decrease in G&A expenses.
For the fiscal year ended July 31, 2009, the Company
recorded a $775,000 income tax provision on a pre-tax income of
$2.4 million, or 32.7 percent effective tax rate. For
the fiscal year ended July 31, 2008, the Company recorded a
$1.4 million income tax provision on pre-tax income of
$4.1 million, or 35.1 percent effective tax rate. The
Companys effective tax rate decreased for the fiscal year
ended July 31, 2009 due to the decrease in pre-tax income,
causing the relative portion of the provision that is made up by
the research and experimentation credit and the manufacturing
deduction to increase.
Net income decreased by $1.1 million to $1.6 million
for the fiscal year ended July 31, 2009, from
$2.7 million for the same period in fiscal 2008. Basic and
diluted earnings per share for the fiscal year ended
July 31, 2009 decreased to $0.07 from $0.11 for the fiscal
year ended July 31, 2008. Basic weighted average shares
outstanding increased from 24,321,713 at July 31, 2008 to
24,459,749 at July 31, 2009.
Liquidity
and Capital Resources
The Company had $18.7 million in cash and cash equivalents
and total interest-bearing debt of $4.1 million as of
July 31, 2010.
Working capital, including the management of inventory and
accounts receivable, is a management focus. At July 31,
2010, the Company had an average of 63 days of sales
outstanding (DSO) in accounts receivable. The 63 DSO
at July 31, 2010 was comparable to July 31, 2009 and
July 31, 2008 utilizing the trailing twelve months of sales.
At July 31, 2010, the Company had 196 days of
inventory on hand. The inventory on hand was favorable to
July 31, 2009 by 37 days and favorable by 69 days
to July 31, 2008 utilizing the trailing twelve months of
cost of sales. Although management attained its goal of reducing
inventory to $13.0 million, it is focused on continued
maintenance of that goal and will look at other means to reduce
its days of inventory on hand even further without impact to its
customer service goals.
Cash flows provided by operating activities were
$27.3 million for the year ended July 31, 2010,
compared to cash flows provided by operating activities of
approximately $492,000 for the comparable fiscal 2009 period.
The increase of approximately $26.8 million was primarily
attributable to the impact of the settlement proceeds from Alcon
which were approximately $19.0 million. In addition, the
increase was attributable to net increases applicable to net
income of $4.1 million, decrease in inventories of
$3.5 million, increases in accounts payable of $928,000 and
increases in income taxes payable of $1.0 million offset in
part by net decreases applicable primarily to the elimination of
the gain on sale of the assets related to the
Omni®
product line of $817,000 and lower accrued expenses of $708,000.
Cash flows provided by investing activities were $337,000 for
the year ended July 31, 2010, compared to cash used in
investing activities of $816,000 for the comparable fiscal 2009
period. During the year ended July 31, 2010, cash additions
to property and equipment were $1.1 million, compared to
$749,000 for fiscal 2009. Increases in cash additions in fiscal
2010 to property and equipment were primarily due to the
purchase of machinery and equipment to meet the increased demand
of our marketing partners. Proceeds from the sale of the
Omni®
product line were approximately $1.5 million during the
fiscal year ended July 31, 2010.
Cash flows used in financing activities were approximately
$9.1 million for the year ended July 31, 2010,
compared to cash used in financing activities of $16,000 for the
year ended July 31, 2009. The increase of $9.1 million
was attributable primarily to the decrease in net borrowings on
the
lines-of-credit
of $5.0 million and principal payments on revenue bonds
payable and long-term debt of $4.1 million. The Company
paid off its
lines-of-credit
and one of its outstanding revenue bonds during fiscal 2010. In
fiscal 2010, 2009 and 2008, the proceeds of the
lines-of-credit
were used to pay Iridex $800,000, $800,000 and $800,000 on
April 15, 2010, April 15, 2009 and April 16,
2008, respectively, as the parties had reached a settlement of
the lawsuit.
35
The Company had the following committed financing arrangements
as of July 31, 2010:
Revolving Credit Facility: The Company has a
credit facility with a bank which allows for borrowings of up to
$9.5 million with an interest rate based on either the
one-, two- or three-month LIBOR plus 2.00 percent and
adjusting each quarter based upon our leverage ratio. As of
July 31, 2010, interest under the facility is charged at
2.32 percent. The unused portion of the facility is charged
at a rate of 0.20 percent. There were no borrowings under
this facility at July 31, 2010. Outstanding amounts are
collateralized by the Companys domestic receivables and
inventory. This credit facility was amended on November 30,
2009, to extend the termination date through November 30,
2010. The Company expects this credit facility to be renewed.
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 July 31, 2010, the
Companys leverage ratio was 1.47 times and the minimum
fixed charge coverage ratio was 1.75 times. Collateral
availability under the line as of July 31, 2010 was
approximately $7.3 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
non-U.S. receivables
revolving credit facility with a bank which allows for
borrowings of up to $1.75 million with an interest rate
based on LIBOR plus 3.0 percent. Pursuant to the terms of
this facility, under no circumstance shall the rate be less than
3.5 percent per annum. The facility is charged an
administrative fee of 1.0 percent. There were no borrowings
under this facility at July 31, 2010. Outstanding amounts
are collateralized by the Companys
non-U.S. receivables.
This credit facility has no financial covenants and was amended
on November 30, 2009, to extend the termination date
through November 30, 2010. Collateral availability under
the facility was approximately $900,000 at July 31, 2010.
The Company expects this credit facility to be renewed.
Equipment Line of Credit: Under this credit
facility, the Company may borrow up to $1.0 million, with
interest currently at one-month LIBOR plus 3.0 percent.
Pursuant to the terms of the equipment line of credit, under no
circumstance shall the rate be less than 3.5 percent per
annum. The unused portion of the facility is not charged a fee.
There were no borrowings under this line as of July 31,
2010. The equipment line of credit was amended on
November 30, 2009, to extend the maturity date to
November 30, 2010. The Company expects this credit facility
to be renewed.
Management believes that cash flows from operations, together
with available cash, will be sufficient to meet the
Companys working capital (including taxes due on the Alcon
settlement), capital expenditure and debt service needs for the
next twelve months.
Contractual
Obligations
The Company has entered into contracts with various third
parties in the normal course of business that will require
future payments. The following illustrates the Companys
contractual obligations as of July 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Revenue Bonds Payable(1)
|
|
$
|
1,728,000
|
|
|
$
|
1,728,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Malis®
Tradename Note Payable(2)
|
|
|
911,000
|
|
|
|
598,000
|
|
|
$
|
313,000
|
|
|
|
|
|
|
|
|
|
Settlement Obligation(3)
|
|
|
1,600,000
|
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
Operating Leases(4)
|
|
|
638,000
|
|
|
|
308,000
|
|
|
|
323,000
|
|
|
$
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
4,877,000
|
|
|
$
|
3,434,000
|
|
|
$
|
1,436,000
|
|
|
$
|
7,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount represents the expected cash payments for our revenue
bonds payable through December 1, 2011. The Company expects
to retire this bond in the next twelve months. |
36
|
|
|
(2) |
|
Amount represents the expected cash payment on the note payable
to the estate of the late Dr. Leonard I. Malis. The note
includes interest at an imputed rate of 6.0 percent. |
|
(3) |
|
Amount represents the expected cash payment on the settlement
obligation to Iridex. The note includes interest at an imputed
rate of 8.0 percent. |
|
(4) |
|
We enter into operating leases in the normal course of business.
Some lease agreements provide us with the option to renew the
lease. Our future cash payment would change if we exercised
these renewal options or if we entered into additional operating
lease agreements. |
Use of
Estimates and Critical Accounting Policies
The financial results of the Company are affected by the
selection and application of accounting policies and methods.
Significant accounting policies which require managements
judgment are discussed below.
Revenue
Recognition
The Company records revenue from product sales when the revenue
is realized and the product is shipped from its facilities. This
includes satisfying the following criteria: the arrangement with
the customer is evident, usually through receipt of a purchase
order; the sales price is fixed and determinable; delivery to
the carrier has occurred; and collectability is reasonably
ensured. Freight and shipping billed to customers is included in
net sales, and the cost of shipping is included in cost of
sales. Sales tax billed to customers is included as a liability
as products are shipped.
The terms and conditions of sales to both our domestic and
international distributors do not differ materially from the
terms and conditions of sales to our domestic and international
end-user customers.
Service revenue substantially relates to repairs of products and
is recognized when the service has been completed. Revenue from
licenses, extended warranty contracts and royalty fees is
recorded when earned.
Deferred
Revenue
On April 23, 2010, the Company entered into a Settlement
and License Agreement with Alcon pursuant to which Alcon paid to
the Company $32.0 million. The net proceeds were
$21.4 million after contingency payments to attorneys. The
Company recognized a gain from this agreement of
$2.4 million in the third fiscal quarter. The remaining
$19.0 million has been accounted for as an up-front license
fee under the Settlement and License Agreement and will be
deferred and recognized as earned over a period of up to fifteen
years based upon the units shipped to Alcon under a Supply
Agreement entered pursuant to the settlement. Significant and
unanticipated changes to the forecasted unit volume over the
life of the agreement or changes in the expected contribution
margins associated with these products could change the timing
of the revenue recognized under this agreement.
Inventories
Inventories, consisting of purchased materials, direct labor and
manufacturing overhead, are stated at the lower of cost, with
cost being determined using the
first-in,
first-out (FIFO) method, or market. The
Companys inventory is very dynamic and new products are
added frequently. Thus, the Company reviews the valuation of its
inventory on a quarterly basis and determines if a valuation
allowance is necessary for items that have not had their values
updated recently. In addition, the Company evaluates inventories
for excess quantities and identified obsolescence quarterly. The
Companys evaluation includes an analysis of historical
sales levels by product and projections of future demand, as
well as estimates of quantities required to support warranty and
other repairs. To the extent that it determines there are some
excess quantities based on its projected levels of sales and
other requirements, or obsolete material in inventory, it
records valuation reserves against all or a portion of the value
of the related parts or products. If future cost valuations,
future demand or market conditions are different from the
Companys projections, a change in recorded inventory
valuation reserves may be required and would be reflected in
cost of sales in the period the revision is made.
37
Amortization
Periods
The Company records amortization of intangible assets using the
straight-line method over the estimated useful lives of these
assets. It bases the determination of these useful lives on the
period over which it expects the related assets to contribute to
its cash flows or in the case of patents, their legal life,
whichever is shorter. If the Companys assessment of the
useful lives of intangible assets changes, it may change future
amortization expense (see Impairment of Long-Lived
Assets).
Allowance
for Doubtful Accounts
The Company evaluates the collectability of accounts receivable
based on a combination of factors. In circumstances where a
specific customer is unable to meet its financial obligations to
the Company, the Company records an allowance against amounts
due to reduce the net recognized receivable to the amount that
management reasonably expects to collect. For all other
customers, the Company records allowances for doubtful accounts
based on the length of time the receivables are past due, the
current business environment, historical experience and credit
insurance. If the financial condition of customers or the length
of time that receivables are past due were to change, the
Company may change the recorded amount of allowances for
doubtful accounts in the future.
Patents
and Research and Development
Incremental legal and other costs to obtain patents are
capitalized to a patent asset. Salaries, benefits and other
direct costs of product development are expensed as operating
expenses in R&D costs. Patents are amortized to operations
under the straight-line method over the shorter of the remaining
statutory life of the patent or the cash flow stream associated
with that patent.
Goodwill
As of July 31, 2010, we have recorded $10.7 million of
goodwill. We perform purchase price allocations including
recognition of intangible assets when we make a business
combination. The excess of the purchase price after the
allocation of fair values to tangible assets and identifiable
intangibles is allocated to goodwill. We make judgments and
estimates in conjunction with the carrying value of these
assets, including amounts to be capitalized and whether the
assets have finite or indefinite lives for amortization
purposes. Currently, we have one reporting unit.
We perform our annual impairment test on goodwill in accordance
with the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC)
350-20-35.
Absent any impairment indicators, goodwill is tested for
impairment on an annual basis. The Company performs its
impairment tests during the fourth fiscal quarter. Our tests may
include three approaches to determine the fair value of our
reporting unit. The first approach is Discounted Cash Flows,
which focuses on our expected cash flows available for common
equity owners. Net cash flows to equity is defined as our
earnings plus depreciation, amortization and interest expense or
EBITDA less our estimated usage of cash for debt, capital
expenditures and working capital changes. The resulting net cash
flows and the terminal value (our value of invested capital at
the end of the five year projection period) are then discounted
to derive an indication of the present value of the
Companys invested capital. Interest-bearing debt is then
subtracted to arrive at the Companys fair value of equity.
