UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended July 31, 2006 or |
| o | 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)
| Delaware | 23-2131580 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| 3845 Corporate Centre Drive | ||
| O’Fallon, Missouri | 63368 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (636) 939-5100
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common stock | The Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issued, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check market if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of voting stock held by non-affiliates of the registrant,
computed by reference to the closing sales price as reported by The Nasdaq Stock Market as of
January 30, 2006, the last business day of the registrant’s most recently completed second fiscal
quarter, was $122,719,268.
At October 13, 2006, there were 24,206,970 shares of the registrant’s common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2006 Annual Meeting of Stockholders,
expected to be held on November 30, 2006, are incorporated by reference into Part III of this Form
10-K where indicated.
SYNERGETICS USA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 31, 2006
FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 31, 2006
TABLE OF CONTENTS
SYNERGETICS USA, INC.
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
result to differ materially from those expressed or implied by such forward-looking statements.
These factors, risks and uncertainties are discussed in Part I,
Item 1A, “Risk Factors.”
Although we believe the expectations reflected in our forward-looking statements are based
upon reasonable assumptions, it is not possible to foresee or identify all 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 annual report on Form 10-K and the information incorporated by reference in this report to
reflect any change in our expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based.
PART I
Item 1. Business
Overview
Synergetics USA, Inc. (“Synergetics USA” or “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”). 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 SmallCap 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 designs, manufactures and markets precision-engineered, microsurgical instruments,
capital equipment and devices primarily for use in vitreoretinal surgery and neurosurgical
applications. Its products are designed and manufactured to support micro or minimally invasive
surgical procedures. In addition, it also designs and manufactures disposable and non-disposable
supplies and accessories for use with these products. Prior to the merger, Synergetics operated on
a fiscal year ending July 31 and Valley Forge operated on a fiscal year ending September 30. The
Company has adopted Synergetics’ fiscal year end and, accordingly, all fiscal year end information
is reported for periods ended on July 31, unless otherwise noted.
The Company operates in two business segments – the Synergetics segment and the Valley Forge
segment. The Synergetics segment includes revenue and operating expenses associated with the sales
of ophthalmic and neurosurgical instruments and Omni® ultrasonic aspirators. The Valley
Forge segment includes revenue and operating expenses associated with the sales of bipolar
electrosurgical generators. The financial results of Valley Forge have been included from
September 22, 2005 through July 31, 2006. For information with regard to net sales, income from
operations and identifiable assets attributable to each of our business segments, see our Notes to
Consolidated Financial Statements.
Revenues from our ophthalmic products constituted 59.4%, 81.5% and 83.3% of our total revenues
in fiscal 2006, 2005 and 2004, respectively. Revenues from our neurosurgical products represented
33.6%, 18.5% and 16.7% of our total revenues in fiscal 2006, 2005 and 2004, respectively. In
addition, other revenue from our pain control management, dental and ear, nose and throat (“ENT”)
products was 7.0% in fiscal 2006. We expect that the relative revenue contribution of our
neurosurgical products will continue to rise in 2007 as a result of our continued efforts to expand
our neurosurgical product line. International revenues of $8.2 million, $5.4 million and $3.4
million constituted 21.3%, 24.8% and 20.3% of our total revenues in fiscal 2006, 2005 and 2004,
respectively. We expect that the relative revenue contribution of our international sales will
rise in 2007 as a result of our continued efforts to expand our international distribution and our
expanded neurosurgical product offerings including the Sonopet Omni® ultrasonic
aspirator and Malis® AdvantageTM.
Other Recent Events
On August 7, 2006, Synergetics finalized the settlement agreement with Peregrine Surgical,
Ltd. (“Peregrine”) and Innovatech Surgical, Inc. (“Innovatech”) for an out-of-court settlement of
its patent infringement lawsuit filed on October 21, 2004 against Peregrine. The terms of the
settlement agreement include Peregrine paying Synergetics $350,000 and Peregrine and Innovatech
agreeing to no longer use, manufacture or sell the technology accused of infringing Synergetics’
U.S. patent nos. 6,357,932 and 6,634,799 covering Synergetics’ Quick-Disconnect Laser Probes and
Adapters. The settlement amount was paid on August 21, 2006.
Since the fiscal year ended July 31, 2006, the Company has received the first orders for the
VitraTM laser unit, which it distributes based on a three-year distribution agreement
with Quantel Medical of France (“Quantel”), the PhotonTM II light source and the
Malis® AdvantageTM. More information about these products can be found in
the discussion below.
Strategy
Our goal is to become a global leader in the development, manufacture and marketing of
precision-engineered, microsurgical instruments and capital equipment for use in vitreoretinal
surgery and neurosurgical 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 can be easily differentiated from our competition; | ||
| • | Identifying microsurgical niches that may offer the prospect for substantial growth and higher profit margins; | ||
| • | Accelerating our international growth; | ||
| • | Utilizing the full breadth and depth of knowledge, experience and resources in our research and development department; | ||
| • | Branding and marketing a substantial portion of our neurosurgical products with the Malis® trademark; | ||
| • | Continuing to develop our distribution channels; | ||
| • | Continuing to grow our disposables revenue stream; | ||
| • | Introducing the Malis® AdvantageTM, the newest multifunctional bipolar electrosurgical generator, into neurosurgery; | ||
| • | Expanding the Malis® AdvantageTM into other surgical markets; | ||
| • | Expanding the use of our Sonopet Omni®, our ultrasonic aspirator, into other surgical markets; and | ||
| • | Exploring opportunities for growth through strategic partnering with other companies, such as our current relationships with Codman & Shurtleff, Inc. (“Codman”), an affiliate of Johnson & Johnson, Stryker Corporation (“Stryker”) and Quantel. |
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Our Business Strategy” for further discussion.
Products and Services
Ophthalmic and Vitreoretinal Surgical Market
Various diseases of the eye, including trauma to the eye, can lead to a damaged retina.
Conditions associated with retinal detachment often require surgical treatment in order to prevent
vision loss. These conditions include proliferative diabetic retinopathy, macular holes, macular
puckers and traumatic eye injuries. Vitreoretinal surgery involves the removal of damaged tissue
from the eye caused by disease or injury that interferes with normal vision. This surgery is
generally performed on the rearward portion of the eye surrounding the retina through incisions
made near the front of the eye. The retinal surgeon may need a variety of different instruments
and capital equipment to perform the surgery, such as a vitreous cutter to remove the vitreous from
the eye, a light source and an illuminator to illuminate the eye, a laser and a laser probe which
delivers a high-intensity light, and other microsurgical instruments including forceps, scissors
and picks, many of which are offered by the Company.
The Company estimates there are approximately 5,500 practicing retinal surgeons worldwide. It
is estimated that approximately 230,000 vitrectomies are performed each year in the United States
and 190,000 vitrectomies are performed throughout the rest of the world.
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 2,000 retinal surgical items including scissors, retractors, cannulas, forceps and other
reusable and disposable surgical instruments. During fiscal 2006, the Company introduced
disposable forceps to be utilized on reusable handles. These forceps and other instruments of
this type have been widely accepted.
We are a leading supplier of 25 and 23 gauge instrumentation to the ophthalmic surgical
market. A larger 20 gauge size was previously the industry standard. These microsurgical
instruments enable surgeons to make smaller stitch-less incisions. However, the use of 25 and 23
gauge instrumentation limits the amount of light that can be delivered to the surgical field using
traditional light sources. As such, we engineered a system solution using smaller optical fibers
that, in combination with other product functionality, are capable of efficiently delivering more
light to the surgical field than traditional light systems. At the same time, the device can
deliver concentrated laser energy to the site to provide endophotocoagulation. This technology was
introduced to operating rooms across the world with Synergetics’ release in July 2004 of our
PhotonTM xenon light source for vitreoretinal illumination. These illuminators produce
high output light and pass laser energy through the devices which are delivered coaxially to the
surgical site through ultra-fine fiberoptic fibers. The ability of the PhotonTM to
deliver both laser energy and vitreoretinal illumination through the same fiber line is unique, as
is the number of accessories which can be attached to the device. These features distinguish the
PhotonTM from other xenon light sources in the marketplace. We believe the
PhotonTM will continue to gain acceptance in the ophthalmic surgical market as demand
increases for 25 and 23 gauge instrumentation used in connection with minimally invasive surgical
techniques.
In September 2006, the Company announced that the PhotonTM had been upgraded to the
PhotonTM II which offers two new features that double the apparent amount of light in
the surgical field.
In addition to producing our own ophthalmic and vitreoretinal surgical instruments and
equipment, we entered into a three-year distribution agreement in June 2006 with Quantel. This
distribution agreement allows for the exclusive distribution of Quantel’s VitraTM into
ophthalmic operating rooms and non-exclusive distribution into ophthalmic offices. The
VitraTM is a portable laser and is compatible with the PhotonTM II
illuminator. In July 2006, we shipped our first two VitraTM lasers.
Our business continues to grow and evolve as new, minimally invasive surgical techniques are
pioneered by leading vitreoretinal surgeons. As microsurgical instruments become ever smaller, new
endoillumination technology is required to assist surgeons in this field. Synergetics was an early
developer of cutting-edge endoillumination and continues to be a leader in the marketplace in the
design, manufacture and marketing of laser probes and fiberoptic endoilluminators.
Neurosurgery Market
There are over 100 different types of brain tumors, and more than 180,000 adults and
approximately 2,200 children are diagnosed with brain tumors each year. In addition to brain tumors,
cerebral aneurysms, congenital malformations of the skull, excess fluid on the brain and other
disorders, including trauma, can lead to neurosurgery. Neurosurgery is a medical specialty dealing
with disorders of the brain, skull, spinal cord, cranial and spinal nerves, the autonomic nervous
system and the pituitary gland. The neurosurgeon may need a variety of different instruments and
capital devices to perform the surgery, such as operating microscopes, ultrasonic suction devices,
electrosurgical generators, computer-assisted virtual neurosurgery and other instruments, many of
which are offered by the Company.
The Company estimates that there are approximately 6,800 practicing neurological surgeons
worldwide. It is estimated that approximately 220,000 cranial procedures are performed each year
in the United States, including over 51,000 craniotomies for tumor removal. In addition, over
500,000 spine surgery procedures are performed annually in the United States and a total of over
one million such procedures are performed worldwide by neurosurgeons and orthopedic surgeons.
The Company has a complementary neurosurgical product line which includes the Omni®
ultrasonic aspirator, an electrosurgical generator and precision neurosurgical instruments. Our
neurosurgery product catalogue consists of over 500 neurosurgical items including capital
equipment, disposable and reusable instruments and other disposable items.
A prominent use of the Company’s Omni® ultrasonic aspirator in neurosurgery is
tumor removal. Through a relationship with Miwatec of Japan, the Company distributes the aspirator
in the U.S., Canada, Latin and most of South America, all but two countries in Europe, South
Africa, Australia and New Zealand. The Omni® ultrasonic aspirator uses ultrasonic waves
to cause vibration of a tip. The aspirator utilizes a handpiece to vibrate a tip that emulsifies
bone and tissue for removal and then utilizes suction to aspirate these bone and tissue fragments.
The Omni® is unique in its ability to remove bone torsionally at a 90o angle,
a feature that is particularly helpful in surgery on the cranium and spine.
Also, in intracranial neurosurgery, a bipolar electrosurgical system is the modality of choice
as compared to monopolar products for coagulation. The popularity of the bipolar system is largely
due to the efforts of the late Dr. Leonard I. Malis, who designed and developed the first
commercial bipolar coagulator in 1955 and pioneered the use of bipolar electrosurgery for use in
the brain.
The foundation of our bipolar electrosurgical system lies in our proprietary
DualWaveTM technology. Using this technology, our bipolar generators are able to
deliver two separate waveforms to perform the two separate and distinct functions of cutting and
coagulation. With the virtual elimination of heat and electrical current spread, this technology,
when used in accordance with the product instructions, can be used in direct contact with nerves,
bones, blood vessels and metal implants, and we believe can be used in many areas of surgery.
Our generators contain a rigidly stabilized voltage control to provide an extremely gentle cut,
using about one-fifth the power of other generators.
Our third generation electrosurgical generator is sold exclusively in neurosurgery through
Codman. We will be the exclusive distributor of our recently introduced fourth generation
generator branded the Malis® AdvantageTM. The AdvantageTM has
many unique features including the ability to blend the two waveforms to perform cutting and
coagulation at the same time, a sterilizable remote control and a friendly, touch screen front
interface which permits easier programmability. These units have successfully completed
electromagnetic compatibility and safety testing required in the United States and European Union.
The registration process continues in other countries. We remain confident that we will
successfully complete the process in a timely manner.
Pain Control Market
The Company manufactures a lesion generator used for minimally invasive pain treatment. The
pain control unit can be utilized for facet denervation, rhizotomy, percutaneous chardotomy, dorsal
root entry zone lesions, peripheral neuralgia, trigeminal neuralgia and ramus communications. Pain
relief is achieved by the controlled heating of the area surrounding the electrode tip. A
thermosensor in the probe is used to control tissue temperature. Impedance values are displayed to
guard against unsafe conditions. The system provides an electrical stimulator for nerve
localization and various coagulating outputs that are selectable based on the procedures
undertaken. The generator is configured for bipolar output, to minimize current leakage, but is
also capable of monopolar operation. The
Company supplies this lesion generator to Stryker pursuant
to a supply and distribution agreement dated as of October 25, 2004. The term of the agreement is
for slightly over five years, commencing on November 11, 2004 and ending on December 31, 2009. The
agreement covers the manufacture and supply of the lesion generator unit together with certain
accessories. Stryker has agreed to make minimum purchases in excess of $900,000 during the first
agreement year and $500,000 in the second and third years. Minimum purchase requirements for years
four and five are to be determined by the parties based on market conditions and other factors. The
agreement also provides Stryker the right of first refusal for the distribution of certain
other products in the pain control, orthopedic, ENT, craniomaxillofacial, and head and neck surgery
markets. The Company has been working on an international version of the lesion generator and
shipped the first prototype units to Stryker in July 2006.
Dental Market
There are an estimated 150,000 professionally active dentists in the United States. As primary
oral health care providers, approximately 80% of dentists are generalists, and approximately 20%
are specialists. There are currently more than 20 different procedures authorized by the American
Dental Association that are eligible for reimbursement for which bipolar surgery can be used
including the surgical treatment of gingivitis, connective tissue graft, surgical removal of
residual tooth roots, crown and bridge preparation, biopsy of oral tissue, excision of cysts and
tumors and surgical removal of impacted or erupted teeth. Our Bident® Bipolar Tissue
Management System uses the same DualWaveTM technology used in neurosurgery, as discussed
above. The Bident® Bipolar System allows dentists to work in direct contact with metal
implants, nerves, bone and blood vessels, essentially eliminating collateral tissue damage from
electrical current spread and heat buildup. This system performs two separate functions: bipolar tissue
cutting and bipolar coagulation of blood vessels and is comprised of the electrosurgical generator,
a foot pedal control, connecting cables and an array of disposable bipolar handheld instruments,
which are attached to the generator via a single use bipolar cord. Our current bipolar dental
products are sold directly to dentists and through distributors.
Manufacturing and Supplies
We design, manufacture and assemble the majority of our ophthalmic and certain of our
neurosurgical products in our facility in O’Fallon, Missouri. The bipolar electrosurgical
generators (including the neurosurgery, pain control and dental units) are manufactured in King of
Prussia, Pennsylvania. The Omni® ultrasonic aspirator and the VitraTM laser
units are manufactured by third parties. Our products are assembled from raw materials and
components supplied to us by third parties. Most of the raw materials and components we use in the
manufacture of our products are available from more than one supplier. For some components,
however, there are relatively few alternate sources of supply. We rely upon single source
suppliers or contract manufacturers for a small portion of our disposable product line, for the
production of our Omni® and for several key components of our PhotonTM xenon
light source and our electrosurgical generators. Our profit margins and our ability to develop and
deliver products on a timely basis may be adversely affected by the lack of alternative supply in
the required timeframe.
The medical devices manufactured by us are subject to extensive regulation by governmental
authorities, including federal, state and foreign governmental agencies. The principal regulator in
the United States is the Food and Drug Administration (the “FDA”). Our manufacturing process is
subject to the regulatory requirements of the Federal Good Manufacturing Practice Regulations as
promulgated by the FDA, as well as other regulatory requirements of the FDA, which mandate detailed
quality assurance and record-keeping procedures and subject us to unscheduled periodic quality
system inspections. We conduct internal quality assurance audits throughout the manufacturing
process and believe that we are in compliance with all applicable government regulations. At both
of our manufacturing facilities, we have also voluntarily chosen to subject ourselves to the audit
procedures established by the International Standards Organization (“ISO”), the world’s largest
developer of standards. In December 1998,
we received certification for ISO 9002/EN 46002. ISO
9002/EN 46002 is a documented international quality system standard
that documents compliance with
the European Medical Device Directive. In December 2003, we were certified to ISO 13485: 1996,
which replaced ISO 9002/EN 46002 as the international standard for quality systems applied to
medical devices. In March 2006, we were certified to ISO 13485: 2003, which replaced ISO 13485:
1996 the international standard for quality systems applied to medical devices.
In October 2005, we completed a 27,000 square foot addition to our 33,000 square foot
manufacturing facility and headquarters in O’Fallon, Missouri. We believe this new facility will
enhance our operations and make them more efficient. In July 2005, Valley Forge moved its
Philadelphia manufacturing, engineering and assembly facility and our Oaks, Pennsylvania selling,
general and administrative offices into a new facility located in Upper Merion Township,
Pennsylvania. Effective May 1, 2005, Valley Forge entered into a combination sublease and lease agreement
for this facility for a term of four and one-half years for approximately 13,500 square feet of
office, assembly, engineering and manufacturing space.
Marketing and Sales
Ophthalmic and Vitreoretinal Surgical Market
In the United States and Canada, over a number of years, we have assembled a dedicated sales
and marketing team. In the United States and Canada, our team sells our ophthalmic and
vitreoretinal surgical products directly to end-users employing a dedicated staff
of approximately 20 sales and marketing professionals. We offer over 2,000 separate catalogue
items in the ophthalmic and vitreoretinal surgical markets. Our ophthalmic and vitreoretinal
products include vitreoretinal instruments, fiber optic endoilluminators, laser probes, a variety
of disposable and reusable instruments designed for intraocular manipulation of tissues,
illumination equipment under the PhotonTM brand, laser equipment for the United States
under the VitraTM brand, an international laser unit and miscellaneous products.
Internationally, we utilize a hybrid sales network comprised of direct sales representatives
and distribution agreements with independent representatives to sell and distribute our ophthalmic
and vitreoretinal surgical products. At July 31, 2006, we had six international direct sales and
marketing employees and are represented by approximately 45 foreign distributors and independent
sales representatives. Our ophthalmic and vitreoretinal surgical products are offered for sale in
approximately 47 countries outside the United States. The terms of sale to our foreign distributors
and our foreign end-user customers do not differ materially from our terms to our domestic end-user
customers. Selling prices are established based upon each country’s price list.
Neurosurgery Market
In September 2005, we initiated a comprehensive reorganization of our ophthalmic and
neurosurgical marketing and sales management teams. This initiative was designed to draw on our
broad sales and marketing expertise developed over the years in the vitreoretinal surgical arena.
We believe the sales model we have successfully employed in the ophthalmic and vitreoretinal
surgical marketplace will translate well to the neurosurgery market and offer us expanded
opportunities for sales growth both domestically and internationally. Domestically, we currently
utilize a hybrid sales network comprised of seven direct sales territory managers and nine
independent distributors to sell our neurosurgical products. These domestic territory managers and
independent distributors are supervised by two sales managers. Internationally, we rely upon 32
independent distributors to sell these products in approximately 41 countries. Internationally, we
presently have one international sales manager. In addition, we have a dedicated marketing staff.
The neurosurgical products we distribute include the Omni® ultrasonic aspirator and
disposables, Tru-MicroTM instruments, Malis® AdvantageTM
electrosurgical generator, Malis® disposables, Malis® cord tubing sets,
Malis® bipolar forceps and miscellaneous endoscopic instruments. We offer approximately
500 separate catalogue items in the neurosurgical market.
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
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
Company’s Malis® trademark to Codman for use with certain Codman products, including
those covered by the distribution agreement.
Pain Control Market
In the pain control market, we manufacture for Stryker a lesion generator for the percutaneous
treatment of pain pursuant to a supply and distribution agreement dated as of October 25, 2004. The
term of the agreement is for slightly over five years, commencing November 11, 2004 and ending on
December 31, 2009, and grants Stryker exclusive worldwide marketing rights for distribution and
sale of the lesion generator. In the first year of the agreement, Stryker agreed to make minimum
purchases in excess of $900,000 for a combination of sales demonstration units and commercial sales
units. In the second and third agreement years, Stryker agreed to make minimum purchases of
approximately $500,000 per year for commercial sales units. Minimum purchase requirements for
agreement years four and five are to be determined by the parties based on market conditions and
other factors. The agreement also provides Stryker the right of first refusal for the distribution
of certain other products in the pain control, orthopedic, ENT, craniomaxillofacial, and head and
neck surgery markets.
Competition
The medical technology industry is highly competitive. We believe that the principal factors
influencing the selection of a vitreoretinal or neurosurgical instrument or device are the product
features, quality, safety, ease of use, price, acceptance by leading physicians and other clinical
benefits. We believe that our precision engineering and innovation, our in-house manufacturing
capabilities, our rapid return instrument repair service and our relationships with leading
practitioners distinguish our products from similar products sold by other entities.
Ophthalmic and Vitreoretinal Surgical Market
Our ophthalmic and vitreoretinal surgical instruments and disposables compete against
manufacturers of similar products, including those sold by our major competitors, Alcon, Inc.,
IRIDEX Corporation (“IRIDEX”), Bausch & Lomb, Inc. and Dutch Ophthalmic
USA. Our PhotonTM xenon light source and our new PhotonTM II gas-arc
light source competes against manufacturers of similar products, including those sold by Alcon,
Inc. In addition, our products compete with smaller specialized companies and larger companies that
do not otherwise focus on ophthalmic and vitreoretinal surgery.
