<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1995
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
QUEST MEDICAL, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
TEXAS 3841 75-1646002
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
ONE ALLENTOWN PARKWAY THOMAS C. THOMPSON
ALLEN, TEXAS 75002 PRESIDENT AND CHIEF EXECUTIVE OFFICER
(214) 390-9800 ONE ALLENTOWN PARKWAY
(Address and Telephone Number of Principal ALLEN, TEXAS 75002
Executive Offices and Principal Place of (214) 390-9800
Business) (Name, Address and Telephone Number
of Agent for Service)
</TABLE>
---------------------
Copies to:
<TABLE>
<S> <C>
KENNETH G. HAWARI MICHAEL W. HALL
JAMES E. CAHILL PETER COHN
HUGHES & LUCE, L.L.P. VENTURE LAW GROUP
1717 MAIN STREET, SUITE 2800 A PROFESSIONAL CORPORATION
DALLAS, TEXAS 75201 2800 SAND HILL ROAD
(214) 939-5500 MENLO PARK, CALIFORNIA 94025
(415) 854-4488
</TABLE>
---------------------
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF DOLLAR AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.05 par
value...................... $39,243,750 $13.125 $39,243,750 $13,533
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Common Stock Rights(3)....... N/A N/A N/A N/A
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</TABLE>
(1) Dollar amount to be registered consists of 2,990,000 shares of Common Stock
at $13.125 per share and the same number of Common Stock Rights (including
up to 390,000 shares subject to an over-allotment option granted to
Underwriters).
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933.
(3) See "Description of Capital Stock -- Shareholders' Rights Plan."
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
QUEST MEDICAL, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM SB-2 PROSPECTUS CAPTION OR LOCATION
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<C> <S> <C>
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus........... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of the Prospectus; Available Information
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Underwriting
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Principal and Selling Shareholders; Certain
Transactions
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Legal Proceedings.......................... Business
10. Directors, Executive Officers, Promoters
and Control Persons...................... Management
11. Security Ownership of Certain Beneficial
Owners and Management.................... Principal and Selling Shareholders
12. Description of Securities.................. Description of Capital Stock
13. Interest of Named Experts and Counsel...... Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification of Securities Act
Liabilities.............................. Not Applicable
15. Organization within Last Five Years........ Certain Transactions
16. Description of Business.................... Prospectus Summary; Business
17. Management's Discussion and Analysis or
Plan of Operation........................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property.................... Business
19. Certain Relationships and Related
Transactions............................. Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters...................... Outside Front Cover Page of Prospectus;
Price Range of Common Stock; Dividend
Policy
21. Executive Compensation..................... Management
22. Financial Statements....................... Financial Statements
23. Changes In and Disagreements with
Accountants on Accounting and Financial
Disclosure............................... Not Applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 1995
PROSPECTUS
2,600,000 SHARES
LOGO
COMMON STOCK
Of the 2,600,000 shares of Common Stock offered hereby, 1,516,667 shares
are being sold by Quest Medical, Inc. ("Quest" or the "Company") and 1,083,333
shares are being sold by shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of the Common Stock by the Selling
Shareholders. The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "QMED." On September 26, 1995, the last reported sale price for
the Common Stock was $13.125 per share. See "Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS," BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO PROCEEDS TO
PRICE TO PUBLIC UNDERWRITING COMPANY(2) SELLING SHAREHOLDERS
DISCOUNTS
AND COMMISSIONS(1)
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<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
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Total(3)....................... $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company, estimated
to be $ .
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 390,000 additional shares of
Common Stock on the same terms and conditions set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds
to Company will be $ , $ and $ , respectively. See
"Underwriting."
---------------------------
The shares of Common Stock offered by the Underwriters are subject to
prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made through the
offices of Vector Securities International, Inc., in Deerfield, Illinois on or
about , 1995.
---------------------------
LOGO LOGO
, 1995
<PAGE> 4
[Artist's renditions of the Company's MPS brand of myocardial protection system
and related disposables; CompuStim spinal cord stimulation device; anesthesia
delivery sets; and operating room scenes]
---------------------
The Company has a number of federally registered trademarks, including
QUEST(R), MULTIPORT(R), RETROGUARD(R), RETRACT-O-TAPE(R), ACTest(R) and
DUO-TUBE(R). MPS(TM), COMPUSTIM(TM), PAINDOC(TM) and ACTester(TM) are among the
Company's non-registered trademarks.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus, including information under "Risk Factors."
THE COMPANY
Quest Medical, Inc. ("Quest" or the "Company") designs, develops,
manufactures and markets a variety of healthcare products used primarily in
cardiovascular surgery, interventional pain management and intravenous fluid
delivery applications. The Company operates several stable and profitable
product lines, including cardiovascular products (such as pressure control
valves, filters and surgical retracting tapes), specialized intravenous fluid
delivery tubing sets and accessories, and pressure monitoring kits used
primarily in labor and delivery. The Company has levered these product lines,
its existing corporate infrastructure and its core competencies in medical
device manufacturing, engineering and regulatory affairs to expand into new
markets as evidenced by the internally funded development of the Quest MPS brand
of myocardial protection system, an innovative and sophisticated system designed
to manage the delivery of solutions to the heart during open-heart surgery. In
addition, the Company recently entered the interventional pain management market
by acquiring Neuromed, Inc. ("Neuromed"), which designs, develops, manufactures
and markets a line of electronic spinal cord stimulation ("SCS") devices used to
manage chronic severe pain.
In 1991, Quest acquired two companies that manufactured and marketed
various cardiovascular products, significantly enhancing the Company's presence
in the cardiovascular products marketplace. In 1992, Quest identified a real and
immediate need in this marketplace for an automated and integrated myocardial
protection system that would be versatile, easy to use, efficient to monitor and
cost-effective. Myocardial protection is the process of arresting and caring for
the heart during open-heart surgery. The Quest MPS system is designed to
integrate key functions relating to the delivery of solutions to the heart such
as varying the rate and ratio of oxygenated blood, crystalloid, potassium and
other additives, and controlling temperature, pressure and other variables to
allow simpler, more flexible and cost-effective management of this process. The
MPS system employs advanced pump, temperature control and microprocessor
technologies and includes a line of captive and non-captive disposable products.
The Company filed a 510(k) pre-market notification for its MPS system with the
United States Food and Drug Administration ("FDA") in August 1995.
In its continuing effort to expand into potentially high growth niche
markets in the medical device industry, the Company acquired Neuromed in March
1995 (the "Neuromed Acquisition"). SCS is gaining increased acceptance as a
viable, efficacious and cost-effective treatment alternative to repeat back
surgeries for relieving chronic severe back pain. The Company believes that its
recently introduced CompuStim products, which are powered by radio frequency
transmitters external to the body, are the technological leaders in the field.
The Company is currently test marketing PainDoc, a pen-based computer system
that works in tandem with the Company's CompuStim devices to assist physicians
and their patients in optimizing the performance of the Company's SCS devices
both pre-and post-operatively.
Since its founding in 1979, the Company has developed, manufactured and
marketed specialized intravenous fluid delivery tubing sets and accessories sold
primarily to major hospitals in the United States. Over the last several years,
the revenues generated by this product line, a substantial component of the
Company's historical base business, have significantly aided the funding of the
Company's research and development efforts. The Company manufactures and markets
over 70 distinct models of specialized intravenous fluid delivery tubing sets.
The Company's business strategy emphasizes the development and
commercialization of new products in niche markets and the enhancement of
existing products, particularly in the myocardial protection and interventional
pain management markets. The Company operates an ISO 9001 certified
manufacturing facility in Allen, Texas, and markets its products through direct
sales and distribution arrangements with independent distributors. Quest intends
to continue pursuing its strategy through internal product development and
acquisitions.
3
<PAGE> 6
THE OFFERING
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<S> <C>
Common Stock offered by:
The Company..................................... 1,516,667
The Selling Shareholders........................ 1,083,333
Total........................................ 2,600,000
Common Stock to be outstanding after the 7,924,668(1)
Offering........................................
Use of Proceeds by the Company.................... Repayment of bank debt and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol..................... QMED
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1994(2) 1994 1995(3) 1995(2)
------- ------- ------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............................. $13,612 $13,643 $13,999 $22,043 $7,223 $ 11,303 $13,961
Gross profit............................ 6,553 6,591 6,381 12,175 3,196 6,393 8,567
Research and development................ 1,387 1,910 3,542 4,402 1,539 2,494 2,729
Non-recurring charges(4)................ 1,247 -- -- -- -- 10,500 --
Marketing, general and administrative... 4,141 4,400 4,977 7,859 2,375 3,511 4,232
Earnings (loss) from operations,
excluding
non-recurring charges................. 1,025 281 (2,138) (86) (719) 388 1,606
Earnings (loss) from operations......... (222) 281 (2,138) (86) (719) (10,112) 1,606
Other income (expense), net............. 473 667 419 (1,070) 178 (501) (741)
Net earnings (loss)..................... 194 816 (1,719) (1,220) (540) (10,613) 571
Net earnings (loss) per share........... $ 0.03 $ 0.15(5) $ (0.33) $ (0.20)(6) $(0.10) $ (1.85) $ 0.08(6)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
------------------------------------------
AS ADJUSTED
ACTUAL AS ADJUSTED(7) FOR OFFERING(8)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities......................... $ 4,707 $ 4,707 $ 4,707
Working capital.......................................................... 10,812 9,312 10,762
Total assets............................................................. 41,652 45,710 45,421
Long-term debt, excluding current maturities............................. 20,830 20,830 4,068
Stockholders' equity..................................................... 12,500 15,058 32,981
</TABLE>
- ---------------
(1) Does not include 1,198,001 shares of Common Stock issuable upon the exercise
of outstanding stock options at a weighted average exercise price of $4.11
per share. See "Management -- Benefit Plans and Other Arrangements."
(2) Assumes the acquisition of Neuromed as of January 1, 1994. See Pro Forma
Condensed Consolidated Statements of Operations and the Notes thereto.
(3) Includes results of Neuromed from April 1, 1995.
(4) Non-recurring charge in 1992 relates to the write-off of assets of a
discontinued business, and for the six months ended June 30, 1995, relates
to purchased in-process research and development incurred in connection with
the Neuromed Acquisition. See Note 2 of the Notes to the Quest Consolidated
Financial Statements.
(5) Includes an increase in net income of $0.03 per share relating to the
cumulative effect of a change in accounting principle. See Note 1(m) of the
Notes to the Quest Consolidated Financial Statements.
(6) If the proceeds of this Offering had been applied to reduce bank debt as of
January 1, 1994 in the manner specified under "Use of Proceeds," then pro
forma earnings per share before extraordinary charge for the year ended
December 31, 1994 would have been $0.03 and pro forma net earnings per share
for the six months ended June 30, 1995 would have been $0.13. An
extraordinary charge resulting from the write-off of capitalized debt
issuance costs associated with the assumed January 1, 1994 repayment of bank
debt would have reduced 1994 pro forma net earnings by $0.03 per share.
(7) Adjusted to reflect the accrual of $1.5 million payable in January 1996 and
the issuance of 200,000 shares of Common Stock concurrently with the closing
of the Offering as contingent "earn-out" consideration relating to the
Neuromed Acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "Certain Transactions."
(8) Adjusted to reflect the sale of 1,516,667 shares of Common Stock offered by
the Company at an assumed public offering price of $13.125 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
---------------------
Unless otherwise indicated, all information in this Prospectus, including
financial information, share and per share data, (i) reflects a 3% stock
dividend, paid on May 23, 1994 to holders of record on May 6, 1994, and (ii)
assumes no exercise of the Underwriters' over-allotment option. Unless the
context otherwise requires, "Quest" or the "Company" refers to Quest Medical,
Inc. and its subsidiaries, including Neuromed, Inc.
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by potential investors in evaluating an
investment in the shares of Common Stock offered hereby.
PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE
The Company's business strategy emphasizes the development and
commercialization of new products in niche markets and the enhancement of
existing products, particularly in the myocardial protection and interventional
pain management markets. There can be no assurance that the Company will be able
to continue to develop new products, enhance existing products, obtain required
regulatory approvals, manufacture these new products in a commercially viable
manner or gain satisfactory market acceptance for such products.
In particular, the Company's future growth depends in part on market
acceptance of the MPS system and family of related products and increased market
acceptance of the Company's spinal cord stimulation products. The Company has
committed substantial resources to the development of the MPS system and related
products. Delays in commencing shipment of the MPS system and related products,
or in developing complementary new products, could have an adverse effect on the
Company's growth prospects. There can be no assurance that such products, if
introduced, will gain market acceptance. The Company also recently acquired its
spinal cord stimulation device business. Although the Company believes that this
business will grow in the future, there can be no assurance that these products
will continue to gain increased market acceptance. See "Business -- Research and
Development" and "Business -- Competition."
INTEGRATION OF NEUROMED
The Company recently completed the acquisition of Neuromed. Successful
integration of an acquired company into existing operations can be difficult and
costly. Quest has begun to integrate into the Company certain of Neuromed's
operations, research and development, sales and marketing, and administrative
functions. The desired benefits of the Neuromed Acquisition will not be achieved
unless the separate operations of the Company and Neuromed are successfully
combined in an orderly and timely manner. The transition process will divert
substantial management attention from the Company's other operations and
activities. Any limitations or difficulties encountered in the transition
process could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
GOVERNMENT REGULATION; UNCERTAINTY OF OBTAINING REGULATORY CLEARANCE
The research and development, manufacture, sale and distribution of medical
devices is subject to extensive regulation by various public agencies,
principally the FDA and corresponding state, local and foreign agencies. The
regulatory process is lengthy, expensive and uncertain. Prior to commercial sale
in the United States, most medical devices must be cleared or approved by the
FDA. Current FDA enforcement policy strictly prohibits the promotion of medical
devices for uses other than those for which the product has been approved or
cleared. Product approvals and clearances can be withdrawn for failure to comply
with regulatory requirements or the occurrence of unforeseen problems following
initial marketing.
In August 1995, the Company filed an application for clearance of a
pre-market notification of its intent to market the MPS system and certain
related products under Section 510(k) of the Federal Food, Drug and Cosmetic Act
("510(k)"). Although the Company believes that the 510(k) procedure is the
appropriate basis upon which to seek FDA clearance or approval, there can be no
assurance that the FDA will accept this view and consider the Company's 510(k)
application. If it is not accepted under the 510(k) procedure, the Company will
have to pursue a pre-market approval ("PMA") for the MPS system. This process
would be far more costly and time consuming than 510(k) clearance. Even if
5
<PAGE> 8
the FDA considers the MPS system under the 510(k) procedure, there can be no
assurance that the FDA will approve the Company's application. In addition, the
Company's PainDoc product is marketable as a data recording and programming
device for use in tandem with the Company's CompuStim devices. The Company has
also filed a 510(k) for the use of PainDoc as an interactive medical treatment
device. Similar risks may apply with respect to this 510(k) application. See
"Business -- Government Regulation."
Significant unforeseen delays in the 510(k) review process or, if
necessary, the PMA approval process could occur as a result of the FDA's
determination that any required clinical data is insufficient to support the
safety and efficacy of these devices for their intended uses, the FDA's failure
to schedule advisory review panels, or changes in the FDA's review guidelines,
procedures, regulations or administrative interpretations. Delays in obtaining
regulatory clearances or approvals, or the failure to obtain required clearances
or approvals, in the United States or other countries, could adversely affect or
prevent the marketing of these products, limit the Company's ability to generate
revenues from these devices and give the Company's competitors a competitive
advantage. There can be no assurance that the Company will be able to obtain
necessary government approvals on a timely basis, if at all.
The Company also must adhere to applicable regulations governing good
manufacturing practices, including testing, control, manufacturing, labeling and
documentation requirements. If violations of the applicable regulations are
noted during inspections of the Company's manufacturing facilities by the FDA or
comparable agencies in other countries, the Company may be required or may elect
to cease manufacturing until the violation is corrected or to recall products
that were manufactured under improper conditions, either of which would have a
material adverse effect on the Company's continued marketing of its products and
on the Company's business, financial condition and results of operations.
In 1991, prior to its acquisition by the Company, Neuromed commenced
clinical trials of a fully implantable SCS device in the United States and
Europe. In late 1993, the FDA cancelled the Investigational Device Exemption
("IDE") relating to this product and rescinded Neuromed's export authority for
this product due to alleged violations by Neuromed, under its prior management,
of applicable rules and regulations, including good manufacturing practices. The
clinical trials were discontinued and the product was withdrawn from the market.
During this period, Neuromed also encountered regulatory difficulties in the
United Kingdom due to alleged noncompliance with applicable rules and
regulations. Quest is engaged in a process intended to restore good relations
with regulatory authorities in the United Kingdom. There can be no assurances
that the Company will not encounter similar difficulties in the future.
A portion of the Company's revenues are dependent upon sales of its
products outside the United States through independent distributors.
International regulatory bodies have established varying regulations governing
product standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. The Company's
inability or failure to comply with these regulations or the imposition of new
regulations could restrict such distributors' ability to sell the Company's
products internationally and thereby adversely affect the Company's business,
financial condition and results of operations. See "Business -- Government
Regulation."
INTENSE COMPETITION, CONTINUAL TECHNOLOGICAL CHANGE AND NEW SURGICAL TECHNIQUES
The medical device market is highly competitive. The Company currently
competes with many companies in the development and marketing of cardiovascular
products, specialized intravenous fluid delivery tubing sets, pressure
monitoring kits and related medical devices. The Company expects to compete with
at least two major medical device companies in the myocardial protection market,
and competes directly with Medtronic, Inc., one of the largest medical device
manufacturers, in the SCS product market. Many of the Company's competitors have
access to greater capital, research and development, marketing, distribution and
other resources than the Company. Furthermore, the medical device market is
characterized by extensive research efforts and rapid product development and
technological change. The Company's present or future products could be rendered
obsolete and
6
<PAGE> 9
noncompetitive by technological advances by the Company's present or future
competitors. The Company's future success will depend upon its ability to remain
competitive with other developers of medical devices. See
"Business -- Competition."
In addition, innovations in surgical techniques or medical practices could
have the effect of reducing or eliminating market demand for one or more of the
Company's products. For example, some cardiovascular surgeons and medical device
companies are developing techniques, procedures and devices for performing
coronary artery bypass surgery without stopping the heart, both through open-
heart surgery and minimally invasive procedures, thereby eliminating the need
for myocardial protection in these cases and potentially reducing the market for
Quest's MPS system. While these techniques, procedures and devices have not to
date attained widespread use, there can be no assurance that they will not gain
broader market acceptance. See "Business -- Competition."
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS
The Company owns nineteen United States patents relating to products that
the Company currently sells or develops. One such patent will expire in February
1996 and one will expire in January 1997. In addition, the Company currently has
three United States patent applications pending, including applications relating
to the MPS system and related products. Successful litigation against the
Company regarding its patents or infringement by the Company of the patent
rights of others could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that pending patent applications will result in issued patents, that
competitors will not challenge or circumvent patents issued to the Company, that
courts will not find the Company's patents invalid, or that the Company's
patents are sufficiently broad to protect the Company's technology or to provide
the Company with a competitive advantage. The Company also relies on trade
secrets and proprietary technology that it seeks to protect, in part, through
confidentiality agreements with employees, consultants and other parties. There
can be no assurance that these parties will not breach these agreements, that
the Company will have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or independently developed by
competitors.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Although the
Company is not currently involved in such litigation, litigation may be
necessary in the future to enforce the Company's patent rights, to protect its
trade secrets or know-how, to defend the Company against claimed infringement of
the rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could result in substantial cost to, and
diversion of effort by, the Company. Adverse determinations in any such
litigation could subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties and prevent the
Company from manufacturing, selling or using certain of its products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Patents, Trademarks and
Proprietary Rights."
COST PRESSURES ON MEDICAL TECHNOLOGY; THIRD PARTY REIMBURSEMENT
The Company believes that the overall escalating cost of medical products
and services has led and will continue to lead to increased pressures on the
healthcare industry to reduce the cost of certain products and services,
including the Company's products. The Company's products are purchased by
hospitals and other users, which bill various third party payors, such as
governmental health programs, private insurance plans, managed care
organizations and other similar programs, for the healthcare products and
services provided to their patients. Third party payors are increasingly
challenging the prices charged for medical products and services and may deny
reimbursement if they determine that a device was not used in accordance with
cost-effective treatment methods as determined by the payor, was experimental or
was used for an unapproved application. Although Medicare, Medicaid and many
health maintenance organizations ("HMOs") generally reimburse for SCS devices
and procedures, especially after repeat back surgeries have failed to relieve
the chronic pain, certain payors refuse to
7
<PAGE> 10
reimburse for SCS devices and others, including the Veterans Administration,
restrict reimbursement. There can be no assurance that third party payors will
continue to reimburse for the Company's products or that their reimbursement
levels will not adversely affect the profitability of the Company's products.
See "Business -- Third Party Reimbursement and Cost Containment."
POTENTIAL PRODUCT LIABILITY AND RECALL; POSSIBLE INSURANCE LIMITATIONS
The testing, manufacturing, marketing and sale of medical devices entail
substantial risks of liability claims or product recalls. The Company's products
are used in cardiovascular applications, spinal cord implant procedures and
intensive care settings in which there is a high risk of serious injury and
death. As a result, the Company faces a risk of exposure to product liability
claims and product recalls if the use of its products or future products are
alleged to have resulted in injury. Such risks may exist with respect to
products that have received, or may receive, regulatory clearance for commercial
sale. In 1993, the FDA cancelled the IDE for a fully implantable SCS device, and
rescinded Neuromed's export authority for this product. See "-- Government
Regulation; Uncertainty of Obtaining Regulatory Clearance" and
"Business -- Government Regulation."
The Company is currently a party to certain product liability claims
relating to SCS devices sold by Neuromed prior to its acquisition by the Company
in March 1995, including one claim regarding the fully implantable SCS device.
Product liability insurers have assumed responsibility for defending the Company
against these claims, subject to reservation of rights in certain cases.
Although the Company is also entitled to contractual indemnification from
Neuromed's former owner with respect to any losses exceeding its product
liability insurance coverage, there can be no assurance that the Company will
not incur significant monetary liability to the claimants if such insurance or
indemnification is unavailable or inadequate for any reason or that the
Company's SCS business or new SCS product lines will not be adversely affected
by these product liability claims. See "Business -- Legal Proceedings."
While the Company seeks to maintain appropriate levels of product liability
insurance with coverage that the Company believes is comparable to that
maintained by companies similar in size and serving similar markets, there can
be no assurance that the Company will avoid significant future product liability
claims and attendant adverse publicity. Furthermore, there can be no assurance
that the Company's product liability insurance will be adequate or that such
insurance coverage will remain available at acceptable costs or at all. A
successful claim brought against the Company for which coverage is denied or in
excess of its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. Additionally,
adverse product liability actions could adversely affect the Company's ability
to obtain and maintain regulatory clearance for its products or its ability to
attract and retain customers for its products.
DEPENDENCE ON DISTRIBUTOR SALES
Sales to distributors constitute a significant portion of the Company's
business. There can be no assurance that the Company will be able to maintain
its relationships with these distributors, or, in the event of termination of
any of these relationships, that a new distributor will be found. The loss of a
significant distributor could have a material adverse effect on the Company's
business, financial condition and results of operations if a new distributor or
other suitable sales organization in the relevant geographic market could not be
found on a timely basis or at all. See "Business -- Sales and Marketing."
RELIANCE ON MAJOR CUSTOMER
The Company has derived $3.4 million, $3.1 million, $2.7 million and $1.5
million, or 25%, 23%, 19% and 14%, of its net revenue for the years ended
December 31, 1992, 1993 and 1994 and the six months ended June 30, 1995,
respectively, from the University of Texas System Cancer Center (M.D.
8
<PAGE> 11
Anderson Hospital). The loss of this customer could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Sales and Marketing."
INTERRUPTION IN SOURCES OF SUPPLY
The Company currently purchases, and will continue to purchase, raw
materials and components for its products from outside vendors. Certain of the
components used in the Company's products are purchased from single sources.
Although the Company has qualified, or is in the process of investigating,
alternate sources of supply for key components, any significant interruption in
supply of these or other components could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Manufacturing."
POSSIBLE VOLATILITY OF SHARE PRICE
Market prices for securities of medical device companies are highly
volatile, and the trading price of the Company's Common Stock could be subject
to significant fluctuations in response to quarterly variations in operating
results, announcements of technological innovations by the Company or its
competitors, government regulation and other events or factors. In addition,
market prices of securities of medical device companies, including the Company,
have from time to time experienced extreme price and volume fluctuations which
may be unrelated to the operating performance of particular companies. These
broad market fluctuations could have a material adverse effect on the market
price of the Company's Common Stock.
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent in large part on the ability of the
Company to attract and retain key management, research and development, sales
and marketing and operational personnel. Competition for such personnel is
intense and the inability to attract and retain additional key personnel, or the
loss of one or more current key employees could have a material adverse effect
on the Company's business, financial condition and results of operations. In
particular, the Company's success will depend on its ability to retain the
services of its executive officers and senior management. In addition, the
Company will have an ongoing need to expand its management personnel and support
staff. None of the executive officers of the Company has an employment agreement
with the Company, and the Company does not maintain life insurance on such
persons. See "Management."
