UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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|
|
|
For
the quarterly period ended October 29, 2007
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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|
|
FOR
THE TRANSITION PERIOD FROM _______________ TO
_______________
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Commission
file number 000-51602
SYNERGETICS
USA, INC.
(Exact
name of registrant as specified in its charter)
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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|
O’Fallon,
Missouri
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63368
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(Address
of principal executive offices)
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(Zip
Code)
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(636)
939-5100
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|
|
(Registrant’s Telephone Number, Including Area Code)
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|
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 x
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer o Accelerated
Filer x Non-Accelerated
Filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No x
The
number of shares outstanding of the issuer’s common stock, $0.001 value per
share, as of December 3, 2007 was 24,311,012 shares.
SYNERGETICS
USA, INC.
Index
to
Form 10-Q
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Page
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PART
I
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Financial
Information
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Item
1.
|
Unaudited
Condensed Consolidated Financial Statements
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|
|
|
Balance
Sheets — October 29, 2007 and July 31, 2007
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3
|
|
|
Statements
of Income for the three months ended October 29, 2007 and October
29,
2006
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4
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|
|
Statements
of Cash Flows for the three months ended October 29, 2007 and
October 29, 2006
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5
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Notes
to Unaudited Condensed Consolidated Financial Statements
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6
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|
Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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11
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|
Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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18
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Item
4.
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Controls
and Procedures
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18
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PART
II
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Other
Information
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Item
1.
|
Legal
Proceedings
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19
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Item
1A.
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Risk
Factors
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19
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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19
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Item
3.
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Defaults
Upon Senior Securities
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19
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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19
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Item
5.
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Other
Information
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19
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Item
6.
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Exhibits
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20
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Signatures
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Part
I — Financial Information
Item
1 — Unaudited Condensed Consolidated Financial Statements
Synergetics
USA, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
As
of October 29, 2007 (Unaudited) and July 31, 2007
(Dollars
in thousands, except share data)
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|
October 29, 2007
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July 31, 2007
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Assets
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|
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Current
Assets
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|
|
|
|
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Cash
and cash equivalents
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$
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160
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$
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167
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Accounts
receivable, net of allowance for doubtful accounts for approximately
$314
and $227, respectively
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7,305
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8,264
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Income
taxes receivable
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723
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726
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Inventories
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14,782
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14,247
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Prepaid
expenses
|
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457
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343
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Deferred
income taxes
|
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554
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516
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Total
current assets
|
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23,981
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24,263
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Property
and equipment, net
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8,081
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8,031
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Goodwill
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10,660
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10,660
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Other
intangible assets, net
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14,564
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14,782
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Patents,
net
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888
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871
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Deferred
expenses
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211
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216
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Cash
value of life insurance
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46
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46
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Total
assets
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$
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58,431
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$
|
58,869
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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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$
|
149
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|
$
|
531
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|
Lines-of-credit
|
|
|
6,757
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|
5,715
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Current
maturities of long-term debt
|
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1,975
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2,161
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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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1,002
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|
2,262
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|
Accrued
expenses
|
|
|
2,786
|
|
|
2,739
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|
Income
taxes payable
|
|
|
477
|
|
|
253
|
|
Total
current liabilities
|
|
$
|
13,395
|
|
$
|
13,910
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|
Long-Term
Liabilities
|
|
|
|
|
|
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|
Long-term
debt, less current maturities
|
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|
4,748
|
|
|
5,014
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Revenue
bonds payable, less current maturities
|
|
|
3,829
|
|
|
3,891
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Deferred
income taxes
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2,585
|
|
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2,619
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Total
long-term liabilities
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11,162
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11,524
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Total
liabilities
|
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|
24,557
|
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25,434
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Commitments
and contingencies (Note 6)
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Stockholders’
Equity
|
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|
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Common
stock at October 29, 2007 and July 31, 2007, $.001 par value, 50,000,000
shares authorized; 24,302,012 and 24,265,500 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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|
24,125
|
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|
24,083
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Retained
earnings
|
|
|
9,725
|
|
|
9,328
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|
Total
stockholders’ equity
|
|
|
33,874
|
|
|
33,435
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Total
liabilities and stockholders’
equity
|
|
$
|
58,431
|
|
$
|
58,869
|
|
See
Notes
to Unaudited Condensed, Consolidated Financial Statements.
Synergetics
USA, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Statements of Income
Three
Months Ended October 29, 2007 and October 29, 2006
(Dollars
in thousands, except per share information)
|
|
Three Months Ended
October 29, 2007
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Three Months Ended
October 29, 2006
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Sales
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$
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10,469
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$
|
9,906
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Cost
of sales
|
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3,944
|
|
|
|
3,600
|
|
Gross
profit
|
|
|
6,525
|
|
|
|
6,306
|
|
Operating
expenses
|
|
|
|
|
|
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Research
and development
|
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|
449
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651
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Selling,
general and administrative
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5,291
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|
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4,937
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5,740
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5,588
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Operating
income
|
|
|
785
|
|
|
|
718
|
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Other
income (expense)
|
|
|
|
|
|
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Interest
income
|
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|
1
|
|
|
|
—
|
|
Interest
expense
|
|
|
(260
|
)
|
|
|
(165
|
)
|
Miscellaneous
|
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|
20
|
|
|
|
9
|
|
|
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|
(239
|
)
|
|
|
(156
|
)
|
Income
before provision for income taxes
|
|
|
546
|
|
|
|
562
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Provision
for income taxes
|
|
|
149
|
|
|
|
185
|
|
Net
income
|
|
$
|
397
|
|
|
$
|
377
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Earnings
per share:
|
|
|
|
|
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Basic
|
|
$
|
0.02
|
|
|
$
|
0.02
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|
Diluted
|
|
$
|
0.02
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|
$
|
0.02
|
|
Basic
weighted average common shares outstanding
|
|
|
24,296,309
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|
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|
24,210,680
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|
Diluted
weighted average common shares outstanding
|
|
|
24,433,288
|
|
|
|
24,377,889
|
|
See
Notes
to Unaudited Condensed, Consolidated Financial Statements.