Neurosurgery Market
In neurosurgery, we develop, design and manufacture precision-engineered, microsurgical
instruments. In addition, we believe we are the premier manufacturer of bipolar electrosurgical
systems for use in neurosurgery. Our neurosurgery bipolar electrosurgical systems compete against
manufacturers of electrosurgical systems, including the Valleylab division of Tyco International
Ltd., Kirwan Surgical Products, Inc., Erbe Elektromedizin GmbH and Aesculap Inc., USA, a B. Braun
Medical Inc. company. Our Omni® ultrasonic aspirator and our proprietary and
patent-pending ultrasonic tip designs offer product features, quality, safety and unique bone
cutting capabilities in the industry, which is particularly helpful in surgery on the cranium and
on the spine. Our Omni® ultrasonic aspirator competes against Integra Life Sciences
Holdings, Corp., the manufacturer of the CUSA ultrasonic system. Our neurosurgical instruments and
disposables compete against manufacturers of similar products, including those sold by Integra
NeuroSciencesTM. In addition, our products compete with smaller specialized companies
and larger
companies that do not otherwise focus on neurosurgery. Our products also compete with
other technologies, such as lasers, handheld instruments and a variety of tissue removal systems
designed for removing skull-based tumors. Aggressive pharmaceutical intervention could preclude the
usage of our surgical products.
Pain Control Market
The lesion generator for the treatment of pain that we manufacture and supply to Stryker
competes with other manufacturers of pain control devices as well as medical practices that treat
this condition with medication.
Dental Market
We believe that we are the only manufacturer of bipolar electrosurgical systems serving the
dental market. Our Bident® Bipolar Tissue Management System competes with monopolar
electrosurgical systems manufactured by Ellman International, Inc. and laser and other monopolar
electrosurgical systems manufactured by several other companies including Parkell, Inc.
Research and Development
Our research and development primarily focuses on developing new products based on our
proprietary Malis® electrosurgical generator/DualWaveTM technology, our
Omni® ultrasonic aspirator and PhotonTM technology and our expertise in
vitreoretinal surgery and neurosurgery. We are continually engineering new products and
instrumentation as well as enhancements to existing products to meet the needs of surgeons in
various surgical disciplines. We have entered into consultation arrangements with leading
international ophthalmic surgeons, all of whom specialize in vitreoretinal procedures. In
neurosurgery, we have worked closely with leading neurosurgeons to develop microsurgical
instruments and ultrasonic tips used with our Omni® ultrasonic aspirator.
The Company has historically invested in leading edge research and development projects and,
in fiscal 2007, we expect continued development of Malis® AdvantageTM
supporting accessories; 25, 23 and 20 gauge precision instruments; 25, 23 and 20 gauge suture-less
precision instruments; endoillumination and laser probes; PhotonTM supporting
disposables; and other products used in conjunction with minimally invasive surgical procedures.
For the 2006, 2005 and 2004 fiscal years, Synergetics expended $1,655,122, $857,798 and
$796,916, respectively, for research and development, which represents 4.3%, 3.9% and 4.7% of net
sales, respectively. For its fiscal years ended September 30, 2004 and 2003, Valley Forge expended
$508,207 and $489,930, respectively, for research and development. We anticipate that we will
continue to incur greater research and development costs in connection with the development of our
products. At July 31, 2006, the Company’s pipeline included approximately 35 active, major projects
in various stages of completion. The Company expects over the next few years to invest in research
and development at approximately 4% to 6% of net sales per fiscal year. Substantially all of our
research and development is conducted internally. In the 2007 fiscal year, we anticipate that we
will fund all of our research and development with current assets and cash flows from operations.
We review our research and development programs quarterly to ensure that they remain consistent
with and supportive of our growth strategies.
During fiscal 2006, the Company’s research and development efforts produced 65 new catalogue
items for ophthalmology. Among those items were a new piece of capital equipment, five new
equipment accessories, 17 new reusable items and 42 new disposables including 21 new laser probes.
During the same timeframe, our research and development efforts produced 19 new catalogue items
for neurosurgery including three new equipment items, ten new reusable products and six new
disposable products. New products, which management defines as products introduced within the
prior 24-month period, accounted for approximately 12% of total sales for the Company for fiscal
2006, approximately $4.6 million. For fiscal 2005, new products accounted for approximately 14% of
total sales for the Company, or just over $3.1 million.
Government Regulations
The marketing and sale of our products in the United States is governed by the Federal Food,
Drug and Cosmetic Act administered by the FDA, as well as varying degrees of regulation by a number
of state and foreign governmental agencies.
FDA regulations are wide ranging and govern the introduction of new medical devices, the
observance of certain standards with respect to the design, manufacture, testing, labeling and
promotion of devices, the maintenance and retention of certain records, the ability to track
devices in distribution, the reporting of potential product defects and patient incidents, the
export of devices and other matters.
All medical devices introduced into the market since 1976, which include substantially all of
our products, are required by the FDA as a condition of sale and marketing to secure either a
510(k) Premarket Notification clearance or an approved Premarket Approval Application (“PMA”). A
Premarket Notification clearance indicates FDA agreement with an applicant’s determination that the
product for which clearance has been sought is substantially equivalent to another medical device
that was on the market before 1976 or that has received 510(k) Premarket Notification clearance.
The process of obtaining a Premarket Notification clearance can take
several months, or years, and
may require the submission of limited clinical data and supporting information. The PMA process
typically requires the submission of significant quantities of clinical data and manufacturing
information and involves significant review costs.
Under FDA regulations, after a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a major change in the
intended use of the device, technology, materials or packaging, requires a new 510(k) clearance.
The FDA requires a manufacturer to make this determination in the first instance, but the FDA can
review any such decision and, if it disagrees, can require a manufacturer to obtain a new 510(k)
clearance or seek enforcement action against the manufacturer.
We are also required to register with the FDA as a device manufacturer and are required to
maintain compliance with the FDA’s Quality System Regulations (“QSRs”). The QSRs incorporate the
requirements of Good Manufacturing Practice and relate to product design, testing and manufacturing
quality assurance, as well as the maintenance of records and documentation.
We may not promote or advertise our products for uses not within the scope of our clearances
or approvals or make unsupported safety or effectiveness claims. Further, we are required to comply
with various FDA requirements for labeling and promotion. The Medical Device Reporting regulations
require that we provide information to the FDA whenever there is evidence to reasonably suggest
that one of our devices may have caused or contributed to a death or serious injury. In addition,
the FDA prohibits us from promoting a medical device before marketing clearance has been received
or promoting a cleared device for unapproved indications. Noncompliance with applicable regulatory
requirements can result in enforcement action, which it is more fully described in the “Risk
Factors” section of this Form 10-K.
We have received Premarket Notification 510(k) clearance for our new multifunctional bipolar
electrosurgical generator and single-use hand switching instruments. We also expect to file new
applications during the fiscal 2007 year to cover new products and variations on existing products.
We cannot assure you that we will be able to obtain necessary clearances or approvals to market any
other products, or existing products for new intended uses, on a timely basis, if at all. Delays in
the receipt or failure to receive clearances or approvals, the loss of previously received
clearances or approvals, or failure to comply with existing or future regulatory requirements could
have a material adverse effect on our business, financial condition, results of operations and
future growth prospects.
Medical device regulations also are in effect in many of the countries outside the United
States in which our products are sold. These laws range from comprehensive device approval and
quality system requirements for some or all of our medical device products to simpler requests for
product data or certifications. The number and scope of these requirements are increasing. In June
1998, The European Union Medical Device Directive became effective, and all medical devices sold in
the European common market must meet the Medical Device Directive standards. The Company sells its
products in the European medical market; as such, we have voluntarily chosen to subject ourselves
to the audit procedures established by the European Union through which we have obtained “CE
Marking” for many of our products. Pursuant to ISO procedures, the Company is audited every six
months. A negative audit
could result in the removal of the “CE Marking” on our products, which would effectively bar
the sale of the Company’s products in the European market. Such a result would have a significant
and material negative impact on the Company and its business. In addition, there are several other
countries that require additional regulatory clearances.
Federal, state and foreign regulations regarding the manufacture and sale of medical devices
are subject to future changes. Although we cannot predict the impact, if any, these changes might
have on our business, the impact could be material.
Management believes that we are in material compliance with the regulations governing our
business.
Safety Approvals
The majority of our capital equipment products also require electrical safety testing, and in
some cases electromagnetic compatibility testing, either as a part of product registration and/or to gain
market acceptance.
Patents and Intellectual Property
Our ability to compete in an effective manner depends primarily on developing, improving and
maintaining proprietary aspects of our technology. As of July 31, 2006, there were approximately 26
pending United States patent applications that relate to our DualWaveTM bipolar
electrosurgical systems, the illumination technology used in our PhotonTM xenon light
source and the disposable products used with it, our ultrasonic bone cutting tips and various other
reusable and disposable instruments. Our PhotonTM xenon light source is based on the
combination of these patent applications, trade secrets and other know-how. Currently, we own 21
United States patents. Our current patents will begin to expire in 2012. We do not believe that the
expiration of any one patent or of all of our patents over time will have a material adverse effect
on our business. Other companies and entities have filed patent applications or have been issued
patents relating to instruments, laser probes, endoillumination, light sources, monopolar and/or
bipolar electrosurgical methods and devices.
We seek patent protection of our key technology, products and product improvements in the
United States and may seek patent protection in selected foreign countries. When determined
appropriate, we will enforce and defend our patent rights. In general, however, we do not rely
exclusively on our patents to provide us with any significant competitive advantages as it relates
to our existing product lines. We also rely upon trade secrets, know-how, continuing technological
innovations and superior engineering to develop and maintain our competitive advantage. In an
effort to protect our trade secrets, we require all of our employees, consultants and advisors
to execute proprietary information agreements and certain of them to
sign invention assignment agreements upon commencement of
employment or consulting relationships with us. These agreements typically provide that all
confidential information developed or made known to these individuals during the course of their
relationship with us must be kept confidential, except in specified circumstances. They also
contain provisions requiring these individuals to assign to us, without additional consideration,
any inventions conceived or reduced to practice by them while employed or retained by us, subject
to customary exceptions.
The late Dr. Leonard I. Malis was the Professor and Chairman Emeritus of Mount Sinai School of
Medicine, Department of Neurosurgery and one of Valley Forge’s former directors. The
Malis® trademark is a name widely recognized and respected in the neurosurgery field.
Dr. Malis had traditionally licensed the Malis® trademark to Codman in connection with
products sold by Codman to end users, which includes products that the Company sells to Codman. On
October 12, 2005, we acquired the Malis® trademark. We paid the estate of Dr. Leonard I.
Malis $159,904 in cash and the remainder in a $3,997,600 promissory note which will be paid in 25
equal quarterly installments of $159,904. During fiscal 2006, we have paid $479,712 and owe
$3,517,888. We expect to pay off the note in January 2012. The promissory note is secured by a
security interest in the trademark and certain of our DualWave™ patents.
Synergetics, the Synergetics’ logo, Malis, Omni, Bident and Finest Energy Source for Surgery
are our registered trademarks. Photon, DualWave, COAG, Advantage, Microserrated, Microfiber,
Solution, Tru-Micro, DDMS, Krypotonite, Diamond Black, Bullseye, Spetzler Claw, Spetzler Micro
Claw, Spetzler Open Angle Micro Claw, Spetzler Barracuda, Spetzler Pineapple and Bi-Safe product
names are our trademarks. All other trademarks or tradenames appearing in the Form 10-K are the
property of their respective owners.
Employees
At October 11, 2006, we had approximately 346 employees. From time to time, we retain
part-time employees, engineering consultants, scientists and other consultants. All full-time
employees participate in our health benefit plan. None of our employees are represented by a union
or covered by a collective bargaining agreement. We consider our relationship with our employees to
be satisfactory.
Available Information
We make available free of charge our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or furnished as required by
Section 13(a) or 15(d) of the Exchange Act through our internet website at www.synergeticsusa.com as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
Item 1A. Risk Factors
In addition to the other information contained in this Form 10-K, we have identified the
following risks and uncertainties that may have a material adverse effect on our business,
financial condition or results of operation. You should carefully consider the risks described
below before making an investment decision.
A significant part of our sales of our neurosurgical products comes from a single customer,
which makes us vulnerable to the loss of that customer.
Codman currently accounts for most of our total revenue from sales of our bipolar
electrosurgical generators. During the fiscal year ended July 2006, revenue from sales of our
bipolar electrosurgical generators represented approximately 17% of the Company’s total revenue.
Under our existing agreement with Codman, Codman distributes the third generation generator
trademarked as the CMCIII on an exclusive basis. Our existing agreement with Codman will expire by
its own terms on December 31, 2008, unless extended by mutual agreement of the parties.
If any of our single source suppliers were to cease providing components, we may not be able
to produce our products.
We rely on a single source for the supply of the ultrasonic aspirator sold in the United
States and internationally under Synergetics’ Omni® brand. Net sales of Synergetics’
Omni® ultrasonic aspirators for each of our fiscal years ended July 31, 2006 and 2005
amounted to greater than 10% of total net sales for each period. Also, the manufacture of
Synergetics’ PhotonTM xenon light source depends on single sources for several key
components. In addition, we subcontract for the manufacture of the disposable cord and tubing sets
for the Malis® electrosurgical generator with a single manufacturer. If any of these
suppliers become unwilling or unable to provide products or components in the required volumes and
quality levels or in a timely manner, we would be required to locate and contract with substitute
suppliers. Although we believe that alternative sources for many of these components and raw
materials are available, we could have difficulty identifying a substitute supplier in a timely
manner or on commercially reasonable terms and may have to pay higher prices to obtain the
necessary materials. Any supply interruption could harm our ability to manufacture our products
until a new source of supply is identified and qualified.
We have also become aware that the manufacturers of several parts used in our third generation
bipolar electrosurgical generator models will no longer be manufacturing these parts in the near
future. While we have arranged to purchase and maintain a significant inventory of these parts, our
efforts may not be sufficient depending on our unit sales. We must develop alternative sources for
these parts as well as alternative parts. Alternative parts, if available, will require engineering
redesign and may require regulatory approval before the manufacture of additional new units.
The medical device industry is highly competitive, and we may be unable to compete effectively
with other companies.
The medical technology industry is characterized by intense competition. We compete with
established medical technology companies and early stage companies that have alternative solutions
for the markets we serve or intend to serve. Many of our competitors have access to greater
financial, technical, research and development, marketing, manufacturing, sales, distribution
services and other resources than we do. Furthermore, our competitors may be more effective at
implementing their technologies to develop commercial products. Certain of the medical indications
that can be treated by our devices can also be treated by other medical devices or by medical
practices that do not include a device. The medical community widely accepts many alternative
treatments and certain of these other treatments have a long history of use.
Our competitive position depends on our ability to achieve market acceptance for our products,
develop new products, implement production and marketing plans, secure regulatory approval for products under development and
protect our intellectual property. We may need to develop new applications for our products to
remain competitive. Technological advances by one or more of our current or future competitors
could render our present or future products obsolete or uneconomical. Our future success depends
upon our ability to compete effectively against current technology as well as respond effectively
to technological advances and upon our ability to successfully implement our marketing strategies
and execute our research and development plan.
Our future results are dependent, in part, upon the successful introduction of our fourth
generation multifunctional bipolar electrosurgical generator, marketed as the Malis®
AdvantageTM.
Our future success, in part, is dependent upon the successful launch of our new
multifunctional bipolar electrosurgical generator and new proprietary single-use, hand-switching
bipolar instruments. We announced these products on October 8, 2005 at the 56th Annual Congress of
Neurosurgeons Meeting. Their success in the marketplace is dependent upon several factors
including:
| • | their acceptance by surgeons; | ||
| • | the recognition of hospitals and surgical centers that the new generator and instruments offer sufficient advantages and benefits to warrant the cost of purchasing the Malis® AdvantageTM; | ||
| • | our ability to create an effective sales network; | ||
| • | our ability to sustain our average selling price through this network; and | ||
| • | the reaction of our competitors in this market. |
Our products may not be accepted in the market.
We cannot be certain that our current products or any other products we may develop or market
will achieve or maintain market acceptance. We cannot be certain that our devices and the
procedures they perform will be able to replace those established treatments or that either
physicians or the medical community in general will accept and utilize our devices or any other
medical products that we may develop. For example, we cannot be certain that the medical community
will accept our new multifunctional electrosurgical generator and proprietary hand-switching
bipolar electrosurgical instruments over traditional monopolar and existing bipolar electrosurgical
generators and instruments.
Market acceptance of our products depends on many factors, including our ability to:
| • | convince third-party distributors and customers that our technology is an attractive alternative to other technologies; | ||
| • | manufacture products in sufficient quantities and at acceptable costs; and | ||
| • | supply and service sufficient quantities of our products directly or through distribution alliances. |
If we do not introduce new commercially successful products in a timely manner, our products
may become obsolete over time, thereby decreasing our revenue and profitability.
Demand for our products may change because of evolving customer needs, the introduction of new
products and technologies, the discovery of cures for certain medical problems, evolving surgical
practices and evolving industry standards. Without the timely introduction of new commercially
successful products and enhancements, our products may become obsolete over time, causing our sales
and operating results to suffer. The success of our new products will depend on several factors,
including our ability to:
| • | properly identify and anticipate customer needs; | ||
| • | commercialize new products in a cost-effective and timely manner; | ||
| • | manufacture and deliver products in sufficient volumes on time; | ||
| • | obtain regulatory approval for new products; | ||
| • | differentiate our products from those of our competitors; |
| • | achieve positive clinical outcomes; | ||
| • | satisfy the increased demands by health care payors, providers and patients for lower-cost procedures and shorter hospital stays and recovery times; | ||
| • | innovate and develop new materials, product designs and surgical techniques; and | ||
| • | provide adequate medical and/or customer education relating to new products and attract key surgeons to advocate these new products. |
New products and enhancements usually require a substantial investment in research and
development before we can determine the viability of the product, and we may not have the financial
resources necessary to fund this research and development. Moreover, new products and enhancements
may not produce revenues in excess of the research and development costs, and they may become
obsolete by changing customer preferences or the introduction by our competitors of new
technologies or features.
Our operating results may fluctuate.
Our operating results have fluctuated in the past and can be expected to fluctuate from
time-to-time in the future. Some of the factors that may cause these fluctuations include, but are
not limited to:
| • | the introduction of new product lines; | ||
| • | product modifications; | ||
| • | the level of market acceptance of new products; | ||
| • | the timing of research and development expenditures; | ||
| • | timing of the receipt of orders from, and product shipments to, distributors and customers; | ||
| • | timing of expenditures; | ||
| • | changes in the distribution arrangements for our products; | ||
| • | manufacturing or supply delays; | ||
| • | the time needed to educate and train additional sales personnel; | ||
| • | costs associated with product introductions; | ||
| • | product returns; and | ||
| • | receipt of necessary regulatory approvals. |
Changes in the health care industry may require us to decrease the selling price for our
products or could result in a reduction in the size of the market for our products, each of which
could have a negative impact on our financial performance.
Trends toward managed care, health care cost containment and other changes in government and
private sector initiatives in the United States and other countries in which we do business are
placing increased emphasis on the delivery of more cost-effective
medical therapies that could adversely affect the sale or the prices of our products. For
example:
| • | there has been a consolidation among health care facilities and purchasers of medical devices in the United States who prefer to limit the number of suppliers from whom they purchase medical products and these entities may decide to stop purchasing their products or demand discounts on our prices; | ||
| • | major third-party payors of hospital services, including Medicare, Medicaid and private health care insurers could substantially revise their payment methodologies or could impose reimbursement cutbacks that could create downward price pressure on our products; | ||
| • | numerous legislative proposals have been considered that would result in major reforms in the United States health care system that could have an adverse effect on our business; | ||
| • | there is economic pressure to contain health care costs in international markets; and | ||
| • | there have been initiatives by third-party payors to challenge the prices charged for medical products that could affect our ability to sell products on a competitive basis. |
Both the pressures to reduce prices for our products in response to these trends and the
decrease in the size of the market as a result of these trends could adversely affect our levels of
revenues and profitability of our sales.
We will first need to obtain regulatory approval to market our products under development.
Our research and development activities and the manufacturing, labeling, distribution and
marketing of our existing and future products are subject to regulation by governmental agencies in
the United States and in other countries. The FDA and comparable agencies in other countries impose
mandatory procedures and standards for the conduct of clinical trials and the production and
marketing of products for diagnostic and human therapeutic use.
Products we have under development are subject to FDA approval or clearance before marketing
for commercial use. The process of obtaining necessary FDA approvals or clearances can take years
and is expensive and full of uncertainties. Our inability to obtain required regulatory approval or
clearance on a timely or acceptable basis could harm our business. Further, approval or clearance
may place substantial restrictions on the indications for which the product may be marketed or to
whom it may be marketed. Further studies may be required to gain approval or clearance for the use
of a product for clinical indications other than those for which the product was initially approved
or cleared or for significant changes to the product.
Furthermore, another risk of application to the FDA relates to the regulatory classification
of new products or proposed new uses for existing products. In the filing of each application, we
are required to make a judgment about the appropriate form and content of the application. If the
FDA disagrees with our judgment in any particular case and, for example, requires us to file a PMA
rather than allowing us to market for approved uses while we seek broader approvals or requires
extensive additional clinical data, the time and expense required to obtain the approval might be
significantly increased or approval might not be granted. Approved and cleared products are subject
to
continuing FDA requirements relating to quality control and quality assurance, maintenance of
records, reporting of adverse events and product recalls, documentation and labeling and promotion
of medical devices.
We may be subject to penalties and may be precluded from marketing our products if we fail to
comply with extensive governmental regulations.
The FDA and foreign regulatory authorities require that our products be manufactured according
to rigorous standards. These regulatory requirements may significantly increase our production
costs and may even prevent us from making our products in amounts sufficient to meet market demand.
If we change our approved manufacturing process, the FDA may need to review the process before it
may be used. Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitability, as a result of delays and
additional capital investment costs. Failure to comply with applicable regulatory requirements
discussed throughout this Form 10-K could subject us to enforcement actions, including:
| • | warning letters; | ||
| • | fines, injunctions and civil penalties against us; | ||
| • | recall or seizure of our products; | ||
| • | operating restrictions, partial suspension or total shutdown of our production; | ||
| • | refusing our requests for premarket clearance or approval of new products; | ||
| • | withdrawing product approvals already granted; and | ||
| • | criminal prosecution. |
The various regulatory schemes that govern the use of our products in the international market
may change, and we may be required to obtain additional marketing clearance for our products. The
complexity, timeframes and costs associated with obtaining marketing clearances are unknown.
We will first need to obtain electrical safety approval to market our applicable products
under development.
The majority of our capital equipment products also require electrical safety testing, and in
some cases, electromagnetic compatibility testing, as either a product registration or to gain
market acceptance. The electrical safety testing and electromagnetic compatibility testing
requirements may change and require us to redesign and retest our products. The complexity,
timeframes and costs associated with potential redesign and retesting are unknown.
Our intellectual property rights may not provide meaningful commercial protection for our
products and could adversely affect our ability to compete in the market.
