e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number 001-10382
SYNERGETICS USA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-5715943 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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3845 Corporate Centre Drive |
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OFallon, Missouri
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63368 |
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(Address of principal executive offices)
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(Zip Code) |
(636) 939-5100
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant 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 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
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of the issuers common stock, $0.001 value per share, as of
December 1, 2009 was 24,495,554 shares.
SYNERGETICS USA, INC.
Index to Form 10-Q
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Change in
Control Agreement between Synergetics USA, Inc. and David M. Hable |
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Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
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Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
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Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
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Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
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EX-10.1 |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
Part I Financial Information
Item 1 Unaudited Condensed Consolidated Financial Statements
Synergetics USA, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of October 31, 2009 (Unaudited) and July 31, 2009
(Dollars in thousands, except per share information)
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October 31, 2009 |
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July 31, 2009 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
363 |
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$ |
160 |
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Accounts receivable, net of allowance for
doubtful accounts of $327 and $316,
respectively |
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8,023 |
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9,105 |
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Inventories |
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14,846 |
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15,025 |
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Prepaid expenses |
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407 |
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416 |
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Deferred income taxes |
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620 |
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654 |
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Total current assets |
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24,259 |
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25,360 |
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Property and equipment, net |
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7,855 |
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7,914 |
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Goodwill |
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10,690 |
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10,690 |
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Other intangible assets, net |
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12,938 |
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13,135 |
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Patents, net |
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932 |
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918 |
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Cash value of life insurance |
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63 |
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63 |
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Total assets |
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$ |
56,737 |
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$ |
58,080 |
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Liabilities and Stockholders Equity |
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Current Liabilities |
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Excess of outstanding checks over bank balance |
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$ |
429 |
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$ |
75 |
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Lines-of-credit |
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3,824 |
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5,035 |
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Current maturities of long-term debt |
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1,864 |
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1,856 |
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Current maturities of revenue bonds payable |
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249 |
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249 |
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Accounts payable |
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1,170 |
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1,822 |
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Accrued expenses |
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2,840 |
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2,874 |
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Income taxes payable |
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53 |
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37 |
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Total current liabilities |
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10,429 |
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11,948 |
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Long-Term Liabilities |
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Long-term debt, less current maturities |
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2,396 |
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2,665 |
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Revenue bonds payable, less current maturities |
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3,363 |
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3,414 |
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Deferred income taxes |
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1,803 |
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1,923 |
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Total long-term liabilities |
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7,562 |
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8,002 |
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Total liabilities |
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17,991 |
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19,950 |
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Commitments and contingencies (Note 7) |
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Stockholders Equity |
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Common stock at October 31, 2009 and July 31,
2009, $0.001 par value, 50,000,000 shares
authorized; 24,495,554 and 24,454,256 shares
issued and outstanding, respectively |
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24 |
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24 |
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Additional paid-in capital |
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24,594 |
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24,520 |
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Retained earnings |
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14,128 |
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13,586 |
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Total stockholders equity |
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38,746 |
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38,130 |
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Total liabilities and stockholders equity |
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$ |
56,737 |
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$ |
58,080 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
3
Synergetics USA, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
Three Months Ended October 31, 2009 and October 29, 2008
(Dollars in thousands, except per share information)
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Three Months Ended |
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Three Months Ended |
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October 31, 2009 |
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October 29, 2008 |
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Net sales |
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$ |
12,146 |
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$ |
12,246 |
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Cost of sales |
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5,327 |
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5,166 |
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Gross profit |
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6,819 |
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7,080 |
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Operating expenses |
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Research and development |
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600 |
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652 |
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Sales and marketing expenses |
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3,259 |
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3,244 |
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General and administrative |
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2,019 |
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2,021 |
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5,878 |
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5,917 |
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Operating income |
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941 |
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1,163 |
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Other income (expense) |
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Interest income |
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2 |
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Interest expense |
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(168 |
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(181 |
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Miscellaneous |
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28 |
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3 |
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(140 |
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(176 |
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Income before provision for income taxes |
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801 |
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987 |
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Provision for income taxes |
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259 |
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326 |
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Net income |
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$ |
542 |
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$ |
661 |
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Earnings per share: |
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Basic |
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$ |
0.02 |
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$ |
0.03 |
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Diluted |
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$ |
0.02 |
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$ |
0.03 |
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Basic weighted-average common shares outstanding |
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24,458,089 |
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24,440,861 |
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Diluted weighted-average common shares outstanding |
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24,496,554 |
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24,578,342 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
4
Synergetics USA, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended October 31, 2009 and October 29, 2008
(Dollars in thousands)
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Three Months Ended |
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Three Months Ended |
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October 31, 2009 |
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October 29, 2008 |
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Cash Flows from Operating Activities |
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Net income |
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$ |
542 |
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$ |
661 |
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Adjustments to reconcile net income to net cash provided by
(used in) operating activities |
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Depreciation and amortization |
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480 |
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466 |
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Provision for doubtful accounts receivable |
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(4 |
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(11 |
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Stock-based compensation |
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74 |
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50 |
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Deferred income taxes |
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(86 |
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(104 |
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(Gain) on sales of assets |
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(15 |
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Change in assets and liabilities |
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(Increase) decrease in: |
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Accounts receivable |
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1,086 |
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417 |
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Inventories |
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179 |
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(1,329 |
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Prepaid expenses |
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9 |
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(133 |
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(Decrease) increase in: |
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Accounts payable |
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(652 |
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(261 |
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Accrued expenses |
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(34 |
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90 |
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Income taxes payable |
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16 |
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(582 |
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Net cash provided by (used in) operating activities |
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1,595 |
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(736 |
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Cash Flows from Investing Activities |
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Proceeds from the sale of assets |
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15 |
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Purchase of property and equipment |
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(198 |
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(127 |
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Acquisition of patents and other intangibles |
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(40 |
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(62 |
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Net cash used in investing activities |
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(223 |
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(189 |
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Cash Flows from Financing Activities |
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Excess of outstanding checks over bank balance |
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354 |
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Net borrowings on lines-of-credit |
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(1,211 |
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1,165 |
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Principal payments on revenue bonds payable |
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(51 |
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(41 |
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Principal payments on long-term debt |
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(123 |
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(123 |
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Payments on debt incurred for acquisition of trademark |
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(138 |
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(130 |
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Net cash (used in) provided by financing activities |
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(1,169 |
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871 |
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Net increase (decrease) in cash and cash equivalents |
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203 |
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(54 |
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Cash and cash equivalents |
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Beginning |
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160 |
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500 |
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Ending |
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$ |
363 |
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$ |
446 |
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See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Synergetics USA, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(Tabular information reflects dollars in thousands, except share and per share information)
Note 1. General
Nature of business: Synergetics USA, Inc. (Synergetics USA or the Company) is a Delaware
corporation incorporated on June 2, 2005, in connection with the 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 instruments, 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.
Reporting period: The Companys year end is July 31 of each calendar year. For interim periods
in fiscal 2010, the Company now uses a calendar month reporting cycle. Formerly, in fiscal 2009,
the Company used a 21 business day per month reporting cycle. The information presented in the
Form 10-Q is for the three month periods August 1, 2009, through October 31, 2009, and August 1,
2008, through October 29, 2008, respectively and represents 64 business days for the period ended
October 31, 2009, and 63 business days for the period ended October 29, 2008. The additional
business day included in operations for the quarter ended October 31, 2009 did not have a material
impact on the results of the operations for the period then ended.