Synergetics
USA, Inc. and Subsidiaries
Unaudited
Condensed Consolidated Statements of Cash Flows
Three
months Ended October 29, 2007 and October 29, 2006
(Dollars
in thousands)
|
|
Three Months Ended
October 29, 2007
|
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|
Three Months Ended
October 29, 2006
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
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Net
income
|
|
$
|
397
|
|
|
$
|
377
|
|
Adjustments
to reconcile net income to net cash used in operating
activities
|
|
|
|
|
|
|
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Depreciation
and amortization
|
|
|
485
|
|
|
|
356
|
|
Provision
for doubtful accounts receivable
|
|
|
86
|
|
|
|
21
|
|
Stock-based
compensation
|
|
|
42
|
|
|
|
33
|
|
Deferred
income taxes
|
|
|
(72
|
)
|
|
|
—
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
872
|
|
|
|
(23
|
)
|
Income
tax receivable
|
|
|
3
|
|
|
|
—
|
|
Inventories
|
|
|
(535
|
)
|
|
|
(1,557
|
)
|
Prepaid
expenses
|
|
|
(127
|
)
|
|
|
(52
|
)
|
Other
current assets
|
|
|
—
|
|
|
|
152
|
|
(Decrease)
increase in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(1,260
|
)
|
|
|
268
|
|
Accrued
expenses and other liabilities
|
|
|
47
|
|
|
|
(612
|
)
|
Income
taxes payable
|
|
|
224
|
|
|
|
36
|
|
Net
cash provided by (used in) operating activities
|
|
|
162
|
|
|
|
(1,001
|
)
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Net
decrease in notes receivable, officer-stockholder
|
|
|
—
|
|
|
|
4
|
|
Purchase
of property and equipment
|
|
|
(272
|
)
|
|
|
(75
|
)
|
Acquisition
of patents and other intangibles
|
|
|
(43
|
)
|
|
|
(112
|
)
|
Sales
of trading securities
|
|
|
—
|
|
|
|
50
|
|
Net
cash used in investing activities
|
|
|
(315
|
)
|
|
|
(133
|
)
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Excess
of outstanding checks over bank balance
|
|
|
(382
|
)
|
|
|
(140
|
)
|
Net
borrowings on lines-of-credit
|
|
|
1,042
|
|
|
|
319
|
|
Principal
payments on revenue bonds payable
|
|
|
(62
|
)
|
|
|
(63
|
)
|
Proceeds
from long-term debt
|
|
|
—
|
|
|
|
919
|
|
Principal
payments on long-term debt
|
|
|
(330
|
)
|
|
|
(125
|
)
|
Payments
on debt incurred for acquisition of trademark
|
|
|
(122
|
)
|
|
|
(115
|
)
|
Net
cash provided by financing activities
|
|
|
146
|
|
|
|
795
|
|
Net
decrease in cash and cash equivalents
|
|
|
(7
|
)
|
|
|
(339
|
)
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
167
|
|
|
|
557
|
|
Ending
|
|
$
|
160
|
|
|
$
|
218
|
|
See
Notes
to Unaudited Condensed, Consolidated Financial Statements.
Synergetics
USA, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
(Tabular
information reflects dollars in thousands, except share and per share
information)
Note
1. General
Nature
of business:
Synergetics USA, Inc. (“Synergetics USA” or the “Company”) is a Delaware
corporation incorporated on June 2, 2005 in connection with the merger of
Synergetics, Inc. (“Synergetics”) and Valley Forge Scientific Corp. (“Valley
Forge”) and the subsequent reincorporation of Valley Forge (the predecessor to
Synergetics USA) in Delaware. Synergetics USA is a leading medical device
company focused on progressing the standard of care for microsurgeons and their
patients by seeking to improve surgical patient outcomes through the delivery
of
innovative improvements in quality, delivery and cost. The Company focuses
on
the ophthalmology, neurosurgery and ear, nose and throat surgery (“ENT”)
markets. The distribution channels include a combination of direct and
independent sales organizations, and important strategic alliances with market
leaders. The Company is located in O’Fallon, 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
Company’s year end is July 31 of each calendar year. For interim periods, the
Company uses a 21 business day per month reporting cycle with the exception of
leap year when the extra shipping day will be included in the second quarter.
As
such, the information presented in the Form 10-Q is for the three month periods
August 1, 2007 through October 29, 2007 and August 1, 2006 through October
29,
2006, respectively and the three month periods contain 63 business
days.
Basis
of presentation:
The
unaudited condensed consolidated financial statements include the accounts
of
Synergetics USA, Inc., and its wholly owned subsidiaries: Synergetics,
Synergetics Development Company, LLC, Synergetics DE, Inc. and Synergetics
IP,
Inc. All significant intercompany accounts and transactions have been
eliminated. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for
the
three months ended October 29, 2007 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 31, 2008. These
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the fiscal year ended July 31, 2007, and notes thereto filed with the
Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on October 15, 2007 (the “Annual Report”).
Note
2. Summary of Significant Accounting Policies
The
Company’s significant accounting policies are disclosed in the Annual Report. In
the first three months of fiscal 2008, no significant accounting policies were
changed other than the implementation of policies for the accounting for
uncertainties in income taxes as described below.
Reclassifications:
Certain
reclassifications have been made to the prior year financial statements and
to the financial statements for the three months ended October 29, 2007 to conform
with the current quarter presentation. Total assets, total liabilities and
net
income were not affected.
Accounting
for Uncertainties in Income Taxes:
Effective August 1, 2007, the Company adopted Financial Accounting Standards
Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes
– an
interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. This Interpretation prescribes a recognition threshold
and
measurement attribute for the financial statement recognition and measurement
of
uncertain tax positions taken or expected to be taken in the income tax return,
and also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN
No. 48 utilizes a two-step approach for evaluating uncertain tax positions
accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes”
(SFAS No. 109). Step one, recognition, requires a company to determine if
the weight of available evidence indicates that a tax position is more likely
than not to be sustained upon audit, including resolution of related appeals
or
litigation processes, if any. Step two, measurement, is based on the largest
amount of benefit, which is more likely than not to be realized on ultimate
settlement. The cumulative effect of adopting FIN No. 48 is to be
recognized as a change in accounting principle, recorded as an adjustment to
the
opening balance of retained earnings on the adoption date. As a result of the
adoption of FIN No. 48, the Company had no uncertain tax positions taken in
prior periods.
The
Company generally recognizes interest and penalties related to uncertain tax
positions through income tax expense. As of the date of adoption, the 2005
– 2006 tax
years
remain subject to examination by major tax jurisdictions. There are no federal,
state or foreign income tax audits in process as of October 29,
2007.
Accounting
for Taxes Collected from Customers and Remitted to Governmental
Authorities:
In June
2006, the Financial Accounting Standards Board (“FASB”) ratified the consensus
reached by the Emerging Issues Tax Force in Issue No. 06-3 (“EITF 06-3”), “How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That is, Gross versus Net Presentation).”
The scope of EITF 06-3 includes any tax assessed by a governmental authority
that is directly imposed on a revenue-producing activity between a seller and
a
customer and may include, but is not limited to, sales, use, value added, and
some excise taxes. EITF 06-3 also concluded that the presentation of taxes
within its scope on either a gross (included in revenues and costs) or net
(excluded from revenues) basis is an accounting policy decision subject to
appropriate disclosure. EITF 06-3 is effective for periods beginning after
December 15, 2006. The Company currently presents these taxes on a net basis
and
has elected not to change its presentation method.
Note
3. Distribution Agreements
The
Company sells a portion of its electrosurgical generators to a U.S. based
national and international distributor as described below:
Codman
and Shurtleff, Inc. (“Codman”)
In
the
neurosurgery market, our bipolar electrosurgical system has been sold for over
20 years through a distribution agreement with Codman. On January 9, 2006,
the Company executed a 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 three-year
license agreement, which provides for the continued licensing of the Company’s
Malis®
trademark to Codman for use with certain Codman products, including those
covered by the distribution agreement. Both agreements expire on
December 31, 2008.
Net
sales
to Codman amounted to approximately $1,314,000 for the three month period ended
October 29, 2007 and $1,725,000 for the three month period ended October 29,
2006. This represented 12.6 and 17.4 percent of net sales for the three months
ended October 29, 2007 and October 29, 2006, respectively.
Note
4. Stock-Based Compensation
Stock
Option Plans
The
following table provides information about awards outstanding at October 29,
2007:
|
|
Three
Months Ended October 29, 2007
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Fair
Value
|
|
Options
outstanding, beginning of period
|
|
|
428,735
|
|
$
|
2.18
|
|
$
|
1.79
|
|
For
the period from August 1, 2007 through October 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Options
outstanding, end of period
|
|
|
428,735
|
|
$
|
2.18
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable, end of period
|
|
|
369,700
|
|
$
|
2.46
|
|
$
|
2.03
|
|
Restricted
Stock Plans
Under
our
2001 Plan, our common stock may be granted at no cost to certain employees
and
consultants of the Company. Pursuant to the 2001 Plan, grantees are entitled
to
dividends and voting rights for their respective shares. Restrictions limit
the
sale or transfer of these shares during a vesting period during which the
restrictions lapse either pro-ratably over a five year vesting period or at
the
end of the fifth year. Upon issuance of stock under the 2001 Plan, unearned
compensation equivalent to the market value at the date of the grant is charged
to stockholders’ equity and subsequently amortized to expense over the
applicable restriction period. During the three months ended October 29, 2007,
34,515 shares were granted under the restricted stock plan. Compensation expense
related to shares granted in the both the current and the previous year was
$25,000. As of October 29, 2007, there was approximately $140,000 of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Company’s 2001 Plan. The cost is expected to be
recognized over a weighted average period of five years.