This valuation method is dependent upon managements
assumptions made regarding future cash flow and cash
requirements and the discount factor used to determine the
present value of our future cash flows. If necessary, we would
also analyze two additional valuation methods: the Guideline
Company approach and the Market Capitalization approach. The
Guideline Company approach focuses on comparing the Company to
selected reasonably similar, publicly traded companies. Under
this approach, valuation multiples are: (i) derived from
operating data of selected similar companies;
(ii) evaluated and adjusted based on our strengths and
weaknesses relative to this selected group of guideline
companies; and (iii) applied to our revenues and EBITDA to
arrive at an indication of invested capital. Interest
bearing-debt is subtracted and a control premium and cash
balances are added to arrive at the fair value of the
Companys equity. This valuation approach is dependent upon
the assumption that our value can be evaluated by analysis of
our earnings and strengths and weaknesses relative to the
selected similar companies and an appropriate control premium
can be determined. The Market Capitalization Approach focuses on
the Companys market capitalization
38
over a period of time and applies a control premium to arrive at
an indication of fair value. This valuation approach is
dependent upon the performance of our stock and the control
premiums utilized in acquisitions completed in the healthcare
equipment and supplies industry.
The fair value determined under the Discounted Cash Flows
methodology in fiscal 2010 resulted in an indication of value
which exceeded the book value of the reporting unit by
approximately 127 percent. Significant and unanticipated
changes to these assumptions or the Companys operating
performance could require a provision for impairment in a future
period.
Other
Intangibles
As of July 31, 2010, we have recorded $5.9 million of
indefinite-lived intangible assets for the
Malis®
trademark. The life of a trademark is inextricably related to
the life of the product bearing the mark or the life of the
business entity owning the trademark. The Company intends to use
the trademark indefinitely, and therefore, its useful life is
not limited to any specific product. We perform impairment tests
on the carrying value of our indefinite-lived intangible assets
at least annually at the end of July or sooner if we identify an
event suggesting possible impairment of the value of this asset.
We test indefinite-lived intangible assets for impairment using
the Discounted Cash Flow methodology, which focuses on our
expected cash flows derived from the use of the intangible
asset. With respect to the trademark, the expected cash flows
are reduced by the related income taxes and debt. The indication
of value for the trademark exceeds its book value by
approximately 42 percent as of July 31, 2010.
Significant and unanticipated changes to either the market for
the
Malis®
banded products or our contract authorizing the use of the
Malis®
trademark could require a provision for impairment in a future
period.
Impairment
of Long-Lived Assets
Long-lived assets and certain identifiable intangible assets to
be held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such asset may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the group of assets and
their eventual disposition. Measurement of an impairment loss
for long-lived assets and certain identifiable intangible assets
that management expects to hold and use is based on the fair
value of the asset. Long-lived assets and certain identifiable
intangible assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell.
Tax
Assets and Liabilities
We account for income taxes in accordance with FASB ASC Topic
740, Income Taxes, which requires that deferred tax
assets and liabilities be recognized using enacted tax rates for
the effect of temporary differences between the book and tax
bases of recorded assets and liabilities. ASC Topic 740 also
requires that deferred tax assets be reduced by a valuation
allowance if its more likely than not that some
portion or all of the deferred tax asset not be realized. In our
annual evaluation of the need for a valuation allowance, we take
into account various factors, including the expected level of
future taxable income in our tax jurisdictions and available tax
planning strategies. If actual results differ from these
assumptions made in our annual evaluation of our valuation
allowance, we may record a change in valuation allowance through
income tax expense in the period this determination is made. At
July 31, 2010, we had deferred tax assets related to net
foreign operating loss carryforwards with a tax value of
$1.3 million. These net foreign operating loss
carryforwards have various expiration dates, depending on the
country and period in which they occurred. The Company has not
established a valuation allowance for these deferred tax assets
based upon projected future taxable income, the expiration dates
of these carryforwards and various tax planning strategies.
In addition, the calculations of our tax liabilities involve
dealing with uncertainties in the application of complex tax
regulation. On August 1, 2007, we adopted the provisions of
ASC Topic 740 related to uncertain tax positions. It is
inherently difficult and subjective to estimate such amounts, as
we have to determine the probability of certain outcomes. We
reevaluate these positions on a quarterly basis including an
analysis of changes in facts or circumstances, changes in tax
law, effectively settled issues or net audit activity. Such a
change in recognition or measurement would result in the
recognition of an additional charge to the tax provision.
39
Stock-Based
Compensation
The Company utilizes FASB ASC Topic 718,
Compensation Stock Compensation in
accounting for its employee stock options. Stock-based
compensation cost is measured at the grant date, based on the
fair value of the award and is recognized over the
directors and employees requisite service period.
Compensation expense is calculated using the Black-Scholes
option pricing model. Of the inputs into the Black-Scholes
option pricing model, the one that can impact the value of the
options the most is the volatility factor. For awards occurring
in fiscal year ended July 31, 2010, the Company has
utilized a volatility factor of 77.8 percent in this
calculation. In addition, the Company utilized an expected
average risk-free interest rate of 2.35 percent, an
expected average life of 10 years and no expected dividends.
Recent
Accounting Pronouncements
Information about recent accounting pronouncements is included
in Note 19 to the consolidated audited financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
The Companys primary market risks include fluctuations in
interest rates and exchange rate variability.
The Company has $18.7 million in cash and cash equivalents
with a substantial portion of this cash held in short-term money
market funds bearing interest at 70 basis points. Interest
income from these funds is subject to market risk in the form of
fluctuations in interest rates. A reduction in the interest on
these funds to 35 basis points would decrease the amount of
interest income from these funds by approximately $67,000.
The Company has two revolving credit facilities and an equipment
line of credit facility in place. The revolving credit
facilities had no outstanding balance at July 31, 2010,
bearing interest at a current rate of LIBOR plus
2.0 percent. The
non-U.S. revolving
credit facility had no outstanding balance at July 31,
2010. Balances on this credit facility currently bear interest
at one-month LIBOR plus 3.0 percent. The equipment line of
credit facility had no outstanding balance at July 31,
2010, bearing interest at one-month LIBOR plus 3.0 percent.
Interest expense from these credit facilities is subject to
market risk in the form of fluctuations in interest rates.
Because the current levels of borrowings are zero, there would
be no market risk associated with the interest rates. 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 8.
|
Financial
Statements and Supplementary Data
|
Financial statements and financial statement schedules specified
by this Item, together with the report thereon by UHY LLP, are
filed pursuant to Item 15 of this Annual Report on
Form 10-K.
Information on quarterly results of operations is set forth in
Note 18, Quarterly Financial Data (Unaudited)
to our consolidated audited financial statements.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures We maintain disclosure controls and
procedures designed to ensure that information required to be
disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
SEC, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Our management, including our
40
Chief Executive Officer and Chief Financial Officer, reviewed
and evaluated the effectiveness of our disclosure controls and
procedures as of July 31, 2010. Based upon such review and
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of the date of such evaluation to provide
reasonable assurance that information required to be disclosed
by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the SECs rules and
forms and that such information is accumulated and communicated
to the Companys management including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Managements Annual Report on Internal Control over
Financial Reporting Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over
financial reporting includes policies and procedures designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally
accepted accounting principles. All internal control systems, no
matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation.
We conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework of
Internal Control over Financial Reporting Guidance
for Smaller Public Companies issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). This evaluation included review of the
documentation of controls, evaluation of the design
effectiveness of controls, testing of the operating
effectiveness of controls and a conclusion of this evaluation.
Based on our evaluation we have concluded our internal control
over financial reporting was effective as of July 31, 2010.
Changes in Internal Control Over Financial
Reporting There were no changes in the
Companys internal control over financial reporting
identified in connection with the evaluation required by
paragraph (d) of
Rule 13a-15
or 15d-15 of
the Securities Exchange Act of 1934, as amended, that occurred
during the fiscal quarter ended July 31, 2010 that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
Attestation Report of Registered Public Accounting
Firm This Annual Report on
Form 10-K
does not include an attestation report of our independent
registered public accounting firm regarding internal control
over financial reporting. Managements report is not
subject to attestation by our independent registered public
accounting firm.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information under the heading, Executive Officers of
the Registrant in Part I, Item I of this Annual
Report on
Form 10-K
is incorporated herein by reference. In addition, certain
information required by this Item 10 will be included in
the Companys definitive proxy materials to be filed with
the SEC within 120 days after the end of the Companys
fiscal year covered by this report and is incorporated herein by
reference. The following sections of such proxy materials are
herein incorporated by reference: Election of
Directors, information regarding the identification of the
members of the Audit Committee of the Company and
Section 16(a) Beneficial Ownership Reporting
Compliance.
The Board of Directors has determined that Ms. Juanita
Hinshaw, one of the Companys independent directors,
qualifies as the Audit Committee financial expert because she
has served in an oversight role in finance and accounting.
41
The Company has established a Code of Business Conduct and
Ethics, which is applicable to all of its employees, officers
and directors. The Code is available on the Companys
website at www.synergeticsusa.com and also is available
to stockholders in print upon request. The Company intends to
satisfy the disclosure requirement under Item 10 of
Form 8-K
regarding the amendment to, or a waiver from, a provision of
this policy that applies to the Companys principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions and that relates to any element of the code of ethics
definition enumerated in Item 406(b) of
Regulation S-K
by posting such information on its website.
During the fourth quarter of fiscal 2010, there were no material
changes to the procedures by which stockholders may recommend
nominees to the Board.
|
|
Item 11.
|
Executive
Compensation
|
Information required pursuant to this Item 11 will be
included in the Companys definitive proxy materials to be
filed with the SEC within 120 days after the end of the
Companys fiscal year covered by this report under the
sections Executive Compensation and Director
Compensation and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Certain information required pursuant to this Item 12 will
be included in the Companys definitive proxy materials to
be filed with the SEC within 120 days after the end of the
Companys fiscal year covered by this report under the
section Principal Stockholders and is incorporated
herein by reference.
EXISTING
EQUITY COMPENSATION PLAN INFORMATION
The table below shows information with respect to all of our
equity compensation plans as of July 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Available for Future
|
|
|
|
|
|
|
|
|
|
Issuance
|
|
|
|
Number of Securities
|
|
|
|
|
|
Under Equity
|
|
|
|
to be Issued Upon
|
|
|
Weighted Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding Securities
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Reflected in the First
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column)
|
|
|
Equity Compensation Plans Approved By Security Holders
|
|
|
576,695
|
|
|
$
|
2.08
|
|
|
|
790,404
|
|
Equity Compensation Plans Not Approved By Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
576,695
|
|
|
$
|
2.08
|
|
|
|
790,404
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information required pursuant to this Item 13 concerning
certain relationships and related transactions, as applicable,
will be included in the Companys definitive proxy
materials to be filed with the SEC within 120 days after
the end of the Companys fiscal year covered by this report
under the section Certain Relationships and Related
Transactions. Information required pursuant to this
Item 13 concerning director independence will be included
in the Companys definitive proxy materials to be filed
with the SEC within 120 days after the end of the
Companys fiscal year covered by this report under the
section Corporate Governance and is incorporated
herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information required pursuant to this Item 14 concerning
our principal accountant fees and services will be included in
our definitive proxy materials to be filed with the SEC within
120 days after the end of the Companys fiscal year
covered by this report under the section Proposal 2
Ratification of Independent Registered Public
Accounting Firm and is incorporated herein by reference.
42
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of this
report.
1. Financial Statements
The consolidated financial statements and supplemental schedule
of Synergetics USA, Inc. and Subsidiaries, together with the
report thereon of independent registered public accounting firm,
are included following Item 15 of this Annual Report on
Form 10-K.
See Index to Financial Statements and Financial Statement
Schedules on
page F-1,
herein.
2. Financial Statement Schedules
Schedule II Valuation Allowances and Qualifying
Accounts is included in Note 20 to the consolidated
financial statements, which are included following Item 15
of this Annual Report on
Form 10-K.
See Index to Financial Statements and Financial Statement
Schedules on
page F-1
herein.
3. Exhibits
The exhibits required to be filed as part of this annual report
on
Form 10-K
are listed in the attached Index to Exhibits.
(b) The exhibits filed with this Annual Report on
Form 10-K
are listed in the attached Index to Exhibits.
(c) None.
43
INDEX TO
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
Audited Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Financial Statement Schedules
|
|
|
|
|
|
|
|
F-24
|
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Synergetics USA, Inc.