Basis of presentation: The unaudited condensed consolidated financial statements include the
accounts of Synergetics USA, Inc., and its wholly owned subsidiaries: Synergetics, Synergetics
Development Company, LLC, Synergetics DE, Inc. and Synergetics IP, Inc. All significant
intercompany accounts and transactions have been eliminated. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring items)
considered necessary for a fair presentation have been included. Operating results for the three
months ended October 31, 2009, are not necessarily indicative of the results that may be expected
for the fiscal year ending July 31, 2010. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements of the
Company for the year ended July 31, 2009, and notes thereto filed with the Companys Annual Report
on Form 10-K filed with the Securities and Exchange Commission on October 28, 2009, (the Annual
Report).
Note 2. Summary of Significant Accounting Policies
Reclassifications: Certain reclassifications have been made to the prior years quarterly and
annual financial statements to conform with the current quarters presentation. Operating income
and net income were not affected.
The Companys significant accounting policies are disclosed in the Annual Report. In the first
three months of fiscal 2010, no significant accounting policies were changed other than the
implementation of the new accounting pronouncements described below:
6
In June 2009, the Financial Accounting Standards Board (FASB) launched the FASB Accounting
Standards Codification (ASC) as the single source of authoritative U.S. GAAP recognized by the
FASB. The ASC reorganizes various U.S. GAAP pronouncements into accounting topics and displays
them using a consistent structure. All existing accounting standards documents are superseded as
described in Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. All of the
contents of the ASC carry the same level of authority, effectively superseding SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, which identified and ranked the sources of
accounting principles and the framework for selecting the principles used in preparing financial
statements in conformity with U.S. GAAP. Also included in the ASC are rules and interpretive
release of the Securities Exchange Commission (SEC), under authority of federal security laws
that are also sources of authoritative U.S. GAAP for SEC registrants. The ASC is effective for
interim and annual periods ending after September 15, 2009. The adoption of the ASC as of August
1, 2009, had no impact on our financial statements other than changing the way specific accounting
standards are referenced in our financial statements.
In September 2006, the FASB issued a new accounting and reporting standard for requiring a
fair value measurement which is principally applied to financial assets and liabilities such as
marketable equity securities and debt instruments. Derivatives include cash flow hedges,
freestanding derivative forward contracts, net investment hedges and interest rate swaps. These
items were previously, and will continue to be, marked-to-market at each reporting period; however,
the definition of fair value is now applied using this new standard. The adoption of this standard
on August 1, 2009, for such assets and liabilities did not have an impact on our condensed
consolidated financial statements (see related disclosures in Note 5 Fair Value Information).
In December 2007, the FASB issued a new accounting and reporting standard for the
noncontrolling interest (previously referred to as minority interest) in a subsidiary and the
accounting for the deconsolidation of a subsidiary. The standard clarifies that changes in a
parents ownership interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest and requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. The gain or loss will
be measured using the fair value of the noncontrolling equity investment on the deconsolidation
date. In addition, the standard also includes expanded disclosures requiring the ownership
interest in subsidiaries held by parties other than the parent be clearly identified and presented
in the consolidated balance sheet within equity, but separate from the parents equity; the amount
of consolidated net income attributable to the parent and noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of operations; and changes in
the parents ownership interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently. The adoption of this standard on August 1, 2009, had no
impact on our financial statements.
In December 2007, the FASB issued an accounting standard which establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling interests in the acquiree
and the goodwill acquired. This standard retains the underlying purchase method of accounting for
acquisitions, but incorporates a number of changes, including the capitalization of purchased
in-process research and development, expensing of acquisition related costs and the recognition of
contingent purchase price consideration at fair value at the acquisition date. In addition,
changes in accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period will be recognized in earnings rather than as an
adjustment to the cost of the acquisition. The adoption of this standard will be applied
prospectively to business combinations consummated after August 1, 2009.
In April 2008, the FASB finalized an accounting standard which delineates the factors that
should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset. The intent of this standard was to improve the consistency
between the useful life of a recognized asset and the period of expected cash flows used to measure
the fair value of the asset. In addition, this standard requires additional disclosures concerning
recognized intangible assets which would enable users of financial statements to assess the extent
to which the expected future cash flows
7
associated with the asset are affected by the entitys intent and/or ability to renew or
extend the arrangement. The adoption of this standard did not have a material impact on our
condensed consolidated financial statements.
In May 2008, the FASB issued an accounting standard which changes the accounting treatment for
convertible debt instruments which requires or permits partial cash settlement upon conversion.
The new standard requires issuers to separate convertible debt instruments into two components: a
non-convertible bond and a conversion option. The separation of the conversion options creates an
original issue discount in the bond component which is to be accreted as interest expense over the
term of the instrument using the interest method, resulting in an increase to interest expense and
a decrease in net income and earnings per share. The adoption of this standard did not have an
impact on our condensed consolidated financial statements.
In June 2008, the FASB issued an accounting standard which provides that unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. The adoption of this standard did not have a material
impact on our reported earnings per share.
In April 2009, the FASB issued a new accounting standard which requires summarized disclosure
in interim period of the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the financial statements. The
adoption of this standard on August 1, 2009, resulted in additional disclosures in our unaudited
interim condensed consolidated financial statements.
Subsequent events: The Company has evaluated subsequent events through December 15, 2009, the
date of issuance of the financial statements.
Note 3. Marketing Partner Agreements
The Company sells a portion of its electrosurgical generators and accessories to a U.S. based
national and international marketing partner 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. 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. Sales to
Codman and its respective percent of net sales for the three-month periods ended October 31, 2009,
and October 29, 2008, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
October 29, |
|
|
2009 |
|
2008 |
Net sales |
|
$ |
885 |
|
|
$ |
902 |
|
Percent of net sales |
|
|
7.3 |
% |
|
|
7.4 |
% |
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 produced by
Synergetics.
No other customer comprises more than 10 percent of sales.
8
Note 4. Stock-Based Compensation
Stock Option Plans
The following table provides information about awards outstanding at October 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, 2009 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted- |
|
|
|
|
|
|
|
Exercise |
|
|
Average |
|
|
|
Shares |
|
|
Price |
|
|
Fair Value |
|
Options outstanding, beginning of period |
|
|
527,735 |
|
|
$ |
2.10 |
|
|
$ |
1.74 |
|
For the period from August 1, 2009 through
October 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
527,735 |
|
|
$ |
2.10 |
|
|
$ |
1.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period |
|
|
470,599 |
|
|
$ |
2.23 |
|
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
|
|
There were no options granted during the first quarter of fiscal 2009 to the independent directors.