Note
5. Supplemental Balance Sheet Information
Inventories
(Dollars in thousands)
|
|
October
29,
2007
|
|
July
31,
2007
|
|
Raw
material and component parts
|
|
$
|
6,658
|
|
$
|
6,754
|
|
Work-in-progress
|
|
|
2,492
|
|
|
1,948
|
|
Finished
goods
|
|
|
5,632
|
|
|
5,545
|
|
|
|
$
|
14,782
|
|
$
|
14,247
|
|
Property
and equipment (Dollars in thousands)
|
|
October
29,
2007
|
|
July
31,
2007
|
|
Land
|
|
$
|
730
|
|
$
|
730
|
|
Building
and improvements
|
|
|
5,436
|
|
|
5,436
|
|
Machinery
and equipment
|
|
|
4,541
|
|
|
4,428
|
|
Furniture
and fixtures
|
|
|
610
|
|
|
610
|
|
Software
|
|
|
115
|
|
|
115
|
|
Construction
in process
|
|
|
193
|
|
|
34
|
|
|
|
|
11,625
|
|
|
11,353
|
|
Less
accumulated depreciation
|
|
|
3,544
|
|
|
3,322
|
|
|
|
$
|
8,081
|
|
$
|
8,031
|
|
Other
intangible assets (Dollars in thousands)
Information
regarding the Company’s other intangible assets is as follows:
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
October
29, 2007
|
|
Patents
|
|
$
|
1,143
|
|
$
|
255
|
|
$
|
888
|
|
Proprietary
know-how
|
|
|
4,057
|
|
|
809
|
|
|
3,248
|
|
Trademark
|
|
|
5,923
|
|
|
—
|
|
|
5,923
|
|
Licensing
agreements
|
|
|
5,834
|
|
|
441
|
|
|
5,393
|
|
|
|
$
|
16,957
|
|
$
|
1,505
|
|
$
|
15,452
|
|
|
|
July
31, 2007
|
|
Patents
|
|
$
|
1,103
|
|
$
|
232
|
|
$
|
871
|
|
Proprietary
know-how
|
|
|
4,057
|
|
|
740
|
|
|
3,317
|
|
Trademark
|
|
|
5,923
|
|
|
—
|
|
|
5,923
|
|
Licensing
agreements
|
|
|
5,834
|
|
|
292
|
|
|
5,542
|
|
|
|
$
|
16,917
|
|
$
|
1,264
|
|
$
|
15,653
|
|
Goodwill
of $10,660,000 is a result of the reverse merger transaction completed on
September 21, 2005. Synergetics Acquisition Corporation, a wholly owned
subsidiary of Valley Forge, merged with and into Synergetics and Synergetics
thereby became a wholly owned subsidiary of Valley Forge. Pursuant to the terms
of the merger agreement, stockholders of Synergetics common stock received
in
the aggregate 15,960,648 shares of Valley Forge common stock, or 4.59 Valley
Forge shares for each share of Synergetics resulting in Synergetics’ former
private stockholders owning approximately 66 percent of Valley Forge’s
outstanding common stock upon completion of the reverse merger. The reverse
merger was accounted for as a purchase business combination with Synergetics
deemed the accounting acquirer and Valley Forge’s assets acquired and
liabilities assumed recorded at fair value.
Estimated
amortization expense on other intangibles for the remaining nine months of
fiscal year ending July 31, 2008 and the next four years thereafter is as
follows (dollars in thousands):
Periods
Ending July 31:
|
|
Amount
|
|
Fiscal
Year 2008 (remaining 9 months)
|
|
$
|
622
|
|
Fiscal
Year 2009
|
|
|
857
|
|
Fiscal
Year 2010
|
|
|
828
|
|
Fiscal
Year 2011
|
|
|
605
|
|
Fiscal
Year 2012
|
|
|
552
|
|
Amortization
expense for the three months ended October 29, 2007 was $263,000.
Pledged
assets; short and long-term debt (excluding revenue bonds
payable)
Short-term
debt as of October 29, 2007 and July 31, 2007 consisted of the
following:
Revolving
Credit Facility: Under
this credit facility, the Company may borrow up to $8.5 million with
interest at an interest rate of the bank’s prime lending rate or LIBOR plus
2.25% and adjusting each quarter based upon our leverage ratio. Currently,
interest under the facility is charged at LIBOR plus 2.75%. Borrowings under
this facility at October 29, 2007 were $6.5 million. Outstanding amounts
are collateralized by the Company’s domestic receivables and inventory. This
credit facility expires December 1, 2008. The facility has two financial
covenants: a maximum leverage ratio of 3.75 times and a minimum fixed charge
coverage ratio of 1.1 times. As of October 29, 2007, the leverage ratio was
3.14
times and the fixed charge coverage ratio was 1.62 times. Availability under
the
line was approximately $2.0 million.
Revolving
Credit Facility:
Under
this credit facility, the Company may borrow up to $2.5 million. Currently,
interest under the facility is charged at the bank’s prime lending rate. There
were no borrowings under this facility at October 29, 2007. Outstanding amounts
are collateralized by the Company’s non-U.S. receivables. This credit facility
expires June 4, 2008 and has no financial covenants. The entire facility
was available at October 29, 2007.
Equipment
Line of Credit:
Under
this credit facility, the Company may borrow up to $1.0 million, with
interest at the bank’s prime lending rate. Borrowings under this facility were
approximately $210,000 on October 29, 2007. Outstanding amounts were secured
by
the purchased equipment. The equipment line of credit facility of
$1.0 million was renewed with a new expiration date of October 31,
2008 and has availability of $790,000.