We have audited the accompanying consolidated balance sheets of
Synergetics USA, Inc. and Subsidiaries as of July 31, 2010
and 2009 and the related consolidated statements of income,
stockholders equity, and cash flows for each of the years
in the three-year period ended July 31, 2010. Synergetics
USA, Inc.s management is responsible for these
consolidated financial statements. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Synergetics USA, Inc. and
Subsidiaries as of July 31, 2010 and 2009, and the
consolidated results of their operations and their cash flows
for each of the years in the three-year period ended
July 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
St. Louis, Missouri
October 12, 2010
F-2
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
ASSETS
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,669
|
|
|
$
|
160
|
|
Accounts receivable, net of allowance for doubtful accounts of
$282 and $330, respectively
|
|
|
9,056
|
|
|
|
9,105
|
|
Inventories
|
|
|
11,891
|
|
|
|
15,025
|
|
Prepaid expenses
|
|
|
792
|
|
|
|
414
|
|
Deferred income taxes
|
|
|
658
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
41,066
|
|
|
|
25,358
|
|
Property and equipment, net
|
|
|
8,044
|
|
|
|
7,914
|
|
Intangible and other assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
10,690
|
|
|
|
10,690
|
|
Other intangible assets, net
|
|
|
12,353
|
|
|
|
13,135
|
|
Deferred expenses
|
|
|
|
|
|
|
2
|
|
Patents, net
|
|
|
870
|
|
|
|
918
|
|
Cash value of life insurance
|
|
|
72
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
73,095
|
|
|
$
|
58,080
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Excess of outstanding checks over bank balance
|
|
$
|
|
|
|
$
|
75
|
|
Lines-of-credit
|
|
|
|
|
|
|
5,035
|
|
Current maturities of long-term debt
|
|
|
1,398
|
|
|
|
1,856
|
|
Current maturities of revenue bonds payable
|
|
|
116
|
|
|
|
249
|
|
Accounts payable
|
|
|
1,800
|
|
|
|
1,822
|
|
Accrued expenses
|
|
|
2,624
|
|
|
|
2,874
|
|
Income taxes payable
|
|
|
11
|
|
|
|
37
|
|
Deferred revenue
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,349
|
|
|
|
11,948
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
939
|
|
|
|
2,665
|
|
Revenue bonds payable, less current maturities
|
|
|
1,612
|
|
|
|
3,414
|
|
Deferred revenue
|
|
|
18,630
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,339
|
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
22,520
|
|
|
|
8,002
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
28,869
|
|
|
|
19,950
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 10 and 17)
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock at July 31, 2010 and July 31, 2009,
$0.001 par value, 50,000,000 shares authorized;
24,772,155 and 24,454,256 shares issued and outstanding,
respectively
|
|
|
25
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
24,905
|
|
|
|
24,520
|
|
Retained earnings
|
|
|
19,319
|
|
|
|
13,586
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(23
|
)
|
|
|
|
|
Total stockholders equity
|
|
|
44,226
|
|
|
|
38,130
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
73,095
|
|
|
$
|
58,080
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
|
Net sales
|
|
$
|
52,075
|
|
|
$
|
52,965
|
|
|
$
|
50,063
|
|
Cost of sales
|
|
|
22,166
|
|
|
|
23,550
|
|
|
|
20,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29,909
|
|
|
|
29,415
|
|
|
|
29,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,008
|
|
|
|
2,998
|
|
|
|
2,654
|
|
Selling
|
|
|
11,958
|
|
|
|
14,262
|
|
|
|
12,601
|
|
General and administrative
|
|
|
8,903
|
|
|
|
9,030
|
|
|
|
9,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,869
|
|
|
|
26,290
|
|
|
|
24,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6,040
|
|
|
|
3,125
|
|
|
|
5,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
38
|
|
|
|
5
|
|
|
|
6
|
|
Interest expense
|
|
|
(491
|
)
|
|
|
(763
|
)
|
|
|
(1,129
|
)
|
Settlement gain
|
|
|
2,398
|
|
|
|
|
|
|
|
|
|
Gain on sale of product line
|
|
|
817
|
|
|
|
|
|
|
|
|
|
Miscellaneous
|
|
|
23
|
|
|
|
3
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,785
|
|
|
|
(755
|
)
|
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
8,825
|
|
|
|
2,370
|
|
|
|
4,102
|
|
Provision for income taxes
|
|
|
3,092
|
|
|
|
775
|
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,733
|
|
|
$
|
1,595
|
|
|
$
|
2,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
24,618,403
|
|
|
|
24,459,749
|
|
|
|
24,321,713
|
|
Diluted weighted average common shares outstanding
|
|
|
24,672,605
|
|
|
|
24,493,263
|
|
|
|
24,474,840
|
|
See Notes to Consolidated Financial Statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(Dollars in thousands, except share data)
|
|
|
Balance, August 1, 2007
|
|
$
|
24
|
|
|
$
|
24,083
|
|
|
$
|
9,328
|
|
|
$
|
|
|
|
$
|
33,435
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
2,663
|
|
|
|
|
|
|
|
2663
|
|
Restricted stock grants
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
Stock-based compensation
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
Proceeds from stock options exercised
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Tax benefit associated with stock option exercises
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2008
|
|
|
24
|
|
|
|
24,342
|
|
|
|
11,991
|
|
|
|
|
|
|
|
36,357
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,595
|
|
|
|
|
|
|
|
1,595
|
|
Restricted stock grants
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
Stock-based compensation
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2009
|
|
|
24
|
|
|
|
24,520
|
|
|
|
13,586
|
|
|
|
|
|
|
|
38,130
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
5,733
|
|
|
|
|
|
|
|
5,733
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,710
|
|
Restricted stock grants
|
|
|
1
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
Stock-based compensation
|
|
|
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
Proceeds from stock options exercised
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
Tax benefit associated with stock option exercises
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2010
|
|
$
|
25
|
|
|
$
|
24,905
|
|
|
$
|
19,319
|
|
|
$
|
(23
|
)
|
|
$
|
44,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except share data)
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,733
|
|
|
$
|
1,595
|
|
|
$
|
2,663
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,053
|
|
|
|
1,052
|
|
|
|
1,013
|
|
Amortization
|
|
|
879
|
|
|
|
908
|
|
|
|
977
|
|
Provision for doubtful accounts receivable
|
|
|
(48
|
)
|
|
|
88
|
|
|
|
23
|
|
Stock-based compensation
|
|
|
287
|
|
|
|
178
|
|
|
|
224
|
|
Deferred income taxes
|
|
|
(588
|
)
|
|
|
(427
|
)
|
|
|
(407
|
)
|
(Gain) loss on sale of equipment
|
|
|
(16
|
)
|
|
|
2
|
|
|
|
5
|
|
(Gain) on sale of product line
|
|
|
(817
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increases) decreases in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(265
|
)
|
|
|
(600
|
)
|
|
|
(352
|
)
|
Income taxes receivable
|
|
|
|
|
|
|
|
|
|
|
473
|
|
Inventories
|
|
|
3,016
|
|
|
|
(457
|
)
|
|
|
(318
|
)
|
Prepaid expenses
|
|
|
(389
|
)
|
|
|
(53
|
)
|
|
|
(31
|
)
|
(Decrease) increase in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(87
|
)
|
|
|
(1,015
|
)
|
|
|
474
|
|
Accrued expenses
|
|
|
(453
|
)
|
|
|
255
|
|
|
|
(80
|
)
|
Income taxes payable
|
|
|
(26
|
)
|
|
|
(1,034
|
)
|
|
|
1,071
|
|
Deferred revenue
|
|
|
19,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
27,309
|
|
|
|
492
|
|
|
|
5,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of a business
|
|
|
|
|
|
|
(40
|
)
|
|
|
(40
|
)
|
Proceeds on the sale of equipment
|
|
|
16
|
|
|
|
1
|
|
|
|
19
|
|
Purchase of property and equipment
|
|
|
(1,133
|
)
|
|
|
(749
|
)
|
|
|
(957
|
)
|
Acquisition of patents and other intangibles
|
|
|
(64
|
)
|
|
|
(20
|
)
|
|
|
(199
|
)
|
Proceeds from the sale of
Omni®
product line
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
Increase in cash value of life insurance
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) in investing activities
|
|
|
337
|
|
|
|
(816
|
)
|
|
|
(1,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of outstanding checks over bank balance
|
|
|
(75
|
)
|
|
|
75
|
|
|
|
(531
|
)
|
Net borrowings (repayments) on
lines-of-credit
|
|
|
(5,035
|
)
|
|
|
1,748
|
|
|
|
(2,428
|
)
|
Principal payments on revenue bonds payable
|
|
|
(1,935
|
)
|
|
|
(228
|
)
|
|
|
(249
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
823
|
|
Principal payments on long-term debt
|
|
|
(1,620
|
)
|
|
|
(1,080
|
)
|
|
|
(1,366
|
)
|
Tax benefit associated with the exercise of non-qualified stock
options
|
|
|
31
|
|
|
|
|
|
|
|
5
|
|
Payment on debt incurred for acquisition of trademark
|
|
|
(564
|
)
|
|
|
(531
|
)
|
|
|
(500
|
)
|
Proceeds from the issuance of common stock
|
|
|
68
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (used in) financing activities
|
|
|
(9,130
|
)
|
|
|
(16
|
)
|
|
|
(4,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange rate effect on cash and cash equivalents
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
18,509
|
|
|
|
(340
|
)
|
|
|
333
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
160
|
|
|
|
500
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
18,669
|
|
|
$
|
160
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
510
|
|
|
$
|
781
|
|
|
$
|
1,145
|
|
Income taxes paid
|
|
|
3,692
|
|
|
|
2,237
|
|
|
|
299
|
|
Supplemental Schedule of Non-cash Investing and Financing
Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment included in accounts payable
|
|
|
65
|
|
|
|
61
|
|
|
|
161
|
|
Transfer from prepaid expense to patents
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Amount owed on acquisition of business
|
|
|
|
|
|
|
|
|
|
|
40
|
|
See Notes to Consolidated Financial Statements.
F-6
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies
|
Nature of business: Synergetics USA,
Inc. (Synergetics USA or 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) and the subsequent reincorporation of
Valley Forge (the predecessor to Synergetics USA) in Delaware.
Synergetics USA is a medical device company. Through continuous
improvement and development of our people, our mission is
to design, manufacture and market innovative microsurgical
devices, capital equipment, accessories and disposables of the
highest quality in order to assist and enable surgeons who
perform microsurgery 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 King of Prussia, Pennsylvania.
During the ordinary course of its business, the Company grants
unsecured credit to its domestic and international customers.
A summary of the Companys significant accounting policies
follows:
Use of estimates in the preparation of financial
statements: The preparation of consolidated
financial statements in conformity with U.S. generally
accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of consolidation: The
consolidated financial statements include the accounts of
Synergetics USA and its wholly owned subsidiaries: Synergetics,
Synergetics IP, Inc., Synergetics Development Company, LLC and
Synergetics Delaware, Inc. All significant intercompany accounts
and transactions have been eliminated.
Cash and cash equivalents: For purposes
of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with
maturity of three months or less to be cash equivalents.
Accounts receivable: During the
ordinary course of its business, the Company grants unsecured
credit to its domestic and international customers. Accounts
receivable are carried at original invoice amount less an
estimate made for doubtful accounts based on a review of all
outstanding amounts on a monthly basis. Collateral is not
generally required on the Companys accounts receivable.
The majority of the Companys
non-U.S. accounts
receivable is covered by credit insurance. Accounts receivable
are generally considered past due based upon their specific
terms. Management determines the allowance for doubtful accounts
by regularly evaluating individual customer receivables and
considering a customers financial condition, credit
history, current economic conditions, and credit insurance.
Accounts receivable are written off when deemed uncollectible.
Recoveries of accounts receivable previously written off are
recorded when received. The Company generally does not charge
interest on past-due amounts in accounts receivable.
Concentration of credit risk: Financial
instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and
cash equivalents and accounts receivable. The Companys
cash and cash equivalents are primarily held in a money market
account in a bank and currently exceed the FDIC insurance limit.
Generally these deposits can be redeemed upon demand and
therefore, bear minimal risk.
Inventories: Inventories, consisting of
purchased materials, direct labor and manufacturing overhead,
are stated at the lower of cost, with cost being determined
using the
first-in,
first-out (FIFO) method, or market. The
Companys inventory is very dynamic and new products are
added frequently. Thus, the Company reviews the valuation of its
inventory on a quarterly basis and determines if a valuation
allowance is necessary for items that have not had their values
updated recently. In addition, the Company evaluates inventories
for excess quantities and identified obsolescence quarterly. The
Companys evaluation includes an analysis of historical
sales levels by product and projections of future demand, as
well as estimates of quantities required to support warranty and
other repairs. To the extent that it determines there are some
excess quantities based on its projected levels of sales and
F-7
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
other requirements, or obsolete material in inventory, it
records valuation reserves against all or a portion of the value
of the related parts or products. If future cost valuations,
future demand or market conditions are different from the
Companys projections, a change in recorded inventory
valuation reserves may be required and would be reflected in
cost of sales in the period the revision is made.
Property and equipment: Property and
equipment are depreciated using the straight-line method over
their estimated useful lives as follows:
|
|
|
|
|
|
|
Useful Lives
|
|
Building and improvements
|
|
|
7-39
|
|
Machinery and equipment
|
|
|
5-7
|
|
Furniture and fixtures
|
|
|
5-7
|
|
Software
|
|
|
3-5
|
|
Goodwill and other intangibles: Absent
any impairment indicators, goodwill is tested for impairment on
an annual basis. The Company performs its goodwill impairment
tests during the fourth fiscal quarter. Other intangible assets,
consisting of licensing agreements and proprietary know-how are
amortized to operations under the straight-line method over
their estimated useful lives or statutory lives whichever is
shorter. These periods range from two to seventeen years. The
life of a trademark is inextricably related to the life of the
product bearing the mark or the life of the business entity
owning the trademark. The Company intends to use the trademark
indefinitely, and therefore, its useful life is not limited to
any specific product. The trademark constitutes an
indefinite-lived intangible that will be used in perpetuity.
Proprietary know-how consists of the patented technology which
is included in one of the Companys core products, bipolar
electrosurgical generators. As a proprietary technology is a
distinguishing feature of the Companys products, it
represents a valuable intangible asset.