Our ability to compete effectively depends, in part, on our ability to maintain the
proprietary nature of our technologies and manufacturing processes, which includes the ability to
obtain, protect and enforce patents on our technology and to protect our trade secrets. We own
patents that cover significant aspects of our products. Certain of our patents have expired and
others will expire in the future. In addition, challenges may be made to our patents and, as a
result, our patents could be narrowed, invalidated or rendered unenforceable. Competitors may
develop products similar to ours that our patents do not cover. In addition, our current and future
patent applications may not result in the issuance of patents in the United States or foreign
countries. Further, there is a substantial backlog of
patent applications in the U.S. Patent and
Trademark Office, and the approval or rejection of patent applications may take several years. We
may become subject to patent infringement claims or litigation or interference proceedings declared
by the U.S. Patent and Trademark Office to determine the priority of invention.
Our competitive position depends, in part, upon unpatented trade secrets, which can be
difficult to protect. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets. In an effort to protect
our trade secrets, we require all of our employees, consultants and advisors to execute proprietary
information agreements and certain of them to sign invention assignment agreements upon
commencement of employment or consulting relationships with us. These agreements typically provide
that, except in specified circumstances, all confidential information developed or made known to
the individual during the course of his or her relationship with us must be kept confidential. They
also contain provisions requiring these individuals to assign to us, without additional
consideration, any inventions conceived or reduced to practice by them while employed or retained
by us, subject to customary exceptions. Some jurisdictions limit the enforceability and scope of
these agreements and these agreements may not provide meaningful protection for our trade secrets
or other proprietary information in the event of the unauthorized use or disclosure of confidential
information.
The medical device industry is characterized by frequent litigation regarding patent and other
intellectual property rights. Companies in the medical device industry have employed intellectual
property litigation to gain a competitive advantage. Numerous patents are held by others,
including academic institutions and our competitors. Until recently patent applications were
maintained in secrecy in the United States until after the patent had been issued. Patent
applications, filed in the United States after November 2000 generally will be published 18 months
after the filing date. However, since patent applications continue to be maintained in secrecy for
at least some period of time, we cannot assure you that our technology does not infringe any
patents, patent applications held by third parties or prior patents. We have, from time to time,
been notified of, or have otherwise been made aware of, claims that we are infringing upon patents
or other proprietary intellectual property owned by others. If it appears necessary or desirable,
we may seek licenses under such patents or proprietary intellectual property. Although patent
holders may offer such licenses, licenses under such patents or intellectual property may not be
offered or the terms of any offered licenses may not be reasonable.
Any claims, with or without merit, and regardless of whether we are successful on the merits,
would be time-consuming, result in costly litigation and diversion of technical and management
personnel, cause shipment delays or require us to develop non-infringing technology or enter into
royalty or licensing agreements. An adverse determination could prevent us from manufacturing or
selling our products, which would have a material adverse effect on our business, results of
operations and financial condition.
In October 2005, IRIDEX filed suit against Synergetics USA for infringement of a patent.
IRIDEX seeks damages, including treble damages and injunctive relief. We filed our answer in the
lawsuit and asked the court to declare that our products do not infringe the IRIDEX patent. In
addition, we countersued IRIDEX alleging that it engaged in false advertising, commercial
disparagement, trade libel, injurious falsehood and unfair competition under the Federal Lanham Act
and applicable Missouri law. While we believe that we have substantial meritorious defenses to
their claims, we may incur significant dedication of management resources and legal costs in
connection with this lawsuit.
We may have product liability claims, and our insurance may not cover all claims.
The development, manufacture, sale and use of medical products entail significant risk of
product liability claims. We maintain product liability coverage at levels we have determined are
reasonable. We cannot assure you that such coverage limits are adequate to protect us from any
liabilities we might incur in connection with the development, manufacture, sale or use of our
products. In addition, we may require increased product liability
coverage as our sales increase in
their current applications and new applications. Product liability insurance is expensive and in
the future may not be available on acceptable terms, if at all. A successful product liability
claim or series of claims brought against us in excess of our insurance coverage could adversely
affect our business.
The loss of key personnel could harm our business.
We believe our success depends on the contributions of a number of our key personnel,
including Messrs. Scheller, Gampp and Malis and Ms. Boone, our Chief Executive Officer, Chief
Operating Officer, Chief Scientific Officer and Chief Financial Officer, respectively. If we lose
the services of key personnel, those losses could materially harm our business. We maintain key
person life insurance of Messrs. Scheller, Gampp and Malis.
If we are unable to hire, train and retain additional sales, marketing, manufacturing,
engineering and finance personnel, our growth could be impaired.
To grow our business successfully and maintain a high level of quality, we will need to
recruit, retain and motivate highly-skilled sales, marketing, engineering, manufacturing and
finance personnel. If we are not able to hire, train, and retain a sufficient number of qualified
employees, our growth may be impaired. In particular, we will need to expand our sales and
marketing organizations in order to increase market awareness of our products and to increase
revenues. In addition, as a company focused on the development of complex products, we will need to
hire additional engineering staff of various experience levels in order to meet our product
development strategy. Competition for skilled employees is intense.
We plan to expand our international sales and distribution operations, and the success of our
international expansion is subject to significant uncertainties.
We believe that we must expand our international sales and distribution operations to have
continued growth. We expect to sell an increasing portion of our products to customers overseas. In
attempting to conduct and expand business internationally, we are exposed to various risks that
could adversely affect our international operations and, consequently, our operating results,
including:
| • | difficulties and costs of staffing and managing international operations; | ||
| • | fluctuations in currency exchange rates; | ||
| • | unexpected changes in regulatory requirements, including imposition of currency exchange controls; | ||
| • | longer accounts receivable collection cycles; | ||
| • | import or export licensing requirements; | ||
| • | potentially adverse tax consequences; | ||
| • | political and economic instability; | ||
| • | obtaining regulatory approval for our products; | ||
| • | end-market and/or regional competition that may have competitive advantages; | ||
| • | potentially reduced protection for intellectual property rights; and |
| • | subjectivity of foreign laws. |
In addition, because we have suppliers that are located outside the United States, we are
subject to risks generally associated with contracting with foreign suppliers and may experience
problems in the timeliness and the adequacy or quality of product deliveries.
The market price of our stock may be highly volatile.
The market price of our common stock could fluctuate substantially due to a variety of
factors, including:
| • | our ability to successfully commercialize our products; | ||
| • | the execution of new agreements and material changes in our relationships with companies with whom we contract; | ||
| • | quarterly fluctuations in results of operations; | ||
| • | announcements regarding technological innovations or new commercial products by us or our competitors or the results of regulatory filings; | ||
| • | market reaction to trends in sales, marketing and research and development and reaction to acquisitions; | ||
| • | sales of common stock by existing shareholders; | ||
| • | economic and political condition, including worldwide geopolitical events; and | ||
| • | fluctuations in the United States financial markets. |
Synergetics USA has anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of its common stock.
Provisions of our certificate of incorporation, bylaws and Delaware law may have the effect of
deterring hostile takeovers or delaying or preventing changes in the control of our management,
including transactions in which our shareholders might otherwise receive a premium for their shares
over then current market prices. In addition, these provisions may limit the ability of our
shareholders to approve transactions that they may deem to be in their best interest. Also, our
board of directors is divided into three classes, as nearly equal in size as practicable, with
three-year staggered terms. This provision may deter a potential acquirer from engaging in a
transaction with us because it will be unable to gain control of our board of directors until at
least two annual meetings in which directors are elected by our shareholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our primary office and manufacturing operations are conducted in a 60,000 square foot building
owned by our wholly owned subsidiary Synergetics Development Company, LLC, a Missouri limited
liability company. The facility is located in O’Fallon, Missouri, approximately 25 miles west of
St. Louis, Missouri.
In addition, effective with the merger, we lease 13,500 square feet of office, assembly and
manufacturing space in King of Prussia, Pennsylvania. Through a combination sublease and lease
agreement, the term of the lease is for approximately four years.
We believe that these facilities are suitable and adequate for our operations. We believe that
we have the ability to generate additional production capacity using our existing manufacturing
facilities.
Item 3. Legal Proceedings
On February 11, 2004, Synergetics 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. Proceedings in the appeal are
on-going. Synergetics has commenced collection efforts against the Defendants.
On October 21, 2004, Synergetics filed suit in the United States District Court, Eastern
District of Pennsylvania against Hurst and McGowan’s company, Innovatech and its manufacturer,
Peregrine, for patent infringement. This suit is captioned Synergetics, Inc. v. Peregrine
Surgical, Ltd., and Innovatech Surgical, Inc., Case No. 4:04-CV-4939. The suit against Innovatech
and Peregrine arises out of the Defendants’ sale, use and manufacture of an adapter and connector
that are alleged to infringe two of Synergetics’ patents. Synergetics seeks damages and injunctive
relief in this action. In a decision on the parties’ motions for summary judgment dated April 6,
2006 the Court ruled that Defendants do not literally infringe the patent, but that trial should
proceed on the issue of whether Defendants infringe pursuant to the doctrine of equivalents. Trial
on this issue was set to begin on June 26, 2006. However, Synergetics, Innovatech and Peregrine
reached a court approved settlement agreement which was finalized on August 7, 2006. The terms of
the settlement agreement include Peregrine paying Synergetics $350,000 and Peregrine and Innovatech
agreeing to no longer use, manufacture or sell this technology. The $350,000 was paid in August
2006.
On October 19, 2005, IRIDEX filed suit in the United States District Court, Eastern District
of Missouri against the Company for patent infringement. This suit is captioned IRIDEX Corporation
v. Synergetics USA, Inc., Case No. 4:05CV1916CDP. IRIDEX filed suit against the Company for
infringement of the IRIDEX Patent No. 5,085,492 (“the ‘492 patent”) entitled “Optical Fiber with
Electrical Encoding.” IRIDEX alleges that Synergetics’ Quick Disconnect Laser Probes and adapter
infringe its patent. It seeks damages, including treble damages, and injunctive relief. On
November 30, 2005, the Company filed its answer in this lawsuit and asked the court to declare
that its products do not infringe the IRIDEX patent. In addition, the Company countersued IRIDEX
alleging that it engaged in false advertising, commercial disparagement, trade libel, injurious
falsehood and unfair competition under the Federal Lanham Act and applicable Missouri common law.
The counterclaim also includes a count of defamation. These claims primarily relate to alleged
false or misleading statements and publications by IRIDEX and its representatives with respect to
the Company’s laser adapters and laser probes. Litigation in this matter is ongoing. While we
believe that we have substantial meritorious defenses to their claims including that we do not
infringe, that there exists substantial prior art that was not considered in their initial patent
application and that six years have lapsed from their notification of infringement to their filing
of the lawsuit which could lead to any potential damages being limited by the equitable theory of
laches and estoppel, we may incur significant dedication of management resources and legal costs in
connection with this lawsuit.
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 a Defendant. This suit is captioned Synergetics, Inc. v. Peregrine Surgical, Ltd., et
al., Case No. 2:06-cv-00107. The suit
arises out of the Defendants’ sale, use and manufacture of a laser probe that is alleged to
infringe Synergetics’ patent. Synergetics seeks damages, including treble damages and injunctive
relief in this action. Innovatech, Peregrine and IRIDEX have asserted by way of affirmative
defenses or counterclaims, inter alia, that they do not infringe the patent, that the patent in
suit is invalid and that Synergetics engaged in inequitable conduct rendering the patent
unenforceable. Innovatech also counterclaimed for alleged violations of the Lanham Act, 15 U.S.C.
§1125. Moreover, Innovatech has moved to add the Company as a party to the case, and to add a
counterclaim for violation of the Sherman Act, 15 U.S.C. § 1 and § 2. Synergetics does not believe
the patent is invalid, or that it engaged in inequitable conduct or conduct that violated the
Lanham Act or Sherman Act, and intends to vigorously prosecute this litigation.
On May 26, 2006, Peregrine filed suit in the United States District Court, Eastern District of
Pennsylvania against the Company seeking a declaratory judgment of non-infringement of Patent No.
5,921,998. The suit is captioned Peregrine Surgical Ltd. v. Synergetics, Inc. and Synergetics USA,
Inc., Case No. 2:06-cv-02237-RBS. On June 19, 2006, by amendment, Peregrine added Synergetics as a
Defendant. On August 17, 2006, the Company and Synergetics moved to dismiss on the grounds that
the Court lacked jurisdiction because at the time of the complaint, there was no case or
controversy. The Court’s ruling on this motion is pending.
On July 19, 2006, Synergetics filed suit against IRIDEX in the Eastern District of Missouri
seeking a declaratory judgment that a new laser probe connector system that Synergetics makes does
not infringe the ‘492 patent. The suit is captioned Synergetics, Inc. v. IRIDEX Corp., Case No.
4:06-cv-1104-CDP. On August 15, 2006, IRIDEX answered and counterclaimed against both Synergetics
and the Company for infringement of the ‘492 patent. The Company and Synergetics have not
responded to these counterclaims, but believe that they do not infringe the ‘492 patent.
In addition, from time to time we may become subject to product liability claims that may
greatly exceed our product liability insurance limits. An adverse outcome of such litigation may
adversely impact our financial condition, results of operations or liquidity. We record a
liability when a loss is known or considered probable and the amount can be reasonably estimated.
If a loss is not probable, a liability is not recorded. As of July 31, 2006, the Company has no
litigation liability reserves recorded.
The Company is also involved in certain litigation incidental to the conduct of its business
and affairs. Management does not believe that the outcome of any such litigation will have a
material adverse effect on the financial condition, results of operation or liquidity of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended July 31, 2006, no matters were submitted to a vote of our
stockholders through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases
of Equity Securities
Prior to September 22, 2005, our common stock was listed on The Nasdaq SmallCap Market (now
known as The Nasdaq Capital Market) and the Boston Stock Exchange under the symbol “VLFG.” On September 22, 2005, Valley Forge
changed its name to Synergetics USA, Inc. and our stock began trading under the symbol “SURG.” The
Company voluntarily delisted its common stock from the Boston Stock Exchange, effective on
September 22, 2005, and our common stock is now listed on The Nasdaq Capital Market.
The table below sets forth the range of high and low sales prices per share of the Company’s
common stock as reported by The Nasdaq Stock Market for each of the quarterly periods within the
fiscal years ended July 31, 2006 and 2005. The prices disclosed from August 1, 2004 through
September 21, 2005 are those of Valley Forge, as the periods disclosed are pre-merger and
Synergetics was a privately-held company. None of the prices shown reflect retail mark-ups,
mark-downs or commissions. For current price information, you are urged to consult publicly
available sources.
| High | Low | |||||||
Year ended July 31, 2005 |
||||||||
Quarter ended October 31, 2004
|
$ | 2.05 | $ | 1.35 | ||||
Quarter ended January 31, 2005
|
2.10 | 1.40 | ||||||
Quarter ended April 30, 2005
|
1.90 | 1.32 | ||||||
Quarter ended July 31, 2005
|
5.79 | 1.86 | ||||||
Year ended July 31, 2006 |
||||||||
Period ended September 21, 2005
|
$ | 6.70 | $ | 4.05 | ||||
Period ended October 27, 2005
|
5.75 | 3.51 | ||||||
Quarter ended January 30, 2006
|
6.24 | 3.18 | ||||||
Quarter ended April 30, 2006
|
8.78 | 5.10 | ||||||
Quarter ended July 31, 2006
|
8.30 | 4.10 | ||||||
The number of shareholders of record of Synergetics USA as of October 13, 2006 was 168.
Valley Forge had not paid any dividends through the date of the merger. Synergetics has not
paid a dividend to holders of its common stock since 1996. We currently intend to retain earnings
to finance growth and development of our business and do not anticipate paying cash dividends in
the near future.
Recent Sales of Unregistered Securities
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 6. Selected Financial Data
The
selected financial data set forth below should be read in conjunction
with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. The
statements of income data for the years ended July 31, 2006, 2005 and 2004 and the balance sheets
data as of July 31, 2006 and 2005 have been derived from audited consolidated financial statements
of the Company included elsewhere in this report. The merger of Synergetics and Valley Forge
was accounted for as a reverse merger, and as such, the Company is reporting the financial
results of Synergetics as the accounting acquirer in the merger. The consolidated statements of
income for the years ended July 31, 2003 and 2002 and the balance sheets data as of July 31, 2004,
2003 and 2002 have been derived from audited consolidated financial statements that are not
included in this report. The historical results are not necessarily indicative of the results of
operations to be expected in the future.
| For the Fiscal Years Ended July 31, | ||||||||||||||||||||
| 2006 | 2005* | 2004* | 2003* | 2002* | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
Statements of Income Data: |
||||||||||||||||||||
Net sales |
$ | 38,246 | $ | 21,792 | $ | 16,887 | $ | 13,017 | $ | 10,447 | ||||||||||
Cost of Sales |
14,238 | 8,289 | 6,514 | 4,483 | 3,609 | |||||||||||||||
Gross profit |
24,008 | 13,503 | 10,373 | 8,534 | 6,838 | |||||||||||||||
Income from operations |
5,002 | 2,383 | 1,690 | 1,866 | 1,572 | |||||||||||||||
Net income |
3,081 | 1,458 | 1,094 | 1,091 | 1,004 | |||||||||||||||
Earnings per common share Basic |
$ | 0.15 | ** | $ | 0.43 | $ | 0.32 | $ | 0.32 | $ | 0.31 | |||||||||
Diluted |
$ | 0.15 | ** | $ | 0.42 | $ | 0.32 | $ | 0.32 | $ | 0.31 | |||||||||
| * | This tabular information reflects Synergetics’ results only and does not reflect the effect of the combination of Synergetics and Valley Forge. | |
| ** | The fiscal years 2005, 2004, 2003 and 2002 have not been adjusted to reflect the 4.59 shares received by the private company shareholders at the time of the reverse merger between Valley Forge and Synergetics forming Synergetics USA, Inc. |
| For the Fiscal Years Ended July 31, | ||||||||||||||||||||
| 2006 | 2005* | 2004* | 2003* | 2002* | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Balance Sheets Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 557 | $ | 1,817 | $ | 1,540 | $ | 1,049 | $ | 943 | ||||||||||
Current assets |
21,908 | 12,757 | 9,563 | 7,709 | 5,920 | |||||||||||||||
Total assets |
51,643 | 20,116 | 14,474 | 12,254 | 7,724 | |||||||||||||||
Current liabilities |
9,310 | 3,969 | 2,862 | 1,687 | 1,396 | |||||||||||||||
Long-term liabilities |
10,028 | 6,008 | 3,113 | 3,251 | 254 | |||||||||||||||
Retained earnings |
8,483 | 5,402 | 3,944 | 2,851 | 1,760 | |||||||||||||||
Stockholders’ equity |
32,305 | 10,139 | 8,499 | 7,316 | 6,074 | |||||||||||||||
| * | This tabular information reflects Synergetics’ results only and does not reflect the effect of the combination of Synergetics and Valley Forge. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following “Management’s Discussion and Analysis of Financial Condition and Results of
Operation,” commonly referred to as MD&A, is intended to help the reader understand Synergetics
USA, its operations and its business environment. MD&A is provided as a supplement to, and should
be read in conjunction with, our consolidated financial statements and accompanying notes. This
overview summarizes the MD&A, which includes the following sections:
| • | Our Business — a general description of the key drivers that affect our business and the industries in which we operate. | ||
| • | Our Business Strategy — a description of the strategic initiatives on which we focus and the goals we seek to achieve. | ||
| • | Results of Operations — an analysis of our Company’s results of operations for the three years presented in our financial statements. | ||
| • | Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, currency exchange and an overview of our financial position. | ||
| • | Contractual Obligations — an analysis of contracts entered into in the normal course of business that will require future payments. | ||
| • | Use of Estimates and Critical Accounting Policies — a description of critical accounting policies including those that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. |
Our Business
The Company designs, manufacturers and markets medical devices for use in ophthalmic and
vitreoretinal surgery and neurosurgery. Its products are designed and manufactured to support micro
or minimally invasive surgical procedures. In addition to such surgical devices and equipment, we
also design and manufacture disposable and non-disposable supplies and accessories for use with
such devices and equipment. For a more detailed description, see “Item 1. Business — Overview.” We
sell our products primarily to hospitals, clinics and surgeons in approximately 70 countries. Sales
outside the United States are primarily through local distributors. As used in this discussion, the
Company or Synergetics USA means the Company and its subsidiaries.
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 surgery and neurosurgery markets. New
products, which management defines as products available for sale within the prior 24-month period,
accounted for approximately 12% of total sales for the Company for fiscal 2006, approximately $4.6
million. For fiscal 2005, new products accounted for approximately 14% of total sales for the
Company, or just over $3.1 million. This growth was primarily in our capital equipment products
both in the ophthalmic and neurosurgery markets. Synergetics’ past revenue growth has been closely
aligned with the adoption by surgeons of new technologies introduced by Synergetics. Since August
1, 2006, Synergetics has introduced 65 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 is surgery performed without making a major incision or opening.
Minimally invasive surgery generally results in less trauma for the patient, 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-million dollar
market for the specialized devices used in the procedures. 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, such as its 23 and 25 gauge instrumentation and
PhotonTM II gas-arc light source for the ophthalmic surgical market and our new
electrosurgical generator, the Malis® AdvantageTM.
Demand Trends
Volume and mix improvements contributed to the majority of sales growth for the Company during
the fiscal years ended July 31, 2006, 2005 and 2004. Ophthalmic and neurosurgical procedures volume
on a global basis continues to rise at an estimated 5% 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 and neurosurgery market.
Pricing Trends
Through its strategy of delivering new and higher quality technologies, the Company has been
generally able to maintain the average selling prices for its products in the face of downward
pressure in the healthcare industry.
Competition in the medical device markets and governmental healthcare cost containment
efforts, particularly in the United States, have negatively impacted the prices medical device
manufacturers received for their products. The Company should be less impacted by this negative
pressure than other manufacturers in the industry because its products are primarily used for
non-discretionary, life or eyesight threatening procedures.
