##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 29, 2008
 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.
  Delaware
    
    20-5715943(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)3845 Corporate Centre DriveOFallon, Missouri
    
    63368(Address of principal executive offices)
    
    (Zip Code)
  (Registrants Telephone Number, Including Area Code)
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company o
 o þ




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##### 



PagePART I Financial InformationItem 1. Unaudited Condensed Consolidated Financial Statements
    
    3Balance Sheets  October 29, 2008 and July 31, 2008
    
    3Statements of Income for the three months ended October 29, 2008 and October 29, 2007
    
    4Statements of Cash Flows for the three months ended October 29, 2008 and October 29, 2007
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    21Item 4. Controls and Procedures
    
    21PART II Other InformationItem 1. Legal Proceedings
    
    22Item 1A. Risk Factors
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    22Item 3. Defaults Upon Senior Securities
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    23Item 5. Other Information
    
    23Item 6. Exhibits
    
    23Trademark Acknowledgements
    
    23Signatures
    
    24Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes Oxley Act of 2002Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes Oxley Act of 2002Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes Oxley Act of 2002Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes Oxley Act of 2002
   2




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##### Table of Contents



Part I  Financial Information
 
 Item 1  Unaudited Condensed Consolidated Financial Statements
 Synergetics USA, Inc. and Subsidiaries
 
 Condensed Consolidated Balance Sheets
 As of October 29, 2008 (Unaudited) and July 31, 2008
 (Dollars in thousands, except per share information)
 October 29, 2008
    
    
    July 31, 2008AssetsCurrent AssetsCash and cash equivalents
    
    $
    446
    
    
    $
    500Accounts receivable, net of allowance for
doubtful accounts of $239 and $250,
respectively
    
    
    8,187
    
    
    
    8,593Inventories
    
    
    15,897
    
    
    
    14,568Prepaid expenses
    
    
    494
    
    
    
    361Deferred income taxes
    
    
    530
    
    
    
    527Total current assets
    
    
    25,554
    
    
    
    24,549Property and equipment, net
    
    
    8,043
    
    
    
    8,159Goodwill
    
    
    10,690
    
    
    
    10,690Other intangible assets, net
    
    
    13,744
    
    
    
    13,946Patents, net
    
    
    1,038
    
    
    
    991Deferred expenses
    
    
    
    
    
    
    6Cash value of life insurance
    
    
    55
    
    
    
    55Total assets
    
    $
    59,124
    
    
    $
    58,396Liabilities and Stockholders EquityCurrent LiabilitiesLines-of-credit
    
    $
    4,452
    
    
    $
    3,287Current maturities of long-term debt
    
    
    1,831
    
    
    
    1,823Current maturities of revenue bonds payable
    
    
    249
    
    
    
    249Accounts payable
    
    
    2,515
    
    
    
    2,776Accrued expenses
    
    
    2,749
    
    
    
    2,659Income taxes payable
    
    
    489
    
    
    
    1,071Total current liabilities
    
    
    12,285
    
    
    
    11,865Long-Term LiabilitiesLong-term debt, less current maturities
    
    
    4,048
    
    
    
    4,309Revenue bonds payable, less current maturities
    
    
    3,601
    
    
    
    3,642Deferred income taxes
    
    
    2,122
    
    
    
    2,223Total long-term liabilities
    
    
    9,771
    
    
    
    10,174Total liabilities
    
    
    22,056
    
    
    
    22,039Commitments and contingencies (Note 6)Stockholders EquityCommon stock at October 29, 2008 and July 31,
2008, $.001 par value, 50,000,000 shares
authorized; 24,440,861 and 24,354,295 shares
issued and outstanding, respectively
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    24,392
    
    
    
    24,342Retained earnings
    
    
    12,652
    
    
    
    11,991Total stockholders equity
    
    
    37,068
    
    
    
    36,357Total liabilities and stockholders equity
    
    $
    59,124
    
    
    $
    58,396
   3




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Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Income
 Three Months Ended October 29, 2008 and October 29, 2007
 (Dollars in thousands, except per share information)
 Three Months Ended
    
    
    Three Months EndedOctober 29, 2008
    
    
    October 29, 2007Net sales
    
    $
    12,246
    
    
    $
    10,469Cost of sales
    
    
    5,166
    
    
    
    3,944Gross profit
    
    
    7,080
    
    
    
    6,525Operating expensesResearch and development
    
    
    652
    
    
    