Patents: Incremental legal and other
costs to obtain the patent are capitalized to a patent asset.
Salaries, benefits and other direct costs of product development
are expensed as operating expenses in research and development
(R&D) costs. Patents are amortized to
operations under the straight-line method over the remaining
statutory life of the patent. Total amortization for the years
ended July 31, 2010, 2009 and 2008 was $879,000, $908,000
and $977,000, respectively.
Deferred revenue: On April 23,
2010, the Company entered into a Confidential Settlement and
License Agreement with Alcon, Inc. and certain of its affiliates
(Alcon) pursuant to which Alcon paid to the Company
$32.0 million. The net proceeds were $21.4 million
after contingency payments to attorneys. The Company recognized
a gain from this agreement of $2.4 million in the third
quarter of fiscal 2010. The remaining $19.0 million has
been accounted for as an up-front license fee under the
Confidential Settlement and License Agreement and will be
deferred and recognized as earned over a period of up to fifteen
years based upon the units shipped to Alcon under a Supply
Agreement entered pursuant to the settlement.
Impairment of long-lived assets (excluding goodwill and
other intangibles): The Company reviews
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future undiscounted cash flows expected to be generated by
the asset. Measurement of an impairment loss for long-lived
assets and certain identifiable assets that management expects
to hold and use is based on the fair value of the asset. Assets
to be sold are reported at the lower of the carrying amount or
the fair value less costs to sell.
Product warranty: The Company provides
a warranty against manufacturing and workmanship defects. Under
the Companys general terms and conditions of sale,
liability during the warranty period (typically three years) is
limited to repair or replacement of the defective item. The
Companys warranty cost is not material.
Income taxes: The Company accounts for
income taxes under Accounting Standards Codification
(ASC) Topic 740, Income Taxes. Under ASC
Topic 740, the deferred tax provision is determined using the
liability
F-8
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit
carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
In addition, under ASC Topic 740, the Company may recognize tax
liabilities when, despite the Companys belief that its tax
return positions are supported, the Company believes that
certain positions may not be fully sustained upon review by tax
authorities. The Company has identified no uncertain tax
positions subsequent to the adoption of this standard on
August 1, 2007.
The Companys policy is to recognize interest and penalties
through income tax expense. As of July 31, 2010, the
2007 2009 tax years remain subject to examination by
major tax jurisdictions. There are no federal, state or
non-U.S. income
tax audits in process as of July 31, 2010.
Fair value of financial
instruments: Fair value is an exit price that
represents the amount that would be received upon sale of an
asset or paid to transfer a liability in an orderly transaction
between market participants. The Company does not have any
financial assets which are required to be measured at fair value
on a recurring basis. Non-financial assets such as goodwill,
intangible assets and property, plant and equipment are measured
at fair value when there is an indicator of impairment and
recorded at fair value only when impairment is recognized. No
impairment indicators existed as of July 31, 2010.
The Companys financial instruments consist of cash and
cash equivalents, accounts receivable, accounts payable, accrued
expenses and debt. As of July 31, 2010, 2009 and 2008, the
carrying amounts of financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short
maturity of these instruments. The carrying amount of notes and
revenue bonds payable and long-term debt is estimated to
approximate fair value because the interest rates fluctuate with
market interest rates or the fixed rates are based on estimated
current rates offered to the Company for debt with similar terms
and maturities.
Foreign currency translation: All
balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Statements of income
amounts have been translated using the average exchange rate for
the year. The gains and losses resulting from the changes in
exchange rates from year to year have been reported in other
comprehensive income (loss). The foreign currency translation
adjustment is the only component of accumulated other
comprehensive loss. Foreign currency translation adjustments
exclude income tax expense (benefit) given that the
Companys investments in
non-U.S. subsidiaries
are deemed to be reinvested for an indefinite period of time.
Revenue recognition: The Company
records revenue from product sales when the revenue is realized
and the product is shipped from its facilities. This includes
satisfying the following criteria: the arrangement with the
customer is evident, usually through the receipt of a purchase
order; the sales price is fixed and determinable; delivery to
the carrier has occurred; and collectability is reasonably
ensured. Freight and shipping billed to customers is included in
net sales, and the cost of shipping is included in cost of
sales. Sales tax billed to customers is included as a liability
as products are shipped.
The terms and conditions of sales to both our domestic and
international distributors do not differ materially from the
terms and conditions of sales to our domestic and international
end-user customers.
Service revenue substantially relates to repairs of products and
is recognized when the service has been completed. Revenue from
licenses, extended warranty contracts and royalty fees is
recorded when earned.
F-9
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Advertising: The Company follows the
policy of charging the costs of advertising to expense as
incurred. Advertising expense was approximately $41,600, $63,400
and $142,400 for the years ended July 31, 2010, 2009 and
2008, respectively.
Royalties: The Company pays royalties
to doctors and medical institutions for providing assistance in
the design of various devices and components. Royalties are paid
quarterly based on the sales of the instrument or components.
Royalty expense was approximately $830,800, $1,172,500 and
$971,600 for the years ended July 31, 2010, 2009 and 2008,
respectively.
Stock compensation: The Company has a
stock plan for employees and consultants allowing for incentive
and non-qualified stock options, restricted stock and stock
awards which have been granted to certain employees and certain
consultants of the Company. In addition, the Company has a stock
option plan for non-employee directors allowing for
non-qualified stock options. Options under this plan have been
granted to all non-employee directors. Stock-based compensation
cost is measured at the grant date, based on the fair value of
the award and is recognized over the directors and
employees requisite service period. Compensation expense
is calculated using the Black-Scholes option pricing model. In
addition, compensation expense equal to number of shares granted
multiplied by the market value on the date of the grant over the
restriction period is recognized in net earnings for restricted
stock awards.
Earnings per share: Basic earnings per
share (EPS) data has been computed on the basis of
the weighted average number of common shares outstanding during
each period presented. Diluted EPS data has been computed on the
basis of the assumed conversion, exercise or issuance of all
potential common stock instruments, unless the effect is to
reduce the loss or increase the net income per common share
(dollars in thousands, except EPS).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,733
|
|
|
$
|
1,595
|
|
|
$
|
2,663
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and denominator for basic
calculation
|
|
|
24,618,403
|
|
|
|
24,459,749
|
|
|
|
24,321,713
|
|
Stock options and restricted stock
|
|
|
54,202
|
|
|
|
33,514
|
|
|
|
153,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
24,672,605
|
|
|
|
24,493,263
|
|
|
|
24,474,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
Net income per share diluted
|
|
$
|
0.23
|
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
Segment reporting: Operating segments
are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly
by the chief decision maker or group, in deciding how to
allocate resources and in assessing performance. The
Companys chief decision maker reviews the results of
operations and requests for capital expenditures based on one
industry segment: producing and selling products and procedures
for minimally invasive surgery, primarily for vitreoretinal
surgery and neurosurgery. The Companys entire revenue is
generated through this segment. Revenues are attributed to
countries based upon the location of end-user customers or
distributors.
Subsequent events: The Company has
evaluated subsequent events through the date of issuance of the
financial statements.
|
|
Note 2.
|
Mergers
and Acquisitions
|
In June 2008, the Company purchased Medimold, Inc., a Missouri
based operation specializing in plastic injection molding for
$80,000 in cash consideration. Medimold, Inc. designs,
engineers, and manufactures quality,
F-10
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
specialized medical tools and devices through their plastic
injection molding technology. The Company is incorporating the
technology into its operations by moving currently machined
parts to the Medimold, Inc. platform. The acquisition is also
expected to enhance component quality, expand the Companys
manufacturing capacity, and provide greater component inventory
control. The purchase price was allocated based upon the fair
value of the assets acquired, with the excess of such purchase
price over the fair value of the acquired assets being allocated
to goodwill.
|
|
Note 3.
|
Marketing
Partner Agreements
|
The Company sells a portion of its generators, devices and
accessories to two U.S. based national and international
marketing partners as described below:
Codman &
Shurtleff, Inc. (Codman)
In the neurosurgical market, the bipolar electrosurgical system
manufactured by Valley Forge prior to the merger has been sold
for over 25 years through a series of distribution
agreements with Codman, an affiliate of Johnson &
Johnson. On April 2, 2009, the Company executed a new,
three-year distribution agreement with Codman for the continued
distribution by Codman of certain bipolar generators and related
disposables and accessories effective January 1, 2009. In
addition, the Company entered into a new, 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, 2011.
On November 16, 2009, the Company announced the signing of
an addendum to its three-year agreement with Codman. Under the
terms of the revised agreement, Codman has the exclusive right
to market and distribute the Companys branded disposable
forceps in fiscal 2010 produced by Synergetics. Codman began
distribution of the disposable bipolar forceps on
December 1, 2009 domestically and February 1, 2010,
internationally.
Total sales to Codman and its respective percent of the
Companys net sales in the fiscal years ended July 31,
2010, 2009 and 2008, including the historical sales of
generators, accessories and disposable cord tubing that the
Company has supplied in the past as well as the disposable
bipolar forceps sales resulting from the addendum to the
existing distribution agreement were as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net Sales
|
|
$
|
6,823
|
|
|
$
|
5,334
|
|
|
$
|
6,041
|
|
Percent of net sales
|
|
|
13.1
|
%
|
|
|
10.1
|
%
|
|
|
12.1
|
%
|
Stryker
Corporation (Stryker)
The Company supplies a lesion generator used for minimally
invasive pain treatment to Stryker pursuant to a supply and
distribution agreement dated as of October 25, 2004. The
original term of the agreement was for slightly over five years,
commencing on November 11, 2004 and ending on
December 31, 2009. On August 1, 2007, the Company
negotiated a one-year extension to the agreement through
December 31, 2010 and increased the minimum purchase
obligation to 300 units per year for the remaining contract
period.
On March 31, 2010, the Company entered into an additional
strategic agreement with Stryker including the sale of accounts
receivable, open sales orders, inventory and certain
intellectual property related to the
Omni®
ultrasonic aspirator product line. The gain from the sale of the
Omni®
product line to Stryker was $817,000 in the third quarter of
fiscal 2010. In addition, the agreement provides for the Company
to supply disposable ultrasonic instrument tips and certain
other consumable products used in conjunction with the
ultrasonic aspirator console and handpieces and pursue certain
development projects for new products associated with
Strykers ultrasonic aspirator products.
F-11
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Total sales to Stryker and its respective percent of the
Companys net sales in the fiscal years ended July 31,
2010, 2009 and 2008, include the historical sales of pain
control generators, and accessories that the Company has
supplied in the past as well as the disposable ultrasonic
instrument tips sales and certain other consumable products in
fiscal 2010 resulting from the new agreements were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net Sales
|
|
$
|
4,811
|
|
|
$
|
2,618
|
|
|
$
|
2,008
|
|
Percent of net sales
|
|
|
9.2
|
%
|
|
|
4.9
|
%
|
|
|
4.0
|
%
|
No other customer comprises more than 10 percent of sales
in any given quarter.
Inventories as of July 31, 2010 and 2009 were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Raw material and component parts
|
|
$
|
5,225
|
|
|
$
|
6,058
|
|
Work in progress
|
|
|
2,050
|
|
|
|
2,723
|
|
Finished goods
|
|
|
4,616
|
|
|
|
6,244
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,891
|
|
|
$
|
15,025
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of fiscal 2009, the Company recorded an
adjustment of approximately $826,000 due to excess and
discontinued finished goods inventory which were either
contributed to a charitable organization or were discarded.
|
|
Note 5.
|
Property
and Equipment
|
Property and equipment as of July 31, 2010 and 2009 were as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
730
|
|
|
$
|
730
|
|
Building and improvements
|
|
|
5,929
|
|
|
|
5,782
|
|
Machinery and equipment
|
|
|
6,136
|
|
|
|
5,363
|
|
Furniture and fixtures
|
|
|
736
|
|
|
|
720
|
|
Software
|
|
|
363
|
|
|
|
336
|
|
Construction in progress
|
|
|
232
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,126
|
|
|
|
13,097
|
|
Less accumulated depreciation
|
|
|
6,082
|
|
|
|
5,183
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,044
|
|
|
$
|
7,914
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense is included in both cost of sales and
selling, general and administrative expenses. There are no
long-lived assets outside of the United States. Depreciation
expense for the years ended July 31, 2010, 2009 and 2008
was $1,053,000, $1,052,000 and $1,013,000, respectively.
F-12
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 6.
|
Other
Intangible Assets
|
Information regarding the Companys other intangible assets
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
July 31, 2010
|
|
|
|
|
|
Proprietary know-how
|
|
$
|
4,057
|
|
|
$
|
1,544
|
|
|
$
|
2,513
|
|
Trademark
|
|
|
5,923
|
|
|
|
|
|
|
|
5,923
|
|
Licensing agreement
|
|
|
5,834
|
|
|
|
1,917
|
|
|
|
3,917
|
|
Patents
|
|
|
1,387
|
|
|
|
517
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,201
|
|
|
$
|
3,978
|
|
|
$
|
13,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009
|
|
|
|
|
|
Proprietary know-how
|
|
$
|
4,057
|
|
|
$
|
1,295
|
|
|
$
|
2,762
|
|
Trademark
|
|
|
5,923
|
|
|
|
|
|
|
|
5,923
|
|
Licensing agreement
|
|
|
5,834
|
|
|
|
1,384
|
|
|
|
4,450
|
|
Patents
|
|
|
1,335
|
|
|
|
417
|
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,149
|
|
|
$
|
3,096
|
|
|
$
|
14,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill of $10,660,000 and proprietary know-how of $4,057,000
are a result of the reverse merger transaction completed on
September 21, 2005.