Our Business Strategy
Our goal is to become a global leader in the development, manufacture and marketing of
precision-engineered, microsurgical instruments, capital equipment and devices for use in
vitreoretinal surgery and neurosurgical applications and to grow our product lines in other
specialty surgical markets. Our recent combination of the businesses of Valley Forge and
Synergetics is a significant component of our strategy toward achieving these goals. Our strategy
includes:
| • | Introducing new technology that can be easily differentiated 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 (ear, nose and throat), spine surgery, plastic surgery and other forms of microsurgery; | ||
| • | Accelerating our international (including Canada) 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 in our research and development department to deliver precision-engineered capital equipment, instruments and disposables based on our own proprietary technologies and innovations; |
| • | Branding and marketing a substantial portion of our neurosurgical products with the Malis® trademark; | ||
| • | Continuing to develop our distribution channels by hiring direct territory managers and independent sales agents 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 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 repair costs and minimize patient-to-patient disease transfer; | ||
| • | Introducing the Malis® AdvantageTM with our new proprietary single-use, hand-switching bipolar instruments with enhanced features and functionality to expand the array of procedures they are designed to perform; | ||
| • | Expanding the use of the Malis® AdvantageTM into other surgical 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 Sonopet Omni®, our ultrasonic aspirator, into other surgical markets as its torsional bone cutting capability allows the surgeon to perform delicate procedures safely; and | ||
| • | Exploring opportunities for growth through strategic partnering with other companies with complimentary products and technologies to facilitate strategic growth in our defined niche markets, such as our current relationships with Codman, Stryker and Quantel. |
Results of Operations
The merger of Synergetics and Valley Forge was accounted for as a reverse merger, and as such,
the Company is reporting the financial results of Synergetics as the accounting acquirer in the
merger, together with the financial results of Valley Forge for the period September 22, 2005
through July 31, 2006. As a result, management’s discussion and analysis of financial condition
and results of operations for the periods set forth below reflects the effect of the combination of
Synergetics and Valley Forge, which was consummated on September 21, 2005. Also, in conjunction
with the merger, we started to operate in two distinct business segments based on the types of
products sold. The Synergetics segment includes our ophthalmic and neurosurgical instruments and
Omni® ultrasonic aspirators. The Valley Forge segment is comprised of our bipolar
electrosurgical generators.
Year-Ended July 31, 2006 Compared to Year-Ended July 31, 2005
Net Sales
The following table presents net sales by medical field (dollars in thousands):
| Year Ended July 31, | ||||||||||||
| 2006* | 2005* | % Increase | ||||||||||
Synergetics: |
||||||||||||
Ophthalmic |
$ | 22,730 | $ | 17,752 | 28.0 | % | ||||||
Neurosurgery |
8,014 | 4,040 | 98.4 | |||||||||
Valley Forge, Neurosurgery |
7,502 | — | N/M | |||||||||
TOTAL |
$ | 38,246 | $ | 21,792 | 75.5 | % | ||||||
| * | For 2005, this tabular information reflects Synergetics’ results only and does not reflect the
effect of the combination of Synergetics and Valley Forge. For 2006, this tabular information
reflects the net sales of Valley Forge from September 22, 2005 through July 31, 2006. Valley
Forge’s sales for the twelve months ended June 30, 2005 were approximately $6.1 million. The
percentage increase over the pro forma numbers would have been 37.2%. N/M – Not meaningful. |
Ophthalmic sales growth was led by continued growth in sales of products in Synergetics’ core
technology areas of instruments and illumination. When comparing neurosurgery, net sales of
Synergetics during the fiscal year ended 2006 were 98.4% greater than 2005 sales, primarily
attributable to the sales in the core technology area of power ultrasonic aspirators and related
disposables. We expect that
PhotonTM
II, the VitraTM
and Omni® sales will continue to
have a positive impact on net sales in fiscal 2007. In addition, we anticipate that the positive
effects of the
Malis®
AdvantageTM
will begin to impact our revenues meaningfully during the second fiscal
quarter of 2007.
The following table presents national and international net sales (dollars in thousands):
| Year Ended July 31, | ||||||||||||
| 2006* | 2005* | % Increase | ||||||||||
United
States — Synergetics |
$ | 22,588 | $ | 16,384 | 37.9 | % | ||||||
United
States — Valley Forge |
7,502 | — | N/M | |||||||||
International (including Canada) |
8,156 | 5,408 | 50.8 | |||||||||
TOTAL |
$ | 38,246 | $ | 21,792 | 75.5 | % | ||||||
| * | For 2005, this tabular information reflects Synergetics’ results only and does not reflect the
effect of the combination of Synergetics and Valley Forge. For 2006, this tabular information
reflects the net sales of Valley Forge from September 22, 2005 through July 31, 2006. Valley
Forge’s sales for the twelve months ended June 30, 2005 were approximately $6.1 million. The
percentage increase over the pro forma numbers would have been 37.2%. N/M – Not meaningful. |
International sales growth was primarily attributable to the sales in core technology areas of
illumination and power ultrasonic aspirators and related disposables. The Omni® power
ultrasonic aspirator received the CE mark during the third quarter of this fiscal year thus
allowing the Company to begin selling these medical devices internationally. In addition, we
anticipate that the positive effects of the Malis® AdvantageTM and the
addition of its CE mark will be fully reflected in operations during the second fiscal quarter of
2007. During fiscal 2006, the
Company added 29 distributors covering 36 countries to its international neurosurgery sales
force due to the addition of the Omni® and the anticipated release of the
Malis® Advantage TM.
Gross Profit
Gross profit as a percentage of net sales was 62.8% in fiscal 2006 compared to 62.0% in 2005.
The growth in gross profit as a percentage of net sales from 2005 to 2006 was attributable
primarily to the royalty payments received from Codman for the use of the Malis®
tradename offset by an additional $322,000 charge to the
Company’s earnings. During fiscal 2006, the Company completed a review of all of its
purchased inventory and a substantial portion of its manufactured
products in response to a material weakness identified in the prior
year. The Company also
completed a review of the complete inventory process as part of its
compliance with the provisions of Sarbanes-Oxley and identified
another weakness. The Company has updated its inventory system and
implemented additional controls including monitoring processes and procedures to correct both weaknesses. The Company has analyzed the additional amount
charged to earnings during the fourth quarter and has determined that
the impact of the charge was not
material to prior year nor to any individual quarter of fiscal 2006.
However, Note 18 to the Audited Financial Statements describes
the impact to the individual quarters.
Operating Expenses
Research and development (“R&D”) as a percentage of net sales was 4.3% and 3.9% for the fiscal
years ended July 31, 2006 and 2005, respectively. R&D costs increased to $1,655,122 in 2006 from
$857,798 in 2005, reflecting not only an increase in spending on active projects focused on areas
of strategic significance such as the Malis® AdvantageTM and the
PhotonTM II, but also $630,510 in R&D for the former Valley Forge. The Company’s
product development pipeline included over 35 active, major projects in various stages of completion at July 31, 2006.
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 4.0% to 6.0% of net sales.
Selling, general and administrative expenses (“SG&A”) increased by $7,089,622 during the
fiscal year ended July 31, 2006 and as a percentage of net sales was 45.4% for the fiscal year
ended July 31, 2006 as compared to 47.1% for the fiscal year ended July 31, 2005. Selling expenses,
which consist of salaries and commissions, the largest component of SG&A, increased approximately
$2.5 million to $9.5 million, or 25.0% of sales, for the fiscal year ended July 31, 2006, compared
to $7.0 million, or 32.3% of sales for the fiscal year ended July 31, 2005. However, selling
expenses as a percentage of net sales decreased from 32.3% of sales for fiscal 2005 to 25.0% of
sales for fiscal 2006. This percentage decrease was due to the fact
that sales from the former Valley Forge require essentially no sales
people because of the OEM nature of its product line.
The increase in SG&A was also impacted by the inclusion of approximately $2.9 million of SG&A
for the former Valley Forge. General and administrative headcount increased by approximately 39.5%
from July 31, 2005, which resulted in an increase in other costs of approximately $1.4 million in
fiscal 2006, as compared to fiscal 2005. Legal fees increased by
$672,000. In addition to the
internal costs associated with the Company’s Sarbanes-Oxley compliance efforts, the Company also
recorded approximately $403,000 in external audit and consulting expense. The costs of the
Company’s Sarbanes-Oxley efforts will continue to be expensed through the remainder of the first
quarter of fiscal 2007.
Also, during fiscal 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123 (R), “Share-Based Payment” (“SFAS 123(R)”) which requires compensation expense to
be recognized in the financial statements. The Company had previously followed Accounting
Principles Board Opinion No. 25, “Accounting for Certain Transaction Involving Stock Compensation”
(“APB No. 25”) and related interpretation in accounting for its employee stock options. Under APB
No. 25, no compensation expense was recognized, if the exercise price of the Company’s employee
stock options equaled or exceeded the market price of the underlying stock on the date of the
grant. The impact of SFAS 123(R) was approximately $117,000. Stock-based compensation cost is
measured at the grant date, based on the fair value of the award calculated using the Black-Scholes
option pricing model and is recognized over the directors’ and employees’ requisite service period.
The Company will continue to grant options to its independent directors but has begun to use
restricted stock to provide incentive compensation for its employees. As of July 31, 2006, the
future compensation cost expected to be recognized under SFAS 123(R) is approximately $10,000 in
2007, $9,000 in 2008, $8,000 in 2009 and $8,000 in 2010. However, the major portion of our
compensation cost arises from our stock option grants to our directors which is recognized when the
options are granted as they are immediately exercisable. These options will be granted to the
directors who are elected or re-elected after the Annual Meeting.
Other Expense
Other expense for the 2006 fiscal year increased 169.8% to $500,622 from $185,561 for the
fiscal year ended July 31, 2005. The increase was due primarily to increased interest expense on
the note payable to the estate of Dr. Malis and increased borrowings on the working capital line
due to working capital needs during the fiscal year. The increased interest expense was partially
offset by the $350,000 settlement agreement with Peregrine. The $350,000 settlement exceeded the
legal costs associated with the trial by approximately $70,000. This net difference has been
recorded in other miscellaneous income.
Operating Income, Income Taxes and Net Income
Operating income for the fiscal year ended July 31, 2006 increased 109.9% to $5.00 million
from $2.38 million in the comparable 2005 period. The increase in operating income was primarily
the result of a 0.8 percentage point increase in gross profit margin on a 75.5% increase in sales partially offset
by increases in R&D, SG&A expenditures and other expense.
The Company’s effective tax rate was 31.5% for the fiscal year ended July 31, 2006 as compared
to 33.7% for the fiscal year ended July 31, 2005. The decrease for the fiscal year ended July 31,
2006 was due primarily to the new domestic manufacturing deduction and lower state taxes as a portion
of the Company’s income is earned in Delaware where there are no state taxes for the type of income
generated there.
Net income increased to $3.08 million from $1.46 million for the fiscal year ended July 31,
2006, as compared to the same 2005 period. The growth in net income was due primarily to an
increase of 0.8 percentage point in gross profit margin on a 75.5% increase in sales, partially offset by increases
in R&D, SG&A expenditures and other expense as described above. Basic and diluted earnings per
share for the fiscal year ended July 31, 2006 decreased to $0.15, as compared to $0.43 and $0.42,
respectively, for the fiscal year ended July 31, 2005. The decrease in earnings per share was the
result of issuing 15,960,648 shares in the merger of Synergetics and Valley Forge. These shares
were counted as outstanding for 313 days during the fiscal year ended July 31, 2006. Therefore,
basic weighted average shares outstanding increased from 3,424,030 to
20,657,255.
Segment Reporting
In conjunction with the reverse merger, the Company now operates in two business segments –
the Synergetics segment and the Valley Forge segment. The Synergetics segment includes revenue and
operating expenses associated with the sales of ophthalmic and neurosurgical instruments and
Omni® ultrasonic aspirators. The Valley Forge segment includes revenue and operating
expenses associated with the sales of bipolar electrosurgical generators. The financial results of
Valley Forge have been included from September 22, 2005.
The Synergetics segment generated net sales of $30.7 million, an increase of $9.0 million or
41.1%. Net sales growth was led by sales of products in Synergetics’ core technology areas of
instruments, illumination and power ultrasonic aspirators including the related disposables.
Operating income for the segment increased from $2.4 million to $2.8 million. The increase in
operating income was primarily the result of $9.0 million in additional sales offset by a 2.4%
lower gross profit margin and approximately $166,000 in additional R&D and $4.2 million in
additional SG&A. The Valley Forge segment generated $7.5 million in net sales and operating income
of $2.2 million. Valley Forge’s two significant customers
are Codman who represents 66.9% of net
sales and Stryker who represents 25.7% of net sales.
Year-Ended July 31, 2005 Compared to Year-Ended July 31, 2004
Net Sales
The following table presents net sales by medical field (dollars in thousands):
| Year Ended July 31,* | ||||||||||||
| 2005 | 2004 | % Increase | ||||||||||
Ophthalmic |
$ | 17,752 | $ | 14,061 | 26.2 | % | ||||||
Neurosurgery |
4,040 | 2,826 | 43.0 | |||||||||
TOTAL |
$ | 21,792 | $ | 16,887 | 29.0 | % | ||||||
| * | This tabular information reflects Synergetics’ results only and does not reflect the effect of the combination of Synergetics and Valley Forge. |
Ophthalmic sales growth was led by continued growth in sales of Synergetics’
PhotonTM xenon light source product and related disposables. Neurosurgery sales growth
was led by continued growth in sales of Synergetics’ Omni® ultrasonic aspirators and
related disposables. We expect that PhotonTM and Omni® sales will continue to
have a positive impact on net sales in fiscal 2006.
The following table presents national and international net sales (dollars in thousands):
| Year Ended July 31,* | ||||||||||||
| 2005 | 2004 | % Increase | ||||||||||
United States |
$ | 16,384 | $ | 13,462 | 21.7 | % | ||||||
International (including Canada) |
5,408 | 3,425 | 57.9 | |||||||||
TOTAL |
$ | 21,792 | $ | 16,887 | 29.0 | % | ||||||
| * | This tabular information reflects Synergetics’ results only and does not reflect the effect of the combination of Synergetics and Valley Forge. |
Growth in the United States was led by growth in sales of Synergetics’ PhotonTM
xenon light source product and our Omni® ultrasonic aspirators and related disposables.
International sales growth was led by sales of our PhotonTM and our disposable products.
Gross Profit
Gross profit as a percentage of net sales was 62.0% in fiscal 2005 compared to 61.4% in 2004.
The growth in gross profit as a percentage of net sales from 2004 to 2005 was attributable
primarily to growth in sales of higher margin products and improved purchasing of raw materials
used in Synergetics’ manufacturing operations.
Operating Expenses
R&D as a percentage of net sales was 3.9% and 4.7% for the fiscal years ended July 31, 2005
and 2004, respectively. R&D costs increased to $857,798 in 2005 from $796,916 in 2004, reflecting
increased spending on active projects focused on areas of strategic significance. Synergetics’
pipeline included over 50 active projects at July 31, 2005. 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 4.0% to 6.0% of net sales.
SG&A increased by $2,375,613 during the fiscal year ended July 31, 2005 and as a percentage of
net sales was 47.1% for the fiscal year ended July 31, 2005, compared to 46.7% for the fiscal year
ended July 31, 2004. Selling expenses, which consist of salaries and commissions, the largest
component of SG&A, increased approximately $900,000 to $7.0 million, or 32.3% of sales, for the
fiscal year ended July 31, 2005, compared to $5.8 million, or 34.4% of sales, for the fiscal year
ended July 31, 2004. In addition, general and administrative headcount increased by approximately
50%, and executive compensation increased by approximately $344,000. Legal fees increased by
$702,000 and other costs increased by approximately $450,000 in the fiscal year ended July 31,
2005, as compared to the fiscal year ended July 31, 2004. The Company expects to realize synergies
from the Valley Forge/Synergetics transaction over the next twenty-four months, which may initially
be offset by ongoing expenses related to the integration of the two companies.
Other Expense
Other expenses for the 2005 fiscal year increased 5.3% to $185,561 from $176,153 for the
fiscal year ended July 31, 2004. The increase was due primarily to increased interest expense.
Operating Income, Income Taxes and Net Income
Operating income for the fiscal year ended July 31, 2005 increased 41.0% to $2.38 million from
$1.69 million in the comparable 2004 period. The increase in operating income was primarily the
result of a 0.6% increase in gross profit margin on a 29.0% increase in sales partially offset by
increases in R&D and SG&A expenditures.
The Company’s effective tax rate was 33.7% for the fiscal year ended July 31, 2005 as compared
to 27.8% for the fiscal year ended July 31, 2004. The increase was due primarily to higher state
taxes for the fiscal year ended July 31, 2005 and a larger research and experimentation credit
exclusion utilized during the fiscal year ended July 31, 2004.
Net income increased to $1.46 million from $1.09 million for the fiscal year ended July 31,
2005, as compared to the same 2004 period. The growth in net income was due primarily to an
increase of 0.6% in gross profit margin on a 29.0% increase in sales, partially offset by increases
in R&D and SG&A expenditures as described above. Basic
and diluted earnings per share for the fiscal year ended July 31, 2005 increased to $0.43 and
$0.42, respectively, as compared to $0.32 for the fiscal year ended July 31, 2004.
Liquidity and Capital Resources
The Company had $557,114 in cash and cash equivalents and total interest-bearing debt of
$11.90 million as of July 31, 2006.
Working capital, including the management of inventory and accounts receivable, is a key
management focus. At July 31, 2006, the Company had 58 days of sales outstanding (“DSO”) for the
three month period ending July 31, 2006 (annualized) in accounts receivable. The Company utilized
the three month period to calculate DSO as it not only included a full reporting period of sales
from Synergetics and Valley Forge, it also included the current growth in sales. The DSO at July
31, 2006 was unfavorable to July 31, 2005 by two days and comparable to July 31, 2004. The increase
in DSO from 2005 is primarily the result of an increase in international sales in the fourth
fiscal quarter of 2006.
At July 31, 2006, the Company had 263 days of inventory on hand for the three month period
ending July 31, 2006 (annualized). The Company utilized the three month period to calculate
inventory on hand as it not only included a full reporting period of cost of goods sold from
Synergetics and Valley Forge, it also included the current growth in cost of goods sold. The
inventory on hand was favorable to July 31, 2005 by 54 days and favorable by 7 days to July 31,
2004. The 263 days of inventory on hand at July 31, 2006 is comparable to the Company’s anticipated
levels of 250 to 275 days. Management believes that meeting customer expectations regarding
delivery times is important to its overall growth strategy.
Cash flows used in operating activities were $2.16 million for the year ended July 31, 2006
compared to cash used in operating activities of $0.06 million for the comparable 2005 period. The
increase in cash used of $2.10 million was attributable primarily to usage increases applicable to
accounts receivable of $2.01 million, inventories of approximately $2.75 million and other working
capital and other adjustments of approximately $0.68 million. Inventories build-up was to support
sales growth. Such usage increases were offset by cash provided by greater net income of
approximately $1.62 million and an increase in accounts payable and accrued expenses of $1.72
million.
Cash
flows used in investing activities were $1.77 million for the fiscal year ended July 31,
2006 compared to $2.41 million for the comparable 2005 period. During the fiscal year ended July
31, 2006, the Company paid $264,609 in cash for the acquisition of patents, compared to $195,215
for the fiscal year ended July 31, 2005. Cash additions to property and equipment during the fiscal
year ended July 31, 2006 were $3.04 million compared to $1.80 million for the fiscal year ended
July 31, 2005. Increases were primarily to support sales growth, new product launches and the
facility expansion at the Company’s manufacturing facility in O’Fallon, Missouri. Cash acquired
through the reverse merger was approximately $2.02 million. In addition, the Company paid
acquisition costs in connection with a reverse merger of $0.50 million for the fiscal year ended
July 31, 2006 compared to $0.39 million for the fiscal year
ended July 31, 2005. Other net sources of
cash in investing activities was $9,811.
Cash
flows provided by financing activities were $2.67 million for the fiscal year ended July
31, 2006 compared to $2.75 million for the fiscal year ended July 31, 2005. The decrease of $0.13
million was applicable primarily to increased borrowings on the lines-of credit of $2.51 million
and net proceeds of long-term debt of $1.43 million offset by the down payment and quarterly
principal payments of $0.50 million on the note payable to the estate of the late Dr. Leonard I
Malis for the acquisition of the Malis® trademark and regularly scheduled payments to
$0.25 million on the revenue bonds payable and $1.16 million on the long-term debt. The decrease
was partially offset by proceeds from stock option exercises of $0.41 million and $0.22 million in
tax benefits associated with the exercise of non-qualified stock options.
The Company had the following committed financing arrangements as of July 31, 2006:
| • | Revolving Credit Facility: Under this credit facility, the Company could borrow up to $5.5 million with interest at an interest rate of LIBOR plus 2.25% and adjusting each quarter based upon our leverage ratio. Currently, interest under the facility is charged at LIBOR plus 2.00%. Borrowings under this facility at July 31, 2006 were $2,641,042. Outstanding amounts are collateralized by the Company’s receivables and inventory. This credit facility expires December 1, 2007. The facility has two financial covenants: a maximum leverage ratio of 3.75 times and a minimum fixed charge coverage ratio of 1.1 times. As of July 31, 2006, the leverage ratio was 1.73 times and the fixed charge coverage ratio was 2.58 times. Availability under the line was approximately $2.8 million. | ||
| • | 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 $689,003 on July 31, 2006. Outstanding amounts were secured by the purchased equipment. The equipment line of credit facility of $1.0 million expires on October 31, 2006 and has availability of $310,957. |
Management believes that cash flows from operations, together with available borrowing under
its existing credit facilities will be sufficient to meet the Company’s working capital, capital
expenditure and debt service needs. If investment opportunities arise, the Company believes that
its earnings, balance sheet and cash flows will allow it to obtain additional capital, if
necessary.