SHAREHOLDERS' RIGHTS PLAN; POTENTIAL ANTI-TAKEOVER EFFECT
The Company's Shareholders' Rights Plan contains provisions which may have
the effect of delaying, deferring or preventing a change in control of the
Company. The Shareholders' Rights Plan grants the holders of rights (other than
rights held by a holder of 20% or more of the Common Stock) the right to buy a
number of shares of Common Stock having a market value equal to two times the
applicable exercise price under certain circumstances, including a person's
acquisition of 20% or more of the outstanding Common Stock. See "Description of
Capital Stock -- Shareholders' Rights Plan."
9
<PAGE> 12
THE COMPANY
The Company was founded in 1979 by current President and Chief Executive
Officer, Thomas C. Thompson, and director John A. Gula. The Company completed an
initial public offering of its Common Stock in 1981 and introduced a line of
electronic intravenous pumps and associated disposables beginning in late 1983.
The Company sold the intravenous pump line in 1987 due to competitive structural
changes in the market. The Company retained a stable and profitable base
business of fluid delivery and other products following the sale and made the
strategic decision to expand into attractive markets in which the Company could
leverage off its base business, corporate infrastructure and core competencies
in medical device manufacturing, engineering and regulatory affairs. In 1991,
Quest acquired two companies that manufactured and marketed various
cardiovascular products, significantly enhancing the Company's presence in the
cardiovascular products marketplace. In 1992, Quest acquired the "ACTester"
product line, consisting of instrumentation and associated disposables used to
measure the activated clotting time of blood, and commenced the research and
development of the MPS system. In March 1995, the Company acquired Neuromed and
its SCS neurostimulation product line, and in August 1995, the Company filed a
510(k) with the FDA for its MPS system and related disposable products.
Quest is a Texas corporation. Its principal executive offices are located
at One Allentown Parkway, Allen, Texas 75002 and its telephone number is
(214) 390-9800.
USE OF PROCEEDS
Assuming an offering price of $13.125 per share (the last reported sale
price for the Common Stock on September 26, 1995 as reported on the Nasdaq
National Market), the net proceeds to the Company from the sale of the 1,516,667
shares of Common Stock to be sold by the Company in the Offering are estimated
to be $18.2 million ($23.0 million if the Underwriters' over-allotment option is
exercised in full), after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company. The Company
intends to use the net proceeds from the Offering to repay $14.0 million of
senior term bank indebtedness currently outstanding, which was incurred in March
1995 in connection with the Neuromed Acquisition, and as much of its working
capital line of credit as possible ($4.5 million currently outstanding). Any
excess net proceeds from the Offering will be used for general corporate
purposes. The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
The senior term debt amortizes $1.95 million per year for the first and
second years, $3.25 million per year for the third and fourth years, and $2.6
million for the fifth year, with a $2.0 million balloon payment due at final
maturity in March 2000. The working capital line matures on May 31, 1997.
Principal installments and interest on the senior term debt and interest on the
working capital line are payable monthly. The loan bears interest at prime plus
125 basis points or, at the Company's option, LIBOR plus 300 basis points, and
interest rates can be locked in at the Company's option for varying periods of
time. These interest rates can also be reduced based on the Company achieving
certain ratios of senior bank debt to earnings before interest, taxes,
depreciation and amortization. As of September 26, 1995, the rate of interest on
the senior term loan was 8.51% and the rate of interest on the working capital
indebtedness was 7.94%.
10
<PAGE> 13
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "QMED." On September 26, 1995, the last reported sale price for the
Company's Common Stock on the Nasdaq National Market was $13.125 per share. On
September 26, 1995 there were approximately 850 holders of record of the
Company's Common Stock. The following table sets forth the quarterly high and
low closing sales prices for the Company's Common Stock. These prices do not
include adjustments for retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1993
First Quarter..................................................... $ 5.56 $ 3.63
Second Quarter.................................................... 4.84 3.63
Third Quarter..................................................... 4.47 3.41
Fourth Quarter.................................................... 5.44 3.75
1994
First Quarter..................................................... $ 4.72 $ 4.13
Second Quarter.................................................... 7.38 4.63
Third Quarter..................................................... 6.38 5.38
Fourth Quarter.................................................... 5.75 4.63
1995
First Quarter..................................................... $ 8.75 $ 4.88
Second Quarter.................................................... 12.50 7.13
Third Quarter (through September 26, 1995)........................ 14.50 12.13
</TABLE>
DIVIDEND POLICY
To date, the Company has not declared or paid any cash dividends on its
Common Stock, and the present policy of the Board of Directors is to retain any
earnings to provide for the Company's growth. Any future determination to pay
dividends will be at the discretion of the Board of Directors, and dependent
upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant. In
addition, the Company's current credit arrangement with NationsBank of Texas,
N.A. ("NationsBank") currently limits the payment of dividends to 25% of net
income (as defined in the credit agreement). The Company intends to use the net
proceeds from the Offering to repay this indebtedness, and thus such
restrictions are expected to lapse upon such repayment. See "Use of Proceeds."
The Company has received a commitment letter from NationsBank that provides for
an amendment of the working capital line of credit and the addition of an
acquisition line of credit. Management expects to negotiate a dividend
limitation that would apply if the acquisition line of credit is utilized. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company has paid one stock dividend on its Common Stock. During April
1994, the Board of Directors approved a 3% stock dividend distributed on May 23,
1994 to shareholders of record as of May 6, 1994. In connection with the
dividend, the Company issued 152,829 shares of Common Stock from its treasury.
The Board of Directors on various occasions, beginning in October 1987 and
as recently as August 1993, approved stock repurchases of up to an aggregate of
3,150,000 shares, of which approximately 2,900,000 have been repurchased to
date. During the year ended December 31, 1994, the Company repurchased no shares
of Common Stock. On March 31, 1995, the Company issued 833,333 shares of Common
Stock from its treasury as partial consideration in the Neuromed Acquisition
and, concurrently with the closing of the Offering, will issue an additional
200,000 shares of Common Stock, which had been earned in July 1995 as additional
"earn-out" consideration. On September 26, 1995, the Company had 1,672,238
shares in its treasury (after reserving for the issuance of such 200,000 shares)
at a cost of $3.6 million (including commissions). The Company does not
anticipate further repurchases during the foreseeable future.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth at June 30, 1995: (i) the actual
capitalization of the Company on a historical basis; (ii) the capitalization of
the Company as adjusted to give effect to the issuance of 200,000 shares of
Common Stock earned in July 1995 as contingent "earn-out" consideration relating
to the Neuromed Acquisition; and (iii) the capitalization of the Company as
adjusted to give effect to the sale by the Company of 1,516,667 shares of Common
Stock in this Offering at an assumed public offering price of $13.125 per share
(after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company). This table should be read in conjunction with
the Quest Consolidated Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus. See also "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions."
<TABLE>
<CAPTION>
JUNE 30, 1995
--------------------------------------
AS ADJUSTED
ACTUAL AS ADJUSTED FOR OFFERING
------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current portion................. $22,892 $ 22,892 $ 4,680
------- --------- ----------
Stockholders' equity:
Common stock of $.05 par value; authorized 10,000,000
shares; issued 8,072,994 shares(1)................... 404 404 404
Additional paid-in capital.............................. 24,443 26,568 41,497
Retained deficit(2)..................................... (7,819) (7,819) (8,109)
Unrealized loss on marketable securities................ (474) (474) (474)
Cost of common shares in treasury; 1,872,238 shares
actual, 1,672,238 shares as adjusted and 155,571
shares as adjusted for Offering...................... (4,054) (3,621) (337)
------- --------- ----------
Total stockholders' equity................................ 12,500 15,058 32,981
------- --------- ----------
Total capitalization...................................... $35,392 $ 37,950 $ 37,661
======= ========= ==========
</TABLE>
- ---------------
(1) Does not include 1,198,001 shares of Common Stock issuable upon the exercise
of outstanding stock options as of September 26, 1995.
(2) Reflects write-off of $290,000 (net of tax effect) of capitalized debt
issuance costs associated with the Neuromed Acquisition due to the
repayment of bank debt from Offering proceeds.
12
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations and balance sheet data
for the five years ended December 31, 1990, 1991, 1992, 1993 and 1994 are
derived from the Company's audited consolidated financial statements. The
selected consolidated statement of operations and balance sheet data set forth
below for the six month periods ended June 30, 1994 and 1995 are derived from
the unaudited consolidated financial statements of the Company and, in the
opinion of management, reflect all adjustments necessary for a fair presentation
of its results of operations and financial condition. All such adjustments are
of a normal recurring nature. The results of operations for an interim period
are not necessarily indicative of results that may be expected for a full year
or any other interim period. This selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995(1)
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue............................. $ 6,209 $10,711 $13,612 $13,643 $13,999 $ 7,223 $ 11,303
Gross profit............................ 2,754 4,827 6,553 6,591 6,381 3,196 6,393
Research and development expense........ 196 668 1,387 1,910 3,542 1,539 2,494
Non-recurring charges(2)................ -- -- 1,247 -- -- -- 10,500
Marketing, general and administrative
expense............................... 2,423 3,145 4,141 4,400 4,977 2,375 3,511
Earnings (loss) from operations,
excluding non-recurring charges....... 136 1,014 1,025 281 (2,138) (719) 388
Earnings (loss) from operations......... 136 1,014 (222) 281 (2,138) (719) (10,112)
Other income (expense), net............. 1,397 326 473 667 419 178 (501)
Earnings (loss) from continuing
operations before income taxes and
cumulative effect of change in
accounting principle.................. 1,533 1,341 251 948 (1,719) (540) (10,613)
Net earnings (loss)..................... 1,456 1,147 194 816 (1,719) (540) (10,613)
Net earnings (loss) per share........... $ 0.26(3) $ 0.21 $ 0.03 $ 0.15(4) $ (0.33) $ (0.10) $ (1.85)
Weighted average common and common
equivalent shares outstanding......... 5,668 5,355 5,594 5,559 5,257 5,240 5,739
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995(1)
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................ $10,364 $ 6,888 $ 6,693 $ 6,594 $ 5,262 $ 7,565 $ 4,707
Working capital......................... 12,656 10,415 10,847 9,566 7,411 8,945 10,812
Total assets............................ 16,803 19,958 20,448 26,739 24,235 26,598 41,652
Long-term debt, excluding current
maturities............................ -- 727 242 4,101 4,124 4,141 20,830
Stockholders' equity.................... 16,248 17,046 17,639 18,252 15,931 17,619 12,500
</TABLE>
- ---------------
(1) Includes results of Neuromed from April 1, 1995.
(2) Non-recurring charge in 1992 relates to the write-off of assets of a
discontinued business, and for the six months ended June 30, 1995, relates
to purchased in-process research and development incurred in connection with
the Neuromed Acquisition. See Note 2 of the Notes to the Quest Consolidated
Financial Statements.
(3) Includes a decrease in net income of $0.01 per share attributable to a loss
from discontinued operations.
(4) Includes an increase in net income of $0.03 per share relating to the
cumulative effect of a change in accounting principle. See Note 1(m) of the
Notes to the Quest Consolidated Financial Statements.
13
<PAGE> 16
SELECTED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1994 and for the six months ended
June 30, 1995 reflect the historical accounts of the Company for those periods,
adjusted to give pro forma effect to the Neuromed Acquisition as if it had
occurred on January 1, 1994. The pro forma condensed consolidated statement of
operations for the year ended December 31, 1994 combines the statement of
operations of the Company for the twelve months ended December 31, 1994 and the
statement of operations of Neuromed for the twelve months ended October 31,
1994. The pro forma condensed consolidated statement of operations for the six
months ended June 30, 1995 combines the statement of operations of the Company
for the six months ended June 30, 1995 (which includes three months of Neuromed
operations since the March 31, 1995 acquisition) and the statement of operations
of Neuromed for the three months ended January 31, 1995.
The pro forma condensed consolidated statements of operations and
accompanying notes should be read in conjunction with the Consolidated Financial
Statements of the Company and Neuromed and the related Notes thereto included
elsewhere in this Prospectus. Management believes the assumptions used in the
following statements provide a reasonable basis on which to present the pro
forma financial data. The pro forma financial data is provided for informational
purposes only and should not be construed to be indicative of the Company's
financial condition or results of operations had the transactions and events
described above been consummated on the date assumed and are not intended to
project the Company's financial condition or results of operations to any future
date or for any future period.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEUROMED
MEDICAL, NEUROMED, ACQUISITION
INC. INC. ADJUSTMENTS PRO FORMA(1)
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue.................................... $ 13,999 $ 8,044 $ -- $ 22,043
Cost of revenue................................ 7,618 1,932 146(2) 9,868
(29)(3)
(27)(4)
228(5)
---------- -------- --------- ----------
Gross profit................................. 6,381 6,112 (318) 12,175
Research and development expense............... 3,542 1,713 (185)(4) 4,402
(668)(6)
Marketing, general and administrative
expense...................................... 4,977 3,417 729(7) 7,859
(1,212)(4)
(52)(6)
---------- -------- --------- ----------
Operating expenses........................... 8,519 5,130 (1,388) 12,261
---------- -------- --------- ----------
Earnings (loss) from operations................ (2,138) 982 1,070 (86)
Other income (expense), net.................... 419 (18) (1,471)(8) (1,070)
---------- -------- --------- ----------
Earnings (loss) before income taxes and
cumulative effect of change in accounting
principle.................................... (1,719) 964 (401) (1,156)
Income taxes................................... -- 384 (320)(9) 64
---------- -------- --------- ----------
Net earnings (loss) before cumulative effect of
change in accounting principle............... $ (1,719) $ 580 $ (81) $ (1,220)
========== ======== ========= ==========
Net earnings (loss) per share before cumulative
effect of change in accounting principle..... $ (0.33) $ (0.20)
========== ==========
Weighted average common shares outstanding..... 5,257 833 6,090
========== ========= ==========
</TABLE>
14
<PAGE> 17
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEUROMED
MEDICAL, NEUROMED ACQUISITION
INC. INC. ADJUSTMENTS PRO FORMA(1)
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue....................................... $ 11,303 $ 2,658 $ -- $ 13,961
Cost of revenue................................... 4,910 637 48(2) 5,394
(7)(3)
(194)(5)
---------- -------- --------- ----------
Gross profit.................................... 6,393 2,021 153 8,567
Research and development expense.................. 2,494 296 (61)(6) 2,729
Non-recurring charge.............................. 10,500 (10,500)(1) --
Marketing, general and administrative expense..... 3,511 1,054 182(7) 4,232
(515)(4)
---------- -------- --------- ----------
Operating expenses.............................. 16,505 1,350 (10,894) 6,961
---------- -------- --------- ----------
Earnings (loss) from operations................... (10,112) 671 11,047 1,606
Other income (expense), net....................... (501) 40 (280)(8) (741)
---------- -------- --------- ----------
Earnings (loss) before income taxes and cumulative
effect of change in accounting principle........ (10,613) 711 10,767 865
Income taxes...................................... -- 283 11(9) 294
---------- -------- --------- ----------
Net earnings (loss) before cumulative effect of
change in accounting principle.................. $ (10,613) $ 428 $ 10,756 $ 571
========== ======== ========= ==========
Net earnings (loss) per share before cumulative
effect of change in accounting principle........ $ (1.85) $ 0.08
========== ==========
Weighted average common and common equivalent
shares outstanding.............................. 5,739 1,034 6,773
========== ========= ==========
</TABLE>
- ---------------
(1) The pro forma condensed consolidated statements of operations exclude a
non-recurring charge of $10.5 million related to purchased in-process
research and development incurred in connection with the Neuromed
Acquisition.
(2) To adjust insurance expense resulting from increased product liability
coverage on Neuromed products.
(3) To adjust depreciation expense related to leasehold improvements of
Neuromed's facility which were revalued at acquisition.
(4) Elimination of salary, benefit, and travel and entertainment expense for two
ex-officers of Neuromed, Mr. William Borkan (the former principal owner of
Neuromed) and Mr. Burt Borkan, who were not retained as employees, and
elimination of deferred compensation and royalty expense under agreements
between Mr. William Borkan and Neuromed, which have been terminated.
(5) To record write-off in 1994 of manufacturing profits capitalized in
inventory at acquisition of Neuromed and, for 1995, reversal of write-off
included in the Company's historical results.
(6) Elimination of expenses pursuant to agreements obligating Neuromed to pay
certain research and development expenses for affiliated companies, which
have been terminated.
(7) To record amortization expense for Neuromed intangible assets which are
being amortized over estimated useful lives of 15 to 20 years computed on a
straight line basis ($545,000 in 1994 and $136,000 in 1995) and adjust
compensation expense resulting from a change in compensation program for key
Neuromed employees.
(8) To record interest expense and amortization expense (for capitalized debt
issuance costs) on debt incurred to consummate the Neuromed Acquisition. The
average interest rate was 9.5% (LIBOR plus 300 basis points).
(9) To adjust income tax expense for the change in taxable income from the
combination of Quest and Neuromed.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements of the Company and the related Notes thereto included
elsewhere in this Prospectus.
OVERVIEW
The Company designs, develops, manufactures and markets a variety of
healthcare products used primarily in cardiovascular surgery, interventional
pain management and intravenous fluid delivery applications. The Company
operates several stable and profitable product lines, including cardiovascular
products (such as pressure control valves, filters and surgical retracting
tapes), specialized intravenous fluid delivery tubing sets and accessories, and
pressure monitoring kits used primarily in labor and delivery.
On March 31, 1995, the Company acquired all of the issued and outstanding
capital stock of Neuromed, which was held by Mr. William Borkan and his brother,
Mr. Burt Borkan. The Neuromed Acquisition has been accounted for as a purchase.
The Company paid the Borkans $15.4 million in cash ($200,000 of which was paid
in June 1995 as a purchase price adjustment) and issued them 833,333 shares of
Common Stock valued at $6.5 million. The Company also incurred $927,000 in
acquisition and financing costs. Depending on Neuromed's attainment of certain
sales objectives, the Company also agreed to pay the Borkans contingent
"earn-out" consideration in January 1996 and January 1997, payable in a
combination of cash and Common Stock. In June 1995, Mr. William Borkan was
elected to the Company's Board of Directors.
In September 1995, the Company and Mr. William Borkan amended certain terms
of the Neuromed acquisition agreement. Under the amendment, (i) the Company
agreed to issue Mr. Borkan 200,000 additional shares of Common Stock
concurrently with the closing of the Offering and pay Mr. Borkan $1.5 million in
cash in January 1996 to satisfy the 1996 contingent payment obligation, which
had been earned in July 1995, (ii) the Company agreed to include all of the
Borkans' Common Stock (1,033,333 shares) in this Offering, (iii) Mr. Borkan
resigned from the Company's Board of Directors and relinquished his board
representation and attendance rights, (iv) Mr. Borkan relinquished his
registration rights, and (v) in the event the 1997 contingent earn-out payment
is fully earned, the Company agreed to pay Mr. Borkan an amount in cash equal to
$1.5 million plus the value of 200,000 shares of Common Stock at the net
Offering price. See "Certain Transactions."
In connection with the Neuromed Acquisition, the Company entered into the
First Amended and Restated Credit Agreement dated March 31, 1995, with
NationsBank (the "Loan Agreement"), which provided for $15.0 million in senior
term financing and a $5.0 million working capital line of credit. The senior
term debt was utilized to pay most of the cash portion of the Neuromed purchase
price. The Company has also drawn down $4.5 million on the working capital line
of credit. This bank debt is collateralized by certain of the Company's assets,
including without limitation, accounts receivable, inventory, equipment,
furniture and other fixed assets, patents, trademarks and other intangible
property, and the Neuromed Common Stock, but excluding marketable securities in
excess of $2.0 million. NationsBank's lien also excludes the Company's real
property, building and certain equipment in Allen, Texas, which collateralize
financing provided in 1993 by MetLife Capital Corporation. The Company intends
to use the net proceeds it receives from the Offering to repay the senior term
debt ($14.0 million of which is currently outstanding) and as much of its
working capital indebtedness as possible ($4.5 million of which is currently
outstanding). See "Use of Proceeds." The Company has received a commitment
letter from NationsBank that provides for the amendment of the working capital
line of credit and the addition of an acquisition line of credit if the Offering
is consummated and the proceeds are applied to repay the indebtedness under the
existing facility. See "-- Liquidity and Capital Resources."
16
<PAGE> 19
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Revenues. Net revenue of $11.3 million for the six months ended June 30,
1995 was $4.1 million, or 56.5% above the level for the comparable 1994 period
of $7.2 million. This increase in net revenue during the first half of 1995
compared to the first half of 1994 was primarily attributable to revenue
generated by Neuromed, which was acquired on March 31, 1995. See "-- Overview"
and "Selected Pro Forma Financial Data." Net revenue from sales of the Company's
other products increased approximately 8% during the six months ended June 30,
1995 compared to the same period a year ago, primarily due to higher unit sales
volume from the Company's cardiovascular products. Management expects net
revenue for the remaining two quarters of 1995 to increase over the comparable
periods during 1994 as a result of the inclusion of the Neuromed revenues in the
Company's financial statements.
Gross Profit. Gross profit of $6.4 million for the six months ended June
30, 1995 was $3.2 million, or 100%, above the level for the comparable 1994
period. As a percentage of net revenue, gross profit increased during the first
half of 1995 to 56.6% as compared to 44.2% for the comparable 1994 period. This
increase in gross profit margin during the six months ended June 30, 1995
compared to the comparable period during 1994 was primarily attributable to the
revenue generated by Neuromed, since Neuromed's products contribute higher gross
profit margins than the Company's other product lines. Consequently, management
expects the Company's overall gross profit margin for the remaining two quarters
of 1995 to increase compared to the comparable 1994 periods.
Operating Expenses. Research and development expense as a percentage of net
revenue increased from 21.3% during the six months ended June 30, 1994, to 22.1%
for the same period in 1995, and the dollar amount increased by $955,000. During
the first half of 1995, the Company continued development efforts on its MPS
system and related products. During the second quarter of 1995, the Company
assembled pre-production MPS units necessary for the validation testing needed
for the 510(k) filing with the FDA. Validation testing was completed and, as
previously noted, the Company filed the 510(k) with the FDA during August 1995.
There can be no assurance that FDA clearance will be obtained or that it will be
obtained without delay. Of the increase in research and development expense for
the six months ended June 30, 1995, $182,000 was research and development
expense attributable to Neuromed's products. The remainder of the increase
during the first half of 1995 compared to the first half of 1994 was primarily
the result of additional salary and contract labor expense from personnel
additions and increased consulting expense. Management expects research and
development expenditures for the remainder of 1995 to decrease from the first
half of 1995's level of $2.5 million because of substantial completion of the
development of the MPS system.
Marketing, general and administrative expenses as a percent of net revenues
decreased to 31.1% for the six months ended June 30, 1995, compared to 32.9% for
the comparable period of 1994, and the dollar amount increased $1.1 million.
Marketing expense as a percentage of net revenue increased to 14.1% for the six
months ended June 30, 1995, compared to 12.3% for the same period during 1994,
and the dollar amount increased by $703,000. Of such increase, $439,000 was
Neuromed marketing expense. The remainder of the increase in marketing expense
was primarily the result of additional salary and benefit expense from personnel
additions, and increased travel, commission and convention expense. In
anticipation of 510(k) clearance, management anticipates hiring four additional
direct salespersons during the second half of 1995, and upon 510(k) clearance,
management expects to add five additional salespersons to market the MPS system
and related products. For the six months ended June 30, 1995, general and
administrative expense increased $433,000 compared to the same period in 1994,
but as a percentage of net revenues, decreased from 20.6% during the first half
of 1994 to 17.0% during the comparable 1995 period. This increase in expense for
the six month period of 1995 compared to 1994 was primarily attributable to
general and administrative expense of Neuromed, including amortization expense
of Neuromed intangibles.
17
<PAGE> 20
Loss from Operations. On March 31, 1995, the Company acquired all of the
capital stock of Neuromed in exchange for $15.4 million cash (excluding $927,000
of related acquisition and financing costs) and 833,333 shares of Common Stock
valued at $6.5 million (plus additional contingent "earn-out" consideration).
See "-- Overview" and "Certain Transactions." Of the cash payment referred to
above, $200,000 was made during June 1995 as a result of a purchase price
adjustment. Of the aggregate purchase price, $10.5 million was identified as
purchased in-process research and development and in accordance with generally
accepted accounting principles was charged to expense as a non-recurring charge,
with no related tax benefit, during the six months ended June 30, 1995. See Note
2 of the Notes to Consolidated Financial Statements. As a result, the loss from
operations increased from $719,000 for the six months ended June 30, 1994, to
$10.1 million for the comparable period during 1995. Excluding this charge, the
Company generated earnings from operations of $388,000 for the six months ended
June 30, 1995 compared to a $719,000 loss for the comparable 1994 period,
reflecting the positive impact of the Neuromed Acquisition. Based on Neuromed's
recent and historical results of operations, management believes that the
Neuromed Acquisition will continue to have a favorable impact on earnings from
operations for the remainder of 1995 as compared to the comparable period during
1994, although there can be no assurances to this effect.