Each independent director receives an option to purchase 10,000 shares of the Companys Common
Stock each year in which he or she is elected, appointed, or re-elected to serve as a director
pursuant to the Amended and Restated 2005 Non-Employee Directors Stock Option Plan. These
options vest pro-ratably on a quarterly basis over the next year of service on the Board. The
Company granted 48,000 and 5,000 options during the fiscal year ended July 31, 2009, to the
Companys Chief Executive Officer (CEO) and the Companys Chief Scientific Officer (CSO),
respectively. The shares granted to the CEO vest pro-ratably over twelve quarters from the grant
date and the shares granted to the CSO vest pro-ratably over twelve months from the grant date. The
Company recorded compensation expense of $12,000 for options granted in prior periods for the three
months ended October 31, 2009. The fair value of options granted during the prior fiscal year was
determined at the date of the grant using a Black-Sholes options-pricing model and the following
assumptions:
|
|
|
|
|
Expected average risk-free interest rate |
|
|
2.25 |
% |
Expected average life (in years) |
|
|
10 |
|
Expected volatility |
|
|
80.5 |
% |
Expected dividend yield |
|
|
0.0 |
% |
The expected average risk-free rate is based on the 10 year U.S. treasury yield curve in December
of 2008. The expected average life represents the period of time that the options granted are
expected to be outstanding giving consideration to vesting schedules, historical exercise and
forfeiture patterns. Expected volatility is based on historical volatilities of Synergetics USA,
Inc.s common stock. The expected dividend yield is based on historical information and
managements plan. The Company expects to issue new shares as options are exercised. As of
October 31, 2009, the future compensation cost expected to be recognized for outstanding stock
options is approximately $14,000 for the remainder of fiscal 2010, $13,000 in fiscal 2011 and
$3,000 in fiscal 2012.
Restricted Stock Plans
Under our Amended and Restated Synergetics USA, Inc. 2001 Stock Plan (2001 Plan), our common
stock may be granted at no cost to certain employees and consultants of the Company. Certain plan
participants are entitled to cash dividends and voting rights for their respective shares.
Restrictions limit the sale or transfer of these shares during a vesting period whereby the
restrictions lapse either pro-ratably over a five-year vesting period or at the end of the fifth
year. These shares also vest upon a change of control event. Upon issuance of stock under the
2001 Plan, unearned compensation equivalent to the market value at the date of the grant is charged
to stockholders equity and subsequently amortized to expense over the applicable restriction
period. As of October 31, 2009, there was approximately $221,000
9
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. The following table provides information about restricted
stock grants during the three-month period ended October 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Number of Shares |
|
|
Grant Date Fair Value |
|
Balance as of July 31, 2009 |
|
|
112,076 |
|
|
$ |
3.13 |
|
Granted |
|
|
3,000 |
|
|
$ |
1.21 |
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2009 |
|
|
115,076 |
|
|
$ |
3.08 |
|
|
|
|
|
|
|
|
Note 5. Fair Value Information
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 October 31,
2009.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the short maturity of these items. The carrying
amount of the Companys notes and revenue bonds payable and long-term debt is estimated to
approximate fair value because the interest rates or the fixed rates are based on estimated current
rates offered to the Company for debt with similar terms and maturities.
Note 6. Supplemental Balance Sheet Information
Inventories
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
July 31, 2009 |
|
Raw material and component parts |
|
$ |
6,064 |
|
|
$ |
6,058 |
|
Work-in-progress |
|
|
2,814 |
|
|
|
2,723 |
|
Finished goods |
|
|
5,968 |
|
|
|
6,244 |
|
|
|
|
|
|
|
|
|
|
$ |
14,846 |
|
|
$ |
15,025 |
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
July 31, 2009 |
|
Land |
|
$ |
730 |
|
|
$ |
730 |
|
Building and improvements |
|
|
5,793 |
|
|
|
5,782 |
|
Machinery and equipment |
|
|
5,230 |
|
|
|
5,363 |
|
Furniture and fixtures |
|
|
736 |
|
|
|
720 |
|
Software |
|
|
363 |
|
|
|
336 |
|
Construction in process |
|
|
293 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
13,145 |
|
|
|
13,097 |
|
Less accumulated depreciation |
|
|
5,290 |
|
|
|
5,183 |
|
|
|
|
|
|
|
|
|
|
$ |
7,855 |
|
|
$ |
7,914 |
|
|
|
|
|
|
|
|
10
Other intangible assets
Information regarding the Companys other intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Value |
|
|
Amortization |
|
|
Net |
|
|
|
October 31, 2009 |
|
Proprietary know-how |
|
$ |
4,057 |
|
|
$ |
1,359 |
|
|
$ |
2,698 |
|
Trademark |
|
|
5,923 |
|
|
|
|
|
|
|
5,923 |
|
Licensing agreements |
|
|
5,834 |
|
|
|
1,517 |
|
|
|
4,317 |
|
Patents |
|
|
1,375 |
|
|
|
443 |
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,189 |
|
|
$ |
3,319 |
|
|
$ |
13,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
Proprietary know-how |
|
$ |
4,057 |
|
|
$ |
1,295 |
|
|
$ |
2,762 |
|
Trademark |
|
|
5,923 |
|
|
|
|
|
|
|
5,923 |
|
Licensing agreements |
|
|
5,834 |
|
|
|
1,384 |
|
|
|
4,450 |
|
Patents |
|
|
1,335 |
|
|
|
417 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,149 |
|
|
$ |
3,096 |
|
|
$ |
14,053 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill of $10,690,000 and proprietary know-how of $4,057,000 are a result of the reverse
merger transaction completed on September 21, 2005. Proprietary know-how consists of the patented
technology which is included in one of the Companys core products, bipolar electrosurgical
generators. As the proprietary technology is a distinguishing feature of the Companys products,
it represented a valuable intangible asset.
The Company did not incur costs to renew or extend the term of acquired intangible assets
during the period ended October 31, 2009.
Estimated amortization expense on other intangibles for the remaining nine months of the
fiscal year ending July 31, 2010 and the next four years thereafter is as follows:
|
|
|
|
|
Periods Ending July 31: |
|
Amount |
|
Fiscal Year 2010 (remaining 9 months) |
|
$ |
629 |
|
Fiscal Year 2011 |
|
|
629 |
|
Fiscal Year 2012 |
|
|
575 |
|
Fiscal Year 2013 |
|
|
573 |
|
Fiscal Year 2014 |
|
|
573 |
|
Amortization expense for the three months ended October 31, 2009, was $223,000.
Pledged assets; short and long-term debt (excluding revenue bonds payable)
Short-term debt as of October 31, 2009, and July 31, 2009, consisted of the following:
Revolving Credit Facility: The Company has a credit facility with Regions Bank (Regions)
which allows for borrowings of up to $9.5 million with interest at an interest rate based on either
the one-, two- or three-month LIBOR plus 2.0 percent and adjusting each quarter based upon our
leverage ratio. As of October 31, 2009, interest under the facility is charged at 2.24 percent. The
unused portion of the facility is charged at a rate of 0.20 percent. Borrowings under this facility
at October 31, 2009, were $3.6 million. 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.
11
The facility has two financial covenants: a maximum leverage ratio of 3.75 times and a
minimum fixed charge coverage ratio of 1.1 times. As of October 31, 2009, the leverage ratio was
1.27 times and the minimum fixed charge coverage ratio was 1.46 times. Collateral availability
under the line at October 31, 2009, was approximately $4.1 million. The facility restricts the
payment of dividends if, following the distribution, the fixed charge coverage ratio would fall
below the required minimum.
Non-U.S. Receivables Revolving Credit Facility: The Company has a credit facility with Regions
which allows for borrowings of up to $1.75 million with an interest rate based on LIBOR plus 3.0
percent. Pursuant to the terms of the non-U.S. receivables revolving credit 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 October 31,
2009. 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 line was approximately $700,000
at October 31, 2009.
Equipment Line of Credit: Under this amended 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. The borrowings as of October 31, 2009,
were $263,000. The equipment line of credit was amended on November 30, 2009, to extend the
maturity date to November 30, 2010.