Contractual Obligations
The Company has entered into contracts with various third parties in the normal course of
business that will require future payments. The following illustrates the Company’s contractual
obligations as of July 31, 2006:
| Payments due by Period | ||||||||||||||||||||
| Less than | More than | |||||||||||||||||||
| Contractual Obligations | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Revolving Line of Credit (1) |
$ | 2,900,217 | $ | 194,381 | $ | 2,705,836 | $ | — | $ | — | ||||||||||
Equipment Line of Credit (2) |
703,214 | 703,214 | — | — | — | |||||||||||||||
Consolidated Equipment Term Loan (3) |
1,102,766 | 529,210 | 573,556 | — | — | |||||||||||||||
Revenue Bonds Payable (4) |
5,204,593 | 467,867 | 897,311 | 669,491 | 3,169,924 | |||||||||||||||
Building Term Loan (5) |
186,789 | 28,311 | 158,478 | — | — | |||||||||||||||
Malis® Tradename Note Payable (6) |
3,517,888 | 639,616 | 1,279,232 | 1,279,232 | 319,808 | |||||||||||||||
Operating Leases (7) |
569,784 | 171,568 | 330,121 | 68,095 | — | |||||||||||||||
Other Long-Term Liabilities (8) |
9,998 | 9,998 | — | — | — | |||||||||||||||
Total Contractual Obligations |
$ | 14,195,249 | $ | 2,744,165 | $ | 5,944,534 | $ | 2,016,818 | $ | 3,489,732 | ||||||||||
| (1) | Amount represents the expected cash payment of the outstanding borrowings of $2,641,042 on our $5.5 million revolving credit facility, including interest at 7.36% through the expiration of the revolving credit facility on December 1, 2007. | |
| (2) | Amount represents the expected cash payment for our $1.0 million revolving equipment line of credit, including interest at 8.25% through the expiration of the equipment line of credit on October 31, 2006. | |
| (3) | Amount represents the cash payment for our consolidated equipment term loan entered into in October 2005, |
| including interest at 6.75%. | ||
| (4) | Amount represents the expected cash payments for our revenue bonds payable, including interest at the established fixed rates through September 1, 2009 and December 1, 2011. | |
| (5) | Amount represents the expected cash payment for our building term loan, including interest at 9.25% through September 2007. | |
| (6) | Amount represents the expected cash payment on the note payable to the estate of the late Dr. Leonard I. Malis. The note includes interest at an imputed rate of 6.0%. | |
| (7) | We enter into operating leases in the normal course of business. Some lease agreements provide us with the option to renew the lease. Our future cash payment would change if we exercised these renewal options or if we entered into additional operating lease agreements. | |
| (8) | Other long-term liabilities represent the expected cash payment on other deferred liabilities. As deferred taxes have not been determined beyond 2006, this amount is excluded from this table. |
Use of Estimates and Critical Accounting Policies
The financial results of the Company are affected by the selection and application of
accounting policies and methods. Significant accounting polices which require management’s judgment
are discussed below.
Principles
of Consolidation
The consolidated financial statements include the accounts of Synergetics USA and its wholly
owned subsidiaries Synergetics, Synergetics IP, Inc. and Synergetics Development Company, LLC. All
significant intercompany accounts have been eliminated.
Revenue Recognition
The Company records revenue from product sales when the revenue is realized and the product is
shipped from its facilities. This includes satisfying the following criteria: the arrangement with
the customer is evident, usually through receipt of a purchase order; the sales price is fixed and
determinable; delivery to the carrier has occurred; and collectibility is reasonably ensured.
Freight and shipping billed to customers is included in net sales and the cost of shipping is
included in cost of sales.
Service revenue substantially relates to repairs of products and is recognized when the
service has been completed. Revenue from license and royalty fees are recorded when earned.
Inventories
Inventories, consisting of purchased materials, direct labor and manufacturing overhead, are
stated at the lower of cost, with cost being determined using the first-in, first-out (“FIFO”)
method, or market. The Company’s inventory is very dynamic and new products are added frequently.
Thus, the Company reviews the valuation of its inventory on a quarterly basis and determines if a
valuation allowance is necessary for items that have not been valued or for items that have not had
their values updated recently. In addition, the Company evaluates inventories for excess
quantities and identified obsolescence quarterly. Its evaluation includes an analysis of historical
sales
levels by product and projections of future demand, as well as estimates of quantities
required to support warranty and other repairs. To the extent that it determines there are some
excess quantities based on its projected levels of sales and other requirements, or obsolete
material in inventory, it records valuation reserves against all or a portion of the value of the
related parts or products. If future cost valuations, future demand or market conditions are
different from the Company’s projections, a change in recorded inventory valuation reserves may be
required and would be reflected in cost of sales in the period the revision is made.
Loss Contingencies
The Company is subject to claims and lawsuits in the ordinary course of its business,
including claims by employees or former employees, with respect to its products and involving
commercial disputes. The Company’s financial statements do not reflect any material amounts related
to possible unfavorable outcomes of claims and lawsuits to which it is currently a party because
management currently believes that such claims and lawsuits are either adequately covered by
insurance or otherwise indemnified, and are not expected, individually or in the aggregate, to
result in a material adverse effect on the Company’s financial condition. However, it is possible
that the Company’s results of operations, financial position and cash flows in a particular period
could be materially affected by these contingencies if management changes its assessment of the
likely outcome of these matters.
Amortization Periods
The Company records amortization of intangible assets using the straight-line method over the
estimated useful lives of these assets. It bases the determination of these useful lives on the
period over which it expects the related assets to contribute to its cash flows or in the case of
patents, their legal life, whichever is shorter. If the Company’s assessment of the useful lives of
intangible assets changes, it may change future amortization expense (see Impairment of Long-Lived
Assets).
Allowance for Doubtful Accounts
The Company evaluates the collectibility of accounts receivable based on a combination of
factors. In circumstances where a specific customer is unable to meet its financial obligations to
the Company, the Company records an allowance against amounts due to reduce the net recognized
receivable to the amount that management reasonably expects to collect. For all other customers,
the Company records allowances for doubtful accounts based on the length of time the receivables
are past due, the current business environment and its historical experience. If the financial
condition of customers or the length of time that receivables are past due were to change, the
Company may change the recorded amount of allowances for doubtful accounts in the future.
Patents and Research and Development
Incremental legal and other costs to obtain the patent are capitalized to a patent asset.
Salaries, benefits and other direct costs of product development are expensed as operating expenses
in research and development costs. Patents are amortized to operations under the straight-line
method over the remaining statutory life of the patent.
Goodwill and Other Intangibles
Absent any impairment indicators, goodwill is tested for impairment on an annual basis. The
Company will perform its impairment tests at the beginning of the fourth fiscal quarter.
Management analyzed the valuation of our recent acquisition by utilizing current business
operations and a market multiple method. Based on this analysis, we believe the enterprise value of
our acquisition continues to be greater than our investment. As a result, we have determined that
no impairment of our goodwill has occurred. While the annual impairment tests did not indicate
goodwill impairment, we would be subject to future impairment if the operating results and cash
flows of our recent acquisition would not support the fair value of the reporting unit’s net assets
including goodwill.
Intangibles assets, consisting of patents, licensing agreements and proprietary know-how are
amortized to operations under the straight-line method over their estimated useful lives or
statutory lives whichever is shorter. These periods range from two to ten years. The life of a
trademark is inextricably related to the life of the product bearing the mark or the life of the
business entity owning the trademark. The Company intends to use the trademark indefinitely, and
therefore, its useful life is not limited to any specific product. The trademark constitutes an
indefinite-lived intangible that will be used in perpetuity.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of
such asset may not be recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the group of assets and their eventual
disposition. Measurement of an impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold and use is based on the fair value of the asset.
Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell.
Deferred Tax Assets and Liabilities
The Company’s deferred tax assets and liabilities are determined based on differences between
the financial statement and tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when a determination is made that it is more likely than not that a portion or
all of the deferred tax assets will not be realized.
Stock-Based Compensation
As of August 1, 2005, SFAS 123(R) became effective for the Company. The Company had
previously followed APB No. 25 and related interpretations in accounting for its employee stock
options. Under APB No. 25, no compensation expense was recognized if the exercise price of the
Company’s employee stock options equaled or exceeded the market price of the underlying stock on
the date of the grant. Under SFAS 123(R), compensation expense is now recognized. Stock-based
compensation cost is measured at the grant date, based on the fair value of the award and is
recognized over the directors’ and employees’ requisite service period. Compensation expense is
calculated using the Black-Scholes option pricing model. Of the inputs into the Black-Scholes
option pricing model, the one that can impact the value of the options the most is the volatility
factor. The Company has utilized 79.7% in this calculation. The Company has elected to use the
modified prospective transition method. Under the modified prospective transition method, an
entity uses the fair value based accounting method for all employee awards granted, modified or
settled after the effective date. As of the effective date, compensation costs related to the
nonvested portion of awards outstanding as of that date are based on the grant date fair value of
those awards as calculated under the original provisions of SFAS No. 123 “Accounting for
Stock-Based Compensation”; that is, an entity would not remeasure the grant date fair value
estimate of the unvested portion of awards granted prior to the effective date of SFAS 123(R).
Recent Accounting Pronouncements
Information about recent accounting pronouncements is included in Note 19 to the Audited
Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company’s primary market risks include fluctuations in interest rates and exchange rate
variability.
The Company has a revolving credit facility and an equipment line of credit facility in place.
The revolving credit facility had an outstanding balance of $2.6 million at July 31, 2006 bearing
interest at LIBOR plus 2.25%. The equipment line of credit facility had an outstanding balance of
$689,003 at July 31, 2006, bearing interest at an effective interest rate at the prime rate.
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 $66,000. The Company does not
perform any interest rate hedging activities related to these two facilities.
Additionally, the Company has exposure to foreign currency fluctuations through export sales
to international accounts. As only approximately 5% of our sales revenue is denominated in foreign
currencies, we estimate that a change in the relative strength of the 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 foreign currency.
Item 8. Financial Statements and Supplementary Data
Financial statements and financial statement schedules specified by this Item, together with
the report thereon of McGladrey & Pullen, LLP, are presented following Item 15 of this report.
Information on quarterly results of operations is set forth in our financial statements under
Note 18 “Quarterly Financial Data (Unaudited).”
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Effectiveness of Controls and Procedures — Our management, under the supervision and
with the participation of our chief executive officer and chief financial officer, has reviewed and
evaluated the effectiveness of the Company’s disclosure controls and procedures as of July 31,
2006. Based on such review and evaluation, our chief executive officer and chief financial officer
have concluded that, as of July 31, 2006, 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 Exchange Act (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.
Management’s Report on Internal Control Over Financial Reporting — Our management is
responsible for establishing and maintaining adequate internal control over financial reporting.
Our internal control over financial reporting includes policies and procedures designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
We conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework of Internal Control over Financial Reporting – Guidance for
Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). This evaluation included review of the documentation of controls, evaluation
of the design effectiveness of controls, testing of the operating effectiveness of controls and a
conclusion of this evaluation. Based on our evaluation, we have concluded our internal control over
financial reporting was effective as of July 31, 2006.
Management’s assessment of internal control over financial reporting excludes our Valley
Forge operations acquired in September 2005, as allowed under the guidance provided by the SEC in
Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in
Exchange Act Periodic Reports, Frequently Asked Questions issued October 6, 2004. These operations
constituted $17.3 million of total assets, $15.3 million of net assets, $6.9 million of net sales
and $1.5 million of income from operations; and such amounts are included in our consolidated
financial statements as of and for the year ended July 31, 2006. Management did not assess the
effectiveness of internal control over financial reporting at these operations because we continue
to integrate these operations into our control environment, thus making it impractical to complete
an assessment as of July 31, 2006.
Changes in Internal Control Over Financial Reporting — During the year ended July 31, 2006, the
following changes were made to the internal control structure:
Inventory – In the course of the annual audit of Synergetics’ fiscal year ended July 31, 2005,
management concluded that there was a deficiency in its internal control relating to inventory.
This control deficiency, which management determined to be a material weakness, related to
Synergetics’ accounting system not being properly updated for raw materials purchased throughout
the period, resulting in incorrect average prices and an incorrect value of inventory recorded in
its accounting records. Because the accounting system was not being updated properly, the
perpetual inventory required substantial adjustment at year-end. The Company completed a review of
all of its purchased inventory and a substantial portion of its manufactured products to determine
the appropriate cost to be utilized for its valuation of all stages of inventory. The Company has
updated its Enterprise Resource Planning (“ERP”) system and created additional monitoring processes
around inventory purchases to allow the changes in raw materials prices to be appropriately tracked
through the accounting system. In addition, the Company identified other inventory costing and
valuation differences which were remediated in this process as well. Such new procedures and
updated ERP system will result in more accurate and reliable interim and year-end financial
information with respect to inventories and cost of goods sold and should enable the Company to
avoid unexpected significant adjustments to this process at period-end.
Valley
Forge — The Company made a change in the accounting and finance reporting structure
during the year to incorporate Valley Forge’s financial reporting into Synergetics’ financial
reporting.
Information
Technology — The Company has hired a Manager of Information Technology and updated
various components of its information technology infrastructure including updates to its backup
system, domain controller and backup servers. The Company has installed all required updates and
patches to the software systems it is running. The Company also performed a complete review of its
security to its financial reporting systems.
Miscellaneous
– The Company during its review of internal control over
financial reporting also strengthened many of
its other manual controls including complete documentation of its policies and procedures and
documentation of key controls that were being performed but not documented.
Attestation Report of Registered Public Accounting Firm — The attestation report of our independent registered
public accounting firm required by this Item 9A is contained in this Form 10-K following Item 15 under the caption “Report of Independent Registered Public Accounting Firm.”
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors and executive officers of the Company will be included in the
Company’s definitive proxy materials to be filed with the SEC within 120 days after the end of the
Company’s fiscal year covered by this report and is incorporated herein by reference. The
following sections of such proxy materials are herein incorporated by reference: “Election of
Directors;” “Executive Officers;” information regarding the identification and description of the
Audit Committee of the Company and the identification of the Audit Committee financial expert under
“Board and Board Committee Meetings, Committee Functions and Compensation;” “Compliance with
Section 16(a) of the Securities Act” and “Corporate Governance and Website Information.”
Item 11. Executive Compensation
Information concerning executive compensation will be included in the Company’s definitive
proxy materials to be filed with the SEC within 120 days after the end of the Company’s fiscal year
covered by this report under the section “Executive Compensation” and is herein incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information concerning security ownership of certain beneficial owners and management and
related stockholder matters will be included in the Company’s definitive proxy materials to be
filed with the SEC within 120 days after the end of the Company’s fiscal year covered by this
report under the section “Existing Equity Compensation Plan Information” and “Principal
Stockholders” and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions, as applicable, will be
included in the Company’s definitive proxy materials to be filed with the SEC within 120 days after
the end of the Company’s fiscal year covered by this report under section “Certain Relationships
and Related Transactions” and is herein incorporated by reference.
Item 14. Principal Accountant Fees and Services
Information concerning our principal accountant fees and services will be included in our
definitive proxy materials to be filed with the SEC within 120 days after the end of the Company’s
fiscal year covered by this report under the section “Information Regarding Independent Registered
Public Accounting Firm” and is herein incorporated by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this report. |
| 1. | Financial Statements | ||
| The consolidated financial statements and supplemental schedule of Synergetics USA, Inc. and subsidiaries, together with the report thereon of McGladrey & Pullen, LLP, are included following Item 15 of this report. See Index to Financial Statements and Financial Statement Schedules. | |||
| 2. | Financial Statement Schedules | ||
| Schedule II — Valuation and Qualifying Accounts | |||
| 3. | Exhibits | ||
| The exhibits required to be filed as part of this annual report on Form 10-K are listed in the attached Index to Exhibits. |
| (b) | The exhibits filed with this annual report on Form 10-K are listed in the attached Index to Exhibits. | ||
| (c) | None. |
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Audited Financial Statements
| 51 | ||||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
Financial Statement Schedules |
||||
| 69 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Synergetics USA, Inc.
O’Fallon, Missouri
Synergetics USA, Inc.
O’Fallon, Missouri
We have audited the consolidated balance sheets of Synergetics USA, Inc. and subsidiaries as of
July 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity,
and cash flows for each of the three years in the period ended July 31, 2006. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provided a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Synergetics USA, Inc. and subsidiaries as of July 31,
2006 and 2005, and the results of their operations and their cash flows for each of the three years
in the period ended July 31, 2006, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Synergetics USA, Inc.’s internal control over financial
reporting as of July 31, 2006, based on criteria established in Internal Control over Financial
Reporting – Guidance for Smaller Public Companies issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated October 16, 2006 expressed an
unqualified opinion on management’s assessment of the effectiveness of Synergetics USA, Inc.’s
internal control over financial reporting and an unqualified opinion on the effectiveness of
Synergetics USA, Inc.’s internal control over financial reporting.
/s/ McGladrey & Pullen, LLP
St. Louis, Missouri
October 16, 2006
October 16, 2006
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Synergetics USA, Inc.
O’Fallon, Missouri
Synergetics USA, Inc.
O’Fallon, Missouri
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Synergetics USA, Inc. maintained effective internal
control over financial reporting as of July 31, 2006, based on criteria established in Internal
Control over Financial Reporting – Guidance for Smaller Public Companies issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Synergetics USA, Inc.’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. A Company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opinion, management’s assessment that Synergetics USA, Inc. maintained
effective internal control over financial reporting as of July 31, 2006, is fairly
stated, in all material respects, based on criteria established in Internal Control
over Financial Reporting – Guidance for Smaller Public Companies issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Synergetics USA, Inc. maintained, in all material respects, effective
internal control over financial reporting as of July 31, 2006, based on criteria
established in Internal Control over Financial Reporting – Guidance for Smaller
Public Companies issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
The Company acquired, through a transaction accounted for as a reverse merger, Valley
Forge Scientific Corp. (“Valley Forge”) on
September 21, 2005. These operations constituted $17.3 million
of total assets, $15.3 million of net assets, $6.9 million of net
sales and $1.5 million of income from operations; and such amounts
are included in our consolidated financial statements as of and for
the year ended July 31, 2006. Management excluded
from its assessment of the effectiveness of the Company’s internal control over
financial reporting as of July 31, 2006, Valley Forge’s internal control over
financial reporting included in the consolidated financial statements of Synergetics
USA, Inc. for the period from September 22, 2005 through July 31, 2006. Our audit of
internal control over financial reporting of the Company also excluded an evaluation
of the internal control over financial reporting of Valley Forge from the period from
September 22, 2005 through July 31, 2006.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Synergetics USA, Inc. and subsidiaries as of July 31, 2006 and 2005 and the related
consolidated statements of income, changes in stockholders’ equity, and cash flows
for each of the three years in the period ended July 31, 2006 and our report dated
October 16, 2006, expressed an unqualified opinion.
/s/
McGladrey & Pullen, LLP
St. Louis, Missouri
October 16, 2006
St. Louis, Missouri
October 16, 2006
Synergetics USA, Inc. and Subsidiaries
Consolidated Balance Sheets
July 31, 2006 and 2005
July 31, 2006 and 2005
| 2006 | 2005 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 557,114 | $ | 1,816,823 | ||||
Investment in trading securities |
49,989 | 29,333 | ||||||
Accounts receivable, net of allowance for doubtful accounts 2006 $179,000; 2005 $135,000 |
6,807,326 | 3,344,214 | ||||||
Note receivable, officer-stockholder |
19,968 | — | ||||||
Income taxes receivable |
512,989 | — | ||||||
Inventories |
13,242,778 | 7,188,636 | ||||||
Prepaid expenses |
421,874 | 220,903 | ||||||
Deferred income taxes |
296,000 | 157,000 | ||||||
Total current assets |
21,908,038 | 12,756,909 | ||||||
Property and equipment, net |
8,496,723 | 6,483,307 | ||||||
Intangible and other assets |
||||||||
Goodwill |
10,660,501 | — | ||||||
Other intangible assets, net |
9,731,750 | — | ||||||
Deferred expenses |
82,930 | — | ||||||
Patents, net |
730,953 | 451,556 | ||||||
Acquisition costs |
— | 394,452 | ||||||
Cash value of life insurance |
32,523 | 29,545 | ||||||
Total Assets |
$ | 51,643,418 | $ | 20,115,769 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current Liabilities |
||||||||
Lines-of-credit |
$ | 3,330,045 | $ | 235,000 | ||||
Current maturities of long-term debt |
966,918 | 276,771 | ||||||
Current maturities of revenue bonds payable |
248,750 | 248,750 | ||||||
Accounts payable |
1,964,191 | 1,148,082 | ||||||
Accrued construction costs |
— | 613,469 | ||||||
Accrued expenses |
2,793,930 | 1,135,217 | ||||||
Income taxes payable |
— | 311,684 | ||||||
Deferred revenue |
6,400 | — | ||||||
Total current liabilities |
9,310,234 | 3,968,973 | ||||||
Long-Term Liabilities |
||||||||
Long-term debt, less current maturities |
3,215,360 | 1,250,939 | ||||||
Revenue bonds payable, less current maturities |
4,139,792 | 4,388,542 | ||||||
Deferred income taxes |
2,663,000 | 343,000 | ||||||
Deferred compensation |
9,998 | 25,519 | ||||||
Total long-term liabilities |
10,028,150 | 6,008,000 | ||||||
Total liabilities |
19,338,384 | 9,976,973 | ||||||
Commitments and contingencies (Notes 9 and 16) |
||||||||
Stockholders’ Equity |
||||||||
Common stock at July 31, 2006 and July 31, 2005, $0.001 par value, 50,000,000 shares
authorized and $0.01667 par value, 8,000,000 shares authorized, respectively;
24,206,970 and 3,542,111 shares issued, respectively; 24,206,970 and 3,456,773 shares
outstanding, respectively |
24,207 | 59,047 | ||||||
Additional paid-in capital |
23,797,654 | 4,985,936 | ||||||
Retained earnings |
8,483,173 | 5,401,816 | ||||||
| 32,305,034 | 10,446,799 | |||||||
Less: Treasury stock, 2006 none, 2005 85,338 shares, at cost |
— | 308,003 | ||||||
| 32,305,034 | 10,138,796 | |||||||
| $ | 51,643,418 | $ | 20,115,769 | |||||
See Notes to Consolidated Financial Statements.
51
Synergetics USA, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended July 31, 2006, 2005 and 2004
Years Ended July 31, 2006, 2005 and 2004
| 2006 | 2005 | 2004 | ||||||||||
Sales |
$ | 38,245,635 | $ | 21,791,582 | $ | 16,887,378 | ||||||
Cost of sales |
14,237,752 | 8,288,884 | 6,514,120 | |||||||||
Gross profit |
24,007,883 | 13,502,698 | 10,373,258 | |||||||||
Operating expenses |
||||||||||||
Research and development |
1,655,122 | 857,798 | 796,916 | |||||||||
Selling, general and administrative |
17,351,249 | 10,261,627 | 7,886,014 | |||||||||
| 19,006,371 | 11,119,425 | 8,682,930 | ||||||||||
Operating income |
5,001,512 | 2,383,273 | 1,690,328 | |||||||||
Other income (expense) |
||||||||||||
Investment income |
19,255 | 30,252 | 17,514 | |||||||||
Interest expense |
(575,442 | ) | (215,590 | ) | (196,143 | ) | ||||||
Miscellaneous |
55,565 | (223 | ) | 2,476 | ||||||||
| (500,622 | ) | (185,561 | ) | (176,153 | ) | |||||||
Income before provision for income taxes |
4,500,890 | 2,197,712 | 1,514,175 | |||||||||
Provision for income taxes |
1,419,533 | 740,000 | 420,600 | |||||||||
Net income |
$ | 3,081,357 | $ | 1,457,712 | $ | 1,093,575 | ||||||
Earnings per share: |
||||||||||||
Basic |
$ | 0.15 | $ | 0.43 | $ | 0.32 | ||||||
Diluted |
$ | 0.15 | $ | 0.42 | $ | 0.32 | ||||||
Basic weighted average common shares outstanding |
20,657,255 | 3,424,030 | 3,401,184 | |||||||||
Diluted weighted average common shares outstanding |
20,821,394 | 3,443,000 | 3,413,866 | |||||||||
See Notes to Consolidated Financial Statements.