Amortization for the years ending July 31, 2011, 2012,
2013, 2014 and 2015 is estimated to approximate $631,000,
$578,000, $577,000, $577,000 and $577,000, respectively.
Accrued expenses as of July 31, 2010 and 2009 consisted of
the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Payroll, commissions and employee benefits
|
|
$
|
790
|
|
|
$
|
966
|
|
Royalties
|
|
|
180
|
|
|
|
243
|
|
Interest
|
|
|
42
|
|
|
|
61
|
|
Warranty
|
|
|
15
|
|
|
|
15
|
|
Other
|
|
|
1,597
|
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,624
|
|
|
$
|
2,874
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Pledged
Assets, Short and Long-Term Debt
|
Revolving Credit Facility: The Company has a
credit facility with a bank which allows for borrowings of up to
$9.5 million (collateral available on July 31, 2010
permits borrowings up to $7.3 million) with an interest
rate based on either the one-, two- or three-month LIBOR plus
2.0 percent and adjusting each quarter based upon our
leverage ratio. As of July 31, 2010, interest under the
facility is charged at 2.32 percent. The unused portion of
the facility is charged at a rate of 0.20 percent. There
were no borrowings under this facility at July 31, 2010.
Outstanding amounts are collateralized by the Companys
domestic receivables and inventory. This credit facility was
amended on November 30, 2009, to extend the termination
date through November 30, 2010. The Company expects this
credit facility to be renewed.
F-13
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
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 July 31, 2010, the leverage ratio
was 1.47 times and the minimum fixed charge coverage ratio was
1.75 times. Collateral availability under the line as of
July 31, 2010, was approximately $7.3 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
non-U.S. receivables
credit facility with a bank which allows for borrowings of up to
$1.75 million with an interest rate based on LIBOR plus
3.0%. Pursuant to the terms of this facility, under no
circumstances shall the rate be less than 3.5 percent per
annum. The facility is charged an administrative fee of
1.0 percent. There were no borrowings under this facility
at July 31, 2010. Outstanding amounts are collateralized by
the Companys
non-U.S. receivables.
This credit facility has no financial covenants and was amended
on November 30, 2009, to extend the termination date
through November 30, 2010. Collateral availability under
this facility was approximately $900,000 at July 31, 2010.
The Company expects this credit facility to be renewed.
Equipment Line of Credit: Under this credit
facility, the Company may borrow up to $1.0 million, with
interest at one-month LIBOR plus 3.0 percent. Pursuant to
the terms of the equipment line of credit, under no
circumstances shall the rate be less than 3.5 percent per
annum. The unused portion of the facility is not charged a fee.
There were no borrowings under this facility at July 31,
2010. The equipment line of credit was amended on
November 30, 2009, to extend the maturity date to
November 30, 2010. The Company expects this credit facility
to be renewed.
Long-term debt as of July 31, 2010 and 2009 consisted of
the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Note payable to bank, due in monthly principal 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
|
|
$
|
|
|
|
$
|
984
|
|
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 6.0 percent; remaining
balance of $959,424 including the effects of imputing interest,
due December 2011, collateralized by the
Malis®
trademark
|
|
|
911
|
|
|
|
1,475
|
|
Settlement obligation to Iridex Corporation
(Iridex), due in annual installments of $800,000
which includes interest at an imputed rate of 8.0 percent;
remaining balance of $1,600,000 including the effects of
imputing interest, due April 15, 2012
|
|
|
1,426
|
|
|
|
2,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,337
|
|
|
|
4,521
|
|
Less current maturities
|
|
|
1,398
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
939
|
|
|
$
|
2,665
|
|
|
|
|
|
|
|
|
|
|
Aggregate annual maturities of long-term debt as of
July 31, 2010 are as follows (dollars in thousands):
|
|
|
|
|
Year Ending July 31,
|
|
Amount
|
|
|
2011
|
|
$
|
1,398
|
|
2012
|
|
|
939
|
|
|
|
|
|
|
|
|
$
|
2,337
|
|
|
|
|
|
|
|
|
Note 9.
|
Revenue
Bonds Payable
|
In September 2002, the Company issued $2,645,000 in Private
Activity Revenue Bonds, Series 2002. The proceeds from the
bond issue were used to provide financing for the construction
of a building and equipment for
F-14
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
use as a manufacturing facility located in OFallon,
Missouri. The bond issue is collateralized by a first deed of
trust. The Company signed a promissory note to a bank payable in
monthly installments of interest only, commencing on
October 1, 2002. Principal is payable on May 1, 2004,
and on the first day of each month thereafter, in the amount of
$11,021 until final payment in monthly installments beginning on
September 1, 2022. Interest is payable at 5.5 percent
through September 1, 2009, and prime rate plus
0.5 percent thereafter. The Company retired these bonds in
the fourth quarter of fiscal 2010. These revenue bonds payable
totaled $1.8 million as of July 31, 2009.
In December 2004, Synergetics Development Co., LLC issued
$2,330,000 in Industrial Revenue Bonds, Series 2004. The
proceeds from the bond issue were used to provide financing for
a building expansion and the purchase of land and equipment
located in OFallon, Missouri. The bond issue is
collateralized by a first deed of trust. The Company signed a
promissory note to a bank payable in monthly installments of
interest only, commencing on February 1, 2005. Principal is
payable in monthly installments beginning on June 1, 2005,
and on the first day of each month thereafter, in the amount of
$9,708, until final payment on December 1, 2024. Interest
is payable at 4.75 percent through December 1, 2011,
and prime rate thereafter. These revenue bonds payable totaled
$1.7 million and $1.9 million as of July 31, 2010
and 2009, respectively.
Under the terms of the bonds, the Company is required to comply
with certain financial covenants, including a minimum debt
coverage ratio of 1.25 to 1.0.
Aggregate annual maturities required on bonds payable as of
July 31, 2010 are as follows (dollars in thousands):
|
|
|
|
|
Year Ending July 31,
|
|
Amount
|
|
|
2011
|
|
$
|
116
|
|
2012
|
|
|
116
|
|
2013
|
|
|
116
|
|
2014
|
|
|
116
|
|
2015
|
|
|
116
|
|
Thereafter
|
|
|
1,148
|
|
|
|
|
|
|
|
|
$
|
1,728
|
|
|
|
|
|
|
|
|
Note 10.
|
Operating
Leases
|
The Company leases various equipment, a portion of its
facilities in OFallon, Missouri and the facility in King
of Prussia, Pennsylvania under operating leases. The
OFallon, Missouri lease expires in July 2012 and the King
of Prussia, Pennsylvania lease has been renewed through October
2012.
The approximate minimum rental commitment under non-cancelable
operating leases as of July 31, 2010 is due as follows
(dollars in thousands):
|
|
|
|
|
Year Ending July 31,
|
|
Amount
|
|
|
2011
|
|
$
|
308
|
|
2012
|
|
|
208
|
|
2013
|
|
|
92
|
|
2014
|
|
|
23
|
|
2015
|
|
|
7
|
|
|
|
|
|
|
|
|
$
|
638
|
|
|
|
|
|
|
Rent expense incurred and charged to cost of sales and selling,
general and administrative expenses was approximately $268,000,
$310,000 and $326,000 for the years ended July 31, 2010,
2009 and 2008, respectively.
F-15
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 11.
|
Income
Tax Matters
|
The Company and its wholly owned subsidiaries file as a single
entity for income tax reporting purposes. The net deferred
income tax amounts included in the accompanying consolidated
balance sheets as of July 31, 2010 and 2009 include the
following amounts as deferred income tax assets and liabilities
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
68
|
|
|
$
|
98
|
|
Inventories
|
|
|
252
|
|
|
|
155
|
|
Accrued liabilities
|
|
|
146
|
|
|
|
181
|
|
Other
|
|
|
192
|
|
|
|
219
|
|
Loss on foreign subsidiaries
|
|
|
1,262
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,920
|
|
|
|
1,399
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
306
|
|
|
|
373
|
|
Other intangible assets
|
|
|
2,295
|
|
|
|
2,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,601
|
|
|
|
2,668
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
( 681
|
)
|
|
$
|
( 1,269
|
)
|
|
|
|
|
|
|
|
|
|
The deferred tax amounts noted above have been classified on the
accompanying consolidated balance sheets as of July 31,
2010 and 2009, as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Current assets
|
|
$
|
658
|
|
|
$
|
654
|
|
Long-term liabilities
|
|
|
(1,339
|
)
|
|
|
(1,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(681
|
)
|
|
$
|
(1,269
|
)
|
|
|
|
|
|
|
|
|
|
The provision for income taxes for the years ended July 31,
2010, 2009 and 2008, consisted of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current payable
|
|
$
|
3,680
|
|
|
$
|
1,202
|
|
|
$
|
1,846
|
|
Deferred
|
|
|
(588
|
)
|
|
|
(427
|
)
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,092
|
|
|
$
|
775
|
|
|
$
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of the Companys income tax at the statutory
rate to the Companys effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Computed at the statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal tax benefit
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
4.5
|
|
Production deductions for domestic manufactures
|
|
|
(2.0
|
)
|
|
|
(3.3
|
)
|
|
|
(1.3
|
)
|
Research and experimentation
|
|
|
(0.6
|
)
|
|
|
(6.9
|
)
|
|
|
(3.5
|
)
|
Other
|
|
|
0.6
|
|
|
|
5.9
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.0
|
%
|
|
|
32.7
|
%
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 12.
|
Employee
Benefit Plan
|
The Company has a 401(k) savings plan, which covers employees
who have attained the age of 18 and who have been credited with
at least one year of service. Company contributions are made at
the discretion of the Board of Directors. The Company made no
contributions to the plan for the years ended July 31,
2010, 2009 and 2008.
|
|
Note 13.
|
Stock-Based
Compensation Plans
|
Stock
Option Plans
In addition to the historical options outstanding for
Synergetics prior to the merger, the Company has options
outstanding under two existing active option plans and two
terminated plans of Valley Forge. The first active plan (the
2001 Plan) was adopted by Valley Forge on
January 16, 2001 pursuant to which 345,000 shares of
common stock were reserved for issuance to employees, officers
and consultants of the Company. The 2001 Plan was amended with
the approval of the Valley Forge stockholders on
September 19, 2005 to increase the number of share awards
issuable under the 2001 Plan from 345,000 to 1,345,000. There
were 610,404 options and restricted shares not yet awarded at
July 31, 2010 under this plan. On September 19, 2005,
the stockholders of Valley Forge voted to adopt the Valley Forge
Scientific Corp. 2005 Non-Employee Directors Stock Option
Plan and voted to authorize up to 200,000 shares issuable
upon exercise of options granted thereunder. On
December 11, 2008, the stockholders of the Company voted to
increase the number of shares authorized for issuance under the
plan from 200,000 to 400,000. There were 180,000 options
available for future grants at July 31, 2010 under this
plan. Generally, options were granted with an exercise price
equal to fair market value at the date of grant and expire
10 years from the date of the grant. Generally, stock
options granted under these plans vest over a five-year period,
with the exception of the non-employee director options which
vest over a twelve-month period.