Other Income (Expense). Other income decreased to an expense of $501,000
during the six months ended June 30, 1995 compared to income of $178,000 during
the comparable 1994 period. This decrease was primarily the result of increased
interest expense. The Company incurred $15.0 million of long-term bank debt on
March 31, 1995, which was used to fund most of the cash payment of the Neuromed
Acquisition. See "-- Overview" and Notes 2 and 3 of the Notes to Consolidated
Financial Statements. Higher overall interest rates on borrowed money also
contributed to higher interest expense during the first half of 1995 as compared
to the first half of 1994. In addition, interest income in the first half of
1995 was lower than in the comparable period of 1994 due to reduced funds
available for investment and lower gains recognized on the sale of the Company's
investments. The Company anticipates that it will use the net proceeds from the
Offering to repay the senior term bank debt ($14.0 million outstanding at
September 26, 1995) and as much of working capital indebtedness ($4.5 million
outstanding at September 26, 1995) as is possible. See "Use of Proceeds."
Net Loss. The net loss increased from $540,000 for the six months ended
June 30, 1994 to $10.6 million during the same period in 1995 as a result of the
aforementioned non-recurring charge for purchased in-process research and
development of $10.5 million incurred in connection with the Neuromed
Acquisition. Excluding this charge, the net loss for the six months ended June
30, 1995 was $113,000.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Revenues. Net revenue of $14.0 million for the year ended December 31,
1994, increased 2.6% from $13.6 million for the comparable 1993 period. Three of
the Company's product lines, however, contributed better results than the
overall 2.6% year over year increase. Net revenue of the Company's
cardiovascular products increased $604,000, or 11.5%, due to higher unit sales
volume from the Company's family of pressure control valves. Net revenue
generated by the Company's pressure monitoring kits increased $160,000, or
11.7%, due to higher unit sales volume. Net revenue generated by the Company's
nasogastric feeding tubes increased $108,000, or 48.2%. Of this increase,
$74,000 was due to higher unit sales volume with the remainder due to a price
increase. Net revenue generated by the Company's specialized tubing sets,
however, decreased by $518,500, or 7.7%, reflecting lower unit sales volume
largely attributable to a reduction in sales of specialized tubing sets used in
oncology to the Company's largest customer, the University of Texas System
Cancer Center (M.D. Anderson Hospital), due to lower hospital census.
Gross Profit. Gross profit during 1994 decreased to $6.4 million compared
to $6.6 million in 1993, a reduction of $210,000. As a percentage of net
revenue, gross profit decreased to 45.6% in 1994 compared to 48.3% during 1993.
The decrease in gross profit during 1994 compared to 1993 resulted primarily
from
18
<PAGE> 21
the lower net revenue generated by the Company's specialized tubing sets. Lower
sales volume of this product line led not only to a reduction in actual gross
profit dollars from this product line, but also to a reduction in gross profit
margins for this product line, since manufacturing volumes were reduced, thus
resulting in higher overhead costs per unit.
Operating Expenses. Research and development expense increased to $3.5
million during 1994 compared to the 1993 level of $1.9 million, and as a
percentage of net revenue increased from 14.0% to 25.3%. During 1994, the
Company continued development efforts on its MPS system and related products.
See "Business -- Research and Development." During June 1994, the Company
completed assembly of five MPS prototypes. In September 1994, the Company
determined that more time was needed to redesign the MPS prototypes into
pre-production units and delayed the anticipated December 1994 510(k) filing
with the FDA. The redesign was completed during December 1994. Increases in
research and development expense during 1994 compared to 1993 were primarily the
result of additional salary and contract labor expense from personnel additions,
increased prototype tooling, test material, consulting, and toxicology test
expenses. The Company also hired fourteen additional research and development
personnel during 1994.
Marketing, general and administrative expense as a percent of net revenues
increased to 35.6% for 1994 compared to 32.2% for 1993, and the dollar amount
increased $577,000. Marketing expense remained relatively unchanged during 1994
as compared to 1993 and as a percentage of revenue, decreased from 14.1% during
1993 to 13.7% during 1994. General and administrative expense increased
$582,000, or 23.4%, during 1994 as compared to 1993, and as a percentage of net
revenue, increased from 18.2% during 1993 to 21.9% for 1994. This increase
during 1994 compared to 1993 was primarily the result of higher recruiting and
relocation expense, depreciation and amortization expense, health insurance
expense, employee relations expense and expenses related to a proposed
acquisition that was not consummated.
Earnings (Loss) from Operations. Earnings from operations decreased from
earnings of $281,000 during 1993 to a loss of $2.1 million in 1994 as a result
of the aforementioned increases in research and development and general and
administrative expenses and the decrease in gross profit.
Other Income (Expense). Other income decreased to $419,000 during 1994
compared to other income of $667,000 for the prior year. This decrease resulted
from an increase in interest expense. Interest expense increased during 1994 as
compared to 1993 by $488,000 primarily due to two pieces of debt which were in
place for all of 1994 but only in place during the fourth quarter of 1993.
During December 1993, the Company consummated a financing with MetLife Capital
Corporation which provided $4.4 million of long term financing for the Company's
new corporate headquarters constructed during 1993. In addition, the Company
increased borrowings against its working capital line of credit with NationsBank
during 1994.
No income tax benefit was recognized for the Company's 1994 net operating
loss. Income tax expense during 1993 was $301,000.
Net Earnings (Loss). Net earnings decreased from net earnings of $816,000
during 1993 to a net loss of $1.7 million in 1994 primarily as a result of the
decrease in earnings from operations (caused by lower gross profit and higher
general and administrative and research and development expenses) and the
decrease in other income discussed above. During May 1993, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company, as permitted under the Statement, elected to adopt the provisions of
the new standard at the end of fiscal 1993. The cumulative effect as of December
31, 1993 of adopting Statement No. 115 was to increase net income by $169,000,
resulting from the reversal of unrealized losses recorded during 1993. The
ending balance of stockholders' equity was decreased by $169,000 to reflect the
net unrealized holding loss on securities classified as available-for-sale
previously carried at the lower of cost or market.
19
<PAGE> 22
YEARS ENDED DECEMBER 31, 1993 AND 1992
Revenues. Net revenue of $13.6 million for 1993, was approximately the same
as net revenue for 1992. This flat net revenue comparison reflected the then
current weakness in the medical device industry. In the wake of the Clinton
Administration's initiatives on healthcare reform, many of the Company's
customers engaged in cost-cutting during the year and reduced inventories of
medical devices and disposables during 1993, causing what management believed to
be a transient reduction in demand. The Company believes that this weakness in
product demand and the reduction in inventory levels reflected the general
uncertainty in the hospital and health care industry prompted by proposed
federal legislation and the general pressure to reduce healthcare costs. Net
revenue generated by the Company's specialized tubing sets decreased by
$342,000, or 4.8%, during 1993 as compared to 1992, reflecting decreased unit
sales volume. A substantial portion of this decrease resulted from a reduction
in sales of specialized tubing sets used in oncology to the Company's largest
customer, the University of Texas System Cancer Center (M.D. Anderson Hospital).
Net revenue generated by the Company's pressure monitoring kits decreased
$175,000, or 11.4%, during 1993 as compared to 1992 from reduced unit sales
volume of transducers (pressure sensors).
Net revenue generated by the Company's cardiovascular products, however,
increased $593,000, or 12.7%, during 1993 as compared to 1992, as a result of
three factors. First, $273,000 of the increase resulted from twelve months of
sales during 1993 from the ACTester product line while the 1992 period included
revenue only from the acquisition date of June 23, 1992 (six months). Second,
$112,000 of the increase resulted from the Company's introduction of a new
disposable product, Retroguard, during the second quarter of 1993. Finally, the
remainder of the increase resulted from a price increase on certain of the
Company's cardiovascular products.
Gross Profit. Gross profit of $6.6 million for 1993 was approximately the
same as gross profit for 1992. As a percentage of net revenue, gross profit
increased to 48.3% in 1993 from 48.1% during 1992. Lower sales volume in the
Company's specialized tubing sets during 1993 as compared to 1992 led not only
to a reduction in actual gross profit dollars from this product line, but also a
reduction in gross profit margin for this product line since manufacturing
volumes were reduced during 1993, resulting in higher overhead costs per unit.
However, higher net revenue in the Company's cardiovascular products, which
typically generate somewhat higher gross profit margins than most of the
Company's other products, more than offset the shortfall in actual gross profit
dollars of the specialized tubing sets. Gross profit margin in the
cardiovascular product line increased during 1993 as compared to 1992, primarily
as a result of a price increase.
Operating Expenses. Research and development expense increased to $1.9
million during 1993 compared to the 1992 level of $1.4 million, and as a
percentage of net revenue, increased from 10.2% to 14.0%. During 1992, the
Company commenced, and during 1993, continued development efforts on its MPS
brand of myocardial protection system and family of related disposable products.
Increases in expense during 1993 as compared to 1992 were primarily related to
additional salary and contract labor expense from personnel additions, increased
consulting and prototype tooling expense.
Marketing, general and administrative expense as a percent of net revenues
increased to 32.2% for 1993 compared to 30.4% for 1992, and the dollar amount
increased $258,000. Marketing expense increased $270,000, or 16.4%, during 1993
as compared to 1992, and as a percentage of net revenue, increased from 12.1%
during 1992 to 14.1% for 1993. This increase resulted primarily from increased
travel expense, samples expense, and advertising and promotional expense to
support the Company's sales efforts for its perfusion and other cardiovascular
product lines. General and administrative expense remained relatively unchanged
during 1993 as compared to 1992.
Earnings (Loss) from Operations. Earnings from operations increased from a
loss of $222,000 during 1992 to earnings of $281,000 for 1993. Results for the
1992 period included a non-recurring charge of $1.2 million to write-off the
assets of a discontinued business. Excluding this charge, earnings from
operations decreased from $1.0 million during 1992 to $281,000 during 1993 as a
result of the increase in marketing and research and development expense
discussed above.
20
<PAGE> 23
Other Income (Expense). Other income increased to $667,000 during 1993 as
compared to other income of $473,000 for the prior year. During 1993, the
Company recorded an expense of $174,000 related to the move to its new corporate
headquarters in Allen, Texas. This expense was largely comprised of moving costs
(including employee relocation costs) and the cancellation of two facility
leases. The Company also recorded an expense of $169,000 to reduce the value of
its investment portfolio to market value. Results for 1993 include a gain on
sale of marketable securities of $462,000, an increase of $325,000 from 1992.
These gains were generated by the sale of substantially all of the Company's
municipal bond portfolio and other interest rate sensitive investments which had
appreciated in value due to falling interest rates. The Company's decision to
significantly expand its research and development efforts reduced its need for
tax-free investment income.
Income tax expense increased $243,000 in 1993 compared to 1992 primarily as
a result of the increase in earnings.
Net Earnings. Net earnings increased from $194,000 during 1992 to $816,000
during 1993 primarily as a result of the aforementioned non-recurring charge
during 1992 of $1.2 million for the write-off of a discontinued business. Net
earnings for 1993 benefited by the cumulative effect of a change in accounting
principle of $169,000 discussed above.
QUARTERLY OPERATING DATA
The following table sets forth certain unaudited operating data for the
four quarters in 1993 and 1994 and the first and second quarters of 1995. In the
opinion of management, the data includes all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the information set
forth therein when read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
1993 1994 1995
---------------------------------------- ---------------------------------- -------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER(1) QUARTER QUARTER(2) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER(3)
------- ---------- ------- ---------- ------- ------- ------- ------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................... $3,302 $3,447 $3,637 $3,257 $3,481 $3,742 $3,458 $3,318 $4,072 $ 7,231
Gross profit................... 1,569 1,714 1,759 1,549 1,470 1,726 1,629 1,556 2,044 4,348
Research and development
expense....................... 322 376 540 672 638 901 870 1,133 1,086 1,408
Marketing, general and
administrative expense........ 1,081 1,108 1,049 1,162 1,136 1,240 1,270 1,331 1,295 2,217
Earnings (loss) from
operations.................... 166 230 170 (285) (304) (415) (511) (908) (337) (9,775)(4)
Earnings (loss) before income
taxes and cumulative effect of
change in accounting
principle..................... 308 884 300 (544) (183) (357) (489) (690) (365) (10,249)(4)
Earnings (loss) before
cumulative effect of change in
accounting principle.......... 221 635 203 (412) (183) (357) (489) (690) (365) (10,249)(4)
Cumulative effect of change in
accounting principle.......... -- -- -- 169 -- -- -- -- -- --
Net earnings (loss)............ 221 635 203 (243) (183) (357) (489) (690) (365) (10,249)(4)
Net earnings (loss) per
share......................... $ 0.04 $ 0.11 $ 0.04 $ (.04)(5)$(0.04) $(0.07) $(0.09) $(0.13) $(0.07) $ (1.66)(4)
Weighted average common and
common equivalent shares
outstanding................... 5,638 5,595 5,525 5,399 5,236 5,245 5,269 5,277 5,302 6,175
</TABLE>
- ---------------
(1) Includes a pre-tax gain of $524,200 relating to a litigation settlement.
(2) Includes a pre-tax expense of $239,358 relating to a litigation settlement.
(3) Reflects results of Neuromed from April 1, 1995.
(4) Includes non-recurring charge of purchased in-process research and
development incurred in connection with the Neuromed Acquisition in the
amount of $10.5 million or $(1.70) per share.
(5) Includes an increase in net income of $0.03 per share relating to the
cumulative effect of a change in accounting principle.
The level and timing of research and development expenditures for the MPS
system and related products has had a significant effect on the quarterly
results of operations during the past several years.
21
<PAGE> 24
In addition, although the Company's base business (prior to the Neuromed
Acquisition) has been stable on an annual revenue basis for the past few years,
the Company experiences quarterly revenue fluctuations which affect results.
Management currently anticipates results for the remainder of 1995 will compare
favorably to the corresponding periods during 1994 as a result of the Neuromed
Acquisition and a decrease in the level of research and development expenditures
for the second half of 1995 compared to the first half due to the substantial
completion of, and filing of the 510(k) for, the MPS system.
Results of operations on a quarterly basis in the future will continue to
depend upon numerous factors including: (i) base business fluctuations; (ii)
market acceptance of new products; (iii) timing of regulatory approvals; (iv)
marketing expenditures for new product introductions; (v) the Company's ability
to manufacture its products efficiently; (vi) timing of research and development
expenditures; and (vii) acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $4.7 million at
June 30, 1995, a decrease of $556,000 from 1994 year-end. Working capital
(current assets less current liabilities) was $10.8 million with a current ratio
of 2.88 to 1 at June 30, 1995.
On March 31, 1995, the Company acquired all of the outstanding capital
stock of Neuromed. The Company paid $15.4 million in cash and 833,333 shares of
Common Stock valued at $6.5 million for the Neuromed stock. Of the cash payment
referred to above, $200,000 was paid in June 1995 as a result of a purchase
price adjustment. The Company also incurred $927,000 in acquisition and
financing costs. In July 1995, the Company recorded additional "earn-out"
consideration of 200,000 shares of Common Stock to be issued upon the closing of
the Offering (or if the Offering is not completed, in January 1996) and $1.5
million in cash payable January 1996. In January 1997 (assuming certain sales
objectives are fully met), the Company is obligated to pay an amount in cash
equal to $1.5 million plus the value of 200,000 shares of Common Stock at the
net Offering price, all as final earn-out consideration. See "-- Overview" and
"Certain Transactions."
In connection with the purchase, the Company determined that the operations
of Neuromed will be relocated to Texas by the end of the first quarter of 1996.
The Company is in the process of finalizing the estimated costs of the
relocation which will be recorded in the third quarter of 1995 as an adjustment
to costs in excess of net assets acquired.
On March 31, 1995, the Company entered into the Loan Agreement with
NationsBank which provided $15.0 million of senior term financing utilized to
pay most of the cash portion of the Neuromed purchase price and a $5.0 million
working capital line. At June 30, 1995, the Company had borrowings under the
working capital line of $4.2 million with a weighted average interest rate of
9.09%. The Company intends to use the net proceeds from the Offering to repay
the senior term debt ($14.0 million of which is currently outstanding) and as
much of the working capital indebtedness as possible ($4.5 million of which is
currently outstanding). Upon repayment, NationsBank would release its liens on
the Company's assets. See "Use of Proceeds."
On September 25, 1995, NationsBank issued the Company a commitment letter
providing for the amendment of the $5.0 million working capital line and the
addition of a $15.0 million acquisition line. Under the commitment letter, the
amended working capital line of credit would be collateralized by the Company's
accounts receivable and inventory and the acquisition line, if drawn upon, would
be collateralized by the Company's remaining unencumbered assets. Management
expects to negotiate a dividend limitation that would apply if the acquisition
line is utilized. There can, of course, be no assurance that a definitive
agreement will be reached with NationsBank or any other financing source or that
any loan agreement would be on the same or comparable terms to the Company's
current indebtedness. The Company has no immediate plans to utilize an
acquisition facility if such facility were indeed obtained.
22
<PAGE> 25
The Company's investment strategy is to maximize its dividend and interest
yields on cash not currently employed in operating activities by investing in
highly liquid investments. The Company's current investment portfolio consists
primarily of interests in publicly traded real estate investment trusts and
publicly traded investment grade corporate preferred stocks (which qualify for
70% dividend exclusion for tax purposes). These investments generally yield
higher returns than certificates of deposit or treasury bills, but with a higher
market value exposure to interest rate risk. Tightening of monetary policy by
the Federal Reserve during 1994 led to a significant rise in both short- and
long-term interest rates, thereby negatively affecting the value of interest
rate sensitive investments. Consequently, at December 31, 1994, the Company's
investment portfolio had declined in value by $918,000. As required by FAS 115,
this decline is reflected as a decrease in stockholders' equity through the
component entitled "unrealized loss on marketable securities." During the first
half of 1995, interest rates fell, resulting in an increase in the value of the
Company's portfolio of $444,000, thereby decreasing the unrealized loss
component of stockholders' equity to $474,000 at June 30, 1995. During the first
half of 1995, the Company was a net seller of marketable securities in the
amount of $1.2 million. The Company's investment strategy has realized
cumulative net gains on its investments of over $1.0 million during the past
three years while continuously realizing higher interest and dividend yields
compared to certificates of deposit or treasury bills. At June 30, 1995, no
individual security represented more than 10% of the total portfolio or 1 1/4%
of total assets. The Company's investment policies prohibit the use of
derivative financial instruments.
The Company spent $995,000 for additions to property, plant and equipment
during the six months ended June 30, 1995, most of which were for manufacturing
toolings and equipment for the MPS system and related products. Management
expects capital expenditures for the remainder of 1995 to approximate $200,000.
Following the Offering, management believes that current cash, cash
equivalents and marketable securities, funds generated from operations, and if
necessary, funds provided by a working capital line of credit, will be
sufficient to satisfy normal cash operating requirements and capital
requirements for the foreseeable future.
CURRENCY FLUCTUATIONS
Substantially all of the Company's international sales are denominated in
U.S. dollars. Fluctuations in currency exchange rates in other countries could
reduce the demand for the Company's products by increasing the price of the
Company's products in the currency of the countries in which the products are
sold, although management does not believe currency fluctuations have had a
material effect on the Company's results of operations.
23
<PAGE> 26
BUSINESS
GENERAL
Quest designs, develops, manufactures and markets a variety of healthcare
products used primarily in cardiovascular surgery, interventional pain
management and intravenous fluid delivery applications. The Company operates
several stable and profitable product lines, including cardiovascular products
(such as pressure control valves, filters and surgical retracting tapes),
specialized intravenous fluid delivery tubing sets and accessories and pressure
monitoring kits used primarily in labor and delivery. The Company has levered
these product lines, its existing corporate infrastructure and its core
competencies in manufacturing, engineering and regulatory affairs to expand into
new markets as evidenced by the internally funded development of the Quest MPS
myocardial protection system, an innovative and sophisticated system designed to
manage the delivery of solutions to the heart during open-heart surgery. In
addition, the Company recently entered the interventional pain management market
by acquiring Neuromed, which designs, develops, manufactures and markets a line
of electronic SCS devices used to manage chronic severe pain.
In 1991, Quest acquired two companies that manufactured and marketed
various cardiovascular products, significantly enhancing the Company's presence
in the cardiovascular products marketplace. In 1992, Quest identified a real and
immediate need in this marketplace for an automated and integrated myocardial
protection system that would be versatile, easy to use, efficient to monitor and
cost-effective. Myocardial protection is the process of arresting and caring for
the heart during open-heart surgery. The Quest MPS system is designed to
integrate key functions relating to the delivery of solutions to the heart such
as varying the rate and ratio of oxygenated blood, crystalloid, potassium and
other additives, and controlling temperature, pressure and other variables to
allow simpler, more flexible and cost-effective management of this process. The
MPS system employs advanced pump, temperature control and microprocessor
technologies and includes a line of captive and non-captive disposable products.
The Company filed a 510(k) for its MPS system with the FDA in August 1995.
In its continuing effort to expand into potentially high growth niche
markets in the medical device industry, the Company acquired Neuromed in March
1995. SCS is gaining increased acceptance as a viable, efficacious and
cost-effective treatment alternative to repeat back surgeries for relieving
chronic severe back pain. The Company believes that its recently introduced
CompuStim products, which are powered by radio frequency transmitters external
to the body, are the technological leaders in the field. The Company is
currently test marketing PainDoc, a pen-based computer system that works in
tandem with the Company's CompuStim devices to assist physicians and their
patients in optimizing the performance of the Company's SCS devices both
pre- and post-operatively.
Since its founding in 1979, the Company has developed, manufactured and
marketed specialized intravenous fluid delivery tubing sets and accessories sold
primarily to major hospitals in the United States. Over the last several years,
the revenues generated by this product line, a substantial component of the
Company's historical base business, have significantly aided the funding of the
Company's research and development efforts. The Company manufactures and markets
over 70 distinct models of specialized intravenous fluid delivery tubing sets.
BUSINESS STRATEGY
The Company's strategy is to capitalize on its existing corporate
infrastructure and apply its core competencies in medical device manufacturing,
engineering and regulatory affairs to expand its presence in targeted niche
markets. The Company believes that this strategy has enabled it to expand into
new product lines with high growth potential such as the MPS system and family
of disposable products, and into new niche markets such as the spinal cord
stimulation market within the larger interventional pain management marketplace.
The Company has internally funded the research and development expense involved
in designing, developing and pursuing regulatory approval for products such as
the MPS system. The Company believes that the historical stability of the
revenue stream generated by its base business has been an important factor in
the Company's ability to develop new and expanded product lines.
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<PAGE> 27
Quest intends to continue pursuing its strategy through internal product
development and acquisitions, with particular emphasis on the cardiovascular and
interventional pain management markets. This strategy was exemplified by the
Company's acquisition of two companies in 1991 that significantly enhanced the
Company's presence in the cardiovascular market, and its subsequent development
of the MPS system and related disposables. Quest's strategy was further
demonstrated by the Company's entry into the interventional pain management
market through the Neuromed Acquisition.
PRODUCTS
The following table summarizes certain information with respect to the
Company's principal products in commercial distribution and under development.
<TABLE>
<CAPTION>
Products Description/Use Status
- --------------------------------- ----------------------------------- -----------------------
<S> <C> <C>
Cardiovascular
Pressure Control Valves Pressure control valves used during Marketed
open-heart surgery
Arterial Line Filters and Filters and traps used to remove Marketed
Bubble Traps potentially dangerous air and other
matter from the blood during open-
heart surgery
Retract-O-Tape Surgical tubes used to retract and Marketed
occlude blood vessels during open-
heart surgery
MPS System and Related Cardioplegia delivery system and 510(k) filed 8/95;
Disposables related fluid delivery catheters certain related
and delivery sets disposables previously
cleared
for marketing
Interventional Pain Management
SCS CompuStim Devices Neurostimulation devices used to Marketed
relieve chronic pain
PainDoc Pen-based computer system used to Test marketed as a
optimize the performance of the computer-based data
Company's implanted SCS devices recording and
both pre- and post-operatively programming device;
amended 510(k) filed
8/95 for use as an
interactive medical
treatment device
Intravenous Fluid Delivery
Multiport(R) Sets Intravenous administration sets Marketed
that allow multiple drug infusions
Anesthesia Sets Intravenous administration sets Marketed
that allow needleless "port"
administration
Other
Intrauterine Pressure Catheters and transducers used to Marketed
Catheters/Transducers assess the frequency, duration and
intensity of contractions during
high risk labor
</TABLE>
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<PAGE> 28
CARDIOVASCULAR
BACKGROUND. According to industry sources, approximately 700,000 open-heart
surgeries were performed worldwide in 1994, and approximately 400,000 coronary
bypass surgeries are performed annually in the United States. These complex
procedures require the extensive use of various disposables, which may include
the Company's valves, filters and traps. With pronounced increases in average
cardiovascular patient age, number of repeat open-heart surgical procedures, and
duration and complexity of open-heart surgical procedures, the process of
arresting and caring for the heart ("myocardial protection") has become a focal
point for the cardiovascular surgeon and the perfusionist. The perfusionist is
the clinical specialist who operates the equipment that manages the delivery of
blood and other fluids to the body's tissues during open-heart procedures.