52
Synergetics USA, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Years Ended July 31, 2006, 2005 and 2004
Years Ended July 31, 2006, 2005 and 2004
| Additional | ||||||||||||||||||||
| Common | paid-in | Retained | Treasury | |||||||||||||||||
| Stock | capital | earnings | stock | Total | ||||||||||||||||
Balance, July 31, 2003 |
$ | 57,920 | $ | 4,715,631 | $ | 2,850,529 | $ | (308,003 | ) | $ | 7,316,077 | |||||||||
Issuance of 22,200 shares of common stock |
371 | 89,430 | — | — | 89,801 | |||||||||||||||
Net income |
— | — | 1,093,575 | — | 1,093,575 | |||||||||||||||
Balance, July 31, 2004 |
58,291 | 4,805,061 | 3,944,104 | (308,003 | ) | 8,499,453 | ||||||||||||||
Issuance of 45,409 shares of common stock |
756 | 180,875 | — | — | 181,631 | |||||||||||||||
Net income |
— | — | 1,457,712 | — | 1,457,712 | |||||||||||||||
Balance, July 31, 2005 |
59,047 | 4,985,936 | 5,401,816 | (308,003 | ) | 10,138,796 | ||||||||||||||
Elimination of treasury shares |
— | (308,003 | ) | — | 308,003 | — | ||||||||||||||
Establish par value of $0.001 on
outstanding shares |
(35,137 | ) | 35,137 | — | — | — | ||||||||||||||
Establish fair value of Valley Forge
common stock on date of merger |
— | 17,987,381 | — | — | 17,987,381 | |||||||||||||||
Restricted stock grants |
15 | 14,873 | — | — | 14,888 | |||||||||||||||
Stock-based compensation |
67 | 441,993 | — | — | 442,060 | |||||||||||||||
Tax benefit associated with stock option
exercises |
— | 222,956 | — | — | 222,956 | |||||||||||||||
Proceeds from stock option exercises |
215 | 417,381 | — | — | 417,596 | |||||||||||||||
Net income |
— | — | 3,081,357 | — | 3,081,357 | |||||||||||||||
Balance, July 31, 2006 |
$ | 24,207 | $ | 23,797,654 | $ | 8,483,173 | $ | — | $ | 32,305,034 | ||||||||||
See Notes to Consolidated Financial Statements.
53
Synergetics USA Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended July 31, 2006, 2005 and 2004
Years Ended July 31, 2006, 2005 and 2004
| 2006 | 2005 | 2004 | ||||||||||
Cash Flows from Operating Activities |
||||||||||||
Net income |
$ | 3,081,357 | $ | 1,457,712 | $ | 1,093,575 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating
activities |
||||||||||||
Depreciation |
737,801 | 510,503 | 394,427 | |||||||||
Amortization |
435,995 | 69,597 | 29,273 | |||||||||
Provision for doubtful accounts receivable |
28,142 | 123,798 | 7,510 | |||||||||
Stock-based compensation |
456,948 | 181,631 | — | |||||||||
Loss on sale of equipment |
(2,393 | ) | — | 7,178 | ||||||||
Deferred income taxes |
(315,000 | ) | (15,000 | ) | 106,000 | |||||||
Change in assets and liabilities, net of reverse merger (Note 2): |
||||||||||||
(Increase) decrease in: |
||||||||||||
Trading securities |
(20,656 | ) | (29,333 | ) | — | |||||||
Receivables |
(2,788,135 | ) | (773,939 | ) | (668,420 | ) | ||||||
Income tax receivable |
(118,504 | ) | 85,960 | 286,681 | ||||||||
Inventories |
(5,128,653 | ) | (2,374,554 | ) | (853,673 | ) | ||||||
Prepaid expenses |
(143,519 | ) | 32,622 | (73,605 | ) | |||||||
Other current assets |
— | 99,537 | (29,710 | ) | ||||||||
(Decrease) increase in: |
||||||||||||
Accounts payable |
556,735 | 386,559 | 31,918 | |||||||||
Accrued expenses |
1,414,138 | (133,659 | ) | 582,744 | ||||||||
Deferred expenses |
(92,051 | ) | 25,519 | — | ||||||||
Income taxes payable |
(258,214 | ) | 295,278 | 16,406 | ||||||||
Net cash provided by (used in) operating activities |
(2,156,009 | ) | (57,769 | ) | 930,304 | |||||||
Cash Flows from investing activities |
||||||||||||
Net decrease in notes receivable, officer-stockholder |
12,789 | — | — | |||||||||
Purchase of property and equipment |
(3,038,336 | ) | (1,795,484 | ) | (686,816 | ) | ||||||
Proceeds from sale of equipment |
— | — | 3,182 | |||||||||
Acquisition of patents |
(264,609 | ) | (195,215 | ) | (113,772 | ) | ||||||
Cash paid for reverse merger costs |
(502,873 | ) | (394,452 | ) | — | |||||||
Cash acquired through reverse merger |
2,023,945 | — | — | |||||||||
Increase in cash value of life insurance |
(2,978 | ) | (29,545 | ) | — | |||||||
Net cash used in investing activities |
(1,772,062 | ) | (2,414,696 | ) | (797,406 | ) | ||||||
Cash Flows from financing activities |
||||||||||||
Net borrowings on lines-of-credit |
2,506,553 | 281,097 | 542,395 | |||||||||
Proceeds from revenue bonds payable |
— | 2,330,000 | — | |||||||||
Principal payments on revenue bonds payable |
(248,750 | ) | (161,375 | ) | (132,250 | ) | ||||||
Proceeds from long-term debt |
1,426,952 | 542,395 | — | |||||||||
Principal payments on long-term debt |
(1,161,437 | ) | (242,871 | ) | (142,174 | ) | ||||||
Tax benefit associated with the exercise of non-qualified stock options |
222,956 | — | — | |||||||||
Payment on debt incurred for acquisition of trademark |
(495,508 | ) | — | — | ||||||||
Proceeds from the issuance of common stock |
417,596 | — | 89,801 | |||||||||
Net cash provided by financing activities |
2,668,362 | 2,749,246 | 357,772 | |||||||||
Net (decrease) increase in cash and cash equivalents |
(1,259,709 | ) | 276,781 | 490,670 | ||||||||
Cash and cash equivalents |
||||||||||||
Beginning |
1,816,823 | 1,540,042 | 1,049,372 | |||||||||
Ending |
$ | 557,114 | $ | 1,816,823 | $ | 1,540,042 | ||||||
Supplemental Disclosures of Cash Flow Information |
||||||||||||
Cash paid for: |
||||||||||||
Interest (Capitalized as a part of property 2006 $27,816, 2005 $67,818; 2004 none) |
$ | 588,370 | $ | 283,408 | $ | 186,164 | ||||||
Income taxes |
1,881,240 | 373,762 | 237,496 | |||||||||
Supplemental Schedule of Noncash Investing and Financing Activities |
||||||||||||
Construction in progress financed by accounts payable |
$ | — | $ | 613,469 | $ | — | ||||||
See Notes to Consolidated Financial Statements.
54
Synergetics USA Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Synergetics USA, Inc. (“Synergetics USA” or the “Company”) is a
Delaware corporation incorporated on June 2, 2005 in connection with the 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. The Company is
located in O’Fallon, Missouri and King of Prussia, Pennsylvania and is engaged in the manufacture
and worldwide sale of microsurgical instruments, capital equipment and devices primarily for use in
vitreoretinal surgery and neurosurgical applications. During the ordinary course of its business,
the Company grants unsecured credit to its domestic and international customers.
A summary of the Company’s significant accounting policies follows:
Use of estimates in the preparation of financial statements: The preparation of
consolidated financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation: Through the date of the reverse merger described in Note 2,
the consolidated financial statements included the accounts of Synergetics and its wholly owned
subsidiary: Synergetics Development Company, LLC and an 83 percent owned subsidiary, Synergetics
Laser, LLC. Thereafter, the consolidated financial statements include the accounts of Synergetics
USA and its wholly owned subsidiaries: Synergetics, Synergetics IP, Inc. and Synergetics
Development Company, LLC. All significant intercompany accounts and transactions have been
eliminated.
Cash and cash equivalents: For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased with maturity of three months or
less to be cash equivalents.
Investment in trading securities: Trading securities, consisting primarily of actively
traded equity and debt securities, are stated at fair value. Realized and unrealized gains and
losses are included in investment income.
Accounts receivable: Accounts receivable are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Management determines the allowance for doubtful accounts by regularly evaluating individual
customer receivables and considering a customer’s financial condition, credit history and current
economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of
accounts receivable previously written off are recorded when received. The Company generally does
not charge interest on past-due amounts or require collateral on accounts receivable.
Concentration of credit risk: Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist principally of cash and accounts receivable. At times,
cash in banks is in excess of the FDIC insurance limit. The Company has not experienced any loss as
a result of those deposits and does not expect any in the future.
Inventories: Inventories are stated at the lower of cost or market with cost being
determined using the first-in, first-out (FIFO) method. The Company reviews the valuation of its
inventory on a quarterly basis and determines if a valuation allowance is necessary for items that
have not been valued or for items that have not had their values updated recently. In addition,
the Company evaluates inventories for excess quantities and identified obsolescence quarterly.
Property and equipment: Property and equipment are depreciated over their estimated useful
lives as follows:
| Useful lives | ||||
Building and improvements |
7-39 | |||
Machinery and equipment |
5-7 | |||
Furniture and fixtures |
5-7 | |||
Software |
3-5 | |||
55
Goodwill and other intangibles: Absent any impairment indicators, goodwill is tested for
impairment on an annual basis. The Company performed its goodwill impairment tests during the
beginning of the fourth fiscal quarter. Other intangible assets, consisting of licensing agreements
and proprietary know-how are amortized to operations under the straight-line method over their
estimated useful lives or statutory lives whichever is shorter. These periods range from two to ten
years. The life of a trademark is inextricably related to the life of the product bearing the mark
or the life of the business entity owning the trademark. The Company intends to use the trademark
indefinitely, and therefore, its useful life is not limited to any specific product. The trademark
constitutes an indefinite-lived intangible that will be used in perpetuity.
Patents: Incremental legal and other costs to obtain the patent are capitalized to a patent
asset. Salaries, benefits and other direct costs of product development are expensed as operating
expenses in research and development costs. Patents are amortized to operations under the
straight-line method over the remaining statutory life of the patent. Total amortization for the
years ended July 31, 2006, 2005 and 2004 was $435,995, $69,597 and $29,273, respectively. Included
in amortization expense for the year ended July 31, 2005, was approximately $20,000 for impairment
of a specific patent. Amortization for the years ending July 31, 2007, 2008, 2009, 2010 and 2011 is
estimated to approximate $521,000, $356,000, $328,000, $318,000 and $303,000, respectively.
Impairment of long-lived assets (excluding goodwill and other intangibles): The Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future undiscounted cash
flows expected to be generated by the asset. If such assets are impaired, the impairment is
recognized as the amount by which the carrying amount exceeds the estimated future undiscounted
cash flows. Assets to be sold are reported at the lower of the carrying amount or the fair value
less costs to sell.
Deferred income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating loss and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
Fair value of financial instruments: The carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value due to the short maturity of these instruments. The carrying amount of notes
and revenue bonds payable and long-term debt is estimated to approximate fair value because the
interest rates fluctuate with market interest rates or the fixed rates are based on estimated
current rates offered to the Company for debt with similar terms and maturities.
Revenue recognition: The Company records revenue from product sales when the revenue is
realized and the product is shipped from its facilities. This includes satisfying the following
criteria: the arrangement with the customer is evident, usually through the receipt of a purchase
order; the sales price is fixed and determinable; delivery to the carrier has occurred; and
collectibility is reasonably ensured. Freight and shipping billed to customers is included in net
sales, and the cost of shipping is included in cost of sales.
Service revenue substantially relates to repairs of products and is recognized when the service has
been completed. Revenue from licenses, extended warranty contracts and royalty fees is recorded
when earned.
Product warranty: The Company provides a warranty against manufacturing and workmanship
defects. Under the Company’s general terms and conditions of sale, liability during the warranty
period (typically five years) is limited to repair or replacement of the defective item. The
Company’s warranty cost is not material.
Advertising: The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was approximately $144,600, $135,500 and $141,000 for the years
ended July 31, 2006, 2005 and 2004, respectively.
Royalties: The Company pays royalties to doctors and medical institutions for providing
assistance in the design of various instruments and components. Royalties are paid quarterly based
on the sales of the instrument or components. Royalty expense was approximately $546,800, $405,000
and $320,600 for the years ended July 31, 2006, 2005 and 2004, respectively.
Earnings per share: Basic earnings per share (“EPS”) data has been computed on the basis of
the weighted average number of common shares outstanding during each period presented. Diluted EPS
data has been computed on the basis of the assumed
56
conversion, exercise or issuance of all potential common stock instruments, unless the effect is to
reduce the loss or increase the net income per common share.
Stock compensation: The Company has a stock plan for employees and consultants allowing for
incentive and non-qualified stock options and restricted stock and stock awards which have been
granted to certain employees and certain consultants of the Company. In addition, we have a stock
option plan for non-employee directors allowing for non-qualified stock options. Options under
this plan have been granted to all non-employee directors. As of August 1, 2005, Statement of
Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123(R)”), became effective for the Company. The Company had previously followed Accounting
Principles Board Opinion No. 25, “Accounting for Certain Transactions Involving Stock Compensation”
(“APB No. 25”), and related interpretations in accounting for its employee stock options. Under APB
No. 25, no compensation expense was recognized, if the exercise price of the Company’s employee
stock options equaled or exceeded the market price of the underlying stock on the date of the
grant. Under SFAS 123(R), compensation expense is now recognized. Stock-based compensation cost is
measured at the grant date, based on the fair value of the award and is recognized over the
directors’ and employees’ requisite service period. Compensation expense is calculated using the
Black-Scholes option pricing model. The Company has elected to use the modified prospective
transition method. Under the modified prospective transition method, an entity uses the fair value
based accounting method for all director and employee awards granted, modified or settled after the
effective date and, therefore, have not restated financial results from prior periods. As of the
effective date, compensation costs related to the nonvested portion of awards outstanding as of
that date are based on the grant-date fair value of those awards as calculated under the original
provisions of SFAS 123 “Accounting for Stock-Based Compensation”; that is, an entity would not
remeasure the grant-date fair value estimate of the unvested portion of awards granted prior to the
effective date of SFAS 123(R). Compensation expense is recognized in net earnings for restricted
stock awards.
For purposes of pro forma disclosures, the fair value of each award granted was estimated at the
date of the grant using the minimum value method with the following assumptions for grants:
risk-free interest rate of 3%; dividend rate of 0%; volatility factor of 0% and a weighted average
life of the awards of 5 or 10 years. The options’ fair value is amortized to expense on a
proportionate basis over the options’ vesting periods. Had compensation cost for all of the
stock-based compensation awards been determined based on the grant date fair values of awards (the
method described in SFAS 123(R)), reported net income would have been reduced to the pro forma
amounts shown below for the fiscal years ended July 31, 2005 and 2004:
| 2005 | 2004 | |||||||
Net income: |
||||||||
As reported |
$ | 1,457,712 | $ | 1,093,575 | ||||
Add: stock-based
employee compensation
expense included in
reported net income, net
of related tax effects |
— | — | ||||||
Deduct: compensation
expense determined under
fair value based method
for all awards, net of
related tax effects |
9,559 | 10,766 | ||||||
Pro forma |
$ | 1,448,153 | $ | 1,082,809 | ||||
Earnings per share: |
||||||||
As reported |
||||||||
Basic |
0.43 | 0.32 | ||||||
Diluted |
0.42 | 0.32 | ||||||
Pro forma |
||||||||
Basic |
0.42 | 0.32 | ||||||
Diluted |
0.42 | 0.32 | ||||||
Reclassifications: Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation. Total assets, total liabilities and net
income were not affected.
Segment information: The Company operates in two business segments – the Synergetics
segment and the Valley Forge segment. The Synergetics segment includes revenue and operating
expenses associated with the sales of ophthalmic and neurosurgical instruments and Omni®
ultrasonic aspirator. The Valley Forge segment includes revenue and operating expenses associated
with the sales of bipolar electrosurgical generators. The financial results of Valley Forge have
been included from September 22, 2005 through July 31, 2006.
57
Note 2. Reverse Merger
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. In addition, all options under the Valley Forge stock option plans vested upon the change of control and accordingly were included in the purchase price utilizing the Black-Scholes valuation methodology at $815,000. The primary reason for the acquisition was to expand the
Company’s neurosurgical product offerings to include the bipolar electrosurgical generator. 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 as follows:
Assets: |
||||
Cash, net of
merger expenses of $891,620 |
$ | 1,132,325 | ||
Accounts receivable |
703,119 | |||
Inventories |
925,489 | |||
Prepaid expenses and other current assets |
573,936 | |||
Property and equipment |
323,962 | |||
Other intangibles: |
10,182,533 | |||
Definite lived |
4,419,240 | |||
Indefinite lived |
5,763,293 | |||
Goodwill |
10,660,501 | |||
Liabilities assumed: |
||||
Accounts payable and accrued expenses |
(509,659 | ) | ||
Income taxes payable |
(35,713 | ) | ||
Note payable issued in connection with Malis® trademark |
(3,473,053 | ) | ||
Deferred income taxes |
(2,496,059 | ) | ||
Net assets acquired |
$ | 17,987,381 | ||
The operations of Valley Forge have been consolidated from the acquisition date. The cost to
acquire Valley Forge has been allocated to the Valley Forge assets acquired and liabilities assumed
according to their estimated fair values. The purchase price of $18,879,000, including Synergetics’ transaction
costs, resulted in acquired goodwill of $10,660,501, which is not deductible for tax purposes.
The unaudited pro forma results, assuming the reverse merger with Valley Forge had occurred at
the beginning of each fiscal period presented below, would have yielded the following results:
| Twelve Months | Twelve Months | |||||||
| Ended | Ended | |||||||
| July 31, | July 31, | |||||||
| 2006 | 2005 (1) | |||||||
Net sales |
$ | 39,117,696 | $ | 27,867,779 | ||||
Net income |
2,940,784 | 1,462,275 | ||||||
Basic earnings per share |
0.13 | 0.06 | ||||||
Diluted earnings per share |
0.13 | 0.06 | ||||||
(1) Prior to the reverse merger, Valley Forge had a fiscal year end of September 30 with quarterly
results reported on calendar quarters. Accordingly, the unaudited pro forma condensed combined
statement of income for the year ended July 31, 2005 was derived by adding the results of the year
ended July 31, 2005 for Synergetics and the results of the twelve months ended June 30, 2005, for
Valley Forge (which was derived by taking the results of the year ended September 30, 2004 less the
results of the nine months ended June 30, 2004 plus the results of the nine months ended June 30,
2005).
These pro forma results include adjustments to give effect to interest expense of the
trademark-related debt and other purchase price adjustments. The pro forma results are not
necessarily indicative of the operating results that would have occurred had the reverse merger
been consummated as of the beginning of each fiscal period, nor are they necessarily indicative of
future operating results.
58
Note 3. Distribution Agreements
In connection with the reverse merger described in Note 2, the Company became a party to the
distribution agreements described below which are in addition to its pre-merger distribution
agreements:
Codman and Shurtleff, Inc. (“Codman”)
In the neurosurgery market, the bipolar electrosurgical system manufactured by Valley Forge
prior to the merger has been sold for over 20 years through a series of distribution agreements
with Codman, an affiliate of Johnson & Johnson and formerly Valley Forge’s largest customer. On
October 15, 2004, Valley Forge executed an agreement with Codman for the period October 1, 2004
through December 31, 2005. The agreement provided for exclusive worldwide distribution rights of
Valley Forge’s existing neurosurgery products in the fields of neurocranial and neurospinal surgery
until March 31, 2005, and non-exclusive rights in these fields from April 1, 2005 through December
31, 2005. On May 6, 2005, in accordance with the terms of the agreement, Valley Forge notified
Codman that, effective July 15, 2005, Codman would be the non-exclusive worldwide distributor of
its existing products in the fields of neurocranial and neurospinal surgery until December 31,
2005. On January 9, 2006, 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 Company’s Malis® trademark to Codman for use
with certain Codman products, including those covered by the distribution agreement.
Net sales to Codman amounted to approximately $6,482,000 for the period from September 22,
2005 to July 31, 2006. This represents 16.9 percent of net sales for the period ended July 31,
2006.
Stryker Corporation (“Stryker”)
On October 25, 2004, Valley Forge 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 Agreement is for a term of five years
after the first acceptance of the unique RF generator by Stryker, which was on November 11, 2004.
There is a minimum purchase obligation that is specified by “Agreement Year.” The first
Agreement Year commenced on November 11, 2004 and ended on the last day of the calendar quarter in
which the first anniversary date of such inception date occurs, which was December 31, 2005.
Stryker satisfied the first Agreement Year minimum. In the second and third Agreement Years,
Stryker agreed to make minimum purchases of approximately $500,000 per year for commercial sale
units. On or before the beginning of the last calendar quarter of the third Agreement Year, and
each Agreement Year thereafter, the Company and Stryker will conduct good faith negotiations
regarding the minimum purchase obligation for the next Agreement Year. Also, during the first two
months of the last calendar quarter in any Agreement Year, the Company and Stryker will conduct
good faith negotiations regarding changes in prices that will take effect on the first day of the
ensuing Agreement Year. The Agreement also provides Stryker the right of first refusal for the
distribution of certain other generator products in the pain control, orthopedic, ENT (ear, nose
and throat), craniomaxillofacial and head and neck surgery markets.
Net sales to Stryker amounted to approximately $1,924,000 for the period from September 22,
2005 to July 31, 2006. This represents 5.0 percent of net sales for the period ended July 31, 2006,
respectively.