Long-term
debt as of October 29, 2007 and July 31, 2007 consisted of the following
(dollars in thousands):
|
|
October
29,
2007
|
|
July
31,
2007
|
|
Note
payable to bank, due in monthly principal installments of $1,139
plus
interest at prime rate plus 1% (an effective rate of 9.25% as of
July 31,
2007), remaining balance due September 2007, collateralized by a
second
deed of trust
|
|
$
|
—
|
|
$
|
151
|
|
Note
payable, due in monthly installments of $509, including interest
at 4.9%,
remaining balance due May 2008, collateralized by a
vehicle
|
|
|
1
|
|
|
3
|
|
Note
payable to bank, due in monthly principal installments of $39,642
beginning November 2005 plus interest at a rate of 8.25%, remaining
balance due September 30, 2010, collateralized by substantially all
assets
of the Company
|
|
|
436
|
|
|
555
|
|
Note
payable to bank, due in monthly installments of $19,173 beginning
December
2006 plus interest at a rate of 8.25%, remaining balance due on November
14, 2010, collateralized by substantially all assets of the
Company
|
|
|
708
|
|
|
766
|
|
Note
payable to the estate of the late Dr. Leonard I. Malis, due in quarterly
installments of $159,904 which includes interest at an imputed rate
of
6.00%, remaining balance of $2,718,368, including contractual interest
payments, due December 2011, collateralized by the Malis®
trademark
|
|
|
2,384
|
|
|
2,506
|
|
Settlement
obligation to Iridex Corporation, due in annual installments of $800,000
which includes interest at an imputed rate of 8.00%, remaining balance
of
$4,000,000 including the effects of imputing interest, due April
15,
2012
|
|
|
3,194
|
|
|
3,194
|
|
|
|
$
|
6,723
|
|
|
7,175
|
|
Less
current maturities
|
|
|
1,975
|
|
|
2,161
|
|
Long-term
portion
|
|
$
|
4,748
|
|
$
|
5,014
|
|
Note
6. Commitments and Contingencies
On
September 22, 2005, the Company entered into three-year employment agreements
with its Chief Executive Officer, its Chief Operating Officer and its Chief
Scientific Officer in conjunction with the merger of Synergetics, Inc. and
Valley Forge Scientific Corporation. On August 1, 2007, the Company entered
into a three-year employment agreement with its Executive Vice President and
Chief Financial Officer. In the event any such executive officer is terminated
without cause, or if such executive officer resigns for good reason, such
executive officer shall be entitled to his or her base salary and health care
benefits through the end of the employment agreement. In addition, the Chief
Financial Officer’s employment agreement includes a change of control provision
whereby she will be entitled to 15 months base salary and health care benefits
if she is terminated within twelve months following a change of control and
all
shares of restricted common stock shall vest.
In
August 2007, we leased approximately 10,000 square feet of additional
engineering and manufacturing space adjacent to our headquarters in O’Fallon,
Missouri for a term of five years.
Subsequent
to the end of the quarter, on November 8, 2007, the Company entered into a
letter agreement with its new Executive Vice President of Sales and Marketing.
In the event of a change in control, the Company shall pay the Executive Vice
President of Sales and Marketing his base salary for one year, and all shares
of
restricted common stock shall vest.
Various
other claims, incidental to the ordinary course of business, are pending against
the Company. In the opinion of management, after consulting with legal counsel,
resolution of these matters is not expected to have a material adverse effect
on
the accompanying financial statements.
The
Company is subject to regulatory requirements throughout the world. In the
normal course of business, these regulatory agencies may require companies
in
the medical industry to change their products or operating procedures, which
could affect the Company. The Company regularly incurs expenses to comply with
these regulations and may be required to incur additional expenses. Management
is not able to estimate any additional expenditure outside the normal course
of
operations which will be incurred by the Company in future periods in order
to
comply with these regulations.
Note
7. Entity Wide Information
.
The
following tables presents the entity wide disclosures for net sales (dollars
in
thousands):
|
|
Three
months ended
|
|
|
|
October
29,
2007
|
|
October
29,
2006
|
|
Product
Line:
|
|
|
|
|
|
|
|
Ophthalmic
|
|
$
|
6,436
|
|
$
|
5,306
|
|
Neurosurgery
|
|
|
3,732
|
|
|
3,775
|
|
Other
(Pain Control, ENT and Dental)
|
|
|
301
|
|
|
825
|
|
Total
|
|
$
|
10,469
|
|
$
|
9,906
|
|
|
|
|
|
|
|
|
|
Region
Specific:
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
7,703
|
|
$
|
8,038
|
|
International
|
|
|
2,766
|
|
|
1,868
|
|
Total
|
|
$
|
10,469
|
|
$
|
9,906
|
|
Note
8. RECENT
ACCOUNTING PROUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”
which relates to the definition of fair value, the methods used to estimate
fair
value and the requirement of expanded disclosures about estimates of fair value.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. At this time, we have not completed our review and assessment of the
impact of adoption of SFAS No. 157.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities.” The Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. This Statement
is effective as of the beginning of an entity’s fiscal year that begins after
November 15, 2007. At this time, we have not completed our review and
assessment of the impact of adoption of SFAS No. 159.
Item
2 — Management’s 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 Company’s Form 10-K for the
fiscal year ended July 31, 2007.
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 facts 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 management’s assumptions and analyses, as of the time
the statements
are made, in light of their experience and perception of
historical conditions,
expected future developments and other factors believed to be appropriate
under the circumstances.
In
addition, certain market data and other statistical information
used throughout
this report are based on independent industry publications.
Although we
believe these sources to be reliable, we have not independently verified
the information
and cannot guarantee the accuracy and completeness of such
sources.
Except
as otherwise required by the federal securities laws, we
disclaim any
obligation or undertaking to publicly release any updates or revisions
to any
forward-looking statement contained in this quarterly report on Form
10-Q and
the information incorporated by reference in this report to reflect
any change
in our expectations with regard thereto or any change in
events, conditions
or circumstances on which any statement is based.
Overview
Synergetics
USA, Inc. (“Synergetics USA” or “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 Forge’s common stock was listed on The
NASDAQ Small Cap Market (now known as The NASDAQ Capital Market) and the Boston
Stock Exchange under the ticker symbol “VLFG.” On September 21, 2005,
Synergetics Acquisition Corporation, a wholly owned Missouri subsidiary of
Valley Forge, merged with and into Synergetics, and Synergetics thereby became
a
wholly owned subsidiary of Valley Forge. On September 22, 2005, Valley Forge
reincorporated from a Pennsylvania corporation to a Delaware corporation and
changed its name to Synergetics USA, Inc. Upon consummation of the merger,
the
Company’s securities began trading on The NASDAQ Capital Market under the ticker
symbol “SURG,” and its shares were voluntarily delisted from the Boston Stock
Exchange.
The
Company is a leading medical device company focused on progressing the standard
of care for microsurgeons and their patients. The Company seeks to improve
surgical patient outcomes through the delivery of innovative improvements in
quality delivery and cost by focusing on three common microsurgical disciplines
including ophthalmology, neurosurgical and ENT surgery. Its distribution
channels include a combination of direct and independent sales organizations,
and important strategic alliances with market leaders. The Company’s product
lines focus upon precision-engineered, microsurgical, hand-held instruments
and
the microscopic delivery of laser energy, ultrasound, electrosurgery,
illumination and irrigation, often delivered in multiple combinations.
Revenues
from our ophthalmic products constituted 61.5 percent and 53.6 percent of our
total revenues for the three months ended October 29, 2007 and for the fiscal
year ended July 31, 2007, respectively. Revenues from our neurosurgical products
represented 35.6 percent and 38.1 percent for the three months ended October
29,
2007 and for the fiscal year ended July 31, 2007, respectively. In addition,
other revenue, which includes our pain control management, dental and ear,
nose
and throat (“ENT”) products was 2.9 percent and 8.3 percent of our total
revenues for the three months ended October 29, 2007 and for the fiscal year
ended July 31, 2007, respectively. We expect that the relative revenue
contribution of our neurosurgical products will rise in 2008 as a result of
our
continued efforts to expand our neurosurgical product line. International
revenues of $2.8 million constituted 26.4 percent of our total revenues for
the
three months ended October 29, 2007. We expect that the relative revenue
contribution of our international sales will rise in 2008 as a result of our
continued efforts to expand our international distribution and direct sales
and
our expanded core product, neurosurgical product offerings including the
Omni®
ultrasonic aspirator and the Malis®
AdvantageTM.
On
August
27, 2007, the Company announced the extension to its contract with Stryker.