Myocardial protection is accomplished through the controlled delivery to the
heart muscle of cardioplegia, a group of solutions including oxygenated blood,
crystalloid, an arresting agent (usually potassium), medication and nutrients,
and is used in virtually all open-heart procedures performed in the United
States and a majority of the procedures performed worldwide.
VALVES, FILTERS AND TRAPS. The Company manufactures and markets a line of
proprietary specialized pressure control valves, pre-bypass and arterial line
filters and bubble traps, which are used by the perfusionist during
cardiopulmonary bypass surgery. Pressure control valves are placed in the
suction line to "vent," or decompress, the heart. These valves serve a number of
functions, including the maintenance of vacuum at a safe and consistent level to
minimize heart muscle tissue damage, as well as the prevention of inadvertent
and potentially catastrophic retrograde air flow into the heart. In 1993 and
1994, respectively, the Company introduced to the market two extensions of its
pressure control valve technology, the RetroGuard valve and the PlegiaGuard
valve. The RetroGuard valve is used with centrifugal pumps to prevent potential
retrograde blood flow and possible air embolism. The PlegiaGuard valve is used
to relieve overpressure in the cardioplegia line in the event that the line
becomes inadvertently clamped or occluded. The Company's arterial line filters
and bubble traps are used in the bypass circuit to remove air and other
potentially dangerous matter from the blood prior to the blood's return to the
patient. The Company's pre-bypass filters are used to flush the circuit external
to the patient's body prior to the initiation of the bypass procedure to
eliminate man-made debris within the lines.
SURGICAL TAPES AND OTHER PRODUCTS. The Company also manufactures and
markets surgical retracting tapes under the trademark Retract-O-Tape, a product
line of silicone elastomer surgical tubing used to apply traction to and occlude
blood vessels during surgical procedures. The Company's surgical tapes are
hollow tubes, sealed at both ends to trap air, which resist collapsing when they
come into contact with a body structure. The Company's ACTester product line
consists of instrumentation and associated disposables used to measure the
activated clotting time of blood.
MPS SYSTEM. In 1992, based on discussions with perfusionists and
cardiovascular surgeons regarding the logistical limitations of existing
cardioplegia delivery systems, the Company identified a real and immediate need
for an automated and integrated myocardial protection system that would be
versatile, easy to use, efficient and cost-effective. Over the past several
years, cardiovascular surgeons have developed advanced myocardial protection
protocols for open-heart surgery that significantly complicate the safe and
efficient administration of cardioplegia delivery using existing systems.
Protocols now call for warm or cold cardioplegia, various levels of potassium,
retrograde or antegrade cardioplegia flow, and a number of other variables.
Existing cardioplegia delivery systems are limited in their ability to
accommodate these evolving protocols, and are also difficult to control and
monitor due to the number of different components and protocol variables. Based
on its reengineering of the conceptual approach to cardioplegia delivery, the
Company designed the MPS system to address the limitations of existing
cardioplegia delivery systems. The Company then commissioned an independent
research firm to survey over 150 surgeons and perfusionists to confirm the
market demand for an automated and integrated approach to managing cardioplegia
delivery.
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<PAGE> 29
The Company subsequently developed, and in August 1995 filed a 510(k) with
the FDA for, the MPS system. This system, which employs advanced pump,
temperature control and microprocessor technologies, is designed to enable the
perfusionist to vary the blood/crystalloid ratio and potassium concentration,
maintain a constant blood temperature, and maintain a constant delivery pressure
through an automated and integrated device. The Quest MPS instrument is designed
to provide this flexibility through the simple setting of dials on its control
panel. The Company believes that the MPS system will simplify the cardioplegia
delivery process and thus improve the safety of this process by reducing the
risk of human error.
As a part of the MPS system, the Company has designed and developed a
"captive" disposable delivery set, which fits into the instrument and is
necessary to the operation of the instrument. The Company has also designed and
developed additional "non-captive" disposable tubing and other accessories for
use with the MPS system. These non-captive disposables are not integral to the
operation of the instrument and can be purchased from other manufacturers. The
Company has received FDA clearance to market certain of its non-captive
disposables through the submission and approval of 510(k)s, and expects to begin
marketing such products in 1995.
INTERVENTIONAL PAIN MANAGEMENT
BACKGROUND. Within the multi-billion dollar worldwide market for
interventional pain management products and services, the market for spinal cord
stimulation products has begun to grow significantly in recent years. SCS
devices employ neurostimulation, the process of electrically stimulating the
spinal cord to reduce chronic severe neuropathic (as opposed to acute) pain by
"masking" the pain signals sent to the brain. Neuropathic pain usually arises
from nerve damage. SCS device implantation manages the pain associated with
failed back syndrome (resulting from certain spinal disorders or unsuccessful
spinal cord surgery), peripheral neuropathy, phantom limb or stump pain,
ischemic pain and reflex sympathetic dystrophy. Traditionally selected as a
treatment alternative after less invasive therapies and repeat spinal cord
surgeries have failed to alleviate pain, SCS is gaining increased acceptance
among prescribing physicians as a treatment alternative because it is
reversible, relatively noninvasive and increasingly effective. The number of
domestic SCS procedures has grown from approximately 4,100 in 1991 to over 5,800
in 1993, representing approximately a 40% increase over two years. A majority of
SCS patients are between 40 and 59 years old, have had three to four previous
back surgeries and have experienced chronic back pain for several years. The
Company believes that there are currently approximately $80 to $90 million in
annual domestic sales of SCS products, based on its assumptions that (i) the
number of annual domestic procedures performed grows at a 20% annual rate, and
(ii) the average SCS device sells to hospitals for approximately $12,500.
Management believes that a number of factors are driving the increased
acceptance and performance of SCS products: technical advances in equipment
leading to more predictable and successful outcomes; physician awareness and
training; an expanding client base; and potential cost containment compared to
other approaches for treating chronic back pain, especially the treatment
alternative of repeat back surgeries. The average SCS procedure, including
device, hospital and physician expense, costs approximately $25,000, and
compared to the expense of three to four repeat back surgeries, is
cost-effective. In addition, most back surgeries are performed in a hospital and
require a hospital stay, while SCS procedures are typically performed on an
out-patient basis.
The market for SCS devices is currently divided between RF-coupled devices,
which use an external power source, and fully implantable systems known as
internal pulse generator ("IPG") devices. The Company believes that IPG devices
currently account for a substantial majority of the number of SCS procedures
performed, with RF-coupled devices accounting for the remainder. The Company
designs, develops, manufactures and markets RF-coupled SCS devices. The primary
advantages of the RF-coupled device include the simple replacement or recharge
of the external battery pack, and relatively lower overall cost. Although an IPG
device provides the convenience of a completely internalized system, IPG devices
involve added cost, complexity and risk because repeat surgeries are required to
replace the IPG power source. The Company believes that managed care and overall
cost
27
<PAGE> 30
sensitivity may lead to increased selection of RF-coupled devices. Moreover, the
latest generation SCS devices generally include more electrodes and dual channel
receivers, both of which consume more electrical energy than an implanted power
source can practically deliver over an extended period of time. Consequently,
the Company believes that RF-coupled devices are beginning to gain market share.
SCS DEVICES. The Company's SCS systems consist of three primary components:
leads, a receiver and a transmitter. The leads are most commonly placed through
the skin into the spinal column's epidural space. This procedure is similar to
that employed by physicians to administer drugs for anesthesia and other common
medical applications. Typically, one or two leads are inserted, each of which
has multiple electrodes that can be used to stimulate the targeted nerve roots
of the spinal cord. Each lead is then connected to the receiver, which is
implanted under the skin on the side of the abdomen. The receiver contains
electronics that receive RF energy and data from a source (the transmitter)
outside the body, and delivers the prescribed electrical pulses to the leads.
The transmitter is approximately the size of a pager, and is typically worn on a
belt. Since it is external to the body, the transmitter can be easily programmed
and serviced as needed, and its battery can be simply recharged or replaced.
Neuromed introduced its first product, the Multiprogrammable Spinal Cord
Stimulator, or Multistim, in 1979. Since that time, Neuromed has played a
significant role in the development of SCS products. Multistim incorporated a
quadrapolar electrode system within a single lead, and was considered a major
innovation in the field of neurostimulation because it significantly reduced
surgical time, cost and risk. Since the launch of Multistim, Neuromed has
developed and introduced a wide range of RF-coupled SCS systems with a variety
of options to accommodate different applications and degrees of pain.
The Company's recently introduced CompuStim systems include four, eight and
sixteen electrode leads; specialty leads for peripheral applications; single and
dual channel receivers; and rechargeable transmitters and antennae. The Company
believes that the CompuStim product line's multi-electrode leads and
multiprogrammable electronics technology have changed the manner in which
neurostimulation is performed worldwide. For example, Neuromed's "Dual Octrode"
device, a recently introduced system of dual leads with eight electrodes each,
creates a targeted current density that appears to be especially effective in
relieving chronic axial (or body trunk) pain. Previously, quadrapolar SCS
systems only relieved the leg pain associated with failed back syndrome.
Industry sources support the view that the Dual Octrode device provides improved
pain relief to both the legs and the back. Consequently, although the Dual
Octrode device has only been on the United States market since February 1995, it
now accounts for approximately 60% of Neuromed's current product revenue and, in
the Company's judgment, is the technological leader in the SCS field. The
Company believes that the long term results of SCS in the treatment of pain have
improved as a result of the flexibility of Neuromed's designs, epitomized by the
Dual Octrode product. Moreover, the ease of use of the system has expanded the
potential market for these products.
Use of the Company's current SCS products in certain operating modes
consumes relatively greater amounts of electrical current, reducing the
operating time of the rechargeable, externally worn battery packs. In addition,
certain of the Company's current SCS products have experienced switch failures
attributable in significant part to a specific brand of switches. These switches
are no longer being purchased and are being replaced by a new switch that
appears not to exhibit the same problems. Patient misuse has also contributed to
the switch failures. Finally, the Company's SCS products have exhibited some
intermittent stimulation, which the Company believes is attributable to several
factors including improper antenna placement, physicians or patients adjusting
stimulation below perceptible levels, improper receiver implant placement
techniques and lead movement. The Company is developing and implementing
improved patient and physician communications and training programs and is
pursuing product design enhancements and improvements to address these matters.
28
<PAGE> 31
PAINDOC. In addition to its current array of SCS devices, the Company is
developing and testing PainDoc, a pen-based computer system that is designed to
assist physicians and their patients in optimizing the performance of the
Company's SCS devices both pre- and post-operatively. PainDoc interfaces with
the Company's CompuStim transmitters to optimize SCS therapy and document
treatment outcomes. PainDoc allows the physician to input information regarding
the patient's description of the location and intensity of the patient's pain.
The resulting "pain map" is then analyzed by the computer to assess and select
the most effective stimulation sets, or combination of multi-electrode
stimulation arrays, to treat the pain. The selected arrays are uploaded into the
patient's CompuStim transmitter. After a trial period, the patient reports to
the physician the location and level of pain relief. These trial results are
uploaded back into PainDoc for the physician's objective review and analysis.
The physician can visually compare the patient's pain map against a stimulation
map and assess whether desired levels of pain relief have been obtained and
whether excess stimulation has been delivered. This process can be effective in
targeting the location of desired pain relief, reducing the patchiness of pain
relief delivered by many SCS devices and reducing or eliminating
overstimulation.
PainDoc enables the physician to program up to 24 different stimulation
sets delivering electrical stimulation every 50 milliseconds to expand pain area
coverage and relief. The Company believes that PainDoc should also allow
physicians to create a broad based database tool that, by using a standardized
methodology, will enable physicians to share and compare outcomes data, which
can then be used to deliver more efficacious pain relief to individual patients.
The Company believes that PainDoc and CompuStim devices used in tandem should
significantly enhance the effectiveness, flexibility and precision of managing
chronic neuropathic pain. The Company expects PainDoc to promote the selection
of the Company's CompuStim devices for SCS procedures, especially as SCS devices
become more complex and the pain management process becomes more refined.
NEW PRODUCT OPPORTUNITIES. The Company believes that significant
opportunities for its SCS technology exist, both in the expansion of possible
applications of its existing products and in the development of new products,
specifically for patients afflicted with peripheral vascular disease, angina,
Parkinson's disease and motor disorders resulting from spinal cord injury or
paralysis. In addition, the Company currently plans to develop other pain
management products, which may include pumps, catheters, ports, needles and
scopes.
INTRAVENOUS FLUID DELIVERY
Since its founding in 1979, the Company has developed, manufactured and
marketed specialized intravenous fluid delivery tubing sets and accessories sold
primarily to major hospitals in the United States. Over the last several years
the revenues generated by this product line, a substantial component of the
Company's historical base business, have significantly aided the funding of the
Company's research and development efforts. The Company's core competencies in
medical device manufacturing, engineering and regulatory affairs have largely
been developed as a consequence of its experience with intravenous fluid
delivery products, including the electronic intravenous pump and associated
disposables business that was sold in 1987.
The Company manufactures and markets over 70 distinct models of specialized
intravenous fluid delivery tubing sets, which can be broken down into two major
product categories -- Multiport(R) sets and anesthesia sets. Hospitals
frequently require specialized disposable intravenous tubing sets for more
complex therapy procedures employed in anesthesia administration, intravenous
feeding, intensive care and cancer therapy. The Company's intravenous tubing
sets generally consist of specialized tubing and connector variations that
distinguish them from standard intravenous sets. The Company also manufactures
and markets injection sites used in heparin and other medication
administrations.
The Company has one patented specialized tubing set, purchased primarily by
the University of Texas System Cancer Center (M.D. Anderson Hospital), which is
used to deliver multiple drugs for complex chemotherapy applications. M.D.
Anderson accounted for $3.4 million, $3.1 million, $2.7 mil-
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<PAGE> 32
lion and $1.5 million, or 25%, 23%, 19% and 14%, of the Company's net revenues
for the years ended December 31, 1992, 1993 and 1994 and the six months ended
June 30, 1995, respectively.
OTHER PRODUCTS
The Company also designs, manufactures and markets other products for the
healthcare industry, including pressure monitoring kits used in labor and
delivery procedures and various critical care applications. The Company's
intrauterine pressure monitoring devices are used to determine pressure within
the mother's uterus primarily during high risk labor and delivery. Approximately
25% of the nearly four million births occurring annually in the United States
are categorized as "high risk" due to factors such as obesity, drug use,
disease, age or low fetus weight. During these procedures, a catheter is
inserted into the mother's uterus to measure uterine fluid pressure. This
information allows the clinician to monitor the progression of labor and to
determine whether intervention is necessary or advisable. The Company's
intrauterine pressure monitoring devices are marketed as kits containing all of
the components required to measure uterine fluid pressure.
RESEARCH AND DEVELOPMENT
Since 1992, the Company has focused its research and development efforts on
designing and developing the MPS system and related products. The Company spent
$9.0 million on the research and development of its MPS system and related
products, representing over 92% of the Company's research and development
expense since 1992. Although the Company plans to continue engaging in ongoing
research and development to introduce new products, enhance the effectiveness,
ease of use, safety and reliability of existing products and expand the
applications for which its products are appropriate, particularly in the
cardiovascular and interventional pain management fields, the Company expects
research and development expense to decline in the near term, as a result of
completing development of the MPS system and certain related products in August
1995.
As of September 26, 1995, the Company had an in-house research and
development staff of 25 engineers, technicians and designers, down from a peak
number of 49 in April 1995. This staff has worked closely with cardiothoracic
surgeons and perfusionists, hospital administrators, other healthcare
professionals and software and hardware engineers to understand the market need
for an integrated system dedicated to myocardial protection, and to design and
develop the MPS system and related disposables. The Company expects to continue
engaging in this collaborative effort to identify new niche market opportunities
and to design and develop innovative and cost-effective products and
enhancements, principally in the areas of cardiovascular surgery and
interventional pain management. Research and development expense in 1992, 1993,
1994 and the first half of 1995 was $1.4 million, $1.9 million, $3.5 million and
$2.5 million, respectively.
MANUFACTURING
The Company manufactures and packages certain cardiovascular products (such
as pressure control valves, filters, traps and surgical retracting tapes) and
intravenous fluid delivery products at its primary manufacturing facility in
Allen, Texas. This facility received ISO 9001 certification (for design and
manufacturing processes) in July 1995. See "Business -- Government Regulation."
Although the Company currently manufactures its line of SCS devices and related
products at its ISO 9002 certified (manufacturing only) facility in Fort
Lauderdale, Florida, the Company plans to transition this operation to the Allen
facility during the fourth quarter of 1995 and the first quarter of 1996.
Finally, the Company manufactures certain cardiovascular products at a facility
in Orange County, California, and will continue to do so for the foreseeable
future.
The Company's manufacturing processes consist of the assembly of standard
and custom component parts and the testing of completed products. The Company
subcontracts with various suppliers to provide it with the quantity of component
parts necessary to assemble its products. Almost all of these components are
available from a number of different suppliers, although certain components are
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<PAGE> 33
purchased from single sources, who manufacture these components from the
Company's toolings. For example, the Company relies on single suppliers for two
separate components of the specialized oncology intravenous tubing set that the
Company supplies to the University of Texas System Cancer Center (M.D. Anderson
Hospital), the Company's largest customer. The Company believes that there are
alternative and satisfactory sources for single-sourced components, although a
sudden disruption in supply from one of these suppliers could adversely affect
the Company's ability to deliver the finished product on time. The Company owns
its own molds for production of a majority of the components used in specialized
tubing sets and cardiovascular products. Consequently, in the event of supply
disruption, the Company would be able to fabricate its own components or
subcontract with another supplier, albeit after a delay in the production
process.
The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where components are assembled
in a "clean room" environment designed and maintained to reduce product exposure
to particulate matter. Products are tested throughout the manufacturing process
for adherence to specifications. Finished components are shipped to outside
processors for sterilization through radiation or treatment with ethylene oxide
gas. After sterilization, the products are quarantined and tested before they
are shipped to customers.
Skills of assembly workers required for the manufacture of medical products
are similar to those required in typical assembly operations. The Company
believes that workers with these skills are readily available in the Dallas,
Fort Lauderdale and Orange County areas.
SALES AND MARKETING
The Company markets most of its cardiovascular products and intravenous
fluid delivery tubing sets through direct contact with hospitals, independent
sales representatives, marketing arrangements with certain distributors and, to
a lesser extent, through telemarketing and direct mail. In addition, the Company
employs two sales managers who oversee the distributors who sell the Company's
cardiovascular products and pressure monitoring kits. The Company plans to
market its MPS system and family of related products domestically through a
direct sales force operating on a sales team approach. In anticipation of 510(k)
clearance, the Company has hired one sales manager and anticipates hiring
approximately four additional sales managers by the end of 1995, and upon 510(k)
clearance, to add approximately five additional salespersons to market the MPS
system and related products. The Company plans to market the MPS system and
related products internationally through specialty distributors. The Company
derives approximately 80% of net revenues attributable to its cardiovascular
products from domestic sales and approximately 20% from European, Australian and
Japanese sales.
Neuromed has historically relied on specialty distributors to market its
SCS devices, and the Company expects to continue this sales and marketing
strategy. The Company employs two sales managers who oversee these specialty
distributors. The primary medical specialists the Company targets in its
marketing efforts are anesthesiologists, neurosurgeons and orthopedic surgeons.
Although neurosurgeons were the first practitioners to use SCS applications,
anesthesiologists now account for a greater percentage of sales as the relative
number of these practitioners has grown and as the understanding and acceptance
of SCS treatment has increased. The Company derives approximately 80% of net
revenues attributable to its SCS devices from domestic sales and approximately
20% from European and Australian sales. See "Risk Factors -- Dependence on
Distributor Sales."
The University of Texas System Cancer Center (M.D. Anderson Hospital)
accounted for $3.4 million, $3.1 million, $2.7 million and $1.5 million, or 25%,
23%, 19% and 14%, of the Company's net revenues for the years ended December 31,
1992, 1993 and 1994 and the six months ended June 30, 1995, respectively. The
Company supplies a patented specialized tubing set used by M.D. Anderson
Hospital for oncology applications. While the Company believes its relations
with this customer are good, and while net revenues in percentage terms have
declined over time and are expected to decline further as a result of the
Neuromed Acquisition, the loss of this customer could have a material adverse
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<PAGE> 34
effect on the Company's business, financial condition and results of operations.
See "Risk Factors -- Reliance on Major Customer."
COMPETITION
In marketing its products, the Company competes with numerous companies
that have substantially greater financial resources and engage in substantially
greater research and development efforts than the Company. Numerous competitors
exist for the Company's cardiovascular products, specialized tubing sets and
pressure monitoring kits. These markets are dominated by established
manufacturers that have broader product lines, greater distribution
capabilities, substantially greater capital resources and larger marketing,
research and development staffs and facilities than the Company. Many of these
competitors offer broader product lines within the specific product market
and/or in the general field of medical devices and supplies. Broad product lines
give many of the Company's competitors the ability to negotiate exclusive, long
term medical device supply contracts and, consequently, the ability to offer
comprehensive pricing of their competing products. By offering a broader product
line in the general field of medical devices and supplies, competitors may also
have a significant advantage in marketing competing products to group purchasing
organizations, HMOs and other managed care organizations that are increasingly
seeking to reduce costs through centralization of purchasing functions. In
addition, the Company's competitors may use price reductions to preserve market
share in their product markets. See "Risk Factors -- Intense Competition,
Continual Technological Change and New Surgical Techniques."
The Company is aware of at least two cardioplegia delivery systems
currently in development or in clinical testing that would compete with the MPS
system. Both products have received FDA 510(k) market clearance. While these
products represent improvements over cardioplegia delivery systems currently in
use, the Company believes that the MPS system will offer a greater range of
functionality, flexibility and ease-of-use. In addition, innovations in surgical
techniques or medical practices could have the effect of reducing or eliminating
market demand for one or more of the Company's products. For example, some
cardiovascular surgeons and medical device companies are developing techniques,
procedures and devices for performing coronary artery bypass surgery without
stopping the heart, both through open-heart surgery and minimally invasive
procedures, thereby eliminating the need for myocardial protection in these
cases and potentially reducing the market for Quest's MPS system. While these
techniques, procedures and devices have not to date attained widespread use,
there can be no assurance that they will not gain broader market acceptance.
While these and other surgical techniques, procedures and devices may reduce the
number of coronary artery bypass procedures that require myocardial protection,
the Company believes that most, if not all, surgical suites will need to be
equipped with a myocardial protection system. See "Risk Factors -- Intense
Competition, Continual Technological Change and New Surgical Techniques."
Neuromed competes in the market for SCS devices with one other significant
supplier, Medtronic, Inc. Medtronic holds a substantial majority share of the
market and sells both RF-coupled systems and IPG devices. See "-- Interventional
Pain Management -- Background."
The Company believes that the principal competitive factors in the
cardiovascular, interventional pain management and intravenous fluid delivery
markets are cost-effectiveness, impact on patient outcomes, product performance,
quality and ease of use, technical innovation and customer service. The Company
intends to continue to compete on the basis of its high performance products,
innovative technologies, manufacturing capability, close customer relations and
support and its strategy to increase its offerings of products within these
markets.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company owns nineteen United States patents relating to products that
the Company currently sells or develops. Although one such patent is scheduled
to expire in February 1996 and another is scheduled to expire in January 1997,
the Company does not believe that either expiration will
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have a material adverse effect on the Company or its ability to sell the
applicable products. Twelve of the nineteen patents cover the Company's
cardiovascular products. From 1993 through 1995, the Company filed four
applications for patents relating to the MPS system and related products, one of
which was issued in January 1995. The issued patent contains 69 claims, many of
which, in the Company's opinion, contain broad coverage of key elements of the
MPS system, including the MPS system's innovative methods of pumping, mixing and
heating fluids. Management believes that the issued patent should provide
significant protection for its MPS system. The three other patent applications
are pending.
Neuromed currently owns four of the United States patents referred to
above, and also owns five foreign patents. In management's view, these patents
offer reasonable coverage of its SCS devices' electrode, receiver and
transmitter technology. These patents cover both RF-coupled devices and IPG
systems, although the Company currently manufactures only RF-coupled devices.
The Company is assessing whether it will file for patent protection concerning
its PainDoc product. The Company also owns three patents relating to its
intravenous fluid delivery tubing sets and accessories and other products.
The validity of any patents issued to the Company may be challenged by
others and the Company could encounter legal and financial difficulties in
enforcing its patent rights against infringers. In addition, there can be no
assurance that other technologies cannot or will not be developed or that
patents will not be obtained by others which would render the Company's patents
obsolete. With the possible exception of the patent relating to the specialized
tubing sets manufactured for the University of Texas System Cancer Center (M.D.