Note 4. Inventories
Inventories as of July 31, 2006 and 2005, were as follows:
| 2006 | 2005 | |||||||
Raw materials and component parts |
$ | 5,614,239 | $ | 2,398,238 | ||||
Work in progress |
2,493,117 | 1,295,976 | ||||||
Finished goods |
5,135,422 | 3,494,422 | ||||||
| $ | 13,242,778 | $ | 7,188,636 | |||||
59
Note 5. Property and Equipment
Property and equipment as of July 31, 2006 and 2005, were as follows:
| 2006 | 2005 | |||||||
Land |
$ | 729,753 | $ | 729,753 | ||||
Building and improvements |
5,339,754 | 2,568,612 | ||||||
Machinery and equipment |
4,196,084 | 2,888,687 | ||||||
Furniture and fixtures |
545,505 | 266,225 | ||||||
Software |
105,208 | 39,734 | ||||||
Construction in progress |
— | 1,688,355 | ||||||
| 10,916,304 | 8,181,366 | |||||||
Less accumulated depreciation |
2,419,581 | 1,698,059 | ||||||
| $ | 8,496,723 | $ | 6,483,307 | |||||
Depreciation expense is included in both cost of sales and selling, general and administrative
expenses.
The construction in progress was applicable to the construction of an approximate 27,000 square
foot addition to the Company’s principal manufacturing and headquarters building which was
completed in October 2005.
There are no long-lived assets outside of the United States.
Note 6. Other Intangible Assets
Information regarding the Company’s other intangible assets is as follows:
| Gross Carrying | Accumulated | |||||||||||
| Value | Amortization | Net | ||||||||||
| July 31, 2006 |
||||||||||||
Patents |
$ | 914,836 | $ | 183,883 | $ | 730,953 | ||||||
Proprietary know-how |
4,057,115 | 336,711 | 3,720,404 | |||||||||
Licensing agreements |
140,000 | 51,850 | 88,150 | |||||||||
Trademark |
5,923,196 | — | 5,923,196 | |||||||||
| $ | 11,035,147 | $ | 572,444 | $ | 10,462,703 | |||||||
| July 31, 2005 |
||||||||||||
Patents |
$ | 588,005 | $ | 136,449 | $ | 451,556 | ||||||
Acquisition costs |
394,452 | — | 394,452 | |||||||||
| $ | 982,457 | $ | 136,449 | $ | 846,008 | |||||||
Note 7. Accrued Expenses
Accrued expenses as of July 31, 2006 and 2005, consisted of the following:
| 2006 | 2005 | |||||||
Payroll, commissions and employee benefits |
$ | 597,543 | $ | 401,684 | ||||
Royalties |
63,968 | 134,077 | ||||||
Warranty |
42,900 | — | ||||||
Other |
2,089,519 | 599,456 | ||||||
| $ | 2,793,930 | $ | 1,135,217 | |||||
60
Note 8. Pledged Assets, Short and Long-Term Debt
Revolving Credit Facility: Under a revolving credit facility, the Company may borrow up to
$5.5 million with a graduated interest rate starting at LIBOR plus 2.25 percent and adjusting each
quarter based upon the Company’s leverage ratio, (an effective rate of 7.36% as of July 31, 2006).
Outstanding borrowings under this facility at July 31, 2006 and July 31, 2005 were approximately
$2,641,042 million and $235,000, respectively. Outstanding amounts are collateralized by the
Company’s receivables and inventory. This credit facility is scheduled to expire on December 1,
2007. The facility has two financial covenants: a maximum leverage ratio of 3.75 times and a
minimum fixed charge coverage ratio of 1.1 times. As of July 31, 2006, the Company’s leverage
ratio was 1.73 times and the fixed charge coverage ratio was 2.58 times.
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, (an effective rate of 8.25% as of July 31,
2006). Outstanding amounts are secured by the purchased equipment. The equipment line of credit
facility of $1.0 million expires on October 31, 2006. Outstanding borrowings under this facility
at July 31, 2006 and 2005 were $689,003 and $588,492, respectively.
Long-term debt as of July 31, 2006 and 2005, consisted of the following:
| 2006 | 2005 | |||||||
Note payable to bank, due in
monthly installments of $1,139 plus
interest at prime rate plus 1% (an
effective rate of 9.25% as of July 31,
2006), remaining balance due September
2007, collateralized by second deed of
trust |
$ | 165,140 | $ | 178,806 | ||||
Note payable, due in monthly
installments of $509 including interest
at 4.9%, remaining balance due May 2008,
collateralized by a vehicle |
9,060 | 15,170 | ||||||
Note payable to bank, due in monthly
principal installments of $39,642
beginning November 2005 plus interest at
the bank’s prime lending rate (an
effective rate of 8.25% as of July 31,
2006), remaining balance due September
30, 2008, collateralized by
substantially all assets of the Company |
1,030,534 | — | ||||||
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 $3,517,888
including the effects of imputing
interest, due December 2011,
collateralized by the Malis®
trademark |
2,977,544 | — | ||||||
Note payable to bank, due in monthly
principal installments of $3,033 plus
interest at prime rate (an effective
rate of 6.25% as of July 31, 2005),
remaining balance due May 2007
collateralized by substantially all
assets of the Company, refinanced in
October 2005 |
— | 63,713 | ||||||
Note payable to bank, due in monthly
principal installments of $7,083 plus
interest at prime rate (an effective
rate of 6.25% as of July 31, 2005),
remaining balance due June 2008,
collateralized by machinery and
equipment, refinanced in October 2005 |
— | 240,833 | ||||||
Note payable to bank, due in monthly
principal installments of $11,300 plus
interest at prime rate (an effective
rate of 6.25% as of July 31, 2005),
remaining balance due September 2008,
collateralized by machinery and
equipment, refinanced in October 2005 |
— | 440,696 | ||||||
| 4,182,278 | 939,218 | |||||||
Less current maturities |
966,918 | 276,771 | ||||||
Long-term portion |
$ | 3,215,360 | $ | 662,447 | ||||
Aggregate annual maturities required on long-term debt as of July 31, 2006 are as follows:
| Year Ending July 31,: | Amount | |||
2007 |
$ | 966,918 | ||
2008 |
1,130,492 | |||
2009 |
610,203 | |||
2010 |
563,661 | |||
2011 |
598,249 | |||
2012 |
312,755 | |||
| $ | 4,182,278 | |||
61
Note 9. Revenue Bonds Payable
In September 2002, the Company issued $2,645,000 in Private Activity Revenue Bonds, Series
2002. The proceeds from the bond issue were used to provide financing for the construction of a
building and equipment for use as a manufacturing facility located in O’Fallon, Missouri. The bond
issue is collateralized by a first deed of trust. The Company signed a promissory note to a bank
payable in monthly installments of interest only, commencing on October 1, 2002. Principal is
payable on May 1, 2004, and on the first day of each month thereafter, in the amount of $11,021
until final payment on September 1, 2022. Interest is payable at 5.5% through September 1, 2009,
and prime rate plus 0.5% thereafter. 2002 issue revenue bonds payable totaled $2,204,167 and
$2,336,417 as of July 31, 2006 and 2005, respectively.
In December 2004, Synergetics Development Co., LLC issued $2,330,000 in Industrial Revenue
Bonds, Series 2004. The proceeds from the bond issue were used to provide financing for a building
expansion and the purchase of land and equipment located in O’Fallon, Missouri. The bond issue is
collateralized by a first deed of trust. The Company signed a promissory note to a bank payable in
monthly installments of interest only, commencing on February 1, 2005. Principal is payable on June
1, 2005, and on the first day of each month thereafter, in the amount of $9,708, until final
payment on December 1, 2024. Interest is payable at 4.75% through December 1, 2011, and prime rate
thereafter. 2004 issue revenue bonds payable totaled $2,184,375 and $2,300,875 as of July 31, 2006
and 2005, respectively.
Under the terms of the credit facility with the bank, the Company is required to comply with
certain financial covenants, including a minimum debt coverage ratio of 1.25 to 1.0.
Aggregate annual maturities required on bonds payable as of July 31, 2006 are as follows:
| Year Ending July 31,: | Amount | |||
2007 |
$ | 248,750 | ||
2008 |
248,750 | |||
2009 |
248,750 | |||
2010 |
248,750 | |||
2011 |
248,750 | |||
Thereafter |
3,144,792 | |||
| $ | 4,388,542 | |||
Note 10. Operating Leases
The Company leases equipment and its facility in King of Prussia, Pennsylvania under operating
leases that end in August 2011.
The approximate minimum rental commitment under non-cancelable operating leases as of July 31,
2006, is due as follows:
| Year Ending July 31,: | Amount | |||
2007 |
$ | 171,568 | ||
2008 |
168,042 | |||
2009 |
162,079 | |||
2010 |
67,600 | |||
2011 |
495 | |||
| $ | 569,784 | |||
Rent expense incurred and charged to cost of sales and selling, general and administrative expenses
was approximately $104,200, $16,300 and $22,900 for the years ended July 31, 2006, 2005 and 2004,
respectively.
Note 11. Income Tax Matters
The Company and its wholly owned subsidiaries file as a single entity for income tax reporting
purposes. The net deferred income tax amounts included in the accompanying consolidated balance
sheets as of July 31, 2006 and 2005, include the following amounts as deferred income tax assets
and liabilities:
62
| 2006 | 2005 | |||||||
Deferred tax assets: |
||||||||
Accounts receivable |
$ | 66,000 | $ | 54,000 | ||||
Inventories |
110,000 | 59,000 | ||||||
Accrued liabilities |
115,000 | 44,000 | ||||||
Other |
5,000 | — | ||||||
| 296,000 | 157,000 | |||||||
Deferred tax liabilities: |
||||||||
Property and equipment |
294,000 | 343,000 | ||||||
Other intangible assets |
2,369,000 | — | ||||||
| 2,663,000 | 343,000 | |||||||
| $ | (2,367,000 | ) | $ | (186,000 | ) | |||
The deferred tax amounts noted above have been classified on the accompanying consolidated balance
sheets as of July 31, 2006 and 2005, as follows:
| 2006 | 2005 | |||||||
Current assets |
$ | 296,000 | $ | 157,000 | ||||
Long-term liabilities |
(2,663,000 | ) | (343,000 | ) | ||||
| $ | (2,367,000 | ) | $ | (186,000 | ) | |||
The provision for income taxes for the years ended July 31, 2006, 2005 and 2004, consisted of the
following:
| 2006 | 2005 | 2004 | ||||||||||
Currently payable |
$ | 1,734,533 | $ | 755,000 | $ | 314,600 | ||||||
Deferred |
(315,000 | ) | (15,000 | ) | 106,000 | |||||||
| $ | 1,419,533 | $ | 740,000 | $ | 420,600 | |||||||
Reconciliation of the Company’s income tax at the statutory rate to the Company’s effective rate is
as follows:
| 2006 | 2005 | 2004 | ||||||||||
Computed at the statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
State taxes net of federal tax benefit |
4.6 | 8.2 | 3.8 | |||||||||
Extraterritorial income exclusion |
(3.0 | ) | (4.0 | ) | (4.0 | ) | ||||||
Production deduction for domestic manufacturers |
(3.5 | ) | — | — | ||||||||
Research and development |
— | (6.9 | ) | (8.8 | ) | |||||||
Other |
(0.6 | ) | 2.4 | 2.8 | ||||||||
| 31.5 | % | 33.7 | % | 27.8 | % | |||||||
Note 12. Employee Benefit Plan
The Company has a 401(k) savings plan, which covers employees who have attained the age of 18
and who have been credited with at least one year of service. Company contributions are made at the
discretion of the Board of Directors. There was a payment of $10,000 made by the Company as
matching contributions to the 401(k) savings plan for the year ended July 31, 2006. The Company
made no contributions to the plan for the years ended July 31, 2005 and 2004.
Note 13. Stock Based Compensation Plans
Stock Option Plans
In addition to the historical options outstanding for Synergetics prior to the merger, the
Company has options outstanding under two existing active option plans and two terminated plans of
Valley Forge. The first active plan (the “2001 Plan”) was adopted by Valley Forge on January 16,
2001 pursuant to which 345,000 shares of common stock were reserved for issuance to employees,
officers and consultants of the Company. The 2001 Plan was amended with the approval of the Valley
Forge stockholders on September 19, 2005 to increase the number of share awards issuable under the 2001 Plan from
345,000 to 1,345,000. There were 1,119,383 options and restricted shares unawarded at July 31, 2006
under this plan. On September 19, 2005, the stockholders of Valley Forge voted to adopt the Valley
Forge Scientific Corp. 2005 Non-Employee Directors’ Stock Option Plan and voted to
63
authorize up to
200,000 shares issuable upon exercise of options granted thereunder. There were 140,000 options
available for future grants at July 31, 2006 under this plan. Generally, options were granted with
an exercise price equal to fair market value at the date of grant and expire 10 years from the date
of the grant. Generally, stock options granted under these plans vest over a five year period with
the exception of the non-employee director options which vest immediately. All options under the
Valley Forge stock option plans were valued at approximately $815,000 in the purchase price
accounting allocation.
A summary of the status of the fixed awards at July 31, 2006, 2005 and 2004 and changes during
the years ended on those dates is as follows:
| Weighted | ||||||||||||
| Average | Weighted | |||||||||||
| Exercise | Average | |||||||||||
| Shares | Price | Fair Value | ||||||||||
Options outstanding as of August 1, 2003 |
19,916 | $ | 1.46 | |||||||||
Granted |
14,000 | $ | 3.57 | |||||||||
Options outstanding as of July 31, 2004 |
33,916 | $ | 2.33 | $ | 2.22 | |||||||
Granted |
24,584 | $ | 4.00 | — | ||||||||
Options outstanding as of July 31, 2005 |
58,500 | $ | 2.33 | $ | 2.97 | |||||||
Exercised prior to September 21, 2005 |
(20,500 | ) | — | $ | 3.92 | |||||||
Options outstanding, September 21, 2005 |
38,000 | $ | 4.64 | $ | 2.46 | |||||||
Conversion ratio applied at September 21, 2005 |
4.59 | 4.59 | — | |||||||||
Converted options |
174,420 | $ | 1.01 | $ | 2.46 | |||||||
Existing options assumed under the Valley Forge Stock option plan |
441,500 | $ | 2.18 | $ | 1.88 | |||||||
For the period from September 22, 2005 through July 31, 2006: |
||||||||||||
Granted |
20,000 | $ | 5.00 | $ | 3.32 | |||||||
Forfeited |
(9,180 | ) | $ | 1.09 | $ | 0.91 | ||||||
Exercised |
(214,990 | ) | $ | 1.87 | $ | 1.62 | ||||||
Options outstanding, July 31, 2006 |
411,750 | $ | 1.98 | $ | 1.63 | |||||||
Options exercisable, July 31, 2006 |
354,375 | $ | 2.12 | $ | 1.75 | |||||||
A further summary about awards outstanding at July 31, 2006 was as follows:
| Weighted Average Grant | ||||||||
| Shares | Date Value | |||||||
Unvested options, beginning of period |
36,834 | $ | 3.42 | |||||
Vested upon change of control |
11,334 | $ | 4.00 | |||||
Unvested options outstanding September 21, 2005 |
25,500 | $ | 3.16 | |||||
Conversion ratio applied at September 21, 2005 |
4.59 | |||||||
Converted options |
117,045 | $ | 0.90 | |||||
From September 22, 2005 through July 31, 2006: |
||||||||
Forfeited |
9,180 | $ | 1.09 | |||||
Vested |
50,490 | $ | 0.89 | |||||
Unvested options, period end |
57,375 | $ | 0.91 | |||||
Proceeds, related tax benefits realized from options exercised and intrinsic value of options
exercised were as follows:
| Fiscal Year Ended | ||||||||||||
| July 31, 2006 | July 31, 2005 | July 31, 2004 | ||||||||||
Proceeds of options exercised |
$ | 417,596 | $ | — | $ | 89,801 | ||||||
Related tax benefit recognized |
222,956 | — | — | |||||||||
Intrinsic value of options exercised |
361,729 | — | — | |||||||||
64
The following table provides information about options outstanding and exercisable options at
July 31, 2006:
| Exercisable | ||||||||
| Options Outstanding | Options | |||||||
Number |
411,750 | 354,375 | ||||||
Weighted average exercise price |
$ | 1.98 | $ | 2.12 | ||||
Aggregate intrinsic value |
$ | 671,681 | $ | 619,470 | ||||
Weighted average contractual term |
6.2 years | 5.8 years | ||||||
The weighted average remaining life for options outstanding and weighted average exercise
price per share for exercisable options at July 31, 2006 were as follows:
| Options Outstanding | Exercisable Options | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Remaining Contractual | Remaining Contractual | |||||||||||||||
| Shares | Life (in Years) | Shares | Life (in Years) | |||||||||||||
< $1.00 |
58,375 | 5.9 years | 58,375 | 5.9 years | ||||||||||||
$1.00 – $2.00 |
211,375 | 6.0 years | 154,000 | 5.1 years | ||||||||||||
$2.00 – $5.00 |
142,000 | 6.5 years | 142,000 | 6.5 years | ||||||||||||
Total |
411,750 | 6.2 years | 354,375 | 5.8 years | ||||||||||||
There were 20,000 stock options granted to our new independent directors during the year ended
July 31, 2006. The fair value of options granted during the fiscal year ended July 31, 2006 was
determined at the date of the grant using a Black-Scholes options-pricing model and the following
assumptions:
Expected average risk-free interest rate |
4.0 | % | ||
Expected average life (in years) |
5 | |||
Expected volatility |
79.7 | % | ||
Expected dividend yield |
0 | % |
The expected average risk-free rate is based on U.S. treasury yield curve. The expected
average life represents the period of time that options granted are expected to be outstanding
giving consideration to vesting schedules, historical exercise and forfeiture patterns. Expected
volatility is based on historical volatilities of Valley Forge’s common stock. The expected
dividend yield is based on historical information and management’s plan. The Company expects to
issue new shares as options are exercised. As of July 31, 2006, the future compensation cost
expected to be recognized under SFAS 123(R) is approximately $10,000 in 2007, $9,000 in 2008,
$8,000 in 2009 and $8,000 in 2010.
Restricted Stock Plans
Under our 2001 Plan, our common stock may be granted at no cost to certain employees and
consultants of the Company. Certain plan participants are entitled to cash dividends and voting
rights for their respective shares. Restrictions limit the sale or transfer of these shares during
a vesting period whereby the restrictions lapse either pro-ratably over a five year vesting period
or at the end of the fifth year. Upon issuance of stock under the 2001 Plan, unearned compensation
equivalent to the market value at the date of the grant is charged to stockholders’ equity and
subsequently amortized to expense over the applicable restriction period. During the fiscal year
ended July 31, 2006 shares granted were 82,617 shares. Compensation expense related to these
shares was $288,207. As of July 31, 2006, there was approximately $65,000 of total unrecognized
compensation cost related to non-vested 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.
| Restricted Stock | ||||
Number |
14,601 | |||
Stock price at date of grant |
$ | 5.48 | ||
Aggregate value |
$ | 80,013 | ||
Weighted average contractual term |
3.9 years | |||
65
In connection with the reverse merger described in Note 2, the Company reincorporated in
Delaware, decreased the par value of common stock from $0.01 2/3 to $0.001, increased the
authorized common shares to 50,000,000 and eliminated the outstanding treasury shares.
During the year ended July 31, 2005, Synergetics issued 45,409 shares of common stock to
employees and directors at prices ranging from $4 to $5 per share.
During the year ended July 31, 2004, Synergetics issued 22,200 shares of common stock to
employees and directors at prices ranging from $4 to $5 per share.
On December 22, 1998, Synergetics filed an amended and restated Articles of Incorporation
decreasing the par value of the 8,000,000 shares of common stock it is authorized to issue from
$0.03 1/3 to $0.01 2/3. The holders of common stock have no preemptive rights and the common stock
has no redemption, sinking fund or conversion provisions. Each share of common stock is entitled to
one vote on any matter submitted to the holders and to equal rights in the assets of Synergetics
upon liquidation. All of the outstanding shares of common stock are fully paid and nonassessable.
Note 14. Research and Development Costs
Research and development costs related to both future and present products are charged to
operations as incurred. The Company incurred approximately $1,655,000, $858,000 and $797,000 of
research and development costs during the years ended July 31, 2006, 2005 and 2004, respectively.
Note 15. Segment Information
In conjunction with the recent merger, the Company operates in two distinct business segments
which are distinguishable by the nature of the types of products sold, as disclosed in Note 1.
Certain financial information from continuing operations for these reportable segments is shown in
the following table:
| Synergetics | Valley Forge | Consolidated | ||||||||||
| For the fiscal year ended July 31, 2006 | ||||||||||||
Net sales: |
||||||||||||
Domestic |
$ | 22,588,265 | $ | 7,501,656 | $ | 30,089,921 | ||||||
International |
8,155,714 | — | 8,155,714 | |||||||||
Operating Income |
2,778,475 | 2,223,037 | 5,001,512 | |||||||||
Identifiable Assets |
28,140,803 | 23,502,615 | 51,643,418 | |||||||||
Capital Expenditures |
2,982,795 | 55,541 | 3,038,336 | |||||||||
| For the fiscal year ended July 31, 2005 |
||||||||||||
Net sales: |
||||||||||||
Domestic |
$ | 16,383,432 | $ | — | $ | 16,383,432 | ||||||
International |
5,408,150 | — | 5,408,150 | |||||||||
Operating Income |
2,383,273 | — | 2,383,273 | |||||||||
Identifiable Assets |
20,115,769 | — | 20,115,769 | |||||||||
Capital Expenditures |
1,795,484 | — | 1,795,484 | |||||||||
Note 16. Related Party Transactions
Notes receivable, officer-stockholder represents various loans made during and before 2001 to
a principal stockholder, director and officer of the Company. The notes bear interest at rates of
4.83 percent to 6.97 percent and are payable in either quarterly installments of $3,525 or annual
installments of $14,100 until the principal and accrued interest have been repaid. The notes are
collateralized by
66
5,833 shares of the Company’s common stock. At July 31, 2006, notes receivable,
officer-stockholder totaled $19,968 and all amounts are current.
Note 17. Commitments and Contingencies
In conjunction with the reverse merger described in Note 2, the Company entered into
three-year employment agreements with its Chief Executive Officer, its Chief Operating Officer and
its Chief Scientific 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 base salary and health care benefits through the end of his employment agreement.