Long-term debt as of October 31, 2009, and July 31, 2009, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
July 31, |
|
|
|
2009 |
|
|
2009 |
|
Note payable to bank, due in
monthly installments of $41,022
beginning August 2008 plus interest
at a rate of 5.0 percent, remaining
balance due July 31, 2011,
collateralized by substantially all
assets of the Company |
|
$ |
861 |
|
|
$ |
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 $1,439,136,
including contractual interest
payments, due December 2011,
collateralized by the
Malis® trademark |
|
|
1,337 |
|
|
|
1,475 |
|
Settlement obligation to Iridex
Corporation, due in annual
installments of $800,000 which
includes interest at an imputed rate
of 8.0 percent, remaining balance of
$2,400,000 including the effects of
imputing interest, due April 15,
2012 |
|
|
2,062 |
|
|
|
2,062 |
|
|
|
|
|
|
|
|
|
|
|
4,260 |
|
|
|
4,521 |
|
Less current maturities |
|
|
1,864 |
|
|
|
1,856 |
|
|
|
|
|
|
|
|
Long-term portion |
|
$ |
2,396 |
|
|
$ |
2,665 |
|
|
|
|
|
|
|
|
Note 7. Commitments and Contingencies
On August 1, 2007, the Company entered into a three-year employment agreement with its
Executive Vice President and Chief Financial Officer, Ms. Boone. In the event she is terminated
without cause, or if she resigns for good reason, she shall be entitled to her base salary and
health care benefits for fifteen additional months.
On July 31, 2008, the Companys Board of Directors formally accepted the resignation of
Gregg Scheller who was the Companys President, CEO and Chairman of the Board. The Company believes
the non-compete covenant contained in the Mr. Schellers employment agreement survives until
July 31, 2010.
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 Chief Operating Officer (COO) and CSO, which agreements were contemplated in conjunction
with
12
the Companys annual review of compensation and therefore were made effective with other
compensation changes as of August, 1, 2009. The change in control agreements with the CEO, COO 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 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 he is 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 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
employment termination.
In addition, Mr. Hables change in control agreement includes an Early Severance payment in
lieu of Ordinary Severance under the following condition. If, before he completes one year of
service, Mr. Hables employment is terminated within one year following a change of control without
cause and for any reason other than death and disability, including an involuntary termination, and
provided he enters into a separation agreement within 30 days of his employment termination, he
shall receive the following in a lump sum: (i) Standard Compensation due; (ii) a amount equal to
one-half times his annual base salary at the rate in effect immediately prior to the change of
control; and (iii) as compensation for certain lost benefits, an amount equal to 10% of his base
salary at the rate in effect immediately prior to the change in control (Early Severance). If
such termination occurs during the period that is 6 to 12 months after Mr. Hables start date (as
defined in the change in control agreement), he shall receive in a lump sum the Early Severance and
an additional amount equal to the sum of one-twelfth times his base salary for each month of
employment completed between 7 and 12 months after his start date.
Various claims, incidental to the ordinary course of business, are pending against the
Company. In the opinion of management, after consultation with legal counsel, resolution of these
matters is not expected to have a material effect on the accompanying financial statements.
The Company is subject to regulatory requirements throughout the world. In the normal
course of business, these regulatory agencies may require companies in the medical industry to
change their products or operating procedures, which could affect the Company. The Company
regularly incurs expenses to comply with these regulations and may be required to incur additional
expenses. Management is not able to estimate any additional 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 8. Enterprise-wide Information
The following tables present the entity-wide disclosures for net sales:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 31, |
|
|
October 29, |
|
|
|
2009 |
|
|
2008 |
|
Product Line: |
|
|
|
|
|
|
|
|
Ophthalmic |
|
$ |
7,522 |
|
|
$ |
7,384 |
|
Neurosurgery |
|
|
2,900 |
|
|
|
2,953 |
|
Marketing partners (Codman,
Stryker Corporation and Iridex
Corporation) |
|
|
1,690 |
|
|
|
1,782 |
|
Other (ENT and Dental) |
|
|
34 |
|
|
|
127 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,146 |
|
|
$ |
12,246 |
|
|
|
|
|
|
|
|
Region Specific: |
|
|
|
|
|
|
|
|
Domestic |
|
$ |
8,489 |
|
|
$ |
8,746 |
|
International |
|
|
3,657 |
|
|
|
3,500 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,146 |
|
|
$ |
12,246 |
|
|
|
|
|
|
|
|
13
Revenues are attributed to countries based upon the location of end-user customers or
distributors.
Note 9. 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 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, 2011
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, 2011 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.
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.
14
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act), provide a safe harbor for forward-looking
statements made by or on behalf of the Company. The Company and its representatives may from time
to time make written or oral statements that are forward-looking, including statements contained
in this report and other filings with the Securities and Exchange Commission (SEC) and in our
reports to stockholders. In some cases forward-looking statements can be identified by words such
as believe, expect, anticipate, plan, potential, continue or similar expressions. Such
forward-looking statements include risks and uncertainties and there are important factors that
could cause actual results to differ materially from those expressed or implied by such
forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A,
Risk Factors section of the Companys Form 10-K for the fiscal year ended July 31, 2009.
Although we believe the expectations reflected in our forward-looking statements are based
upon reasonable assumptions, it is not possible to foresee or identify all factors that could have
a material effect on the future financial performance of the Company. The forward-looking
statements in this report are made on the basis of managements assumptions and analyses, as of the
time the statements are made, in light of their experience and perception of historical conditions,
expected future developments and other factors believed to be appropriate under the circumstances.
In addition, certain market data and other statistical information used throughout this report
are based on independent industry publications. Although we believe these sources to be reliable,
we have not independently verified the information and cannot guarantee the accuracy and
completeness of such sources.
Except as otherwise required by the federal securities laws, we disclaim any obligation or
undertaking to publicly release any updates or revisions to any forward-looking statement contained
in this quarterly report on Form 10-Q and the information incorporated by reference in this report
to reflect any change in our expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
Mission
Through continuous improvement and development of our people, our mission is to design,
manufacture and market innovative microsurgical instruments, 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.
Overview
Synergetics USA, Inc. (Synergetics USA or the Company) is a leading supplier of precision
microsurgery instrumentation. The Companys primary focus is on the microsurgical disciplines of
ophthalmology and neurosurgery. Our distribution channels include a combination of direct and
independent sales organizations and important strategic alliances with market leaders. The
Companys product lines focus upon precision engineered, microsurgical, hand-held instruments and
the microscopic delivery of laser energy, ultrasound, electrosurgery, aspiration, illumination and
irrigation, often delivered in multiple combinations. Enterprise-wide information is included in
Note 8 to the unaudited condensed consolidated financial statements.
The Company is a Delaware corporation incorporated on June 2, 2005, in connection with the
reverse merger of Synergetics, Inc. (Synergetics) and Valley Forge Scientific Corp. (Valley
Forge).
Synergetics was founded in 1991. Valley Forge was incorporated in 1980 and became a
publicly-held company in November 1989. Prior to the merger of Synergetics and Valley Forge, Valley
Forges common
15
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.