On
October 25, 2004, Synergetics USA, Inc.'s predecessor, Valley Forge Scientific
executed a Supply and Distribution Agreement (the "Agreement") with Stryker,
a
Michigan corporation, which provides for the Company to supply to Stryker and
for Stryker to distribute exclusively, on a world-wide basis, a unique radio
frequency ("RF") generator for the percutaneous treatment of pain. The original
agreement was for a term of five years commencing on November 11, 2004 and
ending on December 31, 2009. On August 1, 2007, the companies negotiated a
one
year extension to the contract date and increased the minimum purchase
obligation each year for the remaining contract period. Net sales to Stryker
amounted to approximately $50,000 for the three months ended October 29, 2007
which represents 0.5 percent of net sales for that time period compared to
$577,000 for the three months ended October 29, 2006. Sales to Stryker decreased
during the quarter due to a model changeover. The Company anticipates that
these
sales will return to their typical pattern as the final software changes should
be complete by the end of the Company’s third fiscal quarter of
2008.
On
September 11, 2007, the Company entered into two new distribution agreements
with Volk Optical, granting Synergetics rights over the next three years to
sell
Volk’s products to vitreoretinal surgeons in the United States. The
agreements cover Volk’s line of ophthalmic lenses, used for detailed examination
and treatment of the retina, and exclusive right to sell Volk’s new Optiflex™
Surgical Assistant in the United States. This new vitreoretinal system,
compatible with most leading surgical microscopes, enhances a surgeon’s visual
ability with precision focus and control.
Through
Synergetics, the Company initially engineered and produced prototype instruments
designed to assist retinal surgeons in treating acute subretinal pathologies
such as histoplasmosis and age-related macular degeneration. Synergetics
developed a number of specialized lines of finely engineered, microsurgical
instruments, which today have grown to comprise a product catalogue of over
1,400 retinal surgical items including scissors, retractors, cannulas, forceps
and other reusable and disposable surgical instruments. The Company is a leading
supplier of 25, 23 and 20 gauge instrumentation to the ophthalmic surgical
market which enable surgeons to make smaller, less invasive, stitch-less
incisions. The Company’s illumination devices can deliver concentrated light to
the site providing improved viewing by using a xenon light or gas-arc lamp
source. The ability of the PhotonTM
or
Photon IITM
to
deliver both laser energy and illumination through the same fiber line is
unique, as is the number of accessories which can be attached to the devices.
The
Company has a complementary neurosurgical product line which includes the
Omni®
ultrasonic aspirator, which uses ultrasonic waves to cause vibration of a tip,
that is predominately - used for tumor removal, an electrosurgical generator
that is bipolar and the modality of choice for tissue cutting and coagulation
as
compared to monopolar products and precision neurosurgical instruments. In
addition, the Company has developed and released on a limited basis, a line
of
bipolar instruments in both disposable and reusable formats, some of which
will
connect to all electrosurgical generators and some of which are for use only
with the Malis®
AdvantageTM.
Our
neurosurgery product catalogue consists of over 300 neurosurgical items
including capital equipment, disposable and reusable instruments and other
disposable items. The Company’s sales of neurosurgical products did not grow as
anticipated this quarter. The Company views this as an order timing issue and
it
is not the result of any competitive market pressures. The Company expects
the
normal growth pattern to return for the third quarter of fiscal
2008.
We
anticipate that the Company is strategically positioned for future growth of
our
neurosurgical product line, and we expect that the relative revenue contribution
of our neurosurgical products will increase in fiscal 2008.
New
Product Sales
The
Company’s business strategy has been, and is expected to continue to be, the
development and marketing of new technologies for the ophthalmic, neurosurgical
and ENT markets. New products, which management defines as products introduced
within the prior 24-month period, accounted for approximately 14.1 percent
of
total sales for the Company on a consolidated basis for the three months ended
October 29, 2007, approximately $1.5 million. Our past revenue growth has been
closely aligned with the adoption by surgeons of new technologies introduced
by
the Company. Since August 1, 2007, the Company has introduced over 8 new
products to the ophthalmic and neurosurgery markets. We expect adoption rates
for the Company’s new products in the future to have a similar effect on its
operating performance.
Growth
in Minimally Invasive Surgery Procedures
Minimally
invasive surgery (“MIS”) is surgery performed without making a major incision or
opening. MIS generally results in less patient trauma, less 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. The Company feels it is ideally positioned to take advantage of
this
growing market. We believe our micro-instrumentation capability is unsurpassed.
The Company has made scissors as small as 30 gauge (0.012 inch, 0.3 millimeter)
in diameter with a single activating shaft. The Company also feels that it
is
the world leader in small-fiber illumination technology. The Company’s
PhotonTM
and
PhotonTM
II light
sources can put more light down a fiber of 300 micron diameter or smaller than
any other source in the world. This product was developed for ophthalmology
but
has wide ranging MIS applications. The Company’s Malis®
line
of
electrosurgical bipolar generators are the marketshare leading, neurosurgical
generators worldwide. These generators produce a unique and patented waveform
that has been proven over many decades of use to cause less collateral tissue
damage as compared to other competing generators. The Omni®
power
ultrasound technology provides a new method for the minimally invasive removal
of soft and fibrotic tissue, as well as microscopic bone removal. This
technology is in its infancy and the Company anticipates that it will become
a
standard of care in multiple MIS 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
Volume
and mix improvements contributed to the majority of sales growth for the
Company. Ophthalmic and neurosurgical procedures volume on a global basis
continues to rise at an estimated 5.0% 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 Company’s 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, neurosurgical and ENT
markets.
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, competition
in the markets for our electrosurgical generators and ultrasonic aspirators
has
negatively impacted the Company’s selling prices on these medical
devices.
Results
Overview
During
the fiscal quarter ended October 29, 2007, we had net sales of $10.5 million,
which generated $6.5 million in gross profit, an operating income of $785,000
and net income of $397,000, or $0.02 earnings per share. During the three months
ended October 29, 2006, we had net sales of $9.9 million, which generated $6.3
million in gross profit, operating income of $718,000 and net income of
$377,000, or $0.02 earnings per share. The Company had $160,000 in cash
and $17.6
million in interest-bearing debt and revenue bonds as of October 29, 2007.
We
anticipate that cash flows from operations, together with available borrowings
under our existing credit facilities, will be sufficient to meet our working
capital, capital expenditure and debt service needs for the next twelve months.