Anderson Hospital), the loss of any one patent would not have a material adverse
effect on the Company's current revenue base. Although the Company does not
believe that patents are the sole determinant in the commercial success of its
products, the loss of a significant percentage of its patents or its patents
relating to a specific product line, particularly the MPS system or Neuromed's
SCS product line, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has developed significant technical knowledge which, although
non-patentable, is considered by the Company to be significant in enabling it to
compete. However, the proprietary nature of such knowledge may be difficult to
protect. The Company has entered into an agreement with each key employee
prohibiting such employee from disclosing any confidential information or trade
secrets of the Company and prohibiting that employee from engaging in any
competitive business while the employee is working for the Company and for a
period of one year thereafter. In addition, these agreements also provide that
any inventions or discoveries relating to the business of the Company by these
individuals will be assigned to the Company and become the Company's sole
property.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. The medical device industry is characterized by frequent
and substantial intellectual property litigation. The cardiovascular device
market and the interventional pain management markets are maturing and, as such,
are characterized by extensive patent and other intellectual property claims,
which can create greater potential than in less developed markets for possible
allegations of infringement, particularly with respect to newly developed
technology. Intellectual property litigation is complex and expensive, and the
outcome of this litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse determination in any such proceeding could subject the
Company to significant liabilities to third parties, or require the Company to
seek licenses from third parties or pay royalties that may be substantial.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing or
selling certain of its products, which could have a
33
<PAGE> 36
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Dependence on Patents and
Proprietary Rights."
QUEST, MULTIPORT, RETROGUARD, RETRACT-O-TAPE, ACTest and DUO-TUBE are among
the Company's registered trademarks, and MPS, COMPUSTIM, PAINDOC and ACTester
are among its non-registered trademarks. Registration applications are pending
with respect to MPS, COMPUSTIM and PAINDOC.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding foreign agencies. The research and development, manufacturing,
promotion, marketing and distribution of the Company's products in the United
States are governed by the Federal Food, Drug, and Cosmetic Act and the
regulations promulagated thereunder (the "FDC Act and Regulations"). The Company
is subject to inspection by the FDA for compliance with such regulations and
procedures.
The FDA has traditionally pursued a rigorous enforcement program to ensure
that regulated entities such as the Company comply with the FDC Act and
Regulations. A company not in compliance may face a variety of regulatory
actions, including warning letters, product detentions, device alerts, mandatory
recalls or field corrections, product seizures, injunctive actions or civil
penalties and criminal prosecutions of the company or responsible employees,
officers and directors.
Under the FDA's requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a legally marketed device, the
manufacturer may seek marketing clearance from the FDA to market the device by
filing a 510(k) premarket notification with the FDA. The 510(k) premarket
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer. If substantial
equivalence cannot be established, or if the FDA determines that the device
requires a more rigorous review, the FDA will require that the manufacturer
submit a PMA that must be carefully reviewed and approved by the FDA prior to
sale and marketing of the device in the United States. The process of obtaining
a PMA can be expensive, uncertain and lengthy, frequently requiring anywhere
from one to several or more years from the date of FDA submission. Both a 510(k)
and a PMA, if granted, may include significant limitations on the indicated uses
for which a product may be marketed. FDA enforcement policy strictly prohibits
the promotion of approved medical devices for unapproved uses. In addition,
product approvals can be withdrawn for failure to comply with regulatory
requirements or the occurrence of unforeseen problems following initial
marketing. Although all of the Company's currently marketed products have been
the subject of successful 510(k) submissions, and the Company believes that its
products currently in development will also be eligible for the 510(k)
submission process, there can be no assurance that the FDA will agree with this
view.
In the second quarter of 1994, the Company held a pre-submission meeting
with the FDA's Office of Device Evaluation to determine whether the MPS system
qualified for a 510(k) filing. Based on its meeting with the FDA, the Company
concluded that the MPS system would qualify for 510(k) treatment, and opted to
file its application with test data to facilitate the FDA's review. After
compiling test data over the course of 1995, the Company filed its 510(k)
notification in August 1995. The Company expects to introduce MPS and related
products to commercial markets if and when the FDA clears MPS to market. There
can be no assurance that the FDA will consider the MPS system under 510(k), that
such clearance will be obtained or that it will be obtained without delay. See
"Risk Factors -- Government Regulation; Uncertainty of Obtaining Regulatory
Clearance."
Although the Company's PainDoc product is currently marketable as a data
recording and programming device for use with the Company's CompuStim devices,
the Company has also filed a 510(k) for the use of PainDoc as an interactive
medical treatment device. The initial 510(k) was filed in February 1994 and was
amended in August 1995. Currently, PainDoc can be used to record important
34
<PAGE> 37
information regarding the location and intensity of a patient's pain, analyze
that data, and automate the selection of a large number of electrode arrays that
would be difficult to select manually. PainDoc is then used to program the most
efficacious electrode arrays to alleviate the patient's pain. If 510(k)
clearance is granted for use as an interactive medical treatment device, this
data collection, analysis, selection and programming process could be
accomplished while the patient is receiving neurostimulation, where currently,
the transmitter must be disconnected during the analysis and programming phase.
The Company believes that the filed 510(k) clarifies that PainDoc is essentially
an automated version of the existing CompuStim transmitter, and is therefore
substantially equivalent to a currently marketable product. Again, there is no
assurance that the FDA will grant market clearance or grant it without delay.
While such approval would enhance the value of PainDoc as a treatment optimizing
device by allowing the physician to accelerate the process through "live"
testing, the Company believes that PainDoc as currently used provides the same
functionality and benefits, although at a slower pace.
The Company is also subject to regulation in each of the foreign countries
in which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain countries require the Company's
products to be qualified before they can be marketed in those countries. To
date, the Company has not experienced significant difficulty in complying with
these regulations.
To position itself for access to European and other international markets,
Quest sought and obtained certification under the ISO 9000 Series of Standards.
ISO 9000 is a set of integrated requirements, which when implemented, form the
foundation and framework for an effective quality management system. These
standards were developed and published by the ISO, a worldwide federation of
national standard bodies, founded in Geneva, Switzerland in 1946. ISO has over
92 member countries. ISO certification is widely regarded as essential to enter
Western European markets.
The Company obtained certification and was registered as an ISO 9001
compliant company on July 1, 1995. The ISO 9001 registration is the most
stringent standard in the ISO series and lasts for three years. The German
notified body, Landesgewerbeanstalt Bayern ("LGA") issued the certificate. The
ISO 9001 standards cover design, production, installation and servicing of
products. The Company will be subject to an annual audit by LGA to maintain the
registration. This registration will simplify the process of obtaining the "CE"
mark for its products. This CE mark enables a company's products to be marketed,
sold and used throughout the European Union.
In 1991, prior to its acquisition by the Company, Neuromed commenced
clinical trials of a fully implantable SCS device in the United States and
Europe. In late 1993, the FDA cancelled the IDE relating to this product and
rescinded Neuromed's export authority for this product due to alleged violations
by Neuromed, under its prior management, of applicable rules and regulations,
including good manufacturing practices. The clinical trials were discontinued
and the product was withdrawn from the market. During this period, Neuromed also
encountered regulatory difficulties in the United Kingdom due to alleged
noncompliance with applicable rules and regulations. Quest is engaged in a
process intended to restore good relations with regulatory authorities in the
United Kingdom. There can be no assurances that the Company will not encounter
similar difficulties in the future.
The financial arrangements through which the Company markets, sells and
distributes its products may be subject to certain federal and state laws and
regulations in the United States with respect to the provision of services or
products to patients who are Medicare or Medicaid beneficiaries. The "fraud and
abuse" laws and regulations prohibit the knowing and willful offer, payment or
receipt of anything of value to induce the referral of Medicare or Medicaid
patients for services or goods. In addition, the physician anti-referral laws
prohibit the referral of Medicare or Medicaid patients for certain "Designated
Health Services" to entities in which the referring physician has an ownership
or compensation interest. Violations of these laws and regulations may result in
civil and criminal penalties, including substantial fines and imprisonment. In a
number of states, the scope of fraud and abuse or physician
35
<PAGE> 38
anti-referral laws and regulations, or both, have been extended to include the
provision of services or products to all patients, regardless of the source of
payment, although there is variation from state to state as to the exact
provisions of such laws or regulations. In other states, and, on a national
level, several health care reform initiatives have been proposed which would
have a similar impact. The Company believes that its operations and its
marketing, sales and distribution practices currently comply in all respects
with all current fraud and abuse and physician anti-referral laws and
regulations, to the extent they are applicable. Although the Company does not
believe that it will need to undertake any significant expense or modification
to its operations or its marketing, sales and distribution practices to comply
with federal and state fraud and abuse and physician anti-referral regulations
currently in effect or proposed, financial arrangements between manufacturers of
medical devices and other health care providers may be subject to increasing
regulation in the future. Compliance with such regulation could adversely affect
the Company's marketing, sales and distribution practices, and may affect the
Company in other respects not presently foreseeable, but which could have an
adverse impact on the Company's business, financial condition and results of
operations.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's products are purchased primarily by hospitals and other
users, which then bill various third party payors for the services provided to
the patients. These payors, which include Medicare, Medicaid, private insurance
companies and managed care organizations, reimburse part or all of the costs and
fees associated with the procedures performed with these devices.
Medicare and Medicaid reimbursement for hospitals is based on a fixed
amount for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique, and as a result hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been and may in the future be reduced in the
event of further changes in the resource-based relative value scale method of
payment calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. Any amendments to
existing reimbursement rules and regulations which restrict or terminate the
reimbursement eligibility (or the extent or amount of coverage) of medical
procedures using the Company's products or the eligibility (or the extent or
amount of coverage) of the Company's products could have an adverse impact on
the Company's business, financial condition and results of operations. Third
party payors are increasingly challenging the prices charged for medical
products and services and may deny reimbursement if they determine that a device
was not used in accordance with cost-effective treatment methods as determined
by the payor, was experimental or was used for an unapproved application.
The Company's SCS devices, for example, while cost-effective compared to
repeat back surgeries, have encountered some resistance to third party
reimbursement. Although Medicare, Medicaid and many private insurers reimburse
for the SCS device and procedure, especially after repeat back surgeries have
failed to relieve the chronic pain, certain payors refuse to reimburse for SCS
devices and others, including the Veterans Administration, restrict
reimbursement. There can be no assurance that in the future, third party payors
will continue to reimburse for the Company's products, or that their
reimbursement levels will not adversely affect the profitability of the
Company's products. In addition, the cost of health care has risen significantly
over the past decade, and there have been and may continue to be proposals by
legislators and regulators to curb these costs. Legislative action limiting
reimbursement for certain procedures could have a material adverse effect on the
Company's business, financial condition and results of operations.
In response to the focus of national attention on rising health care costs,
a number of changes to reduce costs have been proposed or have begun to emerge.
There have been, and may continue to be, proposals by legislators and regulators
and third party payors to curb these costs. There has also been a
36
<PAGE> 39
significant increase in the number of Americans enrolling in some form of
managed care plan. It has become a typical practice for hospitals to affiliate
themselves with as many managed care plans as possible. Higher managed care
penetration typically drives down the prices of health care procedures, which in
turn places pressure on medical supply prices. This causes hospitals to
implement tighter vendor selection and certification processes, by reducing the
number of vendors used, purchasing more products from fewer vendors and trading
discounts on price for guaranteed higher volumes to vendors. Hospitals have also
sought to control and reduce costs over the last decade by joining group
purchasing organizations or purchasing alliances. The Company cannot predict
what continuing or future impact existing or proposed legislation, regulation or
such third party payor measures may have on its future business, financial
condition or results of operations.
Changes in reimbursement policies and practices of third party payors could
have a substantial and material impact on sales of certain of the Company's
products. The development or increased use of more cost-effective treatments
could cause such payors to decrease or deny reimbursement to favor these other
treatments. See "Risk Factors -- Cost Pressures on Medical Technology; Third
Party Reimbursement."
EMPLOYEES
As of September 15, 1995, the Company employed approximately 226 full-time
employees, 25 in research and development, 32 in sales and marketing, 124 in
manufacturing and related operations, and the remainder in executive and
administrative positions. The Neuromed Acquisition has added approximately 60 of
these employees to the existing employee base. None of the Company's employees
is represented by a labor union, and the Company considers its employee
relations to be good.
ADVISORY BOARD
The Company has established a Board of Clinical Advisors (the "Advisory
Board") comprised of individuals with substantial expertise in the field of
myocardial protection who have played instrumental roles in the identification
of the market need for the MPS system and its subsequent design and development.
Members of the Company's management and scientific and technical staff consult
closely with the Advisory Board to better understand the technical and clinical
requirements of the cardiovascular surgical team and product functionality
needed to meet those requirements. The Company anticipates that these Advisory
Board members will continue to play similar roles with respect to other
products, and may assist the Company in educating other physicians in the use of
the MPS system and related products.
Certain members of the Advisory Board are employed by academic institutions
and may have commitments to or consulting or advisory agreements with other
entities that may limit their availability to the Company. The members of the
Advisory Board may also serve as consultants to other medical device companies.
No members are expected to devote more than a small portion of their time to the
Company.
FACILITIES
In December 1993, the Company moved into its new manufacturing facility and
executive offices in Allen, Texas (located north of Dallas). The facility covers
approximately 107,000 square feet and was constructed during 1993 on a 19.2 acre
tract that the Company acquired in 1985. The Company borrowed $4.4 million from
MetLife Capital Corporation to construct and outfit this facility. This
financing is collateralized by the Allen land, the Allen facility and certain
equipment of the Company. See Note 3 of the Notes to the Quest Consolidated
Financial Statements. Management expects the current facility to serve its
manufacturing, storage and executive office needs in the Dallas area for the
foreseeable future.
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<PAGE> 40
The Company also currently leases approximately 4,600 square feet of office
and manufacturing space in Orange County, California on a month-to-month basis.
The Company plans to continue manufacturing certain cardiovascular surgery
products at this facility for the foreseeable future.
Neuromed leases approximately 18,000 square feet of office and
manufacturing space in Fort Lauderdale, Florida, where it manufactures and
markets its SCS devices. The Company plans to transition the SCS manufacturing
and marketing functions to its headquarters in Allen by the end of the first
quarter of 1996. Pending this move, the Company believes this facility will
serve Neuromed's needs.
LEGAL PROCEEDINGS
As a consequence of the Neuromed Acquisition in March 1995, the Company is
currently a party to certain product liability claims relating to SCS devices
sold by Neuromed prior to the acquisition, including one claim relating to a
fully implantable device, which was recalled by Neuromed. Product liability
insurers have assumed responsibility for defending the Company against these
claims, subject to reservation of rights in certain cases. Although the Company
is entitled to contractual indemnification from Neuromed's former owner with
respect to any losses exceeding its product liability insurance coverage, there
can be no assurances that the Company will not incur significant monetary
liability to the claimants if such insurance or indemnification is unavailable
or inadequate for any reason, or that the Company's SCS business and new SCS
product lines will not be adversely affected by these product liability claims.
While the Company seeks to maintain appropriate levels of product liability
insurance with coverage that the Company believes is comparable to that
maintained by companies similar in size and serving similar markets, there can
be no assurance that the Company will avoid significant future product liability
claims relating to its SCS, cardiovascular, intravenous fluid delivery or other
products. See "Risk Factors -- Potential Product Liability and Recall; Possible
Insurance Limitations" and "-- Government Regulation."
Except for such product liability claims and other ordinary routine
litigation incidental or immaterial to its business, the Company is not
currently a party to any other pending legal proceeding. The Company maintains
general liability insurance against risks arising out of the normal course of
business.
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<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------------------- --- ----------------------------------------
<S> <C> <C>
Thomas C. Thompson.................... 57 President, Chief Executive Officer and
Director
David O. Turner....................... 48 Executive Vice President and Chief
Operating Officer
F. Robert Merrill III................. 45 Senior Vice President-Finance, Chief
Financial Officer, Treasurer and
Secretary
James P. Calhoun...................... 45 Vice President-Human Resources
George L. Carlson..................... 54 Vice President
Eric D. Dufford....................... 37 Vice President-Sales and Marketing
Kenneth A. Jones...................... 39 Vice President-Research and Development
O. Mark Samples....................... 45 Vice President-Manufacturing
W. Lynn Switzer....................... 47 Vice President-Quality Control
John A. Gula(1)(2).................... 55 Director
Linton E. Barbee(3)................... 57 Director
Hugh M. Morrison(1)(2)................ 48 Director
Robert C. Eberhart, Ph.D(3)........... 58 Director
Michael J. Torma, M.D(1).............. 53 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Stock Option Committee of the Board of Directors.
(3) Member of the Audit Committee of the Board of Directors.
Directors hold office until their term expires and until their successors
have been elected and qualified. Officers are appointed annually and serve at
the discretion of the Board of Directors. There are no family relationships
among executive officers or directors of the Company.
Mr. Thompson co-founded the Company and has been President and Director of
the Company since May 1979 and Chief Executive Officer since May 1984. From
January 1970 to September 1978, Mr. Thompson was President of Vicra Sterile,
Inc. ("Vicra"), a company that developed, manufactured and marketed specialty
medical devices in the field of intravenous therapy. Vicra was acquired by
Baxter Travenol, Inc. in January 1974.
Mr. Turner has been Executive Vice President and Chief Operating Officer of
the Company since April 1994. From August 1972 to April 1994, Mr. Turner was
employed by Texas Instruments in various capacities including Worldwide
Operations Manager of the Consumer Products Division from August 1990 to April
1994, Materials Manager Center Site and Operations Manager for the Defense Group
from October 1989 to August 1990 and as Quality Manager for the Electro-Optics
division of the Defense Group from July 1982 to October 1989.
Mr. Merrill has been Senior Vice President-Finance of the Company since
July 1995, Chief Financial Officer since April 1994, Secretary since February
1989 and Vice President-Finance and Treasurer since February 1981. Mr. Merrill
joined the Company in October 1979 as Director of Manufacturing Operations. Mr.
Merrill was employed by Vicra from October 1975 to October 1979, where he held
several positions including Production Manager, Materials Manager and
Controller.
Mr. Calhoun has been Vice President-Human Resources of the Company since
April 1995. From May 1992 to April 1995, Mr. Calhoun was Executive Director of
Hogan Quality Institute, a management
39
<PAGE> 42
consulting firm. From February 1988 to May 1992, Mr. Calhoun was the Vice
President of Human Resources and Corporate Quality Programs of Harris Adacom
Corporation, a data communications company.
Mr. Carlson has been Vice President of the Company since April 1995. Since
January 1993, Mr. Carlson has served as the President of Neuromed, and from
January 1990 to December 1992, served as its Vice President of Sales and
Marketing. Mr. Carlson has over 15 years of sales and marketing management
experience in electrical stimulation products with Pfizer, Inc., 3M, Medtronic,
Inc. and other medical ventures.
Mr. Dufford has been Vice President-Sales and Marketing of the Company
since June 1994. From January 1991 to May 1994, Mr. Dufford was employed by St.
Jude Medical, Inc., a medical device company, where he held various positions
within the sales and marketing area, including Director of International Sales
from January 1993 to May 1994, and as Domestic Regional Manager from January
1991 to December 1992. From June 1983 to December 1990, Mr. Dufford was employed
by Shiley, Inc. where he held various positions within the Cardiopulmonary
Division, including Regional Manager.
Mr. Jones has been Vice President-Research and Development of the Company
since March 1993. From August 1991 to February 1993, Mr. Jones was Director of
Research and Development of the Company. From March 1978 to July 1991, Mr. Jones
was employed by the Shiley Division of Pfizer, Inc. where he held various
positions in research and development including Manager of New Product
Development for Cardiopulmonary Products from March 1990 to July 1991.
Mr. Samples has been Vice President-Manufacturing of the Company since
March 1990. From November 1983 to February 1990, Mr. Samples was Director of
Manufacturing of the Company. He joined the Company in April 1982 as a project
manager in the research and development group.
Mr. Switzer has been Vice President-Quality of the Company since April 1991
and was Director of Quality of the Company from October 1990 to March 1991. From
September 1971 to September 1990, Mr. Switzer was employed by Baxter
International where he held various positions within the quality assurance area,
including Director of Regulatory Affairs and Quality Assurance.
Mr. Gula co-founded the Company and has been a Director of the Company
since its inception. Since January 1986, Mr. Gula has been an independent
healthcare consultant. Prior to 1986, Mr. Gula served as Executive Vice
President and Secretary of the Company for seven years.
Mr. Barbee has been a Director of the Company since 1983. Since October
1990, Mr. Barbee has been a partner with the law firm of Fulbright & Jaworski,
L.L.P. Prior to October 1990, Mr. Barbee was a partner with the law firm of
Hughes & Luce, L.L.P. for approximately four years.
Mr. Morrison has served as a Director of the Company since 1983. Mr.
Morrison has been engaged as an independent business consultant and investor
since January 1993. From 1989 through 1992, Mr. Morrison served as President and
Chief Executive Officer of American Funeral Services Corporation (formerly
Golden Era Services, Inc.). Mr. Morrison is a director of Owen Healthcare, Inc.,
and Equal Net Holding Corp. From March 1984 to October 1991, Mr. Morrison served
as a director of Dow B. Hickam, Inc., a pharmaceutical company.
Dr. Eberhart has served as Director of the Company since 1994 and also
serves on the Company's Board of Clinical Advisors. Since August 1990, Dr.
Eberhart has served as Chairman of the Board of the Biomedical Engineering
Program at the University of Texas Southwestern Medical Center at Dallas.
Dr. Torma has been a Director of the Company since 1994. Dr. Torma has
served as Chair of Surgical Services of Presbyterian Hospital of Dallas and
Chairman of the Institute for Surgical Sciences of Presbyterian Healthcare
Systems since October 1992. Prior to that time, Dr. Torma served as Command
Surgeon, Strategic Air Command of the USAF from August 1990 to September 1992
and Chief of Professional Affairs and Quality Assurance for the USAF Medical
Services from September 1988 to August 1990.
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<PAGE> 43
EXECUTIVE COMPENSATION
Summary Compensation. The following table reflects, for the year ended
December 31, 1994, the cash and noncash compensation paid by the Company to the
Company's Chief Executive Officer and any other executive officer of the Company
whose salary and bonuses exceeded $100,000 for services rendered in all
capacities (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- ALL OTHER
YEAR SALARY BONUS COMPENSATION(1)
---- -------- ------- ---------------
<S> <C> <C> <C> <C>
Thomas C. Thompson 1994 $168,480 $39,206 $ 4,500
Chief Executive Officer 1993 164,077 23,918 4,497
1992 162,000 21,393 4,364
David O. Turner 1994 84,675 18,911 --
Chief Operating Officer 1993 -- -- --
1992 -- -- --
F. Robert Merrill III 1994 92,150 12,185 3,057
Chief Financial Officer 1993 89,449 7,972 2,937
1992 88,320 6,702 2,496
</TABLE>
- ---------------
(1) Reflects matching employer contributions under the Company's Employees
Saving Plan (401K).
None of the Named Executive Officers received personal benefits, securities
or property in excess of the lesser of $50,000 or 10% of such individual's
reported salary and bonus. The Company did not grant any restricted stock
awards, long term incentive plan payouts or stock appreciation rights to the
Named Executive Officers in 1994, 1993 or 1992.
Option Grants. The following table sets forth the number of options granted
and the estimated exercisable value for Mr. Turner during the year ended
December 31, 1994. During such year, no options were granted to Messrs. Thompson
or Merrill and no SARs were granted to any of the Named Executive Officers.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION
NAME GRANTED FISCAL YEAR BASE PRICE DATE
------------------------------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
David O. Turner..................... 51,500 29% $4.61 April 2004
</TABLE>
The following table provides information related to options exercised by
the Named Executive Officers during the year ended December 31, 1994 and the
number and value of options held at year end. The Company does not have any SARs
outstanding.
AGGREGATE OPTION EXERCISES IN 1994
AND FISCAL YEAR-END 1994 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR-END FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Thompson........ 2,000 $10,850 116,170 -- $ 417,863 $ --
David O. Turner........... -- -- -- 51,500 -- 32,960
F. Robert Merrill III..... -- -- 41,457 3,863 140,620 9,039
</TABLE>
- ---------------
(1) Value based on the difference between the fair market value of the shares of
Common Stock at December 31, 1994, and the exercise price of the options.
41
<PAGE> 44
BENEFIT PLANS AND OTHER ARRANGEMENTS
1979 Stock Option Plan. Pursuant to the 1979 Stock Option Plan, officers
and other employees of the Company may receive options to purchase shares of
Common Stock. The 1979 Stock Option Plan was approved by the Board in 1979 and
amended and approved by the shareholders in 1992. The 1979 Stock Option Plan
provides for the grant of both incentive stock options intended to qualify for
preferential tax treatment under Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified stock options that do not qualify for this
treatment. The exercise price of all options granted under the 1979 Stock Option
Plan must equal or exceed the fair market value of the Common Stock at the time
of grant. The 1979 Stock Option Plan is administered by the Stock Option
Committee.
A total of 1,019,867 shares of Common Stock has been reserved for issuance
under the 1979 Stock Option Plan. As of September 26, 1995, there were
outstanding options to purchase an aggregate of 595,612 shares, at a weighted
average exercise price of $3.31 per share, pursuant to the 1979 Stock Option
Plan. Only 7,705 shares of Common Stock remain available under the 1979 Stock
Option Plan for the grant of additional non-qualified stock options. (A total of
416,550 shares had previously been issued upon the exercise of stock options
granted under the plan.)