A summary of the status of the fixed awards at July 31,
2010, 2009 and 2008 and changes during the years ended on those
dates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Options outstanding as of July 31, 2007
|
|
|
428,735
|
|
|
$
|
2.18
|
|
|
$
|
1.79
|
|
For the period from August 1, 2007 through July 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
$
|
2.95
|
|
|
$
|
2.45
|
|
Forfeited
|
|
|
(17,000
|
)
|
|
$
|
2.85
|
|
|
$
|
2.05
|
|
Exercised
|
|
|
(15,000
|
)
|
|
$
|
1.99
|
|
|
$
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, July 31, 2008
|
|
|
436,735
|
|
|
$
|
2.23
|
|
|
$
|
1.84
|
|
For the period from August 1, 2008 through July 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
93,000
|
|
|
$
|
0.95
|
|
|
$
|
0.78
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
$
|
3.75
|
|
|
$
|
0.99
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, July 31, 2009
|
|
|
527,735
|
|
|
$
|
2.10
|
|
|
$
|
1.74
|
|
For the period from August 1, 2009 through July 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
127,500
|
|
|
$
|
1.37
|
|
|
$
|
1.10
|
|
Forfeited
|
|
|
(14,770
|
)
|
|
$
|
0.94
|
|
|
$
|
0.78
|
|
Exercised
|
|
|
(63,770
|
)
|
|
$
|
1.07
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, July 31, 2010
|
|
|
576,695
|
|
|
$
|
2.08
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, July 31, 2010
|
|
|
462,737
|
|
|
$
|
2.27
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
A further summary about awards outstanding at July 31, 2010
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Shares
|
|
Grant Date Value
|
|
Unvested options, Beginning of period
|
|
|
72,386
|
|
|
$
|
1.01
|
|
Granted
|
|
|
127,500
|
|
|
$
|
1.37
|
|
Vested
|
|
|
85,928
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Unvested options, period end
|
|
|
113,958
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
Proceeds, related tax benefits realized from options exercised
and intrinsic value of options exercised were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
July 31,
|
|
July 31,
|
|
July 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Proceeds of options exercised
|
|
$
|
68
|
|
|
$
|
|
|
|
$
|
30
|
|
Related tax benefit recognized
|
|
|
31
|
|
|
|
|
|
|
|
5
|
|
Intrinsic value of options exercised
|
|
|
59
|
|
|
|
|
|
|
|
41
|
|
The following table provides information about options
outstanding and exercisable options at July 31, 2010
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Exercisable
|
|
|
|
|
Outstanding
|
|
Options
|
|
|
|
Number
|
|
|
576,695
|
|
|
|
462,737
|
|
|
|
|
|
Weighted average exercise price
|
|
$
|
2.08
|
|
|
$
|
2.27
|
|
|
|
|
|
Aggregate intrinsic value
|
|
$
|
986
|
|
|
$
|
866
|
|
|
|
|
|
Weighted average contractual term
|
|
|
5.9 years
|
|
|
|
5.1 years
|
|
|
|
|
|
The weighted average remaining life for options outstanding and
weighted average exercise price per share for exercisable
options at July 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Exercisable Options
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
|
|
|
|
Remaining
|
|
|
|
Remaining
|
|
|
Shares
|
|
Contractual Life
|
|
Shares
|
|
Contractual Life
|
|
|
|
|
(In years)
|
|
|
|
(In years)
|
|
<$1.00
|
|
|
45,000
|
|
|
|
8.3 years
|
|
|
|
45,000
|
|
|
|
8.3 years
|
|
$1.00 $2.00
|
|
|
315,695
|
|
|
|
6.3 years
|
|
|
|
201,737
|
|
|
|
4.7 years
|
|
$2.00 $5.00
|
|
|
216,000
|
|
|
|
4.7 years
|
|
|
|
216,000
|
|
|
|
4.7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
576,695
|
|
|
|
5.9 years
|
|
|
|
462,737
|
|
|
|
5.1 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company granted 40,000 options during the fiscal year ended
July 31, 2010 to the independent directors which vest
pro-rata over twelve months from the grant date. The Company
granted 35,000, options during the fiscal year ended
July 31, 2010 to David M. Hable, the Companys Chief
Executive Officer and 17,500 options each to Kurt W. Gampp the
Companys Chief Operating Officer, Jerry Malis the
Companys Chief Scientific Officer and Pamela G. Boone, the
Companys Chief Financial Officer. The shares granted to
the Companys executive management team vest pro-rata over
five years from the grant date. The fair value of options
granted during the fiscal year ended July 31, 2010 was
determined at the date of the grant using a Black-Scholes
options-pricing model.
F-18
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table provides the weighted average fair value of
options granted and the assumptions used in the Black-Scholes
model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected average risk-free interest rate
|
|
|
2.35
|
%
|
|
|
2.25
|
%
|
|
|
3.5
|
%
|
Expected average life (in years)
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Expected volatility
|
|
|
77.8
|
%
|
|
|
80.5
|
%
|
|
|
69.2
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The expected average risk-free rate is based on 10 year
U.S. treasury yield curve in December of 2009. The expected
average life represents the period of time that 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. The
Company expects to issue new shares as options are exercised. As
of July 31, 2010, the future compensation cost expected to
be recognized is approximately $50,000 in fiscal 2011, $22,000
in fiscal 2012, $19,000 in fiscal 2013, $23,000 in 2014, and
$3,000 in 2015.
Restricted
Stock Plans
Under our 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. 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. As of July 31,
2010, there was approximately $368,000 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 which is generally the vesting period.
In addition, during the fiscal year ended July 31, 2010,
79,244 shares were granted to advisory consultants under
the restricted stock plan. Compensation expense related to these
shares was $110,000 for the fiscal year ended July 31, 2010.
The following table provides information about restricted stock
grants during the fiscal year ended July 31, 2010, 2009 and
2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Restricted stock awards at August 1, 2007
|
|
|
13,101
|
|
|
$
|
5.48
|
|
Granted
|
|
|
40,706
|
|
|
$
|
3.38
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31,2008
|
|
|
53,807
|
|
|
$
|
3.89
|
|
Granted
|
|
|
110,065
|
|
|
$
|
2.78
|
|
Forfeited
|
|
|
51,796
|
|
|
$
|
3.18
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2009
|
|
|
112,076
|
|
|
$
|
2.95
|
|
Granted
|
|
|
176,885
|
|
|
$
|
1.36
|
|
Forfeited
|
|
|
2,000
|
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286,961
|
|
|
$
|
2.04
|
|
|
|
|
|
|
|
|
|
|
F-19
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Compensation expense associated with stock-based compensation
plans as of July 31, 2010, 2009 and 2008 was as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
$
|
34
|
|
|
$
|
52
|
|
|
$
|
74
|
|
Employees
|
|
|
28
|
|
|
|
20
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62
|
|
|
$
|
72
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
$
|
114
|
|
|
$
|
40
|
|
|
$
|
25
|
|
Advisors
|
|
|
111
|
|
|
|
66
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
225
|
|
|
|
106
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Compensation Expense
|
|
$
|
287
|
|
|
$
|
178
|
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax benefits from Share-based Compensation
|
|
$
|
100
|
|
|
$
|
58
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14.
|
Stockholders
Equity
|
Upon completion of the reverse merger between Valley Forge and
Synergetics on September 22, 2005, the Company
reincorporated in Delaware, decreased the par value of common
stock from
$0.012/3
to $0.001, increased the authorized common shares to 50,000,000
and eliminated the outstanding treasury shares.
On December 22, 1998, the Company filed amended and
restated Articles of Incorporation decreasing the par value of
the 8,000,000 shares of common stock it is authorized to
issue from
$0.031/3
to
$0.012/3.
The holders of common stock have no preemptive rights and the
common stock has no redemption, sinking fund or conversion
provisions. Each share of common stock is entitled to one vote
on any matter submitted to the holders and to equal rights in
the assets of the Company upon liquidation. All of the
outstanding shares of common stock are fully paid and
nonassessable.
|
|
Note 15.
|
Research
and Development Costs
|
R&D costs related to both future and present products are
charged to operations as incurred. The Company incurred
approximately $3,008,000, $2,998,000 and $2,654,000 of R&D
costs during the years ended July 31, 2010, 2009 and 2008,
respectively.
F-20
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 16.
|
Enterprise-wide
Sales Information
|
Enterprise-wide sales information as of July 31, 2010, 2009
and 2008 consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended July 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Ophthalmic
|
|
$
|
31,689
|
|
|
$
|
29,981
|
|
|
$
|
28,019
|
|
Neurosurgery- Direct
|
|
|
8,175
|
|
|
|
13,968
|
|
|
|
12,925
|
|
Marketing Partners (Codman, Stryker)
|
|
|
4,204
|
|
|
|
|
|
|
|
|
|
OEM (Codman, Stryker, Iridex Corporation)
|
|
|
7,878
|
|
|
|
8,538
|
|
|
|
8,347
|
|
Other (ENT and Dental)
|
|
|
129
|
|
|
|
478
|
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,075
|
|
|
$
|
52,965
|
|
|
$
|
50,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
35,417
|
|
|
$
|
36,047
|
|
|
$
|
35,838
|
|
International
|
|
|
16,658
|
|
|
|
16,918
|
|
|
|
14,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,075
|
|
|
$
|
52,965
|
|
|
$
|
50,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based upon the location of
end-user customers or distributors.
|
|
Note 17.
|
Commitments
and Contingencies
|
Effective January 29, 2009, the Companys Board of
Directors appointed David M. Hable to serve as President and
CEO. Also on that date, the Company entered into a change in
control agreement with Mr. Hable. On December 9, 2009,
the Company entered into a change in control agreement with each
of its COO and CSO, which agreements were contemplated in
conjunction with the Companys annual review of
compensation; therefore, were made effective with other
compensation changes as of August 1, 2009. On
October 12, 2010, the Company entered into a change of
control agreement with its CFO. This agreement was contemplated
in conjunction with the Companys annual review of
compensation. It was made effective with other compensation
changes as of August 1, 2010. The change in control
agreements with the CEO, COO, CFO and CSO each provide that if
employment is terminated within one year following a change in
control for cause or disability (as each term is defined in the
change in control agreement), as a result of the officers
death, or by the officer other than as an involuntary
termination (as defined in the change in control agreement), the
Company shall pay the officer all compensation earned or accrued
through his or her employment termination date, including
(i) base salary; (ii) reimbursement for reasonable and
necessary expenses; (iii) vacation pay; (iv) bonuses
and incentive compensation; and (v) all other amounts to
which they are entitled under any compensation or benefit plan
of the Company (Standard Compensation Due).
If the officers employment is terminated within one year
following a change in control without cause and for any reason
other than death or disability, including an involuntary
termination, and provided the officer enters into a separation
agreement within 30 days of his employment termination, he
shall receive the following (Ordinary Severance):
(i) all Standard Compensation Due and any amount payable as
of the termination date under the Companys
objectives-based incentive plan, the sum of which shall be paid
in a lump sum immediately upon such termination; and
(ii) an amount equal to one times his annual base salary at
the rate in effect immediately prior to the change in control,
to be paid in 12 equal monthly installments beginning in the
month following his or her employment termination. Furthermore,
all of the officers awards of shares or options shall
immediately vest and be exercisable for one year after the date
of his or her employment termination.
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.
F-21
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
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
expenditures outside the normal course of operations which will
be incurred by the Company in future periods in order to comply
with these regulations.
|
|
Note 18.
|
Quarterly
Financial Data (Unaudited)
|
The following table provides the Companys quarterly
information as presented in the
Form 10-Q
(dollars in thousands except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010
|
|
April 30, 2010
|
|
January 31, 2010
|
|
October 31, 2009
|
|
Quarters ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Sales
|
|
$
|
13,056
|
|
|
$
|
13,859
|
|
|
$
|
13,014
|
|
|
$
|
12,146
|
|
Gross Profit
|
|
|
7,536
|
|
|
|
8,031
|
(1)
|
|
|
7,415
|
(1)
|
|
|
6,927
|
(1)
|
Operating Income
|
|
|
1,472
|
|
|
|
2,045
|
(1)
|
|
|
1,544
|
(1)
|
|
|
979
|
(1)
|
Settlement Gain
|
|
|
|
|
|
|
2,398
|
|
|
|
|
|
|
|
|
|
Gain on sale of product line
|
|
|
|
|
|
|
893
|
(1)
|
|
|
(37
|
)(1)
|
|
|
(39
|
)(1)
|
Net Income
|
|
|
1,005
|
|
|
|
3,309
|
|
|
|
877
|
|
|
|
542
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.13
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
Basic weighted average common shares outstanding
|
|
|
24,735,422
|
|
|
|
24,701,260
|
|
|
|
24,584,393
|
|
|
|
24,458,089
|
|
Diluted weighted average common shares outstanding
|
|
|
24,827,641
|
|
|
|
24,740,304
|
|
|
|
24,614,628
|
|
|
|
24,496,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009
|
|
May 4, 2009
|
|
February 3, 2009
|
|
October 29, 2008
|
|
Quarters ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Sales
|
|
$
|
13,906
|
|
|
$
|
13,161
|
|
|
$
|
13,652
|
|
|
$
|
12,246
|
|
Gross Profit
|
|
|
7,093
|
(2)
|
|
|
7,401
|
|
|
|
7,841
|
|
|
|
7,080
|
|
Operating Income
|
|
|
176
|
(2)
|
|
|
879
|
|
|
|
907
|
|
|
|
1,163
|
|
Net Income
|
|
|
87
|
(2)
|
|
|
458
|
|
|
|
389
|
|
|
|
661
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
Basic weighted average common shares outstanding
|
|
|
24,454,256
|
|
|
|
24,470,755
|
|
|
|
24,451,904
|
|
|
|
24,440,861
|
|
Diluted weighted average common shares outstanding
|
|
|
24,472,354
|
|
|
|
24,471,258
|
|
|
|
24,459,568
|
|
|
|
24,578,342
|
|
|
|
|
(1) |
|
Certain reclassifications have been made to the first and second
quarters quarterly financial statements to conform with
the third quarters presentation which increased gross
profit margin by $197,000, increased operating income by $76,000
and decreased the gain on the sale of the product line by
$76,000. |
|
(2) |
|
In the fourth quarter of fiscal 2009, the Company recorded an
adjustment of approximately $975,000 or $0.03 earnings per
share, net of tax, primarily due to excess and discontinued
inventory which was either contributed to a charitable
organization or was discarded. |
|
|
Note 19.
|
Recent
Accounting Pronouncements
|
In June 2009, the FASB issued an accounting standard limiting
the circumstances in which a financial asset may be derecognized
when the transferor has not transferred the entire financial
asset or has continuing involvement with the
F-22
Synergetics
USA Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
transferred asset. The concept of a qualifying special-purpose
entity, which had previously facilitated sales accounting for
certain asset transfers, is removed by this standard. The new
standard is effective for the Company beginning August 1,
2010 and early application is prohibited. We have not completed
our evaluation of the potential impact, if any, of the adoption
of this standard on our consolidated financial position, results
of operations or cash flows.