Summary of Financial Information
The following tables present net sales by category and our results of operations (dollars in
thousands):
NET SALES BY CATEGORY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 31, 2009 |
|
|
Mix |
|
|
October 29, 2008 |
|
|
Mix |
|
Ophthalmic |
|
$ |
7,522 |
|
|
|
61.9 |
% |
|
$ |
7,384 |
|
|
|
60.3 |
% |
Neurosurgery |
|
|
2,900 |
|
|
|
23.9 |
% |
|
|
2,953 |
|
|
|
24.1 |
% |
Marketing Partners (1) |
|
|
1,690 |
|
|
|
13.9 |
% |
|
|
1,782 |
|
|
|
14.6 |
% |
Other |
|
|
34 |
|
|
|
0.3 |
% |
|
|
127 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,146 |
|
|
|
|
|
|
$ |
12,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information with respect to the breakdown of revenue for the geographical areas is included in
Note 8 to the condensed consolidated financial statements.
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
October 31, 2009 |
|
October 29, 2008 |
|
(Decrease) |
Net Sales |
|
$ |
12,146 |
|
|
$ |
12,246 |
|
|
|
(0.8 |
%) |
Gross Profit |
|
|
6,819 |
|
|
|
7,080 |
|
|
|
(3.7 |
%) |
Gross Profit Margin % |
|
|
56.1 |
% |
|
|
57.8 |
% |
|
|
(2.9 |
%) |
Commercial Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing |
|
|
3,259 |
|
|
|
3,244 |
|
|
|
0.5 |
% |
General and Administrative |
|
|
2,019 |
|
|
|
2,021 |
|
|
|
(0.1 |
%) |
Research and Development |
|
|
600 |
|
|
|
652 |
|
|
|
(8.0 |
%) |
Operating Income |
|
|
941 |
|
|
|
1,163 |
|
|
|
(19.1 |
%) |
Operating Margin |
|
|
7.7 |
% |
|
|
9.5 |
% |
|
|
(18.9 |
%) |
EBITDA (2) |
|
|
1,449 |
|
|
|
1,634 |
|
|
|
(11.3 |
%) |
Net Income |
|
$ |
542 |
|
|
$ |
661 |
|
|
|
(18.0 |
%) |
Earnings per share |
|
|
0.02 |
|
|
|
0.03 |
|
|
|
(33.3 |
%) |
Return on equity (2) |
|
|
1.4 |
% |
|
|
1.8 |
% |
|
|
(22.2 |
%) |
Return on assets (2) |
|
|
1.2 |
% |
|
|
1.4 |
% |
|
|
(14.3 |
%) |
|
|
|
(1) |
|
Sales from our marketing partners are primarily neurosurgery and pain control revenues. |
|
(2) |
|
EBITDA, return on equity and return on assets are not financial measures recognized by U.S.
generally accepted accounting principles (GAAP). EBITDA is defined as income before
interest expense, income taxes, depreciation and amortization. Return on equity is defined
as net income divided by average equity. Return on assets is defined as net income plus
interest expense divided by average assets. See disclosure following regarding the use of
non-GAAP financial measures. |
16
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
October 29, 2008 |
|
Net income |
|
$ |
542 |
|
|
$ |
661 |
|
Interest |
|
|
168 |
|
|
|
181 |
|
Income taxes |
|
|
259 |
|
|
|
326 |
|
Depreciation |
|
|
257 |
|
|
|
243 |
|
Amortization |
|
|
223 |
|
|
|
223 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
1,449 |
|
|
$ |
1,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
542 |
|
|
$ |
661 |
|
Average Equity: |
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
38,746 |
|
|
|
|
|
July 31, 2009 |
|
|
38,130 |
|
|
|
|
|
October 29, 2008 |
|
|
|
|
|
|
37,068 |
|
July 31, 2008 |
|
|
|
|
|
|
36,357 |
|
Average Equity |
|
|
38,438 |
|
|
|
36,713 |
|
Return on Equity |
|
|
1.4 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
542 |
|
|
$ |
661 |
|
Interest |
|
|
168 |
|
|
|
181 |
|
Net income + interest expense |
|
|
710 |
|
|
|
842 |
|
Average Assets: |
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
56,737 |
|
|
|
|
|
July 31, 2009 |
|
|
58,080 |
|
|
|
|
|
October 29, 2008 |
|
|
|
|
|
|
59,124 |
|
July 31, 2008 |
|
|
|
|
|
|
58,396 |
|
Average Assets |
|
|
57,409 |
|
|
|
58,760 |
|
Return on Assets |
|
|
1.2 |
% |
|
|
1.4 |
% |
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 equity and return on 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.
Revenues from our ophthalmic products constituted 61.9 percent and 56.6 percent of our total
revenues for the three months ended October 31, 2009, and for fiscal year ended July 31, 2009,
respectively. Revenues from our neurosurgical products represented 23.9 percent and 26.4 percent
for the
three months ended October 31, 2009, and for the fiscal year ended July 31, 2009,
respectively. Revenues from our marketing partners represented 13.9 percent and 16.1 percent of
our total revenues for the three
17
months ended October 31, 2009, and for the fiscal year ended July
31, 2009, respectively. In addition, other revenue was 0.3 percent of our total revenues for the
three months ended October 31, 2009, and 0.9 percent of our total revenues for the fiscal year
ended July 31, 2009.
International revenues of $3.7 million constituted 30.1 percent of our total revenues for the
three months ended October 31, 2009, as compared to 31.9 percent as of the fiscal year ended July
31, 2009. We expect that the relative revenue contribution of our international sales will continue
to rise for the remainder of fiscal 2010 and fiscal 2011 as a result of our continued efforts to
expand our international distribution and direct sales force.
Recent Developments
On November 10, 2009, the Company announced that it had signed a definitive agreement with
Stryker Corporation (Stryker) in conjunction with the planned 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 (currently marketed under the Omni® brand by
Synergetics in the U.S., Canada and several other countries). The agreement provides for
Synergetics to do the following: sell to Stryker certain assets associated with the marketing and
sales of the Mutoh console and handpiece products; 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 intraoperative ultrasound products. The closings of the transactions are
subject to certain agreed conditions.
On November 16, 2009, the Company announced the signing of an addendum to its three-year
agreement with Codman & Shurtleff, Inc. (Codman). Under the terms of the revised agreement,
Codman will have the exclusive right to market and distribute the Companys branded disposable
bipolar forceps produced by Synergetics.
On November 30, 2009, the Company amended its Revolving Credit Facility, its Non-U.S.
Receivables Revolving Credit Facility and its Equipment Line of Credit. The maturity date of the
facilities were all extended to November 30, 2010.
On
December 9, 2009, the Company entered into Change in Control agreements with its Chief
Operating Officer and its Chief Scientific Officer, effective as of August 1, 2009.
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 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.
The strategy can be divided and summarized as described below.
Improve Profitability and Cash Efficiency through:
Manufacturing Efficiencies
Lean Manufacturing The Company continues to implement lean manufacturing in its
production facilities one product line value stream at a time. During the fiscal year ended
July 31, 2009, four product families were converted to the lean manufacturing methodology,
with the realization of cost savings. During the three months ended October 31, 2009, two
additional product families are in the
process of being converted to this methodology. We plan to continue to implement lean
manufacturing techniques in all disposable product lines during the fiscal year ending
July 31, 2010.
18
Plastic Molding The Companys most recent acquisition, 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 plastic parts and metal machined
parts to injection molded, plastic parts. Our annual savings from the continued introduction
of new parts to this process is projected to be over $200,000 for fiscal year 2010.
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 in inventory on hand from 272 days at October 29,
2008, to 233 days at July 31, 2009, to 229 days at October 31, 2009.
Human Resource Rationalization Starting with a hiring freeze in January 2009, 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.
