##### 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, 2006
 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 000-51602
 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
  o þ o
 o þ




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##### 



PagePART I Financial InformationItem 1. Unaudited Condensed Consolidated Financial Statements
    
    
    3Balance Sheets  October 29, 2006 and July 31, 2006
    
    
    3Statements of Income for the three months ended October 29, 2006 and October 27, 2005
    
    
    4Statements of Cash Flows for the three months ended October 29, 2006 and October 27, 2005
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    19PART II Other Information
    
    
    19Item 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    20Signatures
    
    
    22302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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##### Table of Contents



Part I  Financial Information
 
 Item 1  Unaudited Condensed Consolidated Financial Statements
 Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Balance Sheets
As of October 29, 2006 and July 31, 2006
 (Dollars in thousands except share data)
 October 29, 2006
    
    
    July 31, 2006AssetsCurrent AssetsCash and cash equivalents
    
    $
    218
    
    
    $
    557Investment in trading securities
    
    
    
    
    
    
    50Accounts receivable, net of allowance for
doubtful accounts of approximately $180
and $159, respectively
    
    
    6,809
    
    
    
    6,807Notes receivable, officer-stockholder
    
    
    16
    
    
    
    20Income taxes receivable
    
    
    345
    
    
    
    513Inventories
    
    
    14,800
    
    
    
    13,243Prepaid expenses
    
    
    474
    
    
    
    422Deferred income taxes
    
    
    296
    
    
    
    296Other
    
    
    16
    
    
    
    Total current assets
    
    
    22,974
    
    
    
    21,908Property and equipment, net
    
    
    8,352
    
    
    
    8,497Goodwill
    
    
    10,660
    
    
    
    10,660Other intangible assets, net
    
    
    10,361
    
    
    
    10,463Deferred expenses
    
    
    160
    
    
    
    83Cash value of life insurance
    
    
    33
    
    
    
    32Total assets
    
    $
    52,540
    
    
    $
    51,643Liabilities and Stockholders EquityCurrent LiabilitiesLines-of-credit
    
    $
    3,649
    
    
    $
    3,330Current maturities of long-term debt
    
    
    1,185
    
    
    
    967Current maturities of revenue bonds payable
    
    
    249
    
    
    
    249Accounts payable
    
    
    2,383
    
    
    
    2,255Accrued expenses
    
    
    1,903
    
    
    
    2,503Income taxes payable
    
    
    36
    
    
    
    Deferred revenue
    
    
    4
    
    
    
    6Total current liabilities
    
    
    9,409
    
    
    
    9,310Long-Term LiabilitiesLong-term debt, less current maturities
    
    
    3,676
    
    
    
    3,215Revenue bonds payable, less current maturities
    
    
    4,077
    
    
    
    4,140Deferred income taxes
    
    
    2,663
    
    
    
    2,663Deferred compensation
    
    
    
    
    
    
    10Total long-term liabilities
    
    
    10,416
    
    
    
    10,028Total liabilities
    
    
    19,825
    
    
    
    19,338Stockholders EquityCommon stock at October 29, 2006 and July 31, 2006,
$.001 par value, 50,000,000 shares authorized and
$0.01667 par value; 24,211,809 and 24,206,970
shares issued and outstanding, respectively
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    23,831
    
    
    
    23,798Retained earnings
    
    
    8,860
    
    
    
    8,483Total stockholders equity
    
    
    32,715
    
    
    
    32,305Total liabilities and stockholders equity
    
    $
    52,540
    
    
    $
    51,643
  3




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##### Table of Contents



Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Income
Three Months Ended October 29, 2006 and October 27, 2005
 (Dollars in thousands, except per share information)
 Three Months Ended
    
    
    Three Months EndedOctober 29, 2006
    
    
    October 27, 2005Sales
    
    $
    9,906
    
    
    $
    7,147Cost of sales
    
    
    3,755
    
    
    
    2,308Gross profit
    
    
    6,151
    
    
    
    4,839Operating expensesResearch and development
    
    
    496
    
    
    
    277Selling, general and administrative
    
    
    4,937
    
    
    
    3,8025,433
    
    
    
    4,079Operating income
    
    
    718
    
    
    
    760Other income (expense)Interest income
    
    
    
    
    
    
    12Interest expense
    
    
    (165
    )
    
    
    (36
    )Miscellaneous
    
    
    9
    
    
    
    (156
    )
    
    
    (24
    )Income before provision for income taxes
    
    
    562
    
    
    
    736Provision for income taxes
    
    
    185
    
    
    
    250Net income
    
    $
    377
    
    
    $
    486Earnings per share:Basic
    
    $
    0.02
    
    
    $
    0.04Diluted
    
    $
    0.02
    
    
    $
    0.04Basic weighted average common shares outstanding
    
    
    24,210,680
    
    
    