Our
Business Strategy
Our
goal
is to become a global leader in the development, manufacturing and marketing
of
precision-engineered, microsurgical instruments and capital equipment for use
in
minimally invasive ophthalmic, neurosurgical and ENT applications and to grow
our product lines in other specialty surgical markets. We are taking the
following steps toward achieving our goal:
•
|
Introducing
new technology that easily differentiates our products from our
competition by capitalizing on our combined successes in delivering
minimally invasive products that enable concentrated application
to a
surgical area with decreased impact beyond the specific desired
surgical
effects, resulting in improved recovery times and shorter hospital
stays;
|
|
|
•
|
Identifying
microsurgical niches that may offer the prospect for substantial
growth
and higher profit margins that allow us an opportunity to build
upon our
existing technologies, such as expanding the use of our products
in ENT,
spine surgery, plastic surgery and other forms of
microsurgery;
|
|
|
•
|
Accelerating
our international growth by continuing to build on our recent successes
supported by Valley Forge’s long-established relationships and reputation
in global markets;
|
|
|
•
|
Utilizing
the full breadth and depth of knowledge, experience and resources
of our
research and development department to deliver precision-engineered
capital equipment, instruments, accessories and disposables to
the MIS
market based on our own proprietary technologies and
innovations;
|
|
|
•
|
Branding
and marketing a substantial portion of our neurosurgical and ENT
products
with the Malis® trademark;
|
|
|
•
|
Continuing
to develop our distribution channels, including the expansion of
our
domestic ophthalmic, neurosurgical and ENT direct sales forces,
continued
development of an international direct ophthalmic sales force and
continued expansion of our international neurosurgical distributor
relationships to assure that our products and their associated
benefits
are seen by those making or influencing the purchasing
decisions;
|
|
|
•
|
Continuing
to grow our disposables revenue stream across our product lines
by
focusing on the development of a full offering of disposable adjuncts,
such as instruments, adapters and fiber optics, to our capital
equipment
offerings and emphasizing disposables designed to eliminate hospital
reprocessing and repair costs and minimize patient-to-patient disease
transfer;
|
|
|
•
|
Expanding
the PhotonTM product line into other surgical markets such as
neurosurgery, ENT and general surgery markets;
|
|
|
•
|
Continuing
the penetration of the Malis®
AdvantageTM, our newest multifunctional bipolar
electrosurgical generator, into the neurosurgery
market;
|
|
|
•
|
Developing
the Malis® AdvantageTM applications with our new
proprietary single-use, hand-switching bipolar instruments with
enhanced
features and functionality further into the neurosurgical market
and into
other surgical markets such as spine, ENT and plastic
markets;
|
|
|
•
|
Expanding
the use of the Malis® AdvantageTM into other
microsurgical markets as its increased power and functionality
allows the
surgeon to perform functions similar to traditional monopolar systems,
without the inherent safety limitations;
|
|
|
•
|
Expanding
the use of the Omni®, our ultrasonic aspirator, into
other surgical markets such as spine and the ENT markets as its
torsional
bone cutting capability allows the surgeon to perform delicate
procedures
safely;
|
|
|
|
Exploring
opportunities for growth through strategic partnering with other
companies, such as our current relationships with Codman;
and
|
|
|
•
|
Exploring
opportunities for growth through strategic, accretive mergers or
acquisitions which would further expand our product offerings,
distribution channels or research and development
capabilities.
|
Results
of Operations
Three
Month Period Ended October 29, 2007 Compared to Three Month Period Ended October
29, 2006
Net
Sales
The
following table presents net sales by category (dollars in
thousands):
|
|
Quarter Ended October 29,
|
|
% Increase
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Ophthalmic
|
|
$
|
6,436
|
|
$
|
5,306
|
|
|
21.3
|
%
|
Neurosurgery
|
|
|
3,732
|
|
|
3,775
|
|
|
(1.1
|
)%
|
Other
|
|
|
301
|
|
|
825
|
|
|
(63.5
|
)%
|
Total
|
|
$
|
10,469
|
|
$
|
9,906
|
|
|
5.7
|
%
|
Ophthalmic
sales growth was 21.3 percent from the first quarter of fiscal 2007. Domestic
ophthalmic sales increased 8.7 percent for the first quarter of fiscal 2008
while international ophthalmic sales increased 38.4 percent as compared to
the
first quarter of the previous fiscal year. Domestic ophthalmic sales management
was reorganized on August 1, 2007. The Company continues to train its new,
recently added territory managers and is beginning to see a return on its
investment in a direct sales force in certain countries.
Neurosurgery
net sales during the first fiscal quarter of 2008 were 1.1 percent less than
the
first quarter of fiscal 2007. Domestic neurosurgery sales increased 9.4 percent
and international neurosurgery sales increased 76.9 percent, offset by a
decrease in sales to Codman of 23.8 percent. The increases in domestic and
international were primarily attributable to the sales in the core technology
area of Omni®
power
ultrasonic aspirators, the Malis®
AdvantageTM
and
their
related disposables. The Company expects that sales of these products will
continue to have a positive impact on net sales for the remainder of fiscal
2008. Sales to Codman decreased due to restocking orders received in the first
quarter of the prior year which were not required during the current fiscal
quarter.
Other
net
sales during the first fiscal quarter of 2008 decreased 63.5 percent compared
to
the first fiscal quarter of 2007, primarily attributable to sales to Stryker
in
the pain control market as the model changeover was not complete and
was not yet ready for production in the first quarter of fiscal
2008.
The
following table presents domestic and international net sales (dollars in
thousands):
|
|
Quarter Ended October 29,
|
|
% Increase
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
United
States
|
|
$
|
7,703
|
|
$
|
8,038
|
|
|
(4.2
|
)%
|
International
(including Canada)
|
|
|
2,766
|
|
|
1,868
|
|
|
48.1
|
%
|
Total
|
|
$
|
10,469
|
|
$
|
9,906
|
|
|
5.7
|
%
|
Domestic
sales for the first quarter of fiscal 2008 compared to the same period of fiscal
2007 decreased 4.2% as increases in domestic ophthalmology were offset by a
decrease in sales to Codman. International sales growth of 48.1 percent for
the
first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 was
primarily attributable to the sales increases in both ophthalmology and
neurosurgery equipment and their related disposables.
Gross
Profit
Gross
profit as a percentage of net sales was 62.3 percent in the first quarter of
fiscal 2008 compared to 63.7 percent for the same period in fiscal 2007. Gross
profit as a percentage of net sales from the first quarter of fiscal 2008 to
the
first quarter of fiscal 2007 decreased slightly. However, it increased
approximately 3.5 percentage points from the average gross profit margin for
fiscal 2007. This was primarily due to a selling price increase instituted
at
the beginning of the fiscal year, a change in mix toward higher disposable
product sales, offset by pricing pressure on both ophthalmic and neurosurgical
capital equipment. In June of 2007, the Company instituted a program to
aggressively pursue cost savings. It has already had a reduction in force,
implemented an incentive-based buyer’s program and gained additional control
over its use of manufacturing supplies.
Operating
Expenses
Research
and development (“R&D”) as a percentage of net sales was 4.3 percent and 6.6
percent for the first quarter of fiscal 2008 and 2007, respectively. R&D
costs decreased to $449,000 in the first quarter of fiscal 2008 from $651,000
in
the same period in fiscal 2007, reflecting a decrease in costs associated with
newly introduced products and a slight decrease in spending on active, new
product projects focused on areas of strategic significance. Synergetics’
pipeline included approximately 85 active, major projects in various stages
of
completion as of October 29, 2007. The Company has strategically targeted
R&D spending as a percentage of net sales to be consistent with what
management believes to be an average range for the industry. The Company expects
over the next few years to invest in R&D at a rate of approximately 4% to 6%
of net sales.
Selling,
general and administrative expenses (“SG&A”) increased by $354,000 to
approximately $5.3 million during the first quarter of fiscal 2008 compared
to
approximately $4.9 million during the first quarter of fiscal 2007. The
percentage of SG&A to net sales increased from 49.8 percent for the first
quarter of fiscal 2007 to 50.5 percent for the first quarter of fiscal 2008.
Selling expenses, which consist of salaries, commissions and direct expenses,
the largest component of SG&A, increased approximately $800,000 to
approximately $2.8 million, or 26.8 percent of net sales, for the first quarter
of fiscal 2008, compared to $2.0 million, or 20.4 percent of net sales, for
the
first quarter of fiscal 2007. This increase was due to the mix of sales and
additional direct selling cost associated with sales during the quarter. As
sales to Codman and Stryker decreased and sales of the Company’s core products
increased, it led to a significant increase in commissionable sales on a
percentage basis. Commissionable sales increased from 77.9 percent of sales
during the first quarter of fiscal 2007 to 88.5 percent in the first quarter
of
fiscal 2008. Selling headcount increased by 5.6 percent from October 29, 2006
to
October 29, 2007. General and administrative headcount increased approximately
27.8 percent over that same timeframe primarily due to the addition of
accounting and legal personnel to handle the growing volume of transactions
and
the Sarbanes-Oxley internal control requirements, which resulted in an increase
in general salaries and benefits of approximately $66,000 in the first quarter
of fiscal 2008, compared to the first quarter of fiscal 2007. The Company’s
legal expenses decreased by $353,000 during the first quarter of fiscal 2008
compared to the first quarter of fiscal 2007 as the cost associated with the
Iridex lawsuit and subsequent settlement are no longer a significant factor.