1987 Stock Option Plan. On December 22, 1987, the Board of Directors
approved the 1987 Stock Option Plan. Pursuant to the 1987 Stock Option Plan,
certain officers of the Company received options to purchase shares of Common
Stock. The 1987 Stock Option Plan provides for the grant of nonqualified stock
options that do not qualify for preferential tax treatment under Section 422 of
the Internal Revenue Code of 1986, as amended. The exercise price of all options
granted under the 1987 Stock Option Plan must equal or exceed the fair market
value of the Common Stock at the time of grant. The 1987 Stock Option Plan is
administered by the disinterested members of the Board of Directors.
A total of 302,910 shares of Common Stock has been reserved for issuance
under the 1987 Stock Option Plan. As of September 26, 1995, there were
outstanding options to purchase an aggregate of 95,910 shares, at a weighted
average exercise price of $1.45 per share pursuant to the 1987 Stock Option
Plan. No shares of Common Stock remain available under the 1987 Stock Option
Plan for the grant of additional stock options. (A total of 207,000 shares have
been previously issued upon the exercise of stock options granted under the
plan.)
1995 Stock Option Plan. On March 30, 1995 and June 22, 1995, respectively,
the Board of Directors and shareholders of the Company approved the 1995 Stock
Option Plan. Pursuant to the 1995 Stock Option Plan, officers or other employees
of the Company or any of its subsidiaries (including Neuromed) are eligible to
receive stock option grants under the 1995 Stock Option Plan. The 1995 Stock
Option Plan provides for the grant of both incentive stock options intended to
qualify for preferential tax treatment under Section 422 of the Internal Revenue
Code of 1986, as amended, and nonqualified stock options that do not qualify for
this treatment. The exercise price of all options granted under the 1995 Stock
Option Plan must equal or exceed the fair market value of the Common Stock at
the time of grant. The 1995 Stock Option Plan is administered by the Stock
Option Committee.
A total of 250,000 shares of Common Stock has been reserved for issuance
under the 1995 Stock Option Plan; provided, however, that on January 1 of each
year (commencing on January 1, 1996), the aggregate number of shares of Common
Stock reserved for issuance under the Plan shall be increased by the same
percentage that the total number of issued and outstanding shares of Common
Stock increased from the preceding January 1 to the following December 31 (if
such percentage is positive). As of September 26, 1995, the Company had
outstanding options under the 1995 Stock Option Plan to purchase an aggregate of
207,000 shares, at a weighted average exercise price of $8.09 per share,
pursuant to the 1995 Stock Option Plan.
Directors' Plan. The Quest Medical, Inc. Directors' Stock Option Plan (the
"Directors' Plan") provides for grants of nonqualified stock options, which are
nontransferable, to purchase shares of Common Stock to directors and members of
the Advisory Board of the Company. Options granted
42
<PAGE> 45
under the Directors' Plan vest ratably over a four-year period and the exercise
period for such options cannot exceed six years. Under the Directors' Plan, the
option price per share cannot be less than the fair market value per share on
the date the option is granted. The Company has reserved 557,635 shares of
Common Stock for issuance under the Directors' Plan. As of September 26, 1995,
the Company had outstanding options to purchase an aggregate of 243,579 shares,
at a weighted average exercise price of $3.75 per share pursuant to the
Directors' Plan. Only 67,750 shares of Common Stock remain available under the
Directors' Plan for the grant of additional stock options. (A total of 246,306
shares have been previously issued upon exercise of stock options granted under
the plan.) The Directors' Plan is administered by the Stock Option Committee.
During the year ended December 31, 1994, two directors were granted options
under the Directors' Plan. Robert C. Eberhart, Ph.D. was granted options to
purchase 15,450 shares of Common Stock at an exercise price of $4.245 and
Michael J. Torma, M.D. was granted options to purchase 15,000 shares of Common
Stock at an exercise price of $6.375. During the year ended December 31, 1994,
no options were exercised under the Directors' Plan; however, during April 1995,
two directors exercised options which were scheduled to expire during May and
August 1995. Linton E. Barbee purchased 15,450 shares of Common Stock at an
exercise price of $2.18. The net value of such securities to Mr. Barbee at the
time of exercise (market value less exercise price) was approximately $78,331.
Hugh M. Morrison purchased 6,180 shares of Common Stock at an exercise price of
$1.45. The net value of such securities to Mr. Morrison was approximately
$38,161. In June 1995, Michael J. Torma, M.D. exercised options to purchase
3,750 shares of Common Stock at an exercise price of $6.375. The net value of
such securities to Dr. Torma at the time of exercise was approximately $19,688.
As of September 26, 1995, the Company had outstanding options to purchase
an aggregate of 146,324 shares of Common Stock at a weighted average exercise
price of $3.92 per share under the Directors' Plan to the members of the
Advisory Board. Certain members of the Advisory Board also provide consulting
services to the Company for which they are compensated through separate
agreements.
Employees Savings Plan. The Company has established a Employees Savings
Plan (the "Savings Plan"), which is qualified under Sections 401(a) and 401(k)
of the Code, pursuant to which all full-time employees of the Company may elect
to have the Company make certain salary reduction contributions on their behalf.
Under the Savings Plan, with certain limited exceptions, an employee may elect
to contribute up to 15% of his total compensation to the plan on a pre-tax
basis, and requires the Company to make matching contributions equal to 50% of a
participant's salary deferral, to a maximum of salary deferral contributions
equal to 6% of the participant's total cash compensation, up to $150,000. The
amount of the matching employer contribution may be increased or decreased at
the discretion of the Board of Directors. During the year ended December 31,
1994, the Company committed to contribute approximately $102,961 to the Savings
Plan.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Articles of Incorporation include a provision eliminating or
limiting director liability to the Company and its shareholders for monetary
damages arising from acts or omissions in the director's capacity as a director.
Consistent with the Texas Business Corporation Act, the Company's Articles of
Incorporation do not eliminate or limit a director's liability to the extent the
director is found liable for (i) a breach of the director's duty of loyalty to
the Company or its shareholders, (ii) an act or omission not in good faith that
constitutes a breach of duty of the director to the Company or an act or
omission that involves intentional misconduct or a knowing violation of the law,
(iii) a transaction from which the director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office, (iv) an act or omission for which the liability of a director
is expressly provided by an applicable statute, or (v) an act related to an
unlawful stock repurchase or payment of a dividend.
43
<PAGE> 46
In addition, the Company maintains insurance on behalf of its directors and
executive officers insuring them against any liability asserted against them in
their capacities as directors or officers or arising out of such status.
DIRECTORS' COMPENSATION
Non-management directors receive $1,000 for each Board of Directors meeting
attended and reimbursement for expenses incurred in attending such meetings.
Non-management directors who serve on committees do not receive additional
compensation for serving on such committees.
See "-- Benefit Plans and Other Arrangements -- Directors' Plan" for a
description of options granted to and exercises of options by directors of the
Company.
CERTAIN TRANSACTIONS
On March 31, 1995, the Company acquired all of the issued and outstanding
capital stock of Neuromed, which was held by Mr. William Borkan and his brother,
Mr. Burt Borkan. The Neuromed Acquisition has been accounted for as a purchase.
The Company paid the Borkans $15.4 million in cash ($200,000 of which was paid
in June 1995 as a purchase price adjustment) and issued them 833,333 shares of
Common Stock valued at $6.5 million. Depending on Neuromed's attainment of
certain sales objectives, the Company agreed to pay the Borkans' contingent
"earn-out" consideration in January 1996 and January 1997, payable in a
combination of cash and Common Stock. The Company and Mr. William Borkan also
entered into a consulting agreement pursuant to which Mr. Borkan agreed to
provide certain consulting services to the Company at the rate of $1,000 per
day. The Company is required to pay Mr. Borkan for a minimum of five days per
month ($5,000) until October 31, 1995 and two days per month ($2,000) thereafter
until October 31, 1996. In June 1995, Mr. William Borkan was elected to the
Company's Board of Directors.
In September 1995, the Company and Mr. William Borkan amended certain terms
of the Neuromed acquisition agreement. Under the amendment, (i) the Company
agreed to issue Mr. Borkan 200,000 additional shares of Common Stock
concurrently with the closing of the Offering and pay Mr. Borkan $1.5 million in
cash in January 1996 to satisfy the 1996 contingent payment obligation, which
had been earned in July 1995, (ii) the Company agreed to include all of the
Borkans' Common Stock (1,033,333 shares) in this Offering, (iii) Mr. Borkan
resigned from the Company's Board of Directors and relinquished his board
representation and attendance rights, (iv) Mr. Borkan relinquished his
registration rights, and (v) in the event the 1997 contingent earn-out payment
is fully earned, the Company agreed to pay Mr. Borkan an amount in cash equal to
$1.5 million plus the value of 200,000 shares of Common Stock at the net
Offering price. In the event the Offering is not consummated, among other
things, Mr. Borkan will regain his board representation and attendance rights
and his registration rights.
The Company has engaged the services of the law firm Fulbright & Jaworski,
L.L.P. located in Dallas, Texas. Mr. Linton E. Barbee, a director of the
Company, is a partner of such firm.
44
<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth for certain information with regard to the
beneficial ownership of the Common Stock of the Company as of September 26,
1995, and as adjusted to reflect the sale of shares offered hereby: (i) each
shareholder who will sell shares of Common Stock in this Offering (the "Selling
Shareholders"); (ii) each shareholder who was known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock; (iii) each
director and Named Executive Officer of the Company; and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING(1) NUMBER OF SHARES OFFERING(1)(2)
----------------- TO BE SOLD IN -----------------
BENEFICIAL OWNER NUMBER PERCENT THE OFFERING NUMBER PERCENT
- --------------------------------------------- ------- ------- ---------------- ------- -------
<S> <C> <C> <C> <C> <C>
William N. Borkan............................ 989,333 15.4% 989,333 -- --
3364 N.E. 167th Street
North Miami Beach, Florida 33160
John A. Gula(4).............................. 338,098 5.3% 50,000 288,098 3.6%
454 River Road
Fair Haven, New Jersey 07704
Burt Borkan.................................. 44,000 * 44,000 -- --
3031 Prarie Avenue
North Miami Beach, Florida 33140
The Equitable Companies Incorporated(3)...... 559,187 8.7% -- 559,187 7.1%
787 Seventh Avenue
New York, New York 10019
Dimensional Fund Advisors,Inc. (5)........... 331,118 5.2% -- 331,118 4.2%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Thomas C. Thompson(6)........................ 344,570 5.3% -- 344,570 4.3%
One Allentown Parkway
Allen, Texas 75002
Linton E. Barbee(4).......................... 15,300 * -- 15,300 *
Robert C. Eberhart, Ph.D.(7)................. 11,588 * -- 11,588 *
F. Robert Merrill III(8)..................... 43,385 * -- 43,385 *
Hugh M. Morrison(4).......................... 25,750 * -- 25,750 *
Michael J. Torma, M.D........................ -- -- -- -- --
David O. Turner (7).......................... 12,875 * -- 12,875 *
All directors and executive officers as a
group
(14 persons)(9)............................ 902,101 13.5% 50,000 852,101 10.4%
</TABLE>
- ---------------
* Less than 1.0%.
(1) Unless otherwise noted and subject to community property laws, where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated
as outstanding only when determining the amount and percent owned by such
person or group.
(3) Based on information obtained by the Company from Schedule 13G filed by The
Equitable Companies Incorporated ("The Equitable"), pursuant to a Joint
Filing Agreement among The Equitable, Alpha Assurances I.A.R.D. Mutuelle,
Alpha Assurances Vie Mutuelle, AXA Assurances
45
<PAGE> 48
I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, and Uni Europe Assurance
Mutuelle, and AXA, dated February 10, 1995. Alliance Capital Management
L.P., a subsidiary of The Equitable, is deemed to have beneficial ownership
of 559,187 shares of the Company's Common Stock, as of December 31, 1994.
(4) Includes 10,300 shares subject to options.
(5) Based on information obtained by the Company from Schedule 13G filed by
Dimensional Fund Advisors, Inc. ("Dimensional") dated January 31, 1995.
Dimensional, a registered investment advisor, is deemed to have beneficial
ownership of 331,118 shares of the Company's Common Stock as of December
31, 1994, all of which shares are held in portfolios of DFA Investment
Dimensions Group Inc., a registered open-end investment company, or in
series of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and the DFA Participating Group Trust, investment
vehicles for qualified employee benefit plans, all of which Dimensional
serves as investment manager.
(6) Includes 116,170 shares subject to options.
(7) Consists entirely of shares subject to options.
(8) Includes 43,320 shares subject to options.
(9) Includes 294,140 shares subject to options.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock, $.05
par value per share. As of the date of this Prospectus, 6,408,001 shares of
Common Stock are issued and outstanding (excluding treasury shares but including
200,000 shares to be issued to William N. Borkan upon the closing of the
Offering) and held of record by approximately 850 shareholders. An additional
1,316,456 shares are reserved for issuance upon exercise of employee and
director options, of which options to purchase 1,198,001 shares have been
granted at exercise prices ranging from $1.45 to $12.13 per share. See
"Management -- Benefits Plans and Other Arrangements." The Company will hold
155,571 shares in its treasury following the Offering.
Holders of Common Stock are entitled to receive such dividends, if any, as
may be declared by the Board of Directors out of legally available funds. In the
event of the liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably, based on the number of
shares held, in the assets, if any, remaining after payment of all of the
Company's debts and liabilities.
Holders of Common Stock are entitled to one vote per share for each share
held of record on any matter submitted to the holders of Common Stock for a
vote. Because holders of Common Stock do not have cumulative voting rights, the
holders of a majority of the shares of Common Stock represented at a meeting can
elect all the directors. Holders of Common Stock do not have preemptive rights
to subscribe for or purchase any additional shares of capital stock issued by
the Company. All outstanding shares of the Common Stock are, and the shares of
Common Stock offered hereby will be when issued, duly authorized, validly
issued, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
KeyCorp Shareholder Services, Inc. is the transfer agent and registrar for
the Common Stock.
SHAREHOLDERS' RIGHTS PLAN
The Company has a Shareholders' Rights Plan that may make the acquisition
of control of the Company by means of tender offer, open market purchase, proxy
contest or otherwise more difficult.
46
<PAGE> 49
Each share of Common Stock has associated with it one Common Stock purchase
right ("Right") to purchase from the Company one-half a share of Common Stock at
a price of $12.50 (the "Purchase Price"), subject to adjustment. The description
of and terms of the Rights are set forth in a Rights Agreement dated October 12,
1989 between the Company and MTrust Corp., N.A., as amended by that Amendment of
Rights Agreement dated as of February 9, 1995 (as amended, the "Rights
Agreement"), between the Company and KeyCorp Shareholder Services, Inc. (the
"Rights Agent"). Until the earlier to occur of: (i) 10 days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of Common Stock, except the Company, any subsidiary of
the Company, any employee benefit plan of the Company or William Borkan so long
as Mr. Borkan's beneficial ownership does not exceed 25% of the Common Stock
outstanding or any person who acquires beneficial ownership in a Permitted
Transaction or a Qualified Offer (an "Acquiring Person"); or (ii) 10 days (or
such later date as may be determined by action of the Board of Directors prior
to any person becoming an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of such outstanding shares of Common Stock (the earlier of
such dates being the "Distribution Date"), the Rights are evidenced by the
Common Stock certificates.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the Distribution
Date (or earlier redemption or expiration of the Rights), new Common Stock
certificates issued upon transfer or new issuance of Common Stock will contain
the notation incorporating the Rights Agreement by reference. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights (the "Rights Certificates") will be mailed to holders of record of
the Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights. The Rights are not
exercisable until the Distribution Date and will expire on October 12, 1999 (the
"Final Expiration Date"), unless extended or unless the Rights are earlier
redeemed by the Company.
The Purchase Price payable and the number of shares of Common Stock or
other securities or property issuable upon exercise of the Rights are subject to
adjustment in certain circumstances. In the event any person or entity becomes
an Acquiring Person and one of the following events have occurred, then proper
provision will be made so that each holder of a right, other than Rights
beneficially owned by the Acquiring Person (which will then be void), will have
the right to receive upon exercise that number of shares of Common Stock having
a market value of two times the applicable exercise price of the Right: (i) the
Company is the surviving corporation in a merger with an Acquiring Person and
the Common Stock is not changed or exchanged; (ii) the Acquiring Person engages
in certain self-dealing transactions with the Company; (iii) any person becomes
the beneficial owner of 20% or more of the outstanding shares of Common Stock
(unless the event in which such person acquired 20% or more of the outstanding
shares of Common Stock is a Permitted Transaction or pursuant to a Qualifying
Offer, each of which is defined below); or (iv) the Company engages in a
reclassification or recapitalization that results in an increase of 1% or more
in the Acquiring Person's percentage of ownership of the Company.
A Permitted Transaction is a stock acquisition or tender or exchange offer
pursuant to a definitive agreement which would result in a person beneficially
owning 50% or more of the Common Stock and which was approved by the Directors
(including a majority of the Directors not in association with an Acquiring
Person) prior to the execution of the Agreement or the public announcement of
the offer. A Qualifying Offer is defined as: an all-cash tender offer for 100%
of the outstanding securities of the Company; includes a commitment to pay cash
consideration at least equal to the highest per share consideration paid by the
tender offeror for the Company's securities within the previous 12-month period;
includes the tender offeror's undertaking to complete a second-step, "clean up"
merger in which the tender offeror will pay the same cash consideration as in
the tender offer; and results in the acquisition of a majority of the
outstanding securities of the Company. In the event that the Company is acquired
in a merger or other business combination transaction or 50% or more if its
consolidated
47
<PAGE> 50
assets or earning power are sold, unless such event is a Permitted Transaction
or pursuant to a Qualifying Offer, proper provisions will be made so that each
holder of a Right will have the right to receive, upon the exercise of the Right
at the then applicable exercise price, that number of shares of common stock of
the acquiring company that at the time of such transaction will have a market
value of two times the applicable exercise price of the Right. At any time prior
to the tenth day following an Acquiring Person's acquisition of 15% or more of
the outstanding Common Stock, the Board of Directors of the Company, with
concurrence of a majority of the directors in office at the time the Rights
Agreement was adopted or whose initial election or nomination for election by
the Company's shareholders was approved by a majority of the Continuing
Directors then serving on the Board of Directors (the "Continuing Directors"),
may redeem the Rights in whole, but not in part, at a price of $0.01 per Right.
In addition, the Board of Directors may extend or reduce the period during which
the Rights are redeemable, so long as the Rights are redeemable at the time of
such extension or reduction. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price. The terms of the Rights may be
amended by the Board of Directors of the Company, with concurrence of a majority
of the Continuing Directors, without the consent of the holders of the Rights,
including an amendment to extend the Final Expiration Date, except that from and
after the Distribution Date no such amendment may adversely affect the economic
interests of the holders of the Rights.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters") for whom Vector Securities
International, Inc. and Rauscher Pierce Refsnes, Inc. are acting as
representatives (the "Representatives") have severally agreed to purchase from
the Company and the Selling Shareholders the following respective number of
shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Vector Securities International, Inc. ...................................
Rauscher Pierce Refsnes, Inc. ...........................................
---------
Total.......................................................... 2,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, the Selling
Shareholders and their respective counsel. The nature of the Underwriters'
obligation is such that they are committed to purchase all shares of Common
Stock offered hereby if any of such shares are purchased. The Underwriting
Agreement contains certain provisions whereby if any Underwriter defaults in its
obligation to purchase shares, and the aggregate obligations of the Underwriters
so defaulting do not exceed 10% of the shares offered hereby, the remaining
Underwriters, or some of them, must assume such obligations.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the public
offering price set forth on the cover of this Prospectus, and to certain dealers
at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the public offering of
the shares of Common Stock, the offering price and other selling terms may be
changed by the Underwriters.
48
<PAGE> 51
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 390,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price, less underwriting discounts and commissions, set forth on
the cover page of this Prospectus. To the extent that the Underwriters exercise
this option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total number
of shares of Common Stock offered hereby. The Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters to the extent
the option is exercised. If purchased, the Underwriters shall offer such
additional shares on the same terms as those on which the shares are being
offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act") and to contribute to
payments the Underwriters may be required to make in respect thereof.
The executive officers, directors, and certain other employees and
shareholders of the Company have agreed that they will not, without the prior
written consent of the Representatives, offer, sell or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them for a period of 120 days after the date of this Prospectus. The Company has
agreed that it will not, without the prior written consent of the
Representatives, offer, sell or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities exchangeable
for or convertible into shares of Common Stock for a period of 120 days after
the date of this Prospectus, except that the Company may grant additional
options under its stock option plans, or issue shares upon the exercise of
outstanding stock options.
In connection with this offering certain Underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
National Market may engage in passive market-making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934 during the two business day period before
commencement of sales in this offering. The passive market making transactions
must comply with applicable volume and price limits and be identified as such.
In general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for the security. If all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded. Net purchases by a passive
market maker on each day are generally limited to a specified percentage of the
passive market making average daily trading volume in the Common Stock during a
price period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail, and, if commenced, may be discontinued at any
time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hughes & Luce, L.L.P., Dallas, Texas. Certain legal
matters in connection with the sale of shares of Common Stock in the Offering
will be passed upon for the Underwriters by Venture Law Group, A Professional
Corporation, Menlo Park, California.
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1993
and 1994, and for each of the three years in the period ended December 31, 1994,
and the Consolidated Financial
49
<PAGE> 52
Statements of Neuromed at October 31, 1994, and for each of the two years in the
period ended October 31, 1994 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports, given
upon the authority of such firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Dependence on Patents and Proprietary Rights" and
"Business -- Patents, Trademarks and Proprietary Rights" have been reviewed and
approved by Ross, Clapp, Korn & Montgomery, L.L.P., patent counsel for the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act, with respect to
the shares of Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
to the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement. The Registration Statement, together with the exhibits and schedules
thereto, may be inspected without charge at the offices of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located
at 500 West Madison Street, Chicago, Illinois 60661, and copies of all or any
part of the Registration Statement may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates.
The Company is subject to the information requirements of the Securities
and Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street N.W.,
Washington, D.C. 20549; and at the Commission's regional offices at Northwestern
Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and
14th Floor, 75 Park Place, 14th Floor, New York, New York 10007. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street N.W., Washington D.C. 20549 at prescribed rates.
50
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL:
Quest Medical, Inc.:
Report of Ernst & Young LLP, Independent Auditors................................ F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994 and June 30, 1995
(unaudited)..................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1992, 1993
and 1994 and for the six months ended June 30, 1994 and 1995 (unaudited)........ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1992, 1993 and 1994 and for the six months ended June 30, 1995 (unaudited)...... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993
and 1994 and for the six months ended June 30, 1994 and 1995 (unaudited)........ F-6
Notes to Consolidated Financial Statements....................................... F-7
Neuromed, Inc.:
Report of Ernst & Young LLP, Independent Auditors................................ F-18
Consolidated Balance Sheet as of October 31, 1994 and January 31, 1995
(unaudited)..................................................................... F-19
Consolidated Statements of Income and Retained Earnings for the years ended
October 31, 1993 and 1994 and for the three months ended January 31, 1994 and
1995 (unaudited)................................................................ F-20
Consolidated Statements of Cash Flows for the years ended October 31, 1993 and
1994 and for the three months ended January 31, 1994 and 1994 (unaudited)....... F-21
Notes to Consolidated Financial Statements....................................... F-22
PRO FORMA:
Quest Medical, Inc. and Neuromed, Inc.:
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1994......................................................... F-26
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six
months ended June 30, 1995...................................................... F-27
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations..... F-28
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Quest Medical, Inc.
We have audited the accompanying consolidated balance sheets of Quest
Medical, Inc. and subsidiaries (the Company) as of December 31, 1993 and 1994,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These consolidated 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 generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Quest Medical,
Inc. and subsidiaries at December 31, 1993 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the Company
changed its method of accounting for certain investments in debt and equity
securities.