    449Sales and marketing expenses
    
    
    3,244
    
    
    
    3,051General and administrative
    
    
    2,021
    
    
    
    2,2405,917
    
    
    
    5,740Operating income
    
    
    1,163
    
    
    
    785Other income (expense)Interest income
    
    
    2
    
    
    
    1Interest expense
    
    
    (181
    )
    
    
    (260
    )Miscellaneous
    
    
    3
    
    
    
    20(176
    )
    
    
    (239
    )Income before provision for income taxes
    
    
    987
    
    
    
    546Provision for income taxes
    
    
    326
    
    
    
    149Net income
    
    $
    661
    
    
    $
    397Earnings per share:Basic
    
    $
    0.03
    
    
    $
    0.02Diluted
    
    $
    0.03
    
    
    $
    0.02Basic weighted-average common shares outstanding
    
    
    24,440,861
    
    
    
    24,296,309Diluted weighted-average common shares outstanding
    
    
    24,578,342
    
    
    
    24,433,288
   4




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Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Cash Flows
 Three Months Ended October 29, 2008 and October 29, 2007
 (Dollars in thousands)
 Three Months Ended
    
    
    Three Months EndedOctober 29, 2008
    
    
    October 29, 2007Cash Flows from Operating ActivitiesNet income
    
    $
    661
    
    
    $
    397Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesDepreciation and amortization
    
    
    466
    
    
    
    485Provision for doubtful accounts receivable
    
    
    (11
    )
    
    
    86Stock-based compensation
    
    
    50
    
    
    
    42Deferred income taxes
    
    
    (104
    )
    
    
    (72
    )Change in assets and liabilities(Increase) decrease in:Accounts receivable
    
    
    417
    
    
    
    872Income taxes receivable
    
    
    
    
    
    
    3Inventories
    
    
    (1,329
    )
    
    
    (535
    )Prepaid expenses
    
    
    (133
    )
    
    
    (127
    )(Decrease) increase in:Accounts payable
    
    
    (261
    )
    
    
    (1,260
    )Accrued expenses
    
    
    90
    
    
    
    47Income taxes payable
    
    
    (582
    )
    
    
    224Net cash provided by (used in) operating
activities
    
    
    (736
    )
    
    
    162Cash Flows from Investing ActivitiesPurchase of property and equipment
    
    
    (127
    )
    
    
    (272
    )Acquisition of patents and other intangibles
    
    
    (62
    )
    
    
    (43
    )Net cash used in investing activities
    
    
    (189
    )
    
    
    (315
    )Cash Flows from Financing ActivitiesExcess of outstanding checks over bank balance
    
    
    
    
    
    
    (382
    )Net borrowings on lines-of-credit
    
    
    1,165
    
    
    
    1,042Principal payments on revenue bonds payable
    
    
    (41
    )
    
    
    (62
    )Principal payments on long-term debt
    
    
    (123
    )
    
    
    (330
    )Payments on debt incurred for acquisition of trademark
    
    
    (130
    )
    
    
    (122
    )Net cash provided by financing activities
    
    
    871
    
    
    
    146Net decrease in cash and cash equivalents
    
    
    (54
    )
    
    
    (7
    )Cash and cash equivalentsBeginning
    
    
    500
    
    
    
    167Ending
    
    $
    446
    
    
    $
    160
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Synergetics USA, Inc. and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 (Tabular information reflects dollars in thousands, except share and per share information)
 Note 1. General
 Nature of business:
 Reporting period:
 Basis of presentation:
 Note 2. Summary of Significant Accounting Policies
  Reclassifications:
  6




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Note 3. Distribution Agreements
  Codman and Shurtleff, Inc. (Codman)
 ®
  Note 4. Stock-Based Compensation
 Stock Option Plans
  Three Months Ended October 29, 2008Weighted-Average
    
    
    Weighted-Exercise
    
    
    AverageShares
    
    
    Price
    
    
    Fair ValueOptions outstanding, beginning of period
    
    
    436,735
    
    
    $
    2.23
    
    
    $
    1.84For the period from August 1, 2008
through October 29, 2008:Granted
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Options outstanding, end of period
    
    
    436,735
    
    
    $
    2.23
    
    
    $
    1.84Options exercisable, end of period
    
    
    389,797
    
    
    $
    2.50
    
    
    $
    2.06
  Expected average risk-free interest rate
    
    
    3.5
    %Expected average life (in years)
    