In
addition, the Company also experienced a decrease of approximately $26,000
in
outside consulting costs on the Company’s Sarbanes-Oxley compliance efforts
primarily due to the completion of documentation and testing of the former
Valley Forge location in fiscal 2007 and the Company’s efforts to internalize a
portion of the documentation procedures. As mentioned above, the Company has
instituted a cost savings initiative in June of 2007 and SG&A costs are
targeted as well.
Other
Expenses
Other
expenses for the first quarter of fiscal 2008 increased 53.2 percent to $239,000
from $156,000 for the first quarter of fiscal 2007. The increase was due
primarily to increased interest expense for the increased borrowings on the
Company’s working capital line due to working capital needs and the interest on
the settlement obligation with Iridex which amounted to approximately
$64,000.
Operating
Income, Income Taxes and Net Income
Operating
income for the first quarter of fiscal 2008 was $785,000 as compared to $718,000
in the comparable 2007 fiscal period. The increase in operating income was
primarily the result of a slight decrease in gross profit margin on 5.7 percent
more net sales, a decrease of $202,000 in research and development costs and
an
increase of $354,000 in SG&A expenses primarily related to an additional
$800,000 in selling expense offset by a decrease of $353,000 in legal costs
and
$26,000 in Sarbanes-Oxley consulting costs.
The
Company recorded a $149,000 provision on a pre-tax income of $546,000, a
27.3 percent tax provision, compared to a 33.0 percent tax provision for the
first fiscal quarter of 2007.
Net
income increased by $20,000 to $397,000 for the first quarter of fiscal 2008,
from $377,000 income for the same period in fiscal 2007. Basic and diluted
earnings per share of $0.02 for the first quarter of fiscal 2008 remained flat
for the first quarter of fiscal 2007. Basic weighted average shares outstanding
increased from 24,210,680 to 24,296,309.
Liquidity
and Capital Resources
The
Company had $160,000 in cash and total interest-bearing debt and revenue bonds
payable of $17.6 million as of October 29, 2007.
Working
capital, including the management of inventory and accounts receivable, is
a key
management focus. At October 29, 2007, the Company had an average of 62 days
of
sales outstanding (“DSO”) for the three month period ending October 29, 2007,
unfavorable to July 31, 2007 by five days. The Company utilized the three month
period to calculate DSO as it included the current growth in sales. The
collection time for non-U.S. receivables is generally longer than comparable
U.S. receivables.
At
October 29, 2007, the Company had 296 days sales in inventory on hand,
unfavorable to July 31, 2007 by 21 days. The 296 days sales in
inventory on hand at October 29, 2007 is high based on the Company’s
anticipated levels of 250 to 275 days sales. In the first quarter of fiscal
2008, the Company utilized a twelve month period to calculate days sales in
inventory as first quarter being seasonally slow normally will have the lowest
cost of goods sold, resulting in an overstated result. Using the prior method
which would have used a three month reporting period, the days sales in
inventory on hand would have been 342 days.
Cash
flows provided by operating activities were $162,000 for the three months ended
October 29, 2007, compared to cash flows used in operating activities of $1.0
million for the comparable fiscal 2007 period. The increase in cash provided
of
$1.2 million was attributable to net usage decreases applicable to net
receivables, inventories and accrued expenses of $2.6 million. Such decreases
were somewhat offset by higher other current assets and accounts payable of
approximately $1.7 million and other net working capital and other adjustment
components of approximately $267,000 for the first three months of fiscal 2008.
The Company has been utilizing cash from operations at a decreasing rate and
expects this trend to continue.
Cash
flows used in investing activities was $315,000 for the three months ended
October 29, 2007, compared to cash used in investing activities of $133,000
for
the comparable fiscal 2007 period. During the three months ended October 29,
2007, cash additions to property and equipment were $272,000, compared to
$75,000 for the first three months of fiscal 2007. Increases in cash additions
in fiscal 2008 to property and equipment were primarily to support the purchase
of machinery and equipment for the newly leased R&D space adjacent to our
current facility in O’Fallon, Missouri.
Cash
flows provided by financing activities were $146,000 for the three months ended
October 29, 2007, compared to cash provided by financing activities of $795,000
for the three months ended October 29, 2006. The decrease of $649,000 was
applicable primarily to the increase in the excess of outstanding checks over
the bank balance of $242,000, the decrease in proceeds of long-term debt of
$919,000 and the increase in principal payments on long-term debt of $205,000.
These increases were offset by higher net borrowings on line-of-credit of
$723,000.
The
Company had the following committed financing arrangements as of October 29,
2007:
Revolving
Credit Facility: Under
this credit facility, the Company may borrow up to $8.5 million with
interest at an interest rate of the bank’s prime lending rate or LIBOR plus
2.25% and adjusting each quarter based upon our leverage ratio. Currently,
interest under the facility is charged at LIBOR plus 2.75%. Borrowings under
this facility at October 29, 2007 were $6.5 million. Outstanding amounts
are collateralized by the Company’s domestic receivables and inventory. This
credit facility expires December 1, 2008. The facility has two financial
covenants: a maximum leverage ratio of 3.75 times and a minimum fixed charge
coverage ratio of 1.1 times. As of October 29, 2007, the leverage ratio was
3.14
times and the fixed charge coverage ratio was 1.62 times. Availability under
the
line was approximately $2.0 million.
Revolving
Credit Facility:
Under
this credit facility, the Company may borrow up to $2.5 million. Currently,
interest under the facility is charged at the bank’s prime lending rate. There
were no borrowings under this facility at October 29, 2007. Outstanding amounts
are collateralized by the Company’s non-U.S. receivables. This credit facility
expires June 4, 2008 and has no financial covenants. The entire facility
was available at October 29, 2007.
Equipment
Line of Credit:
Under
this credit facility, the Company may borrow up to $1.0 million, with
interest at the bank’s prime lending rate. Borrowings under this facility were
approximately $210,000 on October 29, 2007. Outstanding amounts are secured
by
the purchased equipment. The equipment line of credit facility of
$1.0 million was renewed during the quarter and expires on October 31,
2008 and has availability of $790,000.
Management
believes that cash flows from operations, together with available borrowings
under its new credit facilities will be sufficient to meet the Company’s working
capital, capital expenditure and debt service needs for the next twelve months.
Critical
Accounting Policies
The
Company’s significant accounting policies which require management’s judgment
are disclosed in our Annual Report on Form 10-K for the year ended July 31,
2007. In the first three months of fiscal 2008, there were no changes to the
significant accounting policies. The Company did implement new accounting
standards FIN No. 48, “Accounting for Uncertainty in Income Taxes” and EITF
06-3 “Accounting
for Taxes Collected from Customers and Remitted to Governmental
Authorities.”
Item
3 — Quantitative and Qualitative Disclosures about Market Risk
The
Company’s primary market risks include fluctuations in interest rates and
exchange rate variability.