On October 19, 2005, IRIDEX Corporation (“IRIDEX”) filed suit in the United States District
Court, Eastern District of Missouri against the Company for patent infringement. This suit is
captioned IRIDEX Corporation v. Synergetics USA, Inc., Case No. 4:05CV1916CDP. IRIDEX filed suit
against the Company for infringement of the IRIDEX Patent No. 5,085,492 (“the ‘492 patent”)
entitled “Optical Fiber with Electrical Encoding.” IRIDEX alleges that Synergetics’ Quick
Disconnect Laser Probes and adapter infringe its patent. It seeks damages, including treble
damages, and injunctive relief. On November 30, 2005, the Company filed its answer in this lawsuit
and asked the court to declare that its products do not infringe the IRIDEX patent. In addition,
the Company countersued IRIDEX alleging that it engaged in false advertising, commercial
disparagement, trade libel, injurious falsehood and unfair competition under the Federal Lanham Act
and applicable Missouri common law. The counterclaim also includes a count of defamation. These
claims primarily relate to alleged false or misleading statements and publications by IRIDEX and
its representatives with respect to the Company’s laser adapters and laser probes. Litigation in
this matter is ongoing. While we believe that we have substantial meritorious defenses to their
claims including that we do not infringe, that there exists substantial prior art that was not
considered in their initial patent application and that six years have lapsed from their
notification of infringement to their filing of the lawsuit which could lead to any potential
damages being limited by the equitable theory of laches and estoppel, we may incur significant
dedication of management resources and legal costs in connection with this lawsuit.
On May 26, 2006, Peregrine Surgical, Ltd. (“Peregrine”) filed suit in the United States
District Court, Eastern District of Pennsylvania against the Company seeking a declaratory judgment
of non-infringement of Patent No. 5,921,998. The suit is captioned Peregrine Surgical, Ltd. v.
Synergetics, Inc. and Synergetics USA, Inc., Case No. 2:06-cv-02237-RBS. On June 19, 2006, by
amendment, Peregrine added Synergetics as a Defendant. On August 17, 2006, the Company and
Synergetics moved to dismiss on the grounds that the Court lacked jurisdiction because at the time
of the complaint, there was no case or controversy. The Court’s ruling on this motion is pending.
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 18. Quarterly Financial Data (Unaudited)
| Quarters Ended | July 31, 2006 | April 30, 2006 | January 30, 2006 | October 27, 2005 | ||||||||||||
Net Sales |
$ | 10,780,551 | $ | 10,449,516 | $ | 9,868,449 | $ | 7,147,119 | ||||||||
Gross Profit |
6,518,567 | (1) | 6,698,864 | (1) | 6,134,127 | (1) | 4,656,323 | (1) | ||||||||
Income from Operations |
1,182,463 | 1,785,405 | 1,456,358 | 577,283 | ||||||||||||
Net Income |
837,193 | 1,026,116 | 858,053 | 359,989 | ||||||||||||
Earnings per Share |
||||||||||||||||
Basic |
$ | 0.03 | (2) | $ | 0.05 | (2) | $ | 0.04 | (2) | $ | 0.04 | (2) | ||||
Diluted |
$ | 0.03 | (2) | $ | 0.05 | (2) | $ | 0.04 | (2) | $ | 0.04 | (2) | ||||
Basic weighted average common shares outstanding |
24,181,547 | 24,090,511 | 23,934,598 | 11,825,684 | ||||||||||||
Diluted weighted average common shares outstanding |
24,406,778 | 24,326,847 | 24,148,742 | 11,927,372 | ||||||||||||
| (1) | During the fourth quarter of the fiscal year ended July 31, 2006, the Company recorded an additional $322,000 charge to the Company’s earnings. |
67
| During fiscal 2006, the Company completed a review of all of its purchased inventory and a substantial portion of its manufactured products in response to a material weakness identified in the prior year. The Company also completed a review of the complete inventory process as part of its compliance with the provisions of Sarbanes-Oxley and identified another weakness. The Company has updated its inventory system and implemented additional controls including monitoring processes and procedures to correct both weaknesses. The Company has analyzed the additional amount charged to earnings during the fourth quarter and has determined that the amount of the charge that would have been applicable to the prior year was immaterial. The amounts in the above table have been adjusted to reflect the estimated charges which would have been applicable to each quarter. The first quarter has been reduced by $183,000 in gross profit and income from operations and $126,000 in net income. The third quarter has been reduced by $139,000 in gross profit and income from operations and $95,000 in net income. The fourth quarter has been increased by $322,000 in gross profit and income from operations and $221,000 in net income. | ||
| (2) | The accumulation of four quarters in fiscal year 2006 for earnings per share may not equal the related per share amounts for the year ended July 31, 2006 due to the timing and amount of shares issued in the reverse merger transaction. |
| Quarters Ended | July 31, 2005 | April 29, 2005 | January 31, 2005 | October 28, 2004 | ||||||||||||
Net Sales |
$ | 5,719,939 | $ | 5,750,074 | $ | 5,346,962 | $ | 4,974,607 | ||||||||
Gross Profit |
3,326,914 | 3,529,413 | 3,366,955 | 3,279,416 | ||||||||||||
Income from Operations |
323,952 | 710,902 | 706,771 | 641,648 | ||||||||||||
Net Income |
275,614 | 387,277 | 423,597 | 371,223 | ||||||||||||
Earnings per Share |
||||||||||||||||
Basic |
$ | 0.08 | $ | 0.11 | $ | 0.12 | $ | 0.11 | ||||||||
Diluted |
$ | 0.08 | $ | 0.11 | $ | 0.12 | $ | 0.11 | ||||||||
Basic weighted average common shares outstanding |
3,456,773 | 3,412,996 | 3,411,364 | 3,411,364 | ||||||||||||
Diluted weighted average common shares outstanding |
3,437,803 | 3,425,667 | 3,424,045 | 3,424,045 | ||||||||||||
Note 19. Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives
embedded in other financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. The statement also
clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS 155 is
effective for all financial instruments acquired, issued, or subject to a remeasurement event
occurring in fiscal years beginning after September 15, 2006. We do not expect the adoption of
SFAS 155 to have an impact on our results of operations or financial condition.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an
amendment to FASB Statement No. 140” (“SFAS 156”). SFAS 156 requires that all separately recognized
servicing rights be initially measured at fair value, if practicable. In addition, this statement
permits an entity to choose between two measurement methods (amortization method or fair value
measurement method) for each class of separately recognized servicing assets and liabilities. This
new accounting standard is effective January 1, 2007. We do not expect the adoption of SFAS 156 to
have an impact on our results of operations or financial condition.
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the
application of SFAS No. 109, “Accounting for Income Taxes” by defining a criterion that an
individual tax position must meet for any part of the benefit of that position to be recognized in
an enterprise’s financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is
effective for our fiscal year commencing July 1, 2007. At this time, we have not completed our
review and assessment of the impact of adoption of FIN 48.
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.
68
Synergetics, Inc. and Subsidiaries
Schedule II — Valuation and Qualifying Accounts
| Balance at | Charged to | Charged to | ||||||||||||||||||
| Beginning of | Cost and | Other | Deductions | Balance at End | ||||||||||||||||
| Classifications | Year | Expenses | Accounts | from Reserves(2) | of Year | |||||||||||||||
Year ended July 31, 2004 |
||||||||||||||||||||
Allowance for Doubtful Accounts |
$ | 40,000 | $ | 7,510 | $ | — | $ | (7,510 | ) | $ | 40,000 | |||||||||
Year ended July 31, 2005 |
||||||||||||||||||||
Allowance for Doubtful Accounts |
$ | 40,000 | $ | 123,798 | $ | — | $ | (28,798 | ) | $ | 135,000 | |||||||||
Year ended July 31, 2006 |
||||||||||||||||||||
Allowance for Doubtful Accounts |
$ | 135,000 | $ | 145,926 | $ | 16,000 | (1) | $ | (117,926 | ) | $ | 179,000 | ||||||||
Allowance for Excess and Obsolete Inventory |
— | 75,000 | — | — | 75,000 | |||||||||||||||
| (1) | Allowance for Doubtful Accounts recorded by Valley Forge Scientific Corp. as of September 22, 2005. | |
| (2) | Adjustments represent write-offs of uncollectible accounts receivable. |
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| Synergetics USA, Inc. | ||||
| (registrant) | ||||
October 16, 2006 |
||||
| /s/ Pamela G. Boone
|
||||
| Financial Officer, Secretary and Treasurer |
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.
October 16, 2006
|
/s/ Gregg D. Scheller
|
|||
| (Principal Executive Officer) and Director | ||||
October 16, 2006
|
/s/ Pamela G. Boone
|
|||
| Financial Officer, Secretary and Treasurer (Principal | ||||
| Financial and Accounting Officer) | ||||
October 16, 2006
|
/s/ Lawrence C. Cardinale
|
|||
October 16, 2006
|
/s/ Robert H. Dick
|
|||
October 16, 2006
|
/s/ Kurt W. Gampp, Jr.
|
|||
October 16, 2006
|
/s/ Guy Guarch
|
|||
October 16, 2006
|
/s/ Juanita H. Hinshaw
|
|||
October 16, 2006
|
/s/ Jerry L. Malis
|
70
Index to Exhibits
| Exhibit | ||
| Number | Description | |
2.1
|
Agreement and Plan of Merger by and among Valley Forge Scientific Corp. (“Valley Forge”), Synergetics Acquisition Corporation and Synergetics, Inc. dated May 2, 2005. (Filed as Exhibit 2.1 to Valley Forge’s Current Report on Form 8-K filed on May 4, 2005 and incorporated herein by reference.) | |
2.2
|
Amendment No. 1 to Agreement and Plan of Merger by and among Valley Forge, Synergetics Acquisition Corporation and Synergetics, Inc. dated June 2, 2005. (Filed as Exhibit 2.1 to Valley Forge’s Current Report on Form 8-K filed on June 3, 2005 and incorporated herein by reference.) | |
2.3
|
Amendment No. 2 to Agreement and Plan of Merger by and among Valley Forge, Synergetics Acquisition Corporation and Synergetics, Inc. dated July 15, 2005. (Filed as Exhibit 2.1 to Valley Forge’s Current Report on Form 8-K filed on July 15, 2005 and incorporated herein by reference.) | |
2.4
|
Agreement and Plan of Reincorporation Merger, dated as of September 22, 2005, between Valley Forge and VFSC Delaware, Inc. (Filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
3.1
|
Amended and Restated Certificate of Incorporation of the Registrant. (Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
3.2
|
Amended and Restated Bylaws of the Registrant. (Filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
4.1
|
Form of common stock certificate of the Registrant. (Filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
10.1
|
Amended and Restated Synergetics USA, Inc. 2001 Stock Plan. (Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2006 and incorporated herein by reference.) | |
10.2
|
Valley Forge Scientific Corp. 2000 Non-Employee Directors’ Stock Option Plan. (Filed as Exhibit 4.3 to Valley Forge’s Registration Statement on Form S-8, Registration No. 333-72134 and incorporated herein by reference.) | |
10.3
|
Valley Forge Scientific Corp. 1988 Non-Qualified Employee Stock Option Plan, as amended. (Filed as Exhibit 10.1 to Valley Forge’s Registration Statement on Form S-8, Registration No. 333-63637 and incorporated herein by reference). | |
10.4
|
Amended and Restated Synergetics USA, Inc. 2005 Non-Employee Directors’ Stock Option Plan. (Filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2006 and incorporated herein by reference.) | |
10.5
|
401(k) and Profit-Sharing Plan. (Filed as Exhibit 10(x) to Valley Forge’s Registration Statement on Form S-18, Registration No. 33-35668-NY and incorporated herein by reference.) | |
10.6
|
Employment Agreement, dated as of September 21, 2005, between Valley Forge and Gregg D. Scheller. (Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
10.7
|
Employment Agreement, dated as of September 21, 2005, between Valley Forge and Jerry L. Malis. (Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
10.8
|
Employment Agreement, dated as of September 21, 2005, between Valley Forge and Kurt W. Gampp, Jr. (Filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
10.9
|
Shareholders’ Agreement, dated as of September 21, 2005, between Valley Forge and each of Gregg D. Scheller, |
71
| Exhibit | ||
| Number | Description | |
| Donna M. Scheller, Kurt W. Gampp, Jr., Jerry L. Malis and the Leonard Malis and Ruth Malis Family Limited Partnership, individually and/or through revocable trusts or family partnerships. (Filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and referenced in the Registrant’s Current Report on Form 8-K filed on October 18, 2005 and incorporated herein by reference.) | ||
10.10
|
Assignment of Know-How Agreement, dated June 30, 1989. (Filed as Exhibit 10(I) to Valley Forge’s Registration Statement on Form S-18, Registration No. 33-35668-NY and incorporated herein by reference.) | |
10.11
|
Assignment of Patents — Bipolar Electrosurgical Systems, June 30, 1989. (Filed as Exhibit 10(h) to Valley Forge’s Registration Statement on Form S-18, Registration No. 33-31008-NY and incorporated herein by reference.) | |
10.12
|
Assignment of Patents — Binocular Magnification System, June 30, 1989. (Filed as Exhibit 10(i) to Valley Forge’s Registration Statement on Form S-18, Registration No. 33-31008-NY and incorporated herein by reference.) | |
10.13
|
Assignment of Malis® trademark, dated June 30, 1989. (Filed as Exhibit 10(j) to Valley Forge’s Registration Statement on Form S-18, Registration No. 33-31008-NY and incorporated herein by reference.) | |
10.14
|
Option Agreement for Malis® Trademark with Leonard I. Malis dated October 22, 2004. (Filed as Exhibit 10.14 to Valley Forge’s Annual Report on Form 10-K for the year ended September 30, 2004 and incorporated herein by reference.) | |
10.15
|
Promissory Note from the Company and Synergetics IP, Inc. to the Estate of Dr. Leonard I. Malis dated October 12, 2005 in the Principal Amount of $3,997,600. (Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 18, 2005 and incorporated herein by reference.) | |
10.16
|
Promissory Note from Jerry L. Malis to Valley Forge. (Filed as Exhibit 10(k) to Valley Forge’s Annual Report on Form 10-K for the year ended September 30, 1994 and incorporated herein by reference.) | |
10.17
|
Promissory Note from Jerry L. Malis to Valley Forge. (Filed as Exhibit 10(p) to Valley Forge’s Annual Report on Form 10-K for the year ended September 30, 1998 and incorporated herein by reference.) | |
10.18
|
Commercial Lease Agreement between GMM Associates and Valley Forge dated July 1, 1995. (Filed as Exhibit 10(p) to Valley Forge’s Annual Report on Form 10-K for the year ended September 30, 1995 and incorporated herein by reference.) | |
10.19
|
Addendum to Commercial Lease Agreement between Valley Forge and GMM Associates dated as of July 1, 2000. (Filed as Exhibit 10.2 to Valley Forge’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 and incorporated herein by reference.) | |
10.20
|
Agreement with Codman & Shurtleff, Inc. dated October 15, 2004. (Filed as Exhibit 10.12 to Valley Forge’s Annual Report on Form 10-K for the year ended September 30, 2004 and incorporated herein by reference.) | |
10.21
|
Amendment No. 1 to the Agreement dated as of October 1, 2004 between Valley Forge and Codman & Shurtleff, Inc. (Filed as Exhibit 10(a) to Valley Forge’s Current Report on Form 8-K filed on March 16, 2005 and incorporated herein by reference.) | |
10.22
|
Supply and Distribution Agreement with Stryker Corporation dated October 25, 2004. (Filed as Exhibit 10.13 to Valley Forge’s Annual Report on Form 10-K for the year ended September 30, 2004 and incorporated herein by reference.) | |
10.23
|
Agreement of Lease between Liberty Property Limited Partnership and Valley Forge. (Filed as Exhibit 10.16 to Valley Forge’s to Registration Statement on Form S-4, Registration No. 333-125521 and incorporated herein by reference.) | |
10.24
|
Agreement for Sale of Commercial Real Estate between Diversified Electronics Co., Inc. and Steve Smith, dated April 21, 2005. (Filed as Exhibit 10.17 to Valley Forge’s Registration Statement on Form S-4, Registration No. 333-125521 and incorporated herein by reference.) | |
10.25
|
Loan Agreement between The Industrial Development Authority of St. Charles County, Missouri and Synergetics Development Company, L.L.C. dated as of September 1, 2002. (Filed as Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) |
72
| Exhibit | ||
| Number | Description | |
10.26
|
Promissory Note from Synergetics Development Company, L.L.C. to The Industrial Development Authority of St. Charles County, Missouri dated September 1, 2002 in the Principal Amount of $2,645,000 (Filed as Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.27
|
Security Agreement (Equipment) dated as of September 1, 2002 from Synergetics, Inc. for the benefit of The Industrial Development Authority of St. Charles County, Missouri. (Filed as Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.28
|
Future Advance Deed of Trust and Security Agreement dated as of September 1, 2002 between Synergetics Development Company, L.L.C. and Victor Zarrilli, as trustee, and The Industrial Development Authority of St. Charles County, Missouri. (Filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.29
|
Guaranty Agreement dated as of September 1, 2002 by and among William L. Bates, Gregg D. Scheller and Kurt W. Gampp, Jr. and Synergetics, Inc. and The Industrial Development Authority of St. Charles County, Missouri. (Filed as Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.30
|
Guaranty of Unassigned Issuer’s Rights dated as of September 1, 2002 by and among William L. Bates, Gregg D. Scheller and Kurt W. Gampp, Jr. and Synergetics, Inc. and The Industrial Development Authority of St. Charles County, Missouri. (Filed as Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.31
|
Bond Purchase Agreement dated as of September 1, 2002 by and among The Industrial Development Authority of St. Charles County, Missouri, Union Planters Bank, N.A. and Synergetics Development Company, L.L.C. (Filed as Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.32
|
First Supplemental Loan Agreement between The Industrial Development Authority of St. Charles County, Missouri and Synergetics Development Company, L.L.C. dated as of December 1, 2004. (Filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.33
|
Promissory Note from Synergetics Development Company, L.L.C. to The Industrial Development Authority of St. Charles County, Missouri dated December 1, 2004 in the Principal Amount of $2,330,000. (Filed as Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.34
|
First Supplemental Future Advance Deed of Trust and Security Agreement dated as of December 1, 2004 between Synergetics Development Company, L.L.C. and Victor Zarrilli, as trustee, and The Industrial Development Authority of St. Charles County, Missouri. (Filed as Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.35
|
First Supplemental Guaranty of Unassigned Issuer’s Rights dated as of December 1, 2004 by and between Synergetics, Inc. and the Industrial Development Authority of St. Charles County, Missouri. (Filed as Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.36
|
Bond Purchase Agreement dated as of December 1, 2004 by and among The Industrial Development Authority of St. Charles County, Missouri, Union Planters Bank, N.A. and Synergetics Development Company, L.L.C. (Filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.37
|
Business Loan Agreement dated September 30, 2005 made and executed between Synergetics, Inc. and Union Planters Bank NA for Principal Amount of $1,000,000. (Filed as Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.38
|
Change in Terms Agreement dated as of September 30, 2005 by Synergetics, Inc. in favor of Union Planters Bank NA in the Principal Amount of $1,000,000. (Filed as Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.39
|
Commercial Guaranty made by Synergetics USA, Inc. regarding Indebtedness of Synergetics, Inc. to Union Planters Bank NA for Principal Amount of $1,000,000. (Filed as Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K |
73
| Exhibit | ||
| Number | Description | |
| for the year ended July 31, 2005 and incorporated herein by reference.) | ||
10.40
|
Commercial Security Agreement dated September 30, 2005 between Synergetics, Inc. and Union Planters Bank NA regarding Indebtedness of Synergetics, Inc. to Union Planters Bank NA for Principal Amount of $1,000,000. (Filed as Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.41
|
Business Loan Agreement dated March 10, 2000 made and executed between Synergetics, Inc. and Union Planters Bank NA for Principal Amount of $1,250,000. (Filed as Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.42
|
Change in Terms Agreement dated as of February 15, 2005 by Synergetics, Inc. in favor of Union Planters Bank NA in the Principal Amount of $1,250,000. (Filed as Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.43
|
Commercial Security Agreement dated March 10, 2000 between Synergetics, Inc. and Union Planters Bank NA regarding Indebtedness of Synergetics, Inc. to Union Planters Bank NA for Principal Amount of $1,250,000. (Filed as Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.44
|
Business Loan Agreement dated as of September 30, 2005 between Synergetics, Inc. and Union Planters Bank NA for Principal Amount of $1,427,105. (Filed as Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.45
|
Promissory Note dated as of September 30, 2005 by Synergetics, Inc. in favor of Union Planters Bank NA in the Principal Amount of $1,427,105. (Filed as Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.46
|
Commercial Guaranty made by Synergetics USA, Inc. regarding Indebtedness of Synergetics, Inc. to Union Planters Bank NA for Principal Amount of $1,427,105. (Filed as Exhibit 10.46 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.47
|
Commercial Security Agreement dated September 30, 2005 between Synergetics, Inc. and Union Planters Bank NA in the Principal Amount of $1,427,105. (Filed as Exhibit 10.47 to the Registrant’s Annual Report on Form 10-K for the year ended July 31, 2005 and incorporated herein by reference.) | |
10.48
|
Form of Employee Restricted Stock Agreement for the Amended and Restated Synergetics USA, Inc. 2001 Stock Plan (Filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2006 and incorporated herein by reference). | |
10.49
|
Letter Agreement between Synergetics, Inc. and Regions Bank, dated February 22, 2006 (Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 2, 2006 and incorporated herein by reference.) | |
10.50
|
Credit and Security Agreement among Synergetics USA, Inc., Synergetics, Inc. and Regions Bank, dated March 13, 2006 (Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 15, 2006 and incorporated herein by reference.) | |
10.51
|
Revolving Note from Synergetics USA, Inc. and Synergetics, Inc. in favor of Regions Bank, dated March 13, 2006 (Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 15, 2006 and incorporated herein by reference.) | |
10.52*
|
First Amendment to Credit and Security Agreement by and among Synergetics, Inc., Synergetics USA, Inc., Regions Bank, as Agent and Lender, and Wachovia Bank, National Association, as Lender, dated September 26, 2006. | |
10.53*
|
Revolving Note from Synergetics USA, Inc. and Synergetics, Inc. in favor of Regions Bank, dated September 26, 2006. | |
10.54*
|
Revolving Note from Synergetics USA, Inc. and Synergetics, Inc. in favor of Wachovia Bank, National Association, dated September 26, 2006. | |
10.55*
|
Letter Agreement between Synergetics, Inc. and Regions Bank, dated September 28, 2006. |
74
| Exhibit | ||
| Number | Description | |
14.1
|
Code of Business Conduct and Ethics of the Registrant. (Filed as Exhibit 14.1 to the Registrant’s Current Report on Form 8-K filed on September 27, 2005 and incorporated herein by reference.) | |
21*
|
Subsidiaries of Registrant. | |
23.1*
|
Consent of McGladrey & Pullen, LLP. | |
31.1*
|
Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification of the Registrant’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2*
|
Certification of the Registrant’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| * | Filed herewith |
75