    11,825,344Diluted weighted average common shares outstanding
    
    
    24,410,724
    
    
    
    11,927,031
  4




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##### Table of Contents



Synergetics USA, Inc. and Subsidiaries
 
 Unaudited Condensed Consolidated Statements of Cash Flows
Three months Ended October 29, 2006 and October 27, 2005
 (Dollars in thousands)
 Three Months Ended
    
    
    Three Months EndedOctober 29, 2006
    
    
    October 27, 2005Cash Flows from Operating ActivitiesNet income
    
    $
    377
    
    
    $
    486Adjustments to reconcile net income to net cash used in operating activitiesDepreciation and amortization
    
    
    356
    
    
    
    243Provision for doubtful accounts receivable
    
    
    21
    
    
    
    3Stock-based compensation
    
    
    33
    
    
    
    201Change in assets and liabilities, net of fiscal year 2006 acquisition of Valley Forge:(Increase) decrease in:Receivables, net
    
    
    (23
    )
    
    
    (114
    )Inventories
    
    
    (1,557
    )
    
    
    (1,378
    )Prepaid expenses
    
    
    (52
    )
    
    
    (221
    )Other current assets
    
    
    152
    
    
    
    (7
    )(Decrease) increase in:Accounts payable
    
    
    128
    
    
    
    (66
    )Accrued
expenses and other liabilities
    
    
    (612
    )
    
    
    270Income taxes payable
    
    
    36
    
    
    
    (43
    )Net cash used in operating activities
    
    
    (1,141
    )
    
    
    (626
    )Cash Flows from Investing ActivitiesNet decrease in notes receivable, officer-stockholder
    
    
    4
    
    
    
    3Purchase of property and equipment
    
    
    (75
    )
    
    
    (1,451
    )Acquisition of patents and other intangibles
    
    
    (112
    )
    
    
    (8
    )Cash paid for reverse merger costs
    
    
    
    
    
    
    (498
    )Cash acquired through reverse merger
    
    
    
    
    
    
    2,024Sales of trading securities
    
    
    50
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (133
    )
    
    
    70Cash Flows from Financing ActivitiesNet borrowings on lines-of-credit
    
    
    319
    
    
    
    1Principal payments on revenue bonds payable
    
    
    (63
    )
    
    
    (62
    )Proceeds from long-term debt
    
    
    919
    
    
    
    115Principal payments on long-term debt
    
    
    (125
    )
    
    
    (69
    )Payments on debt incurred for acquisition of trademark
    
    
    (115
    )
    
    
    (160
    )Proceeds from the exercise of stock options
    
    
    
    
    
    
    7Net cash provided by (used in) financing activities
    
    
    935
    
    
    
    (168
    )Net decrease in cash and cash equivalents
    
    
    (339
    )
    
    
    (724
    )Cash and cash equivalentsBeginning
    
    
    557
    
    
    
    1,817Ending
    
    $
    218
    
    
    $
    1,093
  5




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Synergetics USA, Inc. and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 (Dollars in thousands, except per share information)
 Note 1. General
 Nature of business:
 Reporting period:
 Basis of presentation:
 Note 2. Summary of Significant Accounting Policies
  Reclassifications:
 Note 3. Reverse Merger
  6




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Assets:Cash, net of merger expenses of $892
    
    $
    1,132Accounts receivable
    
    
    703Inventories
    
    
    926Prepaid expenses and other current assets
    
    
    574Property and equipment
    
    
    324Other intangibles
    
    
    10,183Goodwill
    
    
    10,660Liabilities assumed:Accounts payable and accrued expenses
    
    
    (510
    )Income taxes payable
    
    
    (36
    )Note payable issued in connection with Malis® trademark
    
    
    (3,473
    )Deferred income taxes
    
    
    (2,496
    )Net assets acquired
    
    $
    17,987
   Three MonthsEndedOctober 27, 2005 (1)Net sales
    
    $
    8,019Net income
    
    
    321Basic earnings per share
    
    
    0.01Diluted earnings per share
    
    
    0.01
   Note 4. Distribution Agreements
  Codman and Shurtleff, Inc. (Codman)
  7




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®
  Stryker Corporation (Stryker)
    Note 5. Stock-Based Compensation
 Stock Option Plans
  Three Months Ended October 29, 2006Weighted-Average
    
    
    Weighted-Exercise
    
    
    AverageShares
    
    
    Price
    
    
    Fair ValueOptions outstanding, beginning of period
    
    
    411,750
    
    
    $
    1.98
    
    
    $
    1.63For the period from August 1, 2006 through October 29, 2006:Granted
    
    
    