At
October 29, 2007, the Company had two revolving credit facilities and an
equipment line of credit facility in place. The Company’s revolving credit
facilities had an outstanding balance of $6.5 million at October 29, 2007 and
its equipment line of credit facility had an outstanding balance of $210,000
at
October 29, 2007. The equipment line of credit facility bears interest at the
bank’s prime lending rate. The first revolving credit facility bears interest at
LIBOR plus 2.25% and adjusting each quarter based upon our leverage ratio.
Currently, interest under the facility is charged at LIBOR plus 2.75%. The
second revolving credit facility bears interest at the bank’s prime lending
rate. Interest expense from these credit facilities is subject to market risk
in
the form of fluctuations in interest rates and credit risk. 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 $135,000. The Company does not
perform any interest rate hedging activities related to these three
facilities.
Additionally,
the Company has exposure to foreign currency fluctuation through export sales
to
international accounts. Less than 5.0 percent of our sales revenue is
denominated in foreign currencies, we estimate that a change in the relative
strength of the U.S. dollar to foreign currencies would not have a material
impact on the Company’s results of operations. The Company does not conduct any
hedging activities related to foreign currency.
Item
4 — Controls and Procedures
We
have
evaluated, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, the
effectiveness of the Company’s disclosure controls and procedures as of October
29, 2007. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that the disclosure controls and procedures
were effective at the reasonable assurance level as of October 29, 2007, to
ensure that the 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
period specified in the SEC’s rules and forms and (b) is accumulated and
communicated to the Company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and preparation
of
financial statements for external purposes in accordance with generally accepted
accounting principles. A material weakness is a deficiency in an internal
control that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. All internal controls systems, no matter how well-designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
During
the fiscal quarter ended October 29, 2007, there was no change in the Company’s
internal control over financial reporting that has materially affected, or
is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Part
II — Other Information
Item
1 — Legal Proceedings
On
February 11, 2004, Synergetics, the Company’s wholly-owned subsidiary,
filed an action against two ex-employees, in which Synergetics alleged that
the
defendants, among other things, misappropriated trade secrets, intentionally
interfered with Synergetics’ business relationships, and breached
confidentiality contracts. Synergetics subsequently amended the complaint to
add
claims of fraud and breach of fiduciary duty. The suit was brought in the United
States District Court, Eastern District of Missouri and was captioned
Synergetics, Inc. v. Charles Richard Hurst, Jr. and Michael McGowan, Case
No. 4:04-CV-318DDN. On August 10, 2005, defendants answered and filed
counterclaims alleging tortious interference with business relationships and
seeking a declaration that defendants had not misappropriated any confidential
information or trade secrets of Synergetics. After the Court transferred
defendants’ counterclaim for tortious interference to New Jersey (where it was
subsequently dismissed by defendants), trial began on September 12, 2005,
and on September 20, 2005 the jury returned a verdict in favor of
Synergetics. On December 9, 2005, the Court, consistent with the jury’s
findings, entered the judgment awarding Synergetics $1,759,165 in compensatory
damages against defendants, and $293,194 in punitive damages against Hurst
and
$293,194 in punitive damages against McGowan. The Court also granted Synergetics
certain injunctive relief against defendants and awarded costs from the
litigation in the amount of $22,264. On January 9, 2006, defendants filed a
notice of appeal and on February 5, 2007, the Eighth Circuit Court of
Appeals rejected their contentions and affirmed the judgment in all respects.
Synergetics has ongoing collection efforts against the defendants. On
December 8, 2006, defendants moved to vacate the judgment, asserting that
the judgment was obtained through the misconduct of witness tampering. On
June 11, 2007, a multi-day hearing commenced on defendants’ motion to
vacate. Subsequently, on August 21, 2007, the Court issued an order denying
defendants’ motion, but awarding the defendants the sum of $1,172,767 as a
sanction against Synergetics. The net effect of the ruling was to reduce by
approximately one-half the amount of the original judgment against defendants.
On September 17, 2007, defendants filed a Notice of Appeal from the Order
denying their motion to vacate. Synergetics, on September 27, 2007,
cross-appealed on the portion of the Order granting the sanction. Proceedings
in
the appeal are ongoing.
On
January 10, 2006, Synergetics filed a suit in the United States District
Court, Eastern District of Pennsylvania against Innovatech and Peregrine for
infringement of U.S. Patent No. 6,984,230, and on April 25, 2006 the Court
permitted Synergetics to amend its complaint to add Iridex as well. This suit
is
captioned Synergetics, Inc. v. Peregrine Surgical, Ltd., et
al.,
Case
No. 2:06-cv-00107. In April 2007, Synergetics reached a settlement
that resulted in dismissal of all of the defendants except Innovatech. The
remaining defendant, Innovatech, has denied the allegations and asserted a
variety of affirmative defenses and counterclaims. Among the counterclaims,
Innovatech has alleged violations of the Lanham Act, 15 U.S.C. Section 1125
and violation of the Sherman Act, 15 U.S.C. Sections 1 and 2, by
Synergetics and the Company. On September 9, 2007, Innovatech moved to
dismiss its counterclaim without prejudice. Synergetics responded on September
24, 2007 and contemporaneously moved to amend its complaint to dismiss the
infringement claims but assert new declaratory judgment claims corresponding
to
those Innovatech sought to dismiss. Synergetics explained that to the extent
its
motion is granted, it did not oppose Innovatech’s motion to dismiss. However,
Synergetics did not agree to Innovatech’s dismissal of its counterclaims without
prejudice, which would allow Innovatech to refile the claims anew at a place
and
time of its choosing. The Court’s decision on the respective motions is pending.
In
addition, from time to time we may become subject to litigation claims that
may
greatly exceed our liability insurance limits. An adverse outcome of such
litigation may adversely impact our financial condition, results of operations
or liquidity. We record a liability when a loss is known or considered probable
and the amount can be reasonably estimated. If a loss is not probable, a
liability is not recorded. As of October 29, 2007, the Company has no litigation
reserve recorded.
Item
1A — Risk Factors
The
Company’s 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 Company’s Annual Report of Form 10-K for
the fiscal year ended July 31, 2007. In connection with its preparation of
this
quarterly report, management has reviewed and considered these risk factors
and
has determined that, except as otherwise disclosed in this Item 1A, there have
been no material changes to the Company’s risk factors since the date of filing
the Annual Report.
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 Company’s Board of Directors since the filing of the
Company’s annual report on Form 10-K for the fiscal year ended July 31,
2007.
Item
6 — Exhibits
Exhibit No.
|
|
Description
|
|
|
|
10.1
|
|
Letter
Agreement by and between Synergetics USA, Inc. and Dave Dallam dated
November 8, 2007.
|
|
|
|
31.1
|
|
Certification
of the Chief 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 Chief 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,
Omni and Bident are our registered trademarks. Synergetics, Photon, DualWave,
COAG, Advantage, Burst, Microserrated, Microfiber, Solution, TruMicro, DDMS,
Krypotonite, Diamond Black, Bullseye, Claw, Micro Claw, Open Angle Micro Claw,
One-Step, Barracuda, Pineapple, Axcess, Flexx, Veritas, Vivid and Bi-Safe
product names are our trademarks. All other trademarks or tradenames appearing
in the Form 10-Q are the property of their respective owners.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
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SYNERGETICS
USA, INC.
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(Registrant)
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December
10, 2007
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/s/
Gregg D. Scheller
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Gregg
D. Scheller, President and Chief
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Executive
Officer (Principal Executive
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Officer)
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December
10, 2007
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/s/
Pamela G. Boone
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Pamela
G. Boone, Executive Vice
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President,
Chief Financial Officer, Secretary
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and
Treasurer (Principal Financial and
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Principal
Accounting Officer)
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