ERNST & YOUNG LLP
Dallas, Texas
February 24, 1995
F-2
<PAGE> 55
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1993 1994 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 594,448 $ 87,963 $ 298,886
Marketable securities................................................................ 5,999,701 5,174,470 4,407,627
Receivables:
Trade accounts, less allowance for doubtful accounts of $16,135 in 1993, $14,337 in
1994 and $114,337 in 1995......................................................... 2,047,707 1,671,684 4,464,941
Due from broker on unsettled security transactions................................. 637,390 -- --
Interest and other................................................................. 184,293 172,969 294,805
----------- ----------- -----------
Total receivables.............................................................. 2,869,390 1,844,653 4,759,746
----------- ----------- -----------
Inventories:
Raw materials...................................................................... 1,363,340 1,322,498 2,420,492
Work-in-process.................................................................... 426,138 580,432 1,164,654
Finished goods..................................................................... 2,220,445 2,084,522 2,740,156
----------- ----------- -----------
Total inventories.............................................................. 4,009,923 3,987,452 6,325,302
----------- ----------- -----------
Prepaid expenses and other current assets............................................ 429,131 484,406 781,567
----------- ----------- -----------
Total current assets........................................................... 13,902,593 11,578,944 16,573,128
----------- ----------- -----------
Property, plant and equipment:
Land................................................................................. 1,930,289 1,930,289 1,930,289
Building............................................................................. 5,073,809 5,215,454 5,221,434
Leasehold improvements............................................................... 28,804 43,522 43,522
Furniture and fixtures............................................................... 2,579,121 2,587,738 2,858,236
Machinery and equipment.............................................................. 2,779,836 2,722,868 3,554,697
----------- ----------- -----------
12,391,859 12,499,871 13,608,178
Less accumulated depreciation and amortization....................................... 3,071,368 2,867,453 3,331,750
----------- ----------- -----------
Net property, plant and equipment................................................ 9,320,491 9,632,418 10,276,428
----------- ----------- -----------
Cost in excess of net assets acquired, net of accumulated amortization of $58,797 in
1993, $99,550 in 1994 and $159,359 in 1995........................................... 954,409 913,656 3,929,186
Patents, net of accumulated amortization of $629,498 in 1993, $857,965 in 1994,
and $972,199 in 1995................................................................. 1,745,901 1,517,434 1,403,200
Purchased technology from acquisitions, net of accumulated amortization of $112,457 in
1993, $163,007 in 1994 and $254,950 in 1995.......................................... 585,543 534,993 4,443,050
Tradenames, net of accumulated amortization of $31,250 in 1995......................... -- -- 2,468,750
Deferred income taxes.................................................................. -- -- 2,083,426
Other assets, at cost less accumulated amortization of $98,167 in 1993, $141,167 in
1994, and $185,763 in 1995........................................................... 229,995 57,464 474,801
----------- ----------- -----------
$26,738,932 $24,234,909 $41,651,969
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 1,276,375 $ 951,208 $ 2,584,844
Loans payable and current maturities of notes payable................................ 2,297,211 2,759,241 2,307,573
Accrued lease obligation............................................................. 169,129 -- --
Accrued vacations.................................................................... 119,949 125,012 137,557
Accrued contribution to retirement savings plan...................................... 86,903 92,548 142,523
Accrued property taxes............................................................... 136,153 -- 20,105
Other accrued expenses............................................................... 250,550 240,230 568,394
----------- ----------- -----------
Total current liabilities...................................................... 4,336,270 4,168,239 5,760,996
----------- ----------- -----------
Notes payable.......................................................................... 4,100,882 4,123,853 20,830,456
Deferred income taxes.................................................................. 49,998 11,837 2,560,173
Commitments and contingencies
Stockholders' equity:
Common stock, $.05 par value; Authorized 10,000,000 shares; issued 7,939,441 shares
in 1993, 7,982,498 shares in 1994, and 8,072,994 shares in 1995.................... 396,972 399,125 403,650
Additional paid-in capital........................................................... 18,787,628 19,514,171 24,443,640
Retained earnings (deficit).......................................................... 5,430,286 2,794,118 (7,819,188)
Unrealized loss on marketable securities............................................. (169,308) (917,634) (473,653)
Cost of common shares in treasury; 2,860,527 shares in 1993, 2,705,816 shares in
1994, and 1,872,238 shares in 1995 ................................................ (6,193,796) (5,858,800) (4,054,105)
----------- ----------- -----------
Total stockholders' equity..................................................... 18,251,782 15,930,980 12,500,344
----------- ----------- -----------
$26,738,932 $24,234,909 $41,651,969
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 56
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1992 1993 1994 1994 1995
----------- ----------- ----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue................................... $13,612,378 $13,642,764 $13,999,165 $7,223,316 $ 11,303,134
Cost of revenue............................... 7,059,045 7,052,157 7,617,932 4,027,812 4,910,490
----------- ----------- ----------- ---------- ------------
Gross profit............................. 6,553,333 6,590,607 6,381,233 3,195,504 6,392,644
----------- ----------- ----------- ---------- ------------
Operating expenses:
General and administrative.................. 2,493,066 2,481,476 3,063,296 1,485,021 1,917,753
Research and development.................... 1,387,237 1,909,589 3,542,193 1,538,856 2,493,643
Non-recurring charges....................... 1,246,913 -- -- -- 10,500,000
Marketing................................... 1,648,252 1,918,285 1,913,793 890,433 1,593,570
----------- ----------- ----------- ---------- ------------
6,775,468 6,309,350 8,519,282 3,914,310 16,504,966
----------- ----------- ----------- ---------- ------------
Earnings (loss) from operations.......... (222,135) 281,257 (2,138,049) (718,806) (10,112,322)
Other income (expense):
Gain on sale of marketable securities....... 136,840 462,178 464,113 167,451 12,031
Unrealized loss on marketable securities.... -- (169,308) -- -- --
Relocation costs............................ -- (174,083) -- -- --
Litigation settlements, net................. -- 167,088 -- -- --
Interest expense............................ (110,466) (81,800) (569,428) (252,724) (730,971)
Investment and other income................. 446,688 462,474 524,171 263,635 217,956
----------- ----------- ----------- ---------- ------------
473,062 666,549 418,856 178,362 (500,984)
----------- ----------- ----------- ---------- ------------
Earnings (loss) before income taxes and
cumulative effect of change in
accounting principle................... 250,927 947,806 (1,719,193) (540,444) (10,613,306)
Income taxes:
Current..................................... 40,730 250,769 -- -- --
Deferred.................................... 16,584 50,000 -- -- --
----------- ----------- ----------- ---------- ------------
57,314 300,769 -- -- --
----------- ----------- ----------- ---------- ------------
Earnings (loss) before cumulative effect
of change in accounting principle...... 193,613 647,037 (1,719,193) (540,444) (10,613,306)
Cumulative effect of change in accounting
principle................................... -- 169,308 -- -- --
----------- ----------- ----------- ---------- ------------
Net earnings (loss)...................... $ 193,613 $ 816,345 $(1,719,193) $ (540,444) $(10,613,306)
=========== =========== =========== ========== ============
Per common and common equivalent share:
Earnings (loss) before cumulative effect of
change in accounting principle........... $ .03 $ .12 $ (.33) $ (.10) $ (1.85)
Cumulative effect of change in accounting
principle................................ -- .03 -- -- --
----------- ----------- ----------- ---------- ------------
Net earnings (loss)...................... $ .03 $ .15 $ (.33) $ (.10) $ (1.85)
=========== =========== =========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 57
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL RETAINED LOSS ON TOTAL
-------------------- PAID-IN EARNINGS MARKETABLE TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES STOCK EQUITY
-------- -------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991.......... 7,639,668 $381,983 $17,935,461 $4,420,328 $ -- $(5,691,507) $17,046,265
Shares issued upon exercise of stock
options........................... 231,875 11,594 359,351 -- -- -- 370,945
Purchase of 29,519 common shares, at
cost.............................. -- -- -- -- -- (160,687) (160,687)
Tax effect of stock option
exercise.......................... -- -- 189,219 -- -- -- 189,219
Net earnings........................ -- -- -- 193,613 -- -- 193,613
---------- --------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1992.......... 7,871,543 393,577 18,484,031 4,613,941 -- (5,852,194) 17,639,355
Shares issued upon exercise of stock
options........................... 67,898 3,395 116,361 -- -- -- 119,756
Purchase of 100,000 common shares,
at cost........................... -- -- -- -- -- (349,004) (349,004)
Issuance of 1,490 common shares from
treasury.......................... -- -- -- -- -- 7,402 7,402
Tax effect of stock option
exercise.......................... -- -- 187,236 -- -- -- 187,236
Adjustment to unrealized losses on
marketable securities............. -- -- -- -- (169,308) -- (169,308)
Net earnings........................ -- -- -- 816,345 -- -- 816,345
---------- --------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1993.......... 7,939,441 396,972 18,787,628 5,430,286 (169,308) (6,193,796) 18,251,782
Shares issued upon exercise of stock
options........................... 43,057 2,153 134,894 -- -- -- 137,047
Issuance of 1,882 common shares from
treasury.......................... -- -- 5,595 -- -- 4,075 9,670
Stock dividend...................... -- -- 586,054 (916,975) -- 330,921 --
Adjustment to unrealized losses on
marketable securities............. -- -- -- -- (748,326) -- (748,326)
Net loss............................ -- -- -- (1,719,193) -- -- (1,719,193)
---------- --------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1994.......... 7,982,498 399,125 19,514,171 2,794,118 (917,634) (5,858,800) 15,930,980
Shares issued upon exercise of stock
options........................... 90,496 4,525 274,088 -- -- -- 278,613
Issuance of 245 common shares from
treasury.......................... -- -- 1,216 -- -- 529 1,745
Adjustment to unrealized losses on
marketable securities............. -- -- -- -- 443,981 -- 443,981
Issuance of 833,333 common shares
from treasury for acquisition..... -- -- 4,654,165 -- -- 1,804,166 6,458,331
Net loss............................ -- -- -- (10,613,306) -- -- (10,613,306)
---------- --------- ----------- ----------- --------- ----------- -----------
Balance at June 30, 1995
(unaudited)......................... 8,072,994 $403,650 $24,443,640 $(7,819,188) $(473,653) $(4,054,105) $12,500,344
========== ========= =========== =========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 58
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1992 1993 1994 1994 1995
----------- ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................... $ 193,613 $ 816,345 $(1,719,193) $ (540,444) $(10,613,306)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation........................................ 352,602 464,307 761,174 366,884 464,331
Amortization........................................ 406,550 353,258 362,771 180,396 341,832
Deferred income taxes............................... -- 49,998 -- -- --
Gain on sale of assets & marketable securities...... (136,840) (467,428) (464,113) (178,804) (12,031)
Non-recurring charges............................... 1,246,913 -- -- -- 10,500,000
Net gain on litigation settlements.................. -- (167,088) -- -- --
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables....................................... (58,787) (277,313) 387,347 225,207 (1,173,982)
Inventories....................................... (862,762) (12,032) 22,471 228,827 (564,376)
Federal income tax recoverable.................... 56,146 616,823 -- -- --
Prepaid expenses.................................. (121,680) (71,400) (128,770) 50,300 (297,415)
Other assets...................................... -- 6,774 -- -- 11,555
Accounts payable.................................. 20,927 444,610 (325,167) (180,123) 1,028,402
Accrued expenses.................................. (106,206) (173,059) (304,894) (283,257) 89,835
Other............................................. -- (13,311) (39,701) -- --
----------- ------------ ----------- ----------- ------------
Total adjustments.............................. 796,863 754,139 271,118 409,430 10,388,151
----------- ------------ ----------- ----------- ------------
Net cash provided by (used in) operating
activities................................... 990,476 1,570,484 (1,448,075) (131,014) (225,155)
----------- ------------ ----------- ----------- ------------
Cash flows from investing activities:
Purchases of marketable securities.................... (5,998,843) (13,600,809) (8,244,533) (5,560,866) (1,082,992)
Proceeds from sales of marketable securities.......... 6,163,308 13,782,894 8,984,046 4,331,439 2,305,969
Receivable due from broker............................ -- -- 637,390 637,390 --
Proceeds from notes receivable........................ 43,741 -- -- -- --
Additions to property, plant and equipment............ (629,591) (6,500,560) (1,076,871) (702,448) (994,707)
Acquisitions, net of cash acquired.................... (521,557) -- -- -- (15,868,152)
Net proceeds from litigation settlements.............. -- 42,088 -- -- --
Net proceeds from sale of product lines and
other assets........................................ -- 5,250 19,510 11,350 2,600
----------- ------------ ----------- ----------- ------------
Net cash provided by (used in) investing
activities................................... (942,942) (6,271,137) 319,542 (1,283,135) (15,637,282)
----------- ------------ ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from short-term obligations.................. 1,587,914 6,976,117 2,864,902 970,674 633,588
Payments of short-term obligations.................... (1,527,534) (5,140,017) (2,364,902) (58,022) (387,656)
Proceeds of long-term debt............................ -- 4,248,093 106,978 106,978 16,550,000
Payment of long-term debt............................. (484,666) (726,999) (121,977) (63,862) (540,997)
Debt issuance costs................................... -- -- -- -- (461,933)
Exercise of stock options............................. 370,945 119,756 137,047 41,496 279,829
Purchase of treasury stock, net of issuances.......... (160,687) (349,004) -- -- 529
----------- ------------ ----------- ----------- ------------
Net cash provided by (used in) financing
activities................................... (214,028) 5,127,946 622,048 997,264 16,073,360
----------- ------------ ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents.... (166,494) 427,293 (506,485) (416,885) 210,923
Cash and cash equivalents at beginning of period........ 333,649 167,155 594,448 594,448 87,963
----------- ------------ ----------- ----------- ------------
Cash and cash equivalents at end of period.............. $ 167,155 $ 594,448 $ 87,963 $ 177,563 $ 298,886
=========== ============ =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 59
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1994, AND INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 1994 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Quest
Medical, Inc. and subsidiaries (the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Revenue Recognition
Revenue from product sales are recognized at the time the product is
shipped.
(c) Statements of Cash Flows
For purposes of reporting cash flows, the Company considers all
certificates of deposit and short-term, highly liquid debt instruments, such as
U.S. Treasury bills and notes, with original maturities of three months or less
when purchased to be cash equivalents.
Supplemental cash flow information is presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1992 1993 1994 1994 1995
-------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income taxes paid................ $ -- $46,000 $ -- $ -- $ --
======== ======= ======== ======== ========
Interest paid (net of amounts
capitalized)................... $114,213 $70,757 $558,337 $249,361 $699,953
======== ======= ======== ======== ========
</TABLE>
(d) Marketable Securities
Effective December 31, 1993, the Company's marketable equity securities and
debt securities are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in a separate component of stockholders' equity. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in investment
income. Realized gains and losses and declines in value judged to be
other-than-temporary are included in other income. The cost of securities sold
is based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
Prior to December 31, 1993, marketable securities were accounted for at the
lower of cost or market.
The following is a summary of available-for-sale securities at December 31,
1994:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade preferred
securities.......................... $2,788,587 $ -- $522,437 $2,266,150
Utility stocks........................ 328,579 -- 48,704 279,875
Publicly traded limited
partnerships........................ 511,201 -- 80,263 430,938
Real estate investment trusts......... 1,846,566 22,751 150,694 1,718,623
Other................................. 617,171 165 138,452 478,884
---------- -------- -------- ----------
$6,092,104 $ 22,916 $940,550 $5,174,470
========== ======== ======== ==========
</TABLE>
F-7
<PAGE> 60
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994, no individual security represented more than 10% of
the total portfolio or 2% of total assets. The Company did not have any
investments in derivative financial instruments at December 31, 1994.
The following is a summary of available-for-sale securities at June 30,
1995:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade preferred
securities.......................... $1,604,370 $ 3,002 $204,715 $1,402,657
Utility stocks........................ 159,138 -- 21,638 137,500
Real estate investment trusts......... 1,704,722 6,255 119,989 1,590,988
Publicly traded limited
partnerships........................ 582,822 -- 67,322 515,500
Other................................. 830,228 5,711 74,957 760,982
---------- -------- -------- ----------
$4,881,280 $ 14,968 $488,621 $4,407,627
========== ======== ======== ==========
</TABLE>
At June 30, 1995, no individual security represented more than 10% of the
total portfolio or 1% of total assets. The Company did not have any investments
in derivative financial instruments at June 30, 1995.
(e) Inventories
Inventories are recorded at the lower of standard cost or market. Standard
cost approximates actual cost determined on the first-in, first-out (FIFO)
basis.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and
betterments are capitalized; maintenance and repairs are charged to operations
as incurred. The cost and accumulated depreciation of assets retired are removed
from the accounts.
Provisions for depreciation and amortization of property, plant and
equipment are computed using the straight-line method using estimated useful
lives of 3 to 30 years.
During 1993, the Company constructed a new corporate headquarters and
production facility for its operations in Allen, Texas (the "Allen facility").
The Company's Dallas operations were relocated to such facility during December
1993.
(g) Costs in Excess of Net Assets Acquired
The excess of costs over the net assets of businesses acquired is amortized
on a straight line basis over estimated useful lives of 20 to 25 years. The
Company assesses the recoverability of this intangible asset, as well as other
intangible assets, primarily based on its current and anticipated future
undiscounted cash flows. At December 31, 1994 and June 30, 1995, the Company
does not believe there has been any impairment of its intangible assets.
Amortization expense was $20,806, $30,854 and $40,753 for the years ended
December 31, 1992, 1993, and 1994, respectively. Amortization expense was
$19,387 and $59,809 for the six months ended June 30, 1994 and 1995,
respectively.
(h) Patents
Cost of purchased patents is amortized on a straight-line basis over the
estimated useful lives (4 to 14 years) of such patents. Amortization expense was
$188,854, $228,852, and $228,467 for the years ended December 31, 1992, 1993,
and 1994, respectively. Amortization expense was $114,234 for each of
F-8
<PAGE> 61
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the six month periods ended June 30, 1994 and 1995. The cost and accumulated
amortization of fully amortized patents are removed from the accounts.
Costs of patents which are the result of internal development are charged
to current operations.
(i) Purchased Technology Related to Acquisitions
The cost of purchased technology related to acquisitions is based on
appraised values at the date of acquisition and is amortized on a straight-line
basis over the estimated useful lives (10 to 15 years) of such technology.
Amortization expense was $154,897, $50,551, and $50,550 for the years ended
December 31, 1992, 1993, and 1994, respectively. Amortization expense was
$25,275 and $91,943 for the six months ended June 30, 1994 and 1995,
respectively.
(j) Tradenames
The cost of purchased tradenames is based on appraised values at the date
of acquisition and is amortized on a straight-line basis over the estimated
useful life (20 years) of such tradenames. No amortization expense was recorded
during the years ended December 31, 1992, 1993, 1994 or the six months ended
June 30, 1994. Amortization expense was $31,250 for the six months ended June
30, 1995.
(k) Product Development
Start-up, research and development, advertising and promotional costs are
charged to operations in the year in which such costs are incurred.
(l) Earnings per Common and Common Equivalent Share
During April 1994, the Board of Directors approved a 3% stock dividend. The
distribution date was May 23, 1994, for shareholders of record as of May 6,
1994. The weighted average number of common and common equivalent shares
outstanding used in computing the earnings per share for the years ended
December 31, 1993 and 1992 were increased to retroactively reflect the stock
dividend.
Earnings (loss) per share for the years ended December 31, 1992, 1993, and
1994 are based upon 5,594,141, 5,559,422 and 5,256,683 common and, in 1992 and
1993, common equivalent shares outstanding, respectively. Shares issuable upon
exercise of dilutive stock options are included in average common and common
equivalent shares outstanding except where the result is antidilutive.
Loss per share for the six months ended June 30, 1994 and 1995 is based
upon 5,240,490 and 5,738,825 weighted average common shares outstanding,
respectively.
(m) Accounting Changes
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." As permitted under the Statement, the Company
elected to adopt the provisions of the new standard as of the end of 1993. In
accordance with the Statement, prior period financial statements were not
restated to reflect the change in accounting principle. The cumulative effect as
of December 31, 1993, of adopting Statement 115, including the reversal of
unrealized losses, increased net income by $169,308. The balance of
stockholders' equity was decreased by $169,308 at December 31, 1993, to reflect
the net unrealized holding loss on securities classified as available-for-sale.
(n) Reclassifications
Certain prior period amounts have been reclassified to conform to current
year presentation.
F-9
<PAGE> 62
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(o) Interim Periods
The consolidated balance sheet at June 30, 1995 and the consolidated
statements of operations and cash flows for the six month periods ended June 30,
1994 and 1995, and the consolidated statement of stockholders' equity for the
six month period ended June 30, 1995, together with the related notes, are
unaudited, but, in the opinion of management of the Company, include all
adjustments (which consist of normal recurring accruals) necessary to present
fairly, in all material respects, the financial condition at June 30, 1995 and
the results of operations and cash flows for the Company for the six month
periods ended June 30, 1994 and 1995.
(2) ACQUISITION AND DISPOSITION OF ASSETS
On June 23, 1992, the Company purchased from McGaw, Inc. (McGaw)
substantially all of the assets related to McGaw's "ACTester(TM)" product line
for approximately $521,557 cash (including $20,719 of related acquisition
costs). The ACTester product line consists of instrumentation and associated
disposables used to measure the activated clotting time (ACT) of blood, a key
parameter in managing patient coagulation status in catheterization, ECMO,
cardiovascular surgery, dialysis and other critical care applications.
The acquisition was accounted for as a purchase and, accordingly, the
acquired assets have been recorded at their estimated fair values at the date of
acquisition. The operating results are included in the 1992 consolidated
statement of operations from the acquisition date. The purchase price and
expenses associated with the acquisition exceeded the fair values of the
acquired assets by $110,179 which has been included in "Costs in excess of net
assets acquired, net" in the consolidated balance sheets. The costs in excess of
net assets acquired is being amortized on a straight-line basis over a 25 year
period.
During December 1992, the Company wrote-off the assets of Clini-Therm
Corporation acquired in July 1991, resulting in a non-recurring, non-cash charge
to operations of $1,246,913. The write-off was initiated by the Company's
intention to focus research and development investments in its core
cardiovascular market.
On March 31, 1995, the Company acquired for $15,403,263 cash (including
$200,000 paid in June 1995 as a purchase price adjustment, and excluding
$926,822 of related acquisition and financing costs) and 833,333 shares of Quest
common stock valued at $6,458,331, all of the capital stock of Neuromed, Inc.
("Neuromed"), a privately held corporation located in Fort Lauderdale, Florida.
The transaction also provided for contingent consideration of up to $6 million
over the next two years, payable in a combination of cash and additional shares
of Quest common stock in January 1996 and January 1997, depending on sales of
Neuromed's products reaching certain objectives. Financing for the cash portion
of the purchase price was provided by NationsBank of Texas, N.A. (See note 3.)
Neuromed develops, manufactures, and markets electronic neurostimulation
devices for treatment of chronic severe pain. Neuromed's revenues for the fiscal
year ended October 31, 1994, were approximately $8.0 million.
The acquisition was accounted for by the purchase method of accounting. The
allocation of the purchase price among identifiable tangible and intangible
assets was based on the fair market value of those assets using a risk adjusted
income approach. The cost in excess of net assets acquired is being amortized on
a straight line basis over twenty years.
Purchased in-process research and development was identified and valued
through extensive interviews and analysis of data concerning Neuromed's products
under development. Expected future cash flows for products under development
were discounted taking into account economic risks
F-10
<PAGE> 63
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
associated with the inherent difficulties and uncertainty in completing the
products, and thereby achieving technological feasibility, and risks related to
the viability of and potential changes in future target markets. This resulted
in $10,500,000 of purchased research and development which had not yet achieved
technological feasibility and does not have alternative uses. Therefore, in
accordance with generally accepted accounting principles, the $10,500,000, with
no related tax benefit, was charged to expense during the six month period ended
June 30, 1995.
The preliminary purchase price allocation for the acquisition of Neuromed,
as of June 30, 1995 is summarized below:
<TABLE>
<S> <C>
Tradenames.............................................................. $ 2,500,000
Purchased technology.................................................... 4,000,000
Cost in excess of net assets acquired................................... 3,075,339
Purchased research and development...................................... 10,500,000
Net tangible assets acquired............................................ 2,251,144
-----------
$22,326,483
===========
</TABLE>
The preliminary purchase price allocation is subject to change when
additional information concerning asset and liability valuations is obtained.
Therefore, the final allocation may differ from the preliminary amounts
recorded. In connection with the purchase, the Company determined that the
operations of Neuromed will be relocated to Texas by the end of the first
quarter of 1996. The Company is in the process of finalizing the estimated costs
of the relocation which will be recorded in the third quarter of 1995 as an
adjustment to costs in excess of net assets acquired.
The following unaudited pro forma summary presents the results of
operations as if the acquisition had occurred on January 1, 1994. This summary
does not purport to be indicative of what would have occurred had the
acquisition been made as of this date or of results which may occur in the
future. This method of combining the companies is for the presentation of
unaudited pro forma summary results of operations. Actual statements of
operations of Quest Medical, Inc. and of Neuromed, Inc. will be combined from
the effective date of the acquisition forward, with no retroactive restatement.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
1994 1995
------------ -----------
<S> <C> <C>
Pro forma revenue......................................... $22,043,518 $13,961,433
Pro forma earnings (loss) from operations................. (86,467 ) 1,606,837
------------ -----------
Pro forma net earnings (loss) before cumulative effect of
change in accounting principle in 1994.................. (1,220,055 ) 571,156
------------ -----------
Pro forma net earnings (loss) per common and equivalent
share before cumulative effect of change in accounting
principle in 1994....................................... $ (0.20 ) $ 0.08
========== ==========
</TABLE>
The pro forma operations information excludes the non-recurring charge of
$10,500,000 ($1.72 per share) related to purchased in-process research and
development which is expensed at the date of acquisition.