    
    
    $
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    $
    Options outstanding, end of period
    
    
    411,750
    
    
    $
    1.98
    
    
    $
    1.63Options exercisable, end of period
    
    
    354,375
    
    
    $
    2.12
    
    
    $
    1.75
 Restricted Stock Plans
  8




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Note 6: Supplemental Balance Sheets Information
 Inventories (dollars in thousands)
 October 29,
    
    
    July 31,2006
    
    
    2006Raw material and component parts
    
    $
    6,282
    
    
    $
    5,614Work-in-progress
    
    
    2,652
    
    
    
    2,493Finished goods
    
    
    5,866
    
    
    
    5,136$
    14,800
    
    
    $
    13,243
 Property and equipment (dollars in thousands)
 October 29,
    
    
    July 31,2006
    
    
    2006Land
    
    $
    730
    
    
    $
    730Building and improvements
    
    
    5,397
    
    
    
    5,340Machinery and equipment
    
    
    4,170
    
    
    
    4,196Furniture and fixtures
    
    
    539
    
    
    
    546Software
    
    
    105
    
    
    
    105Construction in process
    
    
    65
    
    
    
    11,006
    
    
    
    10,917Less accumulated depreciation
    
    
    2,654
    
    
    
    2,420$
    8,352
    
    
    $
    8,497
 Other intangible assets (dollars in thousands)
  GrossCarrying
    
    
    AccumulatedValue
    
    
    Amortization
    
    
    NetOctober 29, 2006Patents
    
    $
    907
    
    
    $
    197
    
    
    $
    710Proprietary know-how
    
    
    4,047
    
    
    
    428
    
    
    
    3,619Licensing agreements
    
    
    140
    
    
    
    67
    
    
    
    73Organizational costs
    
    
    36
    
    
    
    
    
    
    
    36Trademark
    
    
    5,923
    
    
    
    
    
    
    
    5,923$
    11,053
    
    
    $
    692
    
    
    $
    10,361
 July 31, 2006Patents
    
    $
    915
    
    
    $
    184
    
    
    $
    731Proprietary know-how
    
    
    4,057
    
    
    
    337
    
    
    
    3,720Licensing agreements
    
    
    140
    
    
    
    51
    
    
    
    89Trademark
    
    
    5,923
    
    
    
    
    
    
    
    5,923$
    11,035
    
    
    $
    572
    
    
    $
    10,463
  9




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Years Ending July 31:
    
    Amount2007
    
    $
    4022008
    
    
    3702009
    
    
    3282010
    
    
    3182011
    
    
    303
  Pledged assets; short and long-term debt (excluding revenue bonds payable)
  Revolving Credit Facilities:
 Equipment Line of Credit:
  October 29,
    
    
    July 31,2006
    
    
    2006Note payable to bank, due
in monthly principal
installments of $1,139 plus
interest at prime rate plus 1%
(an effective rate of 8.25% as
of October 29, 2006), remaining
balance due September 2007,
collateralized by a second deed
of trust
    
    $
    161
    
    
    $
    165Note payable, due in monthly
installments of $509, including
interest at 4.9%, remaining
balance due May 2008,
collateralized by a vehicle
    
    
    7
    
    
    
    9Note payable to bank, due in
monthly principal installments
of $39,642 beginning November
2005 plus interest at a rate of
6.75%, remaining balance due
September 30, 2008,
collateralized by substantially
all assets of the Company
    
    
    912
    
    
    
    1,031Note payable to bank, due in
monthly installments of $19,173
beginning December 2006 plus
interest at a rate of 8.25%,
remaining balance due on
November 14, 2010,
collateralized by substantially
all assets of the Company
    
    
    919
    
    
    
    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
$3,357,984, including
contractual interest payments,
due December 2011,
collateralized by the
Malis® trademark
    
    
    2,862
    
    
    
    2,9774,861
    
    
    
    4,182Less current maturities
    
    
    1,185
    
    
    
    967Long-term portion
    
    $
    3,676
    
    
    $
    3,215
 Note 7. Related Party Transactions
  10




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Note 8. Commitments and Contingencies
   et al inter alia
   Note 9. Segment Information
  Synergetics
    

Synergetics
East
    
    ConsolidatedThree Months Ended October 29, 2006Net sales
    
    $
    8,201
    
    
    $
    1,705
    
    
    $
    9,906Operating income
    
    
    429
    
    
    
    289
    
    
    
    718Identifiable assets
    
    
    32,429
    
    
    
    20,111
    
    
    
    52,540
 Three Months Ended October 27, 2005Net sales
    
    $
    6,391
    
    
    $
    756
    *
    
    $
    7,147Operating income
    
    
    656
    
    
    