Cash Management The Company is focused on its debt level 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, increase the days in accounts payable. During
the three months ended October 31, 2009, the Company improved its leverage ratio (total debt
divided by total debt plus total stockholders equity) to 23.2 percent from 25.7 percent at
July 31, 2009.
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. 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, an instrument
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 has been 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 versus the
opportunities afforded by their distribution network. As discussed in the Recent
Developments section above, the Company has signed a definitive agreement with Stryker in
conjunction with the planned acquisition by Stryker of certain assets from Mutoh used to
produce the Sonopet Ultrasonic Aspirator control consoles and handpieces
(currently marketed under the Omni® brand by Synergetics in the U.S., Canada and
several other countries). The Company will supply disposable ultrasonic instrument tips and
certain other
19
consumable products used in conjunction with the Sonopet/Omni®
ultrasonic aspirator console and handpieces. In addition, the Company announced the signing
of an addendum to its three-year agreement with Codman for the exclusive right to market and
distribute the Companys branded disposable bipolar forceps produced by Synergetics.
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 in aligning the incentives and promotional direction of the
sales force with those of the Companys interests as a whole. It is anticipated that this will
result in enhanced productivity.
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 8.0 percent of
total sales for the Company for the three months ended October 31, 2009, or approximately $977,000.
The Companys past revenue growth has been closely aligned with the adoption by surgeons of new
technologies introduced by Synergetics. In the last 24-month period, the Company has introduced 82
new items to the ophthalmic and neurosurgery markets. We expect adoption rates for the Companys
new products in the future to have a similar effect on its operating performance.
Growth in Minimally Invasive Surgery Procedures
Minimally invasive surgery is surgery performed without making a major incision or opening.
Minimally invasive surgery generally results in less patient trauma, decreased likelihood of
complications related to the incision and a shorter recovery time. A growing number of surgical
procedures are performed using minimally invasive techniques, creating a multi-billion dollar
market for the specialized devices used in the procedures. Based on our micro-instrumentation
capability, we believe we are ideally positioned to take advantage of this growing market. The
Company has developed scissors having a single activating shaft as small as 30 gauge (0.012 inch,
0.3 millimeter in diameter). We also believe that we are the world leader in small-fiber
illumination technology as our PhotonTM and PhotonTM II
light sources can transmit more light through a fiber of 300 micron diameter or smaller than any
other light source in the world. 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 Omni® power ultrasound system technology
provides a new method for the minimally invasive removal of soft and fibrotic tissue, as well as
bone removal. This technology is in its infancy, and we anticipate that, once fully developed, it
will become a standard of care in multiple minimally invasive surgical applications. The Company
has benefited from the overall growth in this market and expects to continue to benefit as it
continues to introduce new and improved technologies targeting this market.
Demand Trends
Increased international sales contributed to all of the sales growth for the Company during
the three months ended October 31, 2009. A recent 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 volume on a global basis continues to rise at an estimated 5.0 percent growth rate
driven by an aging global population, new technologies, advances in surgical techniques and a
growing global market resulting from ongoing improvements in healthcare delivery in third world
countries, among other factors. In addition, the demand for high quality products and new
technologies, such as the Companys innovative instruments and disposables, to support growth in
procedures volume continues to positively impact
growth. The Company believes innovative surgical approaches will continue to significantly
impact the ophthalmic and neurosurgical market.
20
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 are negatively
impacting the volume of the Companys capital equipment sales. Therefore, the Company only
experienced flat sales during the three months ended October 31, 2009, as compared to a compound
annual growth rate of approximately 8.5 percent in fiscal 2009.
Results Overview
During the fiscal quarter ended October 31, 2009, we had net sales of $12.1 million, which
generated $6.8 million in gross profit, operating income of $941,000 and net income of
approximately $542,000, or $0.02 earnings per share. The Company had $363,000 in cash and $11.7
million in interest-bearing debt and revenue bonds as of October 31, 2009. Management anticipates
that cash flows from operations, together with available borrowings under our existing credit
facilities, will be sufficient to meet working capital, capital expenditure and debt service needs
for the next twelve months.
Results of Operations
Three-Month Period Ended October 31, 2009 Compared to Three-Month Period Ended October 29, 2008
Net Sales
The following table presents net sales by category (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
October 31, 2009 |
|
|
October 29, 2008 |
|
|
(Decrease) |
|
Ophthalmic |
|
$ |
7,522 |
|
|
$ |
7,384 |
|
|
|
1.9 |
% |
Neurosurgery |
|
|
2,900 |
|
|
|
2,953 |
|
|
|
(1.8 |
%) |
Marketing
partners (Codman,
Stryker and
Iridex
Corporation) |
|
|
1,690 |
|
|
|
1,782 |
|
|
|
(5.2 |
%) |
Other |
|
|
34 |
|
|
|
127 |
|
|
|
(73.2 |
%) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,146 |
|
|
$ |
12,246 |
|
|
|
(0.8 |
%) |
|
|
|
|
|
|
|
|
|
|
Ophthalmic sales grew 1.9 percent in the first quarter of fiscal 2010 compared to the first
quarter of fiscal 2009. Domestic ophthalmic sales decreased 3.1 percent, while international sales
increased 10.2 percent primarily due to sales of disposable products. When comparing neurosurgery,
net sales during the first quarter of fiscal 2010 were 1.8 percent less than first quarter of
fiscal 2009. Domestic neurosurgery sales increased 2.6 percent and international sales decreased
15.5 percent. Sales to our marketing partners of $1.7 million were
5.2% less than sales in the comparable quarter of the prior year,
primarily due to lower sales of capital equipment product lines.
Sales of pain control generators to Stryker during the first quarter
of fiscal 2009 were higher due to Strykers model change
completed during fiscal 2008. The sales to Stryker returned to a
normal sales rate during the first quarter of fiscal 2010. Sales to
Codman were down 1.9% due to reduced sales of generator disposables. The Company
expects that in fiscal 2010, the VitraTM laser and Malis® electrosurgical
generator sales will
improve as signs of an economic turnaround are beginning to take shape and that the related
disposables will continue to have a positive impact on net sales.
21
The following table presents domestic and international net sales (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
October 31, 2009 |
|
|
October 29, 2008 |
|
|
(Decrease) |
|
United States (including OEM sales) |
|
$ |
8,489 |
|
|
$ |
8,746 |
|
|
|
(2.9 |
%) |
International (including Canada) |
|
|
3,657 |
|
|
|
3,500 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,146 |
|
|
$ |
12,246 |
|
|
|
(0.8 |
%) |
|
|
|
|
|
|
|
|
|
|
Domestic sales for the first quarter of fiscal 2010 compared to the same period of fiscal 2009
decreased 2.9 percent as sales of domestic ophthalmology decreased 3.1 percent and sales to our
marketing partners decreased by 5.2 percent. These domestic sales decreases were partially offset
by a 2.6 percent increase in domestic neurosurgery sales. International sales grew 4.5 percent as
the ophthalmology product line grew 10.2 percent partially offset by international neurosurgery
sales decreasing 15.5 percent.
Gross Profit
Gross profit as a percentage of net sales was 56.1 percent in the first quarter of fiscal
2010, compared to 57.8 percent for the same period in fiscal 2009. Gross profit as a percentage of
net sales for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009
decreased approximately 2 percentage points, primarily due to the change in mix toward higher
international sales and reduced absorption of both labor and overhead on our capital equipment
product lines.