    
    5Expected volatility
    
    
    69.2
    %Expected dividend yield
    
    
    0.0
    %
   7




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Restricted Stock Plans
  Note 5. Supplemental Balance Sheet Information
 Inventories
 October 29, 2008
    
    
    July 31, 2008Raw material and component parts
    
    $
    5,931
    
    
    $
    5,379Work-in-progress
    
    
    3,528
    
    
    
    2,772Finished goods
    
    
    6,438
    
    
    
    6,417$
    15,897
    
    
    $
    14,568
 Property and equipment
 October 29, 2008
    
    
    July 31, 2008Land
    
    $
    730
    
    
    $
    730Building and improvements
    
    
    5,720
    
    
    
    5,720Machinery and equipment
    
    
    4,992
    
    
    
    4,959Furniture and fixtures
    
    
    692
    
    
    
    680Software
    
    
    333
    
    
    
    332Construction in process
    
    
    111
    
    
    
    3012,578
    
    
    
    12,451Less accumulated depreciation
    
    
    4,535
    
    
    
    4,292$
    8,043
    
    
    $
    8,159
 Other intangible assets
  GrossCarrying
    
    
    AccumulatedValue
    
    
    Amortization
    
    
    NetOctober 29, 2008Proprietary know-how
    
    $
    4,057
    
    
    $
    1,086
    
    
    $
    2,971Trademark
    
    
    5,923
    
    
    
    
    
    
    
    5,923Licensing agreements
    
    
    5,834
    
    
    
    984
    
    
    
    4,850Patents
    
    
    1,385
    
    
    
    347
    
    
    
    1,038$
    17,199
    
    
    $
    2,417
    
    
    $
    14,782
 July 31, 2008Proprietary know-how
    
    $
    4,057
    
    
    $
    1,017
    
    
    $
    3,040Trademark
    
    
    5,923
    
    
    
    
    
    
    
    5,923Licensing agreements
    
    
    5,834
    
    
    
    851
    
    
    
    4,983Patents
    
    
    1,315
    
    
    
    324
    
    
    
    991$
    17,129
    
    
    $
    2,192
    
    
    $
    14,937
  8




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Periods Ending July 31:
    
    AmountFiscal Year 2009 (remaining 9 months)
    
    $
    653Fiscal Year 2010
    
    
    842Fiscal Year 2011
    
    
    619Fiscal Year 2012
    
    
    565Fiscal Year 2013
    
    
    563
  Pledged assets; short and long-term debt (excluding revenue bonds payable)
  Revolving Credit Facility:
  Non-U.S. Receivables Revolving Credit Facility
  9




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Equipment Line of Credit
  October 29,
    
    
    July 31,2008
    
    
    2008Note payable to bank, due in monthly
installments of $41,022 beginning August
2008 plus interest at a rate of 5.0
percent, remaining balance due July 31,
2011, collateralized by substantially all
assets of the Company
    
    $
    1,354
    
    
    $
    1,477Note payable to the estate of the late Dr.
Leonard I. Malis, due in quarterly
installments of $159,904 which includes
interest at an imputed rate of 6.00
percent, remaining balance of $2,078,752,
including contractual interest payments,
due December 2011, collateralized by the
Malis® trademark
    
    
    1,876
    
    
    
    2,006Settlement obligation to Iridex
Corporation, due in annual installments of
$800,000 which includes interest at an
imputed rate of 8.00 percent, remaining
balance of $3,200,000 including the
effects of imputing interest, due April
15, 2012
    
    
    2,649
    
    
    
    2,6495,879
    
    
    
    6,132Less current maturities
    
    
    1,831
    
    
    
    1,823Long-term portion
    
    $
    4,048
    
    
    $
    4,309
 Note 6. Commitments and Contingencies
       10




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Note 7. Entity Wide Information
  Three Months EndedOctober 29,
    
    
    October 29,2008
    
    
    2007Product Line:Ophthalmic
    
    $
    7,384
    
    
    $
    6,365Neurosurgery
    
    
    2,953
    
    
    
    2,561OEM (Codman, Stryker and Iridex)
    
    
    1,782
    
    
    
    1,364Other (ENT and Dental)
    
    
    127
    
    
    
    179Total
    
    $
    12,246
    
    
    $
    10,469Region Specific:Domestic
    
    $
    8,746
    
    
    $
    7,719International
    
    
    3,500
    
    
    