In June 2009, the FASB issued an accounting standard which
amends the accounting for variable interest entities
(VIEs) and changes the process as to how an
enterprise determines which party consolidates a VIE. This also
defines the party that consolidates the VIE (the primary
beneficiary) as the party with (1) the power to direct
activities of the VIE that most significantly affect the
VIEs economic performance and (2) the obligation to
absorb losses of the VIE or the right to receive benefits from
the VIE. Upon adoption of this accounting standard, the
reporting enterprise must reconsider its conclusions on whether
an entity should be consolidated, and should a change result,
the effect on its net assets will be recorded as a cumulative
effect adjustment to retained earnings. This accounting standard
will be effective for the Company beginning August 1, 2010
and early application is prohibited. We have not completed our
evaluation of the potential impact, if any, of the adoption of
this standard on our consolidated financial position, results of
operations or cash flows.
In October 2009, the FASB issued an accounting standard
requiring an entity to allocate revenue arrangement
consideration at the inception of a multiple-deliverable revenue
arrangement to all of its deliverables based on their relative
selling prices. This accounting is effective for revenue
arrangements entered into or materially modified by the Company
beginning August 1, 2010 with early adoption permitted. We
have not completed our evaluation of the potential impact, if
any, of the adoption of this standard on our consolidated
financial position, results of operations or cash flows.
In October 2009, the FASB issued an accounting standard
addressing how entities account for revenue arrangements that
contain both hardware and software elements. Due to the
significant difference in the level of evidence required for
separation of multiple deliverables within different accounting
standards, this particular accounting standard will modify the
scope of accounting guidance for software revenue recognition.
Many tangible products containing software and nonsoftware
components that function together to deliver the tangible
products essential functionality will be accounted for
under the revised multiple-element arrangement revenue
recognition guidance disclosed above. This accounting standard
is effective for revenue arrangements entered into or materially
modified by the Company beginning August 1, 2010 with early
adoption permitted. We have not completed our evaluation of the
potential impact, if any, of the adoption of this standard on
our consolidated financial position, results of operations or
cash flows.
In January 2010, the FASB issued the Accounting Standards Update
(ASU)
No. 2010-06,
Improving Disclosures about Fair Value Measurements,
which amends ASC 820, Fair Value Measurements and
Disclosures. This ASU requires disclosures of transfers
into and out of Levels 1 and 2, more detailed roll forward
reconciliations of Level 3 recurring fair value measurement
on a gross basis, fair value information by class of assets and
liabilities and descriptions of valuation techniques and inputs
for Level 2 and 3 measurements. The effective date is the
second quarter of fiscal 2011 except for the roll forward
reconciliations, which are required in the first quarter of
fiscal 2012. The Company does not believe the adoption of this
ASU will have a material effect on its consolidated financial
statements.
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.
F-23
|
|
Note 20.
|
Valuation
Allowances and Qualifying Accounts
|
Schedule II
Valuation Allowances and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charges to
|
|
|
Charges to
|
|
|
Deduction
|
|
|
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
Other
|
|
|
from
|
|
|
Balance at
|
|
Classifications
|
|
of Year
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Reserves(1)
|
|
|
End of Year
|
|
|
|
(Dollars in thousands)
|
|
|
Year ended July 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts & Returned Goods
|
|
$
|
227
|
|
|
$
|
69
|
|
|
$
|
|
|
|
$
|
(46
|
)
|
|
$
|
250
|
|
Allowance for Excess and Obsolete Inventory
|
|
$
|
26
|
|
|
$
|
39
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
65
|
|
Year ended July 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts & Returned Goods
|
|
$
|
250
|
|
|
$
|
206
|
|
|
$
|
|
|
|
$
|
(126
|
)
|
|
$
|
330
|
|
Allowance for Excess and Obsolete Inventory
|
|
$
|
65
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(26
|
)
|
|
$
|
39
|
|
Year ended July 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts & Returned Goods
|
|
$
|
330
|
|
|
$
|
48
|
|
|
$
|
|
|
|
$
|
(96
|
)
|
|
$
|
282
|
|
Allowance for Excess and Obsolete Inventory
|
|
$
|
39
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
38
|
|
|
|
|
(1) |
|
Adjustments represent write-offs of uncollectible accounts
receivable. |
F-24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Synergetics USA, Inc.
(registrant)
David M. Hable, President and Chief
Executive Officer (Principal Executive Officer)
October 12, 2010
Pamela G. Boone, Executive Vice President, Chief
Financial Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
David M. Hable, President and Chief
Executive Officer and Director
and Director (Principal Executive Officer)
October 12, 2010
Pamela G. Boone, Executive Vice President, Chief
Financial Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
October 12, 2010
Robert Dick, Chairman of the Board of Directors
October 12, 2010
/s/ Lawrence
C. Cardinale
Lawrence C. Cardinale, Director
October 12, 2010
44
Kurt W. Gampp, Jr., Director
October 12, 2010
Guy Guarch, Director
October 12, 2010
Juanita H. Hinshaw, Director
October 12, 2010
Jerry L. Malis, Director
October 12, 2010
45
Index to
Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger by and among Valley Forge
Scientific Corp. (Valley Forge), Synergetics
Acquisition Corporation and Synergetics, Inc. dated May 2,
2005. (Filed as Exhibit 2.1 to Valley Forges Current
Report on
Form 8-K
filed on May 4, 2005 and incorporated herein by reference.)
|
|
2
|
.2
|
|
Amendment No. 1 to Agreement and Plan of Merger by and
among Valley Forge, Synergetics Acquisition Corporation and
Synergetics, Inc. dated June 2, 2005. (Filed as
Exhibit 2.1 to Valley Forges Current Report on
Form 8-K
filed on June 3, 2005 and incorporated herein by reference.)
|
|
2
|
.3
|
|
Amendment No. 2 to Agreement and Plan of Merger by and
among Valley Forge, Synergetics Acquisition Corporation and
Synergetics, Inc. dated July 15, 2005. (Filed as
Exhibit 2.1 to Valley Forges Current Report on
Form 8-K
filed on July 15, 2005 and incorporated herein by
reference.)
|
|
2
|
.4
|
|
Agreement and Plan of Reincorporation Merger, dated as of
September 22, 2005, between Valley Forge and VFSC Delaware,
Inc. (Filed as Exhibit 2.1 to the Registrants Current
Report on
Form 8-K
filed on September 27, 2005 and incorporated herein by
reference.)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant. (Filed as Exhibit 3.1 to the Registrants
Current Report on
Form 8-K
filed on September 27, 2005 and incorporated herein by
reference.)
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Registrant. (Filed as
Exhibit 3.2 to the Registrants Current Report on
Form 8-K
filed on September 27, 2005 and incorporated herein by
reference.)
|
|
4
|
.1
|
|
Form of common stock certificate of the Registrant. (Filed as
Exhibit 4.1 to the Registrants Current Report on
Form 8-K
filed on September 27, 2005 and incorporated herein by
reference.)
|
|
10
|
.1(1)
|
|
Amended and Restated Synergetics USA, Inc. 2001 Stock Plan.
(Filed as Exhibit 10.1 to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended April 30, 2006 and incorporated
herein by reference.)
|
|
10
|
.2(1)
|
|
Valley Forge Scientific Corp. 2000 Non-Employee Directors
Stock Option Plan. (Filed as Exhibit 4.3 to Valley
Forges Registration Statement on
Form S-8,
Registration
No. 333-72134
and incorporated herein by reference.)
|
|
10
|
.3(1)
|
|
Valley Forge Scientific Corp. 1988 Non-Qualified Employee Stock
Option Plan, as amended. (Filed as Exhibit 10.1 to Valley
Forges Registration Statement on
Form S-8,
Registration
No. 333-63637
and incorporated herein by reference).
|
|
10
|
.4(1)
|
|
Amended and Restated Synergetics USA, Inc. 2005 Non-Employee
Directors Stock Option Plan. (Filed as Exhibit 10.3
to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended April 30, 2006 and incorporated
herein by reference).
|
|
10
|
.5(1)
|
|
Amendment No. 1 to Amended and Restated Synergetics USA,
Inc. 2005 Non-Employee Directors Stock Option Plan. (Filed
as Exhibit 10.1 to the Registrants Current Report on
Form 8-K
filed on January 29, 2009, and incorporated herein by
reference).
|
|
10
|
.6(1)
|
|
401(k) and Profit-Sharing Plan. (Filed as Exhibit 10(x) to
Valley Forges Registration Statement on
Form S-18,
Registration
No. 33-35668-NY
and incorporated herein by reference).
|
|
10
|
.7(1)
|
|
Change of Control Agreement between Synergetics USA, Inc. and
David M. Hable (Filed as Exhibit 10.1 to Registrants
Current Report on
Form 8-K
filed February 3, 2009), and incorporated herein by
reference).
|
|
10
|
.8(1)
|
|
Change in Control Agreement effective as of August 1, 2009
by and between Kurt Gampp and Synergetics USA, Inc. (Filed as
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
filed on December 15, 2009).
|
|
10
|
.9(1)
|
|
Change in Control Agreement effective as of August 1, 2009
by and between Jerry Malis, MD and Synergetics USA, Inc. (Filed
as Exhibit 10.2 to the Registrants Current Report on
Form 8-K
filed on December 15, 2009).
|
|
10
|
.10(1)(2)
|
|
Change in Control Agreement effective as of by and between
Pamela G. Boone and Synergetics USA, Inc.
|
46
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11(1)
|
|
Employment Agreement, dated as of September 21, 2005,
between Valley Forge and Jerry L. Malis. (Filed as
Exhibit 10.2 to the Registrants Current Report on
Form 8-K
filed on September 27, 2005 and incorporated herein by
reference.)
|
|
10
|
.12(1)
|
|
Employment Agreement, dated as of September 21, 2005,
between Valley Forge and Kurt W. Gampp, Jr. (Filed as
Exhibit 10.3 to the Registrants Current Report on
Form 8-K
filed on September 27, 2005 and incorporated herein by
reference.)
|
|
10
|
.13(1)
|
|
Employment Agreement, dated as of August 1, 2007, between
Synergetics USA, Inc. and Pamela G. Boone. (Filed as
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
filed on August 6, 2007 and incorporated herein by
reference.)
|
|
10
|
.14
|
|
Assignment of Know-How Agreement, dated June 30, 1989.
(Filed as Exhibit 10(I) to Valley Forges Registration
Statement on
Form S-18,
Registration
No. 33-35668-NY
and incorporated herein by reference.)
|
|
10
|
.15
|
|
Assignment of Patents Bipolar Electrosurgical
Systems, June 30, 1989. (Filed as Exhibit 10(h) to
Valley Forges Registration Statement on
Form S-18,
Registration
No. 33-31008-NY
and incorporated herein by reference.)
|
|
10
|
.16
|
|
Assignment of Patents Binocular Magnification
System, June 30, 1989. (Filed as Exhibit 10(i) to
Valley Forges Registration Statement on
Form S-18,
Registration
No. 33-31008-NY
and incorporated herein by reference.)
|
|
10
|
.17
|
|
Assignment of
Malis®
Trademark, dated June 30, 1989. (Filed as
Exhibit 10(j) to Valley Forges Registration Statement
on
Form S-18,
Registration
No. 33-31008-NY
and incorporated herein by reference.)
|
|
10
|
.18
|
|
Option Agreement for
Malis®
Trademark with Leonard I. Malis dated October 22, 2004.