In July 1995, the sales objectives were reached which triggered a liability
for the 1996 contingent consideration payments with regard to the Neuromed
Acquisition. The Company recorded the additional "earn-out" consideration of
200,000 shares of Quest Medical common stock valued at $2,558,200 and a $1.5
million liability (payable in cash in January 1996). In addition, in September
1995, the Company amended certain terms of the acquisition agreement whereby the
Company agreed to
F-11
<PAGE> 64
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accelerate issuance of the 200,000 shares for the 1996 earn-out and the seller
relinquished certain rights from the previous agreement. The amended agreement
sets the 1997 contingent consideration at a cash payment equal to $1.5 million
plus an amount equal to the value of 200,000 shares of common stock at the net
offering price of shares issued in connection with the Offering contemplated by
the Prospectus in which these financial statements are included.
(3) CURRENT AND LONG-TERM DEBT
At December 31, 1994, the Company has two credit line facilities. These
facilities expire on September 30, 1995, and include a $3,000,000 working
capital line and a $5,000,000 acquisition line. The lines are collateralized by
the Company's accounts receivable, inventories, machinery and equipment, and in
the case of an acquired business, the purchased assets. Advances under the
$3,000,000 working capital line bear interest at the prime rate plus 25 basis
points or the lender's CD rate plus 150 basis points, at the Company's
discretion. Advances under the $5,000,000 acquisition line bear interest at the
prime rate plus 75 basis points or the lender's CD rate plus 200 basis points,
at the Company's discretion. Advances under the acquisition line are immediately
converted to a five-year term loan. At December 31, 1994 the Company had
advances in the amount of $2,650,000 outstanding under the working capital line
and no advances outstanding under the acquisition line. The Company is subject
to certain covenants related to these facilities. Significant covenants include
the maintenance of a minimum current ratio, ratio of debt to net worth (as
defined) and restricts the payment of cash dividends to 25% of annual net
earnings.
On December 28, 1993, the Company entered into two agreements with MetLife
Capital Corporation for long-term financing on the Allen facility in the amount
of $4,355,071. The first agreement, in the amount of $3,000,000, is related to
the Allen facility building. This loan bears interest at an adjustable rate
based on the 30-day commercial paper rate plus 300 basis points, or the Company
has the option at any time from closing through the first 24 months, to fix the
rate based on the 10-year Treasury Bill rate plus 300 basis points. This note
has a 25-year amortization. The Company has the option of prepaying this note
during years 6-10, subject to certain provisions. The interest rate in effect at
December 31, 1994 was 9.05% and at June 30, 1995 was 9.07%. The loan is
collateralized by the Allen facility building and land and has an unpaid balance
of $2,978,045 at December 31, 1994 and $2,971,950 at June 30, 1995. The second
agreement, in the amount of $1,355,071, is related to certain equipment and
furnishings purchased for the Allen facility. This loan bears interest at an
adjustable rate based on the 30-day commercial paper rate plus 250 basis points,
or the Company has the option at any time from closing through the first 24
months, to fix the rate based on the 5-year Treasury Bill rate plus 250 basis
points. This note has a 10-year amortization. The interest rate in effect at
December 31, 1994, was 8.29% and 8.57% at June 30, 1995. This loan is
collateralized by the equipment and furnishings purchased with the proceeds and
has an unpaid balance of $1,255,049 at December 31, 1994 and $1,207,647 at June
30, 1995.
At December 31, 1994, the Company has 8.625% and 8% notes available that
are secured by certain Company marketable securities, held by investment
companies. These marketable securities have a carrying value of $1,083,060 and
$1,212,112, respectively. Borrowings under these notes are restricted to 50% of
the market value of these marketable securities held by investment companies. At
December 31, 1994, the amounts available for total borrowings were $541,530 and
$606,056, respectively. At December 31, 1994, the Company had no advances
outstanding with respect to these notes. At June 30, 1995, the Company had a 9%
note payable for $245,932. This note was collateralized by certain of the
Company's investments, held by the investment company, which had a carrying
value of $1,153,965. Borrowings under this note are restricted to 50% of the
market value of certain of the Company's investments held by the investment
company. At June 30, 1995, the amount available for additional borrowing under
this note was $331,050.
F-12
<PAGE> 65
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total interest incurred during 1993 was $164,777. Capitalized interest, in
conjunction with the construction of the Allen facility in 1993 was recorded as
part of the building, and is amortized over the building's useful life. In 1993,
$82,977 of interest costs were capitalized. No interest was capitalized in 1994
and 1992.
On March 31, 1995, the Company entered into a First Amended and Restated
Credit Agreement with NationsBank of Texas, N.A. (the "Loan Agreement"). The
Loan Agreement provided for $15 million in senior term financing, which was
utilized to pay the cash portion of the Neuromed purchase price (See Note 2),
and a working capital line of up to $5 million. Amortization of the senior term
debt is $1,950,000 per year for the first and second years, $3,250,000 per year
for the third and fourth years, and $2,600,000 for the fifth year, with a
$2,000,000 balloon payment due at the end of the fifth year. Borrowings under
the working capital line are due and payable on May 31, 1997. Borrowings under
both facilities bear interest at prime plus 125 basis points, or at the
Company's option, LIBOR plus 300 basis points. The interest rate can be reduced
based on the Company achieving certain ratios of senior bank debt to EBITDA
(earnings before interest, taxes, depreciation, and amortization). At June 30,
1995, the Company had an outstanding principal balance of $14,512,500 under the
senior term debt, including a current portion of $1,950,000, with a weighted
average interest rate of 9.49%. At June 30, 1995, the Company had borrowings
under the working capital line of $4,200,000 with a weighted average interest
rate of 9.09%.
The aforementioned facilities with NationsBank are collateralized by
certain of the Company's assets, including without limitation, accounts
receivable, inventory, equipment, furniture and other fixed assets, patents,
trademarks and other intangible property, and the Neuromed common stock, but
excluding marketable securities in excess of $2 million, and excluding the real
property, building, and equipment financed in 1993 by MetLife Capital
Corporation. The Company is subject to certain covenants related to the
NationsBank debt. Significant covenants include the maintenance of a minimum
current ratio, ratio of debt to net worth (as defined) and restrictions on the
payment of cash dividends to 25% of annual net earnings.
(4) FEDERAL INCOME TAXES
The Company adopted the provisions of the Statement on Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (Statement No. 109), effective
January 1, 1993. The cumulative effect of adopting Statement No. 109 was not
material. Under Statement No. 109, deferred tax assets and liabilities are
recognized using the liability method, whereby tax rates are applied to
cumulative temporary differences based on when and how they are expected to
effect the tax return. Prior to the adoption of Statement No. 109, income tax
expense was determined using the provisions of FAS No. 96.
The significant components of the net deferred tax liability at December
31, were as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ----------
<S> <C> <C>
Deferred tax assets
Tax credit and net operating loss carry forwards......... $ 668,419 $1,664,528
Accrued expenses and reserves............................ 107,276 106,902
Unrealized loss on marketable securities................. 57,565 311,996
Valuation allowance...................................... (673,734) (1,745,090)
--------- -----------
Total deferred tax asset......................... 159,526 338,336
</TABLE>
F-13
<PAGE> 66
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1993 1994
--------- -----------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation..................... (68,040) (208,644)
Purchase price adjustments deducted for tax and amortized
for book.............................................. (100,322) (95,989)
Other.................................................... (41,162) (45,540)
--------- ----------
Total deferred tax liability..................... (209,524) (350,173)
--------- ----------
Net deferred tax liability....................... $ (49,998) $ (11,837)
========= ==========
</TABLE>
The provision for income taxes for the years ended December 31 consists of
the following amounts:
<TABLE>
<CAPTION>
1992 1993 1994
------- -------- --------
<S> <C> <C> <C>
Current
Federal............................................. $40,730 $250,769 $ --
State............................................... -- -- --
------- -------- --------
40,730 250,769 --
Deferred............................................ 16,584 50,000 --
------- -------- --------
$57,314 $300,769 $ --
======= ======== ========
</TABLE>
A reconciliation of the provision (benefit) for taxes on earnings (loss)
before cumulative effect of change in accounting principle, to the taxes
calculated at the U.S. statutory rate follows:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ---------
<S> <C> <C> <C>
Federal income tax (benefit) at statutory rate.... $ 85,315 $322,254 $(584,526)
Unrecognized deductions........................... 70,309 57,565 --
Tax exempt interest............................... (91,376) (93,720) (52,862)
Nondeductible amortization of goodwill............ 8,863 10,490 13,856
Basis difference of purchase price allocation..... (46,352) (33,073) (27,189)
Alternative minimum tax........................... 23,098 -- --
Other............................................. 7,457 37,253 13,413
Benefit of net operating loss not recognized...... -- -- 637,308
-------- -------- ---------
$ 57,314 $300,769 $ --
======== ======== =========
</TABLE>
During the years ended December 31, 1992 and 1993, the Company realized
$189,219 and $187,236, respectively, of tax benefits from stock option
deductions which has been credited to paid-in capital.
At December 31, 1994, general business credits of $751,912 and alternative
minimum tax credits of $134,284 are available to offset future tax liabilities.
If unused, the general business credits expire in various amounts beginning in
1997 through 2009.
During the period ended June 30, 1995, the Company eliminated the valuation
allowance for deferred tax assets that was recorded in prior years of
$1,745,090. The elimination of the valuation allowance was recorded as a
reduction of costs in excess of net assets acquired because the reduction
resulted from deferred tax liabilities recorded in connection with the
acquisition of Neuromed.
(5) STOCK PURCHASE RIGHTS
On October 12, 1989, the Company declared a distribution to stockholders of
record on October 23, 1989, of one common stock purchase right for each
outstanding share of common stock. Each right
F-14
<PAGE> 67
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entitles the holder to purchase one-half of a share of common stock at an
exercise price of $5.00. The purchase price payable and the number of shares
issuable upon exercise of the rights are subject to adjustment by the Company in
order to prevent dilution. The rights are not exercisable or transferable apart
from the common stock until ten days after a public announcement that a person
or group either (1) has acquired or has obtained the right to acquire 15% or
more of the Company's outstanding shares of common stock, or (2) has commenced
or announced an intention to commence a tender offer or exchange offer for 20%
or more of the outstanding shares of common stock. Until a right is exercised,
the holder of a right, as such, will have no rights as a stockholder of the
Company, including, without limitation, the right to vote as a stockholder or
receive dividends.
The rights may be redeemed in whole by the Company at a price of $0.01 per
right at any time prior to their expiration on October 12, 1999, or prior to the
point at which they become exercisable.
Under certain circumstances described in the rights agreement, the holder
will be entitled to purchase at the current exercise price that number of shares
of common stock of the acquiring company having a market value of two times the
exercise price of the right.
On February 9, 1995, the Board of Directors amended two provisions of the
rights agreement. First, the purchase price (as defined in the rights agreement)
for each one-half share of common stock purchased pursuant to the exercise of
the right was increased from $5.00 to $12.50. Secondly, the definition of
acquiring person was amended to exclude Mr. Borkan or his affiliates so long as
their ownership does not exceed 25% of the common shares outstanding at any
time.
(6) STOCK OPTIONS
At December 31, 1994, under the Company's stock option plans, options may
be granted to purchase 1,999,892 shares of its common stock of which 1,442,257
options may be granted to key employees (Employees' Plan) and 557,635 options
may be granted to directors and advisory directors (Directors' Plan). These
options are exercisable one-fourth each year over a four-year period of
continuous service. Certain options under both the Employees' Plan and
Directors' Plan have a special two year vesting schedule. These options are
exercisable one-half each year over a two-year period. The stock options granted
under the Employee's Plan expire ten years from the date of grant. The stock
options granted under the Directors' Plan expire six years from date of grant.
The changes in the number of common shares issuable under outstanding options,
the number of shares reserved for issuance and the price range of options for
the years ended December 31, 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
1993 1994
-------------- --------------
<S> <C> <C>
Outstanding at beginning of year...................... 838,119 894,455
Granted............................................... 205,664 252,444
Effect of 3% stock dividend........................... -- 31,679
Rescinded............................................. (81,430) (47,548)
Exercised............................................. (67,898) (43,057)
----------- -----------
Outstanding at end of year............................ 894,455 1,087,973
=========== ===========
Exercisable at end of year............................ 427,194 488,590
=========== ===========
Shares reserved for issuance.......................... 256,487 139,804
=========== ===========
Price range of options outstanding at end of year..... $1.50 to $4.75 $1.45 to $6.38
Price range of options exercised during the year...... $1.50 to $3.75 $1.45 to $4.25
</TABLE>
Effective March 30, 1995, the Board of Directors adopted the Quest Medical,
Inc. 1995 Stock Option Plan ("the Plan"). The total number of shares of Common
Stock issuable under the Plan is 250,000.
F-15
<PAGE> 68
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Officers or other key employees of the Company are eligible to receive stock
option grants under the Plan. The per share exercise price of each option is
determined by the Stock Option Committee of the Board of Directors, but in no
event is less than the Fair Market Value of the Common Stock at the time the
option is granted. Generally, each option will be for a term of not less than
five years nor more than ten years from the date of grant. Vesting of the
options will be determined by the Stock Option Committee, although for the most
part, options will become exercisable with respect to 25% of the total number of
shares subject to the option twelve months after the date of grant and with
respect to an additional 25% at the end of each twelve-month period thereafter
on a cumulative basis during the succeeding three years. The plan was approved
by the shareholders of the Company at the Annual Meeting of Shareholders held on
June 22, 1995.
A summary of transactions through June 30, 1995 follows:
<TABLE>
<S> <C>
Granted.................................................................... 167,000
--------
Outstanding at end of period............................................... 167,000
========
Price of options outstanding at end of period.............................. $ 7.125
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
The Company occupied office and warehouse space under the terms of
cancelable operating leases extending through 1993. During 1993, the Company
canceled two operating leases with a penalty of approximately $68,000. Future
minimum rental payments under noncancelable leases for autos as of December 31,
1994, was $12,323 in 1995, $6,474 in 1996 and $3,393 in 1997. Total rent expense
under operating leases for the years ended December 31, 1992, 1993, and 1994 was
$271,168, $293,221 and $24,930, respectively.
In conjunction with the acquisition of Neuromed, Inc. on March 31, 1995,
the Company assumed a noncancelable lease for approximately 18,000 square feet
of office and manufacturing space in Davie (Ft. Lauderdale), Florida. The lease,
which expires on February 28, 1996, has a monthly rental payment of $11,236. The
lease contains a renewal option. As of June 30, 1995, future minimum rental
payments under noncancelable auto leases and the aforementioned facility lease
are $73,577 in 1995, $28,946 in 1996, and $3,016 in 1997. Total rent expense
under operating leases for the six months ended June 30, 1994 and 1995 was
20,047 and 47,670, respectively.
The Company is involved in various lawsuits and claims, the ultimate
disposition of which management believes will not have a material adverse effect
upon the Company's business or consolidated financial position.
(8) FINANCIAL INSTRUMENTS, RISK CONCENTRATION, AND MAJOR CUSTOMERS
The Company designs, develops, manufactures and markets a variety of
healthcare products used primarily in cardiovascular surgery, interventional
pain management and intravenous fluid delivery applications. In the United
States, the Company's accounts receivable are due primarily from hospitals and
distributors located throughout the country. Internationally, the Company's
accounts receivable are due primarily from distributors located in Europe and
Australia. The Company generally does not require collateral. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of all accounts receivable. Any losses from bad debts have
historically been within management's expectations.
Net sales to a major customer for each of the years ended December 31, as a
percentage of total net revenues were as follows: 1992 -- 25%, 1993 -- 23%, and
1994 -- 19%.
F-16
<PAGE> 69
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement savings plan (the "Plan")
available to substantially all employees. The Plan permits employees to elect
salary deferral contributions of up to 15% of their compensation and requires
the Company to make matching contributions equal to 50% of the participants'
contributions, to a maximum of 6% of the participants' compensation. The expense
of the Company's contribution for the year ended December 31, was $61,530 in
1992, $86,903 in 1993, and $102,961 in 1994. The expense of the Company's
contributions was $49,500 and $50,100 for the six months ended June 30, 1994 and
1995, respectively.
(10) LITIGATION SETTLEMENT
On May 13, 1993, the Company entered into a settlement agreement relating
to the litigation it filed on April 20, 1990, against Kirschner Medical
Corporation, its directors and Alex Brown and Sons, Inc. Under the terms of the
settlement agreement, the Company received $600,000 cash and 100,000 warrants to
purchase Kirschner Medical common stock for three years at an exercise price of
$6.00 per share. Each warrant is convertible into one share of Kirschner Medical
common stock. The Company incurred litigation expenses of approximately
$201,000. The Company recorded a pre-tax gain of $524,200 which is reflected in
"Other income (expenses) -- Litigation settlements, net" in the Consolidated
Statements of Operations.
During October 1993, an agreement was reached to settle a lawsuit filed
against the Company on November 2, 1992, in the United States Bankruptcy Court
for the Northern District of Texas by Jeffery Mims, Trustee for Clini-Therm
Corporation. The complaint alleged the Company fraudulently purchased claims
from Ford Motor Credit Corporation and unfairly rescinded its agreement to
finance Clini-Therm's reorganization. The Company recorded a pre-tax charge of
$357,112 (including $157,112 of litigation expense) which is reflected in "Other
Income (expenses) -- Litigation settlement, net" in the Consolidated Statements
of Operations.
F-17
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Neuromed, Inc.
We have audited the accompanying consolidated balance sheet of Neuromed,
Inc. and subsidiaries (the "Company") as of October 31, 1994, and the related
consolidated statements of income and retained earnings, and cash flows for each
of the two years in the period ended October 31, 1994. These consolidated
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 generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Neuromed, Inc.
and subsidiaries at October 31, 1994, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
October 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, in fiscal 1994, the
Company changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Dallas, Texas
April 1, 1995
F-18
<PAGE> 71
NEUROMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1994 1995
---------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $1,834,399 $ 1,374,390
Accounts receivable, net of allowance for doubtful accounts of
$100,000 in 1994 and 1995...................................... 1,383,178 1,778,183
Inventories....................................................... 1,488,418 1,578,183
Loan receivable, shareholder...................................... 656,586 --
Deferred income tax............................................... 506,493 506,493
Other current assets.............................................. 108,422 100,478
---------- -----------
Total current assets...................................... 5,977,496 5,337,727
---------- -----------
Property, plant and equipment, net.................................. 244,283 243,675
Other assets........................................................ 7,467 2,695
---------- -----------
$6,229,246 $ 5,584,097
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loan payable...................................................... $ 1,634 $ 408
Accounts payable and accrued expenses............................. 1,106,581 866,317
Accrued royalty expense........................................... 853,115 218,355
Income taxes payable.............................................. 784,539 587,557
---------- -----------
Total current liabilities................................. 2,745,869 1,672,637
---------- -----------
Deferred income taxes payable....................................... 32,979 32,979
Shareholders' equity:
Common stock, Class A voting; $.004 par value; 9,000,000 shares
authorized; 5,819,250 shares issued in 1994 and 1995........... 23,277 23,277
Common stock, Class B non-voting; $.01 par value; 100,000 shares
authorized; 94,850 shares issued and outstanding in 1994 and
1995........................................................... 948 948
Capital in excess of par value.................................... 48,337 48,337
Retained earnings................................................. 3,397,836 3,825,919
---------- -----------
3,470,398 3,898,481
Less common stock, Class A voting, held in treasury, at cost,
16,926 shares in 1994 and 1995................................. (20,000) (20,000)
---------- -----------
3,450,398 3,878,481
---------- -----------
$6,229,246 $ 5,584,097
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE> 72
NEUROMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER THREE MONTHS ENDED
31, JANUARY 31,
---------------------- ----------------------
1993 1994 1994 1995
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.................................... $7,182,073 $8,044,353 $1,512,942 $2,658,299
Operating costs and expenses:
Cost of sales.............................. 1,579,647 1,932,763 460,034 637,303
Selling.................................... 1,769,327 1,968,342 437,517 618,643
General and administrative................. 1,500,487 1,448,256 367,641 434,957
Research and development................... 1,530,091 1,713,316 390,417 296,182
---------- ---------- ---------- ----------
6,379,552 7,062,677 1,655,609 1,987,085
---------- ---------- ---------- ----------
Income (loss) from operations................ 802,521 981,676 (142,667) 671,214
Other:
Interest, net.............................. 20,125 62 (23,024) 9,944
Foreign currency transaction loss.......... (8,149) -- -- --
Other income (loss)........................ 215,464 (17,951) (18,059) 29,943
---------- ---------- ---------- ----------
227,440 (17,889) (41,083) 39,887
---------- ---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle.................................. 1,029,961 963,787 (183,750) 711,101
Provision (benefit) for income taxes......... 286,255 383,765 (73,169) 283,018
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting principle............. 743,706 580,022 (110,581) 428,083
Cumulative effect of change in accounting
principle.................................. -- 261,285 -- --
---------- ---------- ---------- ----------
Net income (loss)............................ 743,706 841,307 (110,581) 428,083
Retained earnings, beginning of period....... 1,812,823 2,556,529 2,556,529 3,397,836
---------- ---------- ---------- ----------
Retained earnings, end of period............. $2,556,529 $3,397,836 $2,445,948 $3,825,919
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE> 73
NEUROMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------ -----------------------
1993 1994 1994 1995
----------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)........................... $ 743,706 $ 841,307 $(110,581) $ 428,083
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Cumulative effect of change in accounting
principle.............................. -- (261,285) -- --
Gain on damaged inventory................ (91,433) -- -- --
Depreciation and amortization............ 90,966 83,001 20,700 20,865
Changes in operating assets and
liabilities:
Accounts receivable.................... (580,947) 398,994 (135,670) (395,005)
Inventory.............................. (53,180) (526,000) (98,076) (89,765)
Other current assets................... 11,069 (50,001) 7,705 7,944
Other assets........................... 28,756 28,985 (25,353) 4,772
Accounts payable and accrued
expenses............................ (127,967) 567,684 (64,080) (240,264)
Accrued royalty expense................ (360,340) 508,182 147,510 (634,760)
Income taxes........................... 211,521 67,886 (389,048) (196,982)
----------- ---------- --------- -----------
Net cash provided by (used in) operating
activities............................... (127,849) 1,658,753 (646,893) (1,095,112)
----------- ---------- --------- -----------
Cash flows from investing activities
Additions to property, plant and
equipment................................ (251,534) (72,008) (4,743) (20,257)
Redemption of preferred stock
investment............................... 88,364 67,336 6,942 --
Insurance proceeds from casualty loss....... 738,311 331,477 331,477 --
----------- ---------- --------- -----------
Net cash provided by (used in) investing
activities............................... 575,141 326,805 333,676 (20,257)
----------- ---------- --------- -----------
Cash flows from financing activities
Loan to Shareholder......................... (6,900) (649,686) -- --
Proceeds from loan receivable,
shareholder.............................. -- -- 1,700 656,586
Proceeds from loans payable................. 2,246,133 857,528 617,651 --
Repayment of loans payable.................. (2,452,886) (864,004) (381,640) (1,226)
----------- ---------- --------- -----------
Net cash provided by (used in) financing
activities............................... (213,653) (656,162) 237,711 655,360
----------- ---------- --------- -----------
Net increase (decrease) in cash............... 233,639 1,329,396 (75,506) (460,009)
Cash and cash equivalents, beginning of
period...................................... 271,364 505,003 505,003 1,834,399
----------- ---------- --------- -----------
Cash and cash equivalents, end of period...... $ 505,003 $1,834,399 $ 429,497 $ 1,374,390
=========== ========== ========= ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest...... $ 18,206 $ 34,969 $ 23,187 $ 7,500
=========== ========== ========= ===========
Cash paid during the period for income
taxes....................................... $ 63,034 $ 364,027 $ 327,436 $ 7,030
=========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-21
<PAGE> 74
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO OCTOBER 31, 1994, AND INFORMATION
FOR THE THREE MONTHS ENDED JANUARY 31, 1994 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Neuromed, Inc. and subsidiaries manufacture implantable medical devices
used for neurostimulation. The devices manufactured include multi-programmable
spinal cord stimulators using various electrode types and multi-programmable
deep brain stimulators. They are used primarily for the treatment of chronic
pain.
Basis of Presentation
The consolidated financial statements include the accounts of Neuromed,
Inc. and its wholly-owned subsidiaries ("Neuromed" or the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. The carrying amount of cash and cash
equivalents approximate their fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets. Amortization of leasehold improvements is computed on a
straight-line basis over the lesser of the useful life of the asset or the term
of the lease.
Income Taxes
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this
statement, deferred tax assets and liabilities are determined based upon the
difference 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.
Interim Periods
The consolidated balance sheet at January 31, 1995 and the consolidated
statements of income and retained earnings and consolidated statements of cash
flows for the three month periods ended January 31, 1994 and 1995, together with
the related notes, are unaudited, but, in the opinion of management of the
Company, include all adjustments (which consist of normal recurring accruals)
necessary to present fairly, in all material respects, the financial condition
at January 31, 1995 and the results of operations and cash flows for the Company
for the three month periods ended January 31, 1994 and 1995.
F-22
<PAGE> 75
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVENTORIES
Inventories as of October 31, 1994 and January 31, 1995 are comprised of
the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1994 1995
----------- -----------
<S> <C> <C>
Raw materials................................................. $ 753,903 $ 804,873