Operating Expenses
R&D as a percentage of net sales was 4.9 percent and 5.3 percent for the first quarter of
fiscal 2010 and 2009, respectively. R&D costs decreased by $52,000 in the first quarter of fiscal
2010 compared to the same period in fiscal 2009. The Companys pipeline included approximately 25
active projects in various stages of completion as of October 31, 2009. 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, 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
4.0 to 6.0 percent.
Sales and marketing expenses remained relatively flat at 26.8 percent of net sales, for the
first fiscal quarter of 2010, compared to 26.5 percent for the first fiscal quarter of 2009. The
slight increase in sales and marketing expenses as a percentage of net sales was primarily due to
sales decreasing 0.8 percent.
General and administrative expenses remained relatively flat during the first fiscal quarter
of 2010 and as a percentage of net sales were 16.6 percent for the first fiscal quarter of 2010 as
compared to 16.5 percent for the first fiscal quarter ended October 29, 2009.
Other Expenses
Other expenses for the first quarter of fiscal 2010 decreased 20.5 percent to $140,000 from
$176,000 for the first quarter of fiscal 2009. The decrease was due primarily to a lower interest
rate, as well as a reduced average balance on the Companys working capital line of credit
borrowings.
Operating Income, Income Taxes and Net Income
Operating income for the first quarter of fiscal 2010 was $941,000, as compared to operating
income of $1.2 million in the comparable 2009 fiscal period. The decrease in operating income was
primarily the result of 0.8 percent less net sales and $161,000 more cost of sales, partially
offset by $52,000 less R&D costs.
22
The Company recorded a $259,000 provision on pre-tax income of $801,000, a 32.3 percent tax
provision, in the quarter ended October 31, 2009. In the quarter ended October 29, 2008, the
Company recorded a $326,000 tax provision on pre-tax income of $987,000, a 33.0 percent tax
provision.
Net income decreased by $119,000 to $542,000 for the first quarter of fiscal 2010, from
$661,000 for the same period in fiscal 2009. Basic and diluted earnings per share for the first
quarter of fiscal 2010 decreased to $0.02 from $0.03 for the first quarter of fiscal 2009. Basic
weighted-average shares outstanding increased from 24,440,861 at October 29, 2008, to 24,458,089 at
October 31, 2009.
Liquidity and Capital Resources
The Company had approximately $363,000 in cash and $11.7 million in interest-bearing debt and
revenue bonds as of October 31, 2009.
Working capital, including the management of inventory and accounts receivable, is a key
management focus. At October 31, 2009, the Company had an average of 55 days of sales outstanding
(DSO) utilizing the trailing twelve months sales for the period ending October 31, 2009. The 55
days of sales outstanding at October 31, 2009, was 8 days favorable to July 31, 2009, and 6 days
favorable to October 29, 2008, utilizing the trailing twelve months of sales. The collection time
for non-U.S. receivables is generally longer than comparable U.S. receivables, and as such, the
increase in non-U.S. sales to 30.1 percent is unfavorably impacting the DSO calculation.
At October 31, 2009, the Company had 229 days of cost of sales in inventory on hand utilizing
the trailing twelve months cost of sales for the period ending October 31, 2009. The 229 days of
cost of sales in inventory was favorable to July 31, 2009, by 4 days and 43 days favorable to
October 29, 2008, utilizing the trailing twelve months of cost of sales. Although management
believes that meeting customer expectations regarding delivery times is important to its overall
growth strategy, inventory reduction continues to be a focus of the Company and its newly installed
MRP system will continue to aid in meeting that goal during fiscal 2010.
Cash flows provided by operating activities were $1.6 million for the three months ended
October 31, 2009, compared to cash flows used in operating activities of approximately $736,000 for
the comparable fiscal 2009 period. The increase of $2.3 million was attributable to net increases
applicable to deferred income taxes, net receivables, inventories, prepaid expenses and income
taxes payable of $3.0 million, offset in part by net decreases applicable to net income, gain on
sale of assets, accounts payable and accrued expenses and other of $651,000.
Cash flows used in investing activities was $223,000 for the three months ended October 31,
2009, compared to cash used in investing activities of $189,000 for the comparable fiscal 2009
period. During the three months ended October 31, 2009, cash additions to property and equipment
were $198,000, compared to $127,000 for the first three months of fiscal 2009. During the three
months ended October 31, 2009, cash additions to patents and other intangibles were $40,000,
compared to $62,000 for the first three months of fiscal 2009.
Cash flows used in financing activities were $1.2 million for the three months ended October
31, 2009, compared to cash provided by financing activities of $871,000 for the three months ended
October 29, 2008. The decrease of $2.0 million was attributable primarily to a decrease in the
balance of net borrowings on the line of credit of $2.4 million, offset in part by an increase in
excess of outstanding checks over the bank balance of $354,000.
The Company had the following committed financing arrangements as of October 31, 2009:
Revolving Credit Facility: The Company has a credit facility with Regions Bank (Regions)
which allows for borrowings of up to $9.5 million with interest at an interest rate based on either
the one-, two- or three-month LIBOR plus 2.00 percent and adjusting each quarter based upon our
leverage ratio. As of
23
October 31, 2009, interest under the facility is charged at 2.24 percent. The
unused portion of the facility is charged at a rate of 0.20 percent. Borrowings under this facility
at October 31, 2009, were $3.6 million. 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 facility has two financial covenants: a maximum leverage ratio of 3.75 times and a
minimum fixed charge coverage ratio of 1.1 times. As of October 31, 2009, the Companys leverage
ratio was 1.27 times and the minimum fixed charge coverage ratio was 1.46 times. Collateral
availability under the line as of October 31, 2009, was approximately $4.1 million. The facility
restricts the payment of dividends if, following the distribution, the fixed charge coverage ratio
would fall below the required minimum.
Non-U.S. Receivables Revolving Credit Facility: The Company has a credit facility with Regions
which allows for borrowings of up to $1.75 million with an interest rate based on LIBOR plus 3.0
percent. Pursuant to the terms of the non-U.S. receivables revolving credit 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 October 31,
2009. 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 line was approximately $700,000
at October 31, 2009.
Equipment Line of Credit: Under this amended credit facility, the Company may borrow up to
$1.0 million, with interest now being one-month LIBOR plus 3.0 percent. 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. The borrowings under this facility as of October 31, 2009, were $263,000. The
equipment line of credit was amended on November 30, 2009, to extend the maturity date to November
30, 2010.
Management believes that cash flows from operations, together with available borrowings under
its new credit facilities, will be sufficient to meet the Companys working capital, capital
expenditure and debt service needs for the next twelve months.
Critical Accounting Policies
The Companys significant accounting policies which require managements judgment are
disclosed in our Annual Report on Form 10-K for the year ended July 31, 2009. In the first three
months of fiscal 2009, there were no changes to the significant accounting policies except for the
implementation of the new accounting pronouncements as discussed in Note 2.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
The Companys primary market risks include fluctuations in interest rates and exchange rate
variability.
The Company has two revolving credit facilities and an equipment line of credit facility in
place. The primary revolving credit facility had an outstanding balance of $3.6 million at October
31, 2009, bearing interest at a current rate of LIBOR plus 2.0 percent. The non-U.S. revolving
credit facility had no outstanding balance at October 31, 2009. Balances on this credit facility
bear interest at one-month LIBOR plus 3.0 percent. The equipment line of credit facility had an
outstanding balance of $263,000 at October 31, 2009, 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. Assuming the current levels of borrowings at variable rates and a
two-percentage-point increase in the average interest rate on these borrowings, it is estimated
that our interest expense would have increased by approximately $76,000. The Company does not
perform any interest rate hedging activities related to these three facilities.