(Filed as Exhibit 10.14 to Valley Forges Annual
Report on
Form 10-K
for the year ended September 30, 2004 and incorporated
herein by reference.)
|
|
10
|
.19
|
|
Promissory Note from the Company and Synergetics IP, Inc. to the
Estate of Dr. Leonard I. Malis dated October 12, 2005
in the Principal Amount of $3,997,600. (Filed as
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
filed on October 18, 2005 and incorporated herein by
reference.)
|
|
10
|
.20
|
|
Supply and Distribution Agreement with Stryker Corporation dated
October 25, 2004. (Filed as Exhibit 10.13 to Valley
Forges Annual Report on
Form 10-K
for the year ended September 30, 2004 and incorporated
herein by reference.)
|
|
10
|
.21
|
|
Agreement of Lease between Liberty Property Limited Partnership
and Valley Forge. (Filed as Exhibit 10.16 to Valley
Forges to Registration Statement on
Form S-4,
Registration
No. 333-125521
and incorporated herein by reference.)
|
|
10
|
.22
|
|
Amendment to Agreement of Lease between Liberty Property Limited
Partnership and Synergetics USA, Inc. dated March 26, 2009
(Filed as Exhibit 10.23 to the Registrants Annual
Report on
Form 10-K
for the year ended July 31, 2009 and incorporated herein by
reference.)
|
|
10
|
.23
|
|
Loan Agreement between The Industrial Development Authority of
St. Charles County, Missouri and Synergetics Development
Company, L.L.C. dated as of September 1, 2002. (Filed as
Exhibit 10.25 to the Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.24
|
|
Promissory Note from Synergetics Development Company, L.L.C. to
The Industrial Development Authority of St. Charles County,
Missouri dated September 1, 2002 in the Principal Amount of
$2,645,000 (Filed as Exhibit 10.26 to the Registrants
Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.25
|
|
Security Agreement (Equipment) dated as of September 1,
2002 from Synergetics, Inc. for the benefit of The Industrial
Development Authority of St. Charles County, Missouri. (Filed as
Exhibit 10.27 to the Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
47
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.26
|
|
Future Advance Deed of Trust and Security Agreement dated as of
September 1, 2002 between Synergetics Development Company,
L.L.C. and Victor Zarrilli, as trustee, and The Industrial
Development Authority of St. Charles County, Missouri. (Filed as
Exhibit 10.28 to the Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.27
|
|
Guaranty Agreement dated as of September 1, 2002 by and
among William L. Bates, Gregg D. Scheller and Kurt W. Gampp, Jr.
and Synergetics, Inc. and The Industrial Development Authority
of St. Charles County, Missouri. (Filed as Exhibit 10.29 to
the Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.28
|
|
Guaranty of Unassigned Issuers Rights dated as of
September 1, 2002 by and among William L. Bates, Gregg D.
Scheller and Kurt W. Gampp, Jr. and Synergetics, Inc. and The
Industrial Development Authority of St. Charles County,
Missouri. (Filed as Exhibit 10.30 to the Registrants
Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.29
|
|
Bond Purchase Agreement dated as of September 1, 2002 by
and among The Industrial Development Authority of St. Charles
County, Missouri, Union Planters Bank, N.A. and Synergetics
Development Company, L.L.C. (Filed as Exhibit 10.31 to the
Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.30
|
|
First Supplemental Loan Agreement between The Industrial
Development Authority of St. Charles County, Missouri and
Synergetics Development Company, L.L.C. dated as of
December 1, 2004. (Filed as Exhibit 10.32 to the
Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.31
|
|
Promissory Note from Synergetics Development Company, L.L.C. to
The Industrial Development Authority of St. Charles County,
Missouri dated December 1, 2004 in the Principal Amount of
$2,330,000. (Filed as Exhibit 10.33 to the
Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.32
|
|
First Supplemental Future Advance Deed of Trust and Security
Agreement dated as of December 1, 2004 between Synergetics
Development Company, L.L.C. and Victor Zarrilli, as trustee, and
The Industrial Development Authority of St. Charles County,
Missouri. (Filed as Exhibit 10.34 to the Registrants
Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.33
|
|
First Supplemental Guaranty of Unassigned Issuers Rights
dated as of December 1, 2004 by and between Synergetics,
Inc. and the Industrial Development Authority of St. Charles
County, Missouri. (Filed as Exhibit 10.35 to the
Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.34
|
|
Bond Purchase Agreement dated as of December 1, 2004 by and
among The Industrial Development Authority of St. Charles
County, Missouri, Union Planters Bank, N.A. and Synergetics
Development Company, L.L.C. (Filed as Exhibit 10.36 to the
Registrants Annual Report on
Form 10-K
for the year ended July 31, 2005 and incorporated herein by
reference.)
|
|
10
|
.35(1)
|
|
Form of Employee Restricted Stock Agreement for the Amended and
Restated Synergetics USA, Inc. 2001 Stock Plan (Filed as
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended April 30, 2006 and incorporated
herein by reference).
|
|
10
|
.36
|
|
Letter Agreement between Synergetics, Inc. and Regions Bank,
dated February 22, 2006 (Filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on March 2, 2006 and incorporated herein by
reference.)
|
|
10
|
.37
|
|
Credit and Security Agreement among Synergetics USA, Inc.,
Synergetics, Inc. and Regions Bank, dated March 13, 2006.
(Filed as Exhibit 10.1 to the Registrants Current
Report on
Form 8-K
filed on March 15, 2006 and incorporated herein by
reference.)
|
|
10
|
.38
|
|
First Amendment to Credit and Security Agreement by and among
Synergetics, Inc., Synergetics USA, Inc., Regions Bank, as Agent
and Lender, and Wachovia Bank, National Association, as Lender,
dated September 26, 2006. (Filed as Exhibit 10.52 to
the Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2006 and incorporated
herein by reference.)
|
48
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.39
|
|
Second Amendment to Credit and Security Agreement by and among
Synergetics, Inc., Synergetics USA, Inc., Regions Bank, as Agent
and Lender, and Wachovia Bank, National Association, as Lender,
dated December 8, 2006 (Filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on December 8, 2006 and incorporated herein by
reference.)
|
|
10
|
.40
|
|
Third Amendment to Credit and Security Agreement by and among
Synergetics, Inc., Synergetics USA, Inc. and Regions Bank, as
Lender, dated June 7, 2007. (Filed as Exhibit 10.1 to
the Registrants Current Report on
Form 8-K
filed on June 8, 2007 and incorporated herein by reference.)
|
|
10
|
.41
|
|
Revolving Note from Synergetics USA, Inc. and Synergetics, Inc.
in favor of Regions Bank, dated March 13, 2006 (Filed as
Exhibit 10.2 to the Registrants Current Report on
Form 8-K
filed on March 15, 2006 and incorporated herein by
reference.)
|
|
10
|
.42
|
|
Revolving Note from Synergetics USA, Inc. and Synergetics, Inc.
in favor of Regions Bank, dated September 26, 2006. (Filed
as Exhibit 10.53 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2006 and incorporated
herein by reference.)
|
|
10
|
.43
|
|
Amended and Restated Revolving Note from Synergetics USA, Inc.
and Synergetics, Inc. in favor of Regions Bank, dated
December 8, 2006. (Filed as Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
filed on December 8, 2006 and incorporated herein by
reference.)
|
|
10
|
.44
|
|
Amended and Restated Revolving Note from Synergetics USA, Inc.
and Synergetics, Inc. in favor of Regions Bank, dated
June 7, 2007. (Filed as Exhibit 10.3 to the
Registrants Current Report on
Form 8-K
filed on June 8, 2007 and incorporated herein by reference.)
|
|
10
|
.45
|
|
Second 2008 Amended and Restated Revolving Note from
Synergetics, Inc. and Synergetics USA, Inc. in favor of Regions
Bank, dated December 1, 2008. (Filed as Exhibit 10.2
to the Registrants Current Report on
Form 8-K
filed on December 3, 2008 and incorporated herein by
reference).
|
|
10
|
.46
|
|
Letter Agreement between Synergetics, Inc. and Regions Bank,
dated September 28, 2006. (Filed as Exhibit 10.55 to
the Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2006 and incorporated
herein by reference.)
|
|
10
|
.47
|
|
Foreign Accounts Credit and Security Agreement dated
June 20, 2007 by and among Synergetics, Inc., Synergetics
USA, Inc., Synergetics Germany, GmbH, and Synergetics Italia,
Srl as Borrowers and Regions Bank as Lender. (Filed as
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
filed on June 26, 2007 and incorporated herein by
reference.)
|
|
10
|
.48
|
|
Foreign Accounts Revolving Note from Synergetics, Inc.,
Synergetics USA, Inc., Synergetics Germany, GmbH, and
Synergetics Italia, Srl in favor of Regions Bank, dated
June 20, 2007. (Filed as Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
filed on June 26, 2007 and incorporated herein by
reference.)
|
|
10
|
.49
|
|
Fourth Amendment to Credit and Security Agreement by and among
Synergetics, Inc. and Synergetics USA, Inc. as Borrowers and
Regions Bank as Lender, dated as of January 31, 2008 (Filed
as Exhibit 10.1 to the Registrants Current Report on
Form 8-K
filed on March 11, 2008 and incorporated herein by
reference.)
|
|
10
|
.50
|
|
Amended and Restated Revolving Note from Synergetics USA, Inc.
and Synergetics, Inc. in favor of Regions Bank, dated as of
January 31, 2008. (Filed as Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
filed on March 11, 2008 and incorporated herein by
reference.)
|
|
10
|
.51
|
|
First Amendment to Foreign Accounts Credit Agreement by and
among Synergetics, Inc., Synergetics USA, Inc., Synergetics
Germany, GmbH and Synergetics Italia, Srl as Borrowers and
Regions Bank as Lender, dated as of January 31, 2008 (Filed
as Exhibit 10.3 to the Registrants Current Report on
Form 8-K
filed on March 4, 2008 and incorporated herein by
reference.)
|
|
10
|
.52
|
|
Amended and Restated Foreign Accounts Revolving Note from
Synergetics, Inc., Synergetics USA, Inc., Synergetics Germany,
GmbH and Synergetics Italia, Srl in favor of Regions Bank, dated
as of January 31, 2008 (Filed as Exhibit 10.4 to the
Registrants Current Report on
Form 8-K
filed on March 11, 2008 and incorporated herein by
reference.)
|
|
10
|
.53
|
|
Second Amendment to Foreign Accounts Credit Agreement by and
among Synergetics, Inc., Synergetics USA, Inc., Synergetics
Germany, GmbH, Synergetics Italia, Srl and Synergetics France,
SARL as Borrowers and Regions Bank as lender dated as of
June 5, 2008 (Filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on June 10, 2008 and incorporated herein by
reference.)
|
49
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.54
|
|
Second Amended and Restated Foreign Accounts Revolving Note from
Synergetics, Inc., Synergetics USA, Inc., Synergetics Germany,
GmbH, Synergetics Italia, Srl and Synergetics France, SARL, in
favor of Regions Bank, dated as of June 5, 2008. (Filed as
Exhibit 10.2 to the Registrants Current Report on
Form 8-K
filed on June 10, 2008 and incorporated herein by
reference.)
|
|
10
|
.55
|
|
Fifth Amendment to Credit and Security Agreement by and among
Synergetics, Inc. and Synergetics USA, Inc. as Borrowers and
Regions Bank as Lender, dated December 1, 2008 (Filed as
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
filed on December 3, 2008 and incorporated herein by
reference.)
|
|
10
|
.56
|
|
Third Amendment to Foreign Accounts Credit Agreement by and
among Synergetics, Inc. Synergetics USA, Inc., Synergetics
Germany, GmbH, Synergetics Italia, Srl and Synergetics France,
SARL as Borrowers and Regions Bank as lender dated as of
June 4, 2009.
|
|
10
|
.57(3)
|
|
Seventh Amendment to Credit and Security Agreement by and among
Synergetics Inc. and Synergetics USA, Inc. as Borrowers and
Regions Bank as Lender, dated as of November 30, 2009
(Filed as Exhibit 10.1 to the Registrants Current
Report on
Form 8-K
filed on December 3, 2009 and incorporated herein by
reference).
|
|
10
|
.58
|
|
Fourth Amendment to Credit and Security Agreement by and among
Synergetics Inc., Synergetics USA, Inc., Synergetics Germany,
GMBH, Synergetics Italia, Srl and Synergetics France, SARL as
Borrowers and Regions Bank as Lender, dated as of
November 30, 2009 (Filed as Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
filed on December 3, 2009 and incorporated by reference).
|
|
10
|
.59
|
|
Confidential Settlement and License Agreement between
Synergetics USA, Inc. and Alcon, Inc., Alcon Laboratories, Inc.
and Alcon Research Ltd. (filed as Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended April 30, 2010 and incorporated
herein by reference).
|
|
10
|
.60
|
|
Supply Agreement between Synergetics, Inc. and Alcon Research
Ltd. (filed as Exhibit 10.2 to the Companys Quarterly
Report on
Form 10-Q
for the quarter ended April 30, 2010 and incorporated
herein by reference).
|
|
10
|
.61
|
|
Agreement dated October 19, 2009 by and among Synergetics
USA, Inc., Steven R. Becker, BC Advisors, LLC, SRB Management,
L.P., SRB Greenway Opportunity Fund, L.P. and SRB Greenway
Capital (Q.P.), L.P. (Filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on October 20, 2009 and incorporated herein by
reference).
|
|
10
|
.62
|
|
Amendment executed April 19, 2010 by and among Synergetics
USA, Inc., Steven R. Becker, BC Advisors, LLC, SRB Management,
L.P., SRB Greenway Opportunity Fund, L.P. and SRB Greenway
Capital (Q.P.), L.P. (filed as Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on April 22, 2010 and incorporated herein by
reference).
|
|
21(2)
|
|
|
Subsidiaries of Registrant.
|
|
23
|
.1(2)
|
|
Consent of UHY, LLP.
|
|
31
|
.1(2)
|
|
Certification of the Registrants Principal Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
31
|
.2(2)
|
|
Certification of the Registrants Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1(2)
|
|
Certification of the Registrants Principal Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
.2(2)
|
|
Certification of the Registrants Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Management contract or compensatory plan or arrangement. |
|
(2) |
|
Filed herewith. |
|
(3) |
|
The Company did not enter into a sixth amendment to credit
agreement. |
50