    2,750Total
    
    $
    12,246
    
    
    $
    10,469
  Note 8. Recent Accounting Pronouncements
 Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
    11




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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
  The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act), provide a safe harbor for forward-looking
statements made by or on behalf of the Company. The Company and its representatives may from time
to time make written or oral statements that are forward-looking, including statements contained
in this report and other filings with the Securities and Exchange Commission (SEC) and in our
reports to stockholders. In some cases forward-looking statements can be identified by words such
as believe, expect, anticipate, plan, potential, continue or similar expressions. Such
forward-looking statements include risks and uncertainties and there are important factors that
could cause actual results to differ materially from those expressed or implied by such
forward-looking statements. These factors, risks and uncertainties can be found in Part I, Item 1A,
Risk Factors section of the Companys Form 10-K for the fiscal year ended July 31, 2008.
 Although we believe the expectations reflected in our forward-looking statements are based
upon reasonable assumptions, it is not possible to foresee or identify all factors that could have
a material effect on the future financial performance of the Company. The forward-looking
statements in this report are made on the basis of managements assumptions and analyses, as of the
time the statements are made, in light of their experience and perception of historical conditions,
expected future developments and other factors believed to be appropriate under the circumstances.
 In addition, certain market data and other statistical information used throughout this report
are based on independent industry publications. Although we believe these sources to be reliable,
we have not independently verified the information and cannot guarantee the accuracy and
completeness of such sources.
 Except as otherwise required by the federal securities laws, we disclaim any obligation or
undertaking to publicly release any updates or revisions to any forward-looking statement contained
in this quarterly report on Form 10-Q and the information incorporated by reference in this report
to reflect any change in our expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
 Overview
    13




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® ®
 ® ® ® ®
    14




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Recent Developments
   New Product Sales
  Growth in Minimally Invasive Surgery Procedures
 TM TM TM ® ®
  15




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Demand Trends
  Pricing Trends
 TM ®
 Results Overview
  Our Business Strategy
  
    
    continuous improvement and development of our people,
    
    continuous improvement and development of our manufacturing facilities,
    
    continuous improvement of our systems; and
    
    continuous improvement of our research and development initiatives.
    16




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Results of Operations
 Three Month Period Ended October 29, 2008 Compared to Three Month Period Ended October 29, 2007
 Net Sales
  Quarter Ended% IncreaseOctober 29, 2008
    
    
    October 29, 2007
    
    
    (Decrease)Ophthalmic
    
    $
    7,384
    
    
    $
    6,365
    
    
    
    16.0
    %Neurosurgery
    
    
    2,953
    
    
    
    2,561
    
    
    
    15.3
    %OEM (Codman, Stryker and Iridex)
    
    
    1,782
    
    
    
    1,364
    
    
    
    30.6
    %Other
    
    
    127
    
    
    
    179
    
    
    
    (29.1
    %)Total
    
    $
    12,246
    
    
    $
    10,469
    
    
    
    17.0
    %
 TM TM
 ® TM ®
   17




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Quarter Ended October 29,2008
    
    
    2007
    
    
    % IncreaseUnited States (including OEM sales)
    
    $
    8,746
    
    
    $
    7,719
    
    
    
    13.3
    %International (including Canada)
    
    
    3,500
    
    
    
    2,750
    
    
    
    27.3
    %Total
    
    $
    12,246
    
    
    $
    10,469
    
    
    
    17.0
    %
  Gross Profit
  Operating Expenses
     18




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Other Expenses
  Operating Income, Income Taxes and Net Income
    Liquidity and Capital Resources
       19




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Revolving Credit Facility:
  Non-U.S. Receivables Revolving Credit Facility
 Equipment Line of Credit
  Critical Accounting Policies
   20




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Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   21




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Part II  Other Information
 
 Item 1  Legal Proceedings
    
 Item 1A  Risk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
   22




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Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit No.
    
    Description31.1
    
    
    Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 Trademark Acknowledgements
   23




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SYNERGETICS USA, INC.
(Registrant)December 8, 2008
    
    /s/Robert Dick

Robert Dick, Chairman of the Board of Directors(Principal Executive Officer and Director)December 8, 2008
    
    /s/ Pamela G. Boone

Pamela G. Boone, Executive VicePresident, Chief Financial Officer, Secretaryand Treasurer (Principal Financial andPrincipal Accounting Officer)
  24




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##### Table of Contents



Exhibit No.
    
    Description31.1
    
    
    Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  25