Additionally, the Company has exposure to non-U.S. currency fluctuations through export sales
to international accounts. As only approximately 5.0 percent of our sales revenue is denominated in
non-U.S. currencies, we estimate that a change in the relative strength of the dollar to non-U.S.
currencies would not have a material impact on the Companys results of operations. The Company
does not conduct any hedging activities related to non-U.S. currency.
24
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive
officer and chief financial officer, has reviewed and evaluated the effectiveness of the Companys
disclosure controls and procedures as of October 31, 2009. Based on such review and evaluation, our
principal executive officer and chief financial officer have concluded that, as of October 31,
2009, the disclosure controls and procedures were effective to ensure that information required to
be disclosed by the Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and (b) is accumulated and communicated to the
Companys management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the first fiscal quarter ended October 31, 2009, there was no change in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
Part II Other Information
Item 1 Legal Proceedings
On April 17, 2008, the Company filed a lawsuit in the United States District Court for the
Southern District of New York against Swiss-based Alcon, Inc. and its primary operating subsidiary
in the U.S., Alcon Laboratories, Inc. (collectively Alcon). This suit is captioned Synergetics
USA, Inc. v. Alcon Laboratories, Inc. and Alcon, Inc., Case No. 08-CIV-003669. The Companys
attorneys in this matter have agreed to represent the Company on a contingency-fee basis. In the
complaint, the Company alleges that Alcon has used its monopoly power in the market for vitrectomy
machines to control its customers purchasing decisions in favor of Alcons surgical illumination
sources and associated accessories by, for example, tying sales of its light pipes to sales of its
patented fluid collection cassettes, which are required for each vitreoretinal surgery using
Alcons market-dominant vitrectomy machine. The complaint describes further anti-competitive
behaviors, which include commercial disparagement of the Companys products; payment of grant
monies to surgeons, hospitals and clinics in order to influence purchasing decisions; the
maintenance of a large surgeon advisory board, whose members receive benefits far beyond their
advisory contributions and are required to buy Alcons products; predatory pricing; an unlawful
rebate program; and a threat to further lock out the Company from an associated market unless
granted a license to use some of our key patented technologies. The Company requested both monetary
damages and injunctive relief. On June 23, 2008, Alcon filed a pleading responsive to the
complaint, denying all counts and asserting affirmative defenses. On June 4, 2009, the Court ruled
in the Companys favor, denying a motion by Alcon to dismiss the complaint. The Court ruled that
the Companys allegations present a legitimate legal claim for which damages may be awarded. At
present, deadlines for pre-trial activities in this suit related to the Companys claims are
scheduled through January 2010.
In its pleading on June 23, 2008, Alcon also made counterclaims in which it alleged that the
Company misappropriated trade secrets from Infinitech, Inc., a company acquired by Alcon in 1998.
On July 9, 2009, the Court issued a judgment in the Companys favor, ruling that the
counterclaims are barred by the statute of limitations and cannot be the basis for a remedy.
On October 9, 2008, Alcon Research, Ltd. (Alcon Research) filed a lawsuit against the
Company and Synergetics in the Northern District of Texas, Case No. 4-08CV-609-Y, alleging
infringement of
25
United States Patent No. 5,603,710, as such patent is amended by the Re-examination
Certificate issued July 19, 2005. On March 20, 2009, Alcon Research amended its complaint to add
claims further alleging infringement of United States Patent No. 5,318,560 and infringement of and
unfair competition with respect to three Alcon-owned trademarks, namely Alcon®,
Accurus® and Greishaber®. Alcon Research has requested enhanced damages based
on an allegation of willful infringement, and has requested an injunction to stop the alleged acts
of infringement. On April 6, 2009, the Company answered the amended complaint with a general denial
of the claims, as well as affirmative defenses and a request for the Court to make declarations of
non-infringement with respect to the patents and trademarks at issue. Based on a belief that the
patents at issue are not valid, the Company requested that the United States Patent and Trademark
Office (PTO) re-examine both patents and moved the Court for a stay of all proceedings during
re-examination. On September 18, 2009, the Court granted the Companys motion and stayed all
proceedings in the lawsuit in their entirety until such time as both of the patents at issue have
completed re-examination. The Court ruled that the stay would not prejudice or be a tactical
disadvantage for Alcon Research and that the stay may allow the re-examination to simplify or
eliminate many of the issues in question. On November 2, 2009, the court denied Alcon Researchs
Motion for Reconsideration of the ordered stay, leaving the case administratively closed until the
conclusion of the re-examination proceedings. The Company believes it has meritorious defenses to
all claims made by Alcon Research, such that no liability will arise in this case, though the
amount of any monetary damages that may be awarded is wholly indeterminable at this time. The
Company is currently awaiting the PTO re-examination results.
In addition, from time to time we may become subject to litigation claims that may greatly
exceed our product liability insurance limits. An adverse outcome of such litigation may adversely
impact our financial condition, results of operations or liquidity. We record a liability when a
loss is known or considered probable and the amount can be reasonably estimated. If a loss is not
probable, a liability is not recorded. As of October 31, 2009, the Company has no litigation
reserve recorded.
Item 1A Risk Factors
The Companys business is subject to certain risks and events that, if they occur, could
adversely affect our financial condition and results of operations and the trading price of our
common stock. For a discussion of these risks, please refer to the Risk Factors section of the
Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2009. In connection with
its preparation of this quarterly report, management has reviewed and considered these risk factors
and has determined thatthere have been no material changes to the Companys risk factors since the
date of filing the Annual Report on Form 10-K for the fiscal year ended July 31, 2009.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
There have been no material changes to the procedures by which security holders may recommend
nominees to the Companys Board of Directors since the filing of the Companys Annual Report on
Form 10-K for the fiscal year ended July 31, 2009.
26
Item 6 Exhibits
|
|
|
Exhibit No. |
|
Description |
|
|
|
10.1
|
|
Change in Control Agreement between
Synergetics USA, Inc. and David M. Hable. |
|
|
|
31.1
|
|
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Trademark Acknowledgements
Malis, the Malis waveform logo, Omni, Bident, Bi-Safe, Gentle Gel and Finest Energy Source for
Surgery are our registered trademarks. Synergetics, the Synergetics logo, PHOTON, DualWave, COAG,
Advantage, Microserrated, Microfiber, Solution, Tru-Micro, DDMS, Kryptonite, Diamond Black,
Bullseye, Spetzler Claw, Spetzler Micro Claw, Spetzler Open Angle Micro Claw, Spetzler Barracuda,
Spetzler Pineapple, Axcess, Veritas, Lumen and Lumenator product names are our trademarks. All
other trademarks or tradenames appearing in this Form 10-Q are the property of their respective
owners.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
SYNERGETICS USA, INC.
(Registrant)
|
|
December 15, 2009 |
/s/ David M. Hable
|
|
|
David M. Hable, President and Chief |
|
|
Executive Officer (Principal Executive
Officer) |
|
|
|
|
|
December 15, 2009 |
/s/ Pamela G. Boone
|
|
|
Pamela G. Boone, Executive Vice |
|
|
President, Chief Financial Officer, Secretary
and Treasurer (Principal Financial and
Principal Accounting Officer) |
|
|
28