    105
    *
    
    
    760Identifiable assets
    
    
    20,386
    
    
    
    24,288
    
    
    
    44,674
 
 *
    
    For the period September 22, 2005 through October 27, 2005. 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, 2006.
 Although we believe the expectations reflected in our forward-looking statements are based
upon reasonable assumptions, it is not possible to foresee or identify all facts that could have a
material effect on the future financial performance of the Company. The forward-looking statements
in this report are made on the basis of managements assumptions and analyses, as of the time the
statements are made, in light of their experience and perception of historical conditions, expected
future developments and other factors believed to be appropriate under the circumstances.
 In addition, certain market data and other statistical information used throughout this report
are based on independent industry publications. Although we believe these sources to be reliable,
we have not independently verified the information and cannot guarantee the accuracy and
completeness of such sources.
 Except as otherwise required by the federal securities laws, we disclaim any obligation or
undertaking to publicly release any updates or revisions to any forward-looking statement contained
in this quarterly report on Form 10-Q and the information incorporated by reference in this report
to reflect any change in our expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.
 Overview
   ® ® ® TM
 12




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® ® TM ® TM
 ® ® ® ® ® ® ®
  New Product Sales
  Growth in Minimally Invasive Surgery Procedures
 TM ® TM
 Demand Trends
  13




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Pricing Trends
   Results Overview
  Our Business Strategy
  
    
    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 (including Canada) growth;
    
    Utilizing the 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 including the
expansion of our domestic ophthalmic sales force and development of
an international direct ophthalmic sales force;
    
    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 the
Omni®,
our ultrasonic aspirator, into other surgical markets such as the
neurospine and the ENT markets; and
 14




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##### Table of Contents




    
    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 Medical of France (Quantel).
 Results of Operations
 ®
 Three Month Period Ended October 29, 2006 Compared to Three Month Period Ended October 27, 2005
 Net Sales
  Quarter Ended October*
    
    
    % Increase2007
    
    
    2006**
    
    
    (Decrease)Synergetics:Ophthalmic
    
    $
    5,306
    
    
    $
    5,354
    
    
    
    (0.9
    %)Neurosurgery
    
    
    2,895
    
    
    
    1,037
    
    
    
    179.2
    %Synergetics
East
    
    
    1,705
    
    
    
    756
    
    
    
    125.5
    %$
    9,906
    
    
    $
    7,147
    
    
    
    38.6
    %
 
 *
    
    For fiscal 2007, this information is for the quarter ended October 29, 2006, and for fiscal
2006, the quarter ended October 27, 2005.**
    
    For fiscal 2006, this tabular information reflects the net
sales of Synergetics East from
September 22, 2005 through October 27, 2005. TM TM
 TM TM
 ® TM
  Quarter Ended October*2007
    
    
    2006**
    
    
    % IncreaseUnited States  Synergetics
    
    $
    6,333
    
    
    $
    4,851
    
    
    
    30.6
    %United
States  Synergetics East
    
    
    1,705
    
    
    
    756
    
    
    
    125.5
    %International
 Synergetics(including Canada)
    
    
    1,868
    
    
    
    1,540
    
    
    
    21.3
    %$
    9,906
    
    
    $
    7,147
    
    
    
    38.6
    %
 
 *
    
    For fiscal 2007, this information is for the quarter ended October 29, 2006, and for fiscal
2006, the quarter ended October 27, 2005.**
    
    For fiscal 2006, this tabular information reflects the net
sales of Synergetics East from
September 22, 2005 through October 27, 2005. 15




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® ® TM
 Gross Profit
  Operating Expenses
   Other Expense
  Operating Income, Income Taxes and Net Income
    16




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Segment Reporting
 ®
  Liquidity and Capital Resources
      17




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®
  Revolving Credit Facility:
 Equipment Line of Credit:
  Critical Accounting Policies
  
 Item 3  Quantitative and Qualitative Disclosures about Market Risk
    18




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Item 4  Controls and Procedures
    
 Part II  Other Information
 
 Item 1  Legal Proceedings
    19




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et al inter alia
    
 Item 1A  Risk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 20




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Exhibit No.
    
    Description31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Trademark Acknowledgements
  21




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##### Table of Contents



SYNERGETICS USA, INC.
(Registrant)December 8, 2006
    
    /s/ Gregg D. SchellerGregg D. Scheller, President and ChiefExecutive Officer (Principal ExecutiveOfficer)December 8, 2006
    
    /s/ Pamela G. BoonePamela G. Boone, Executive VicePresident, Chief Financial Officer, Secretaryand Treasurer (Principal Financial andPrincipal Accounting Officer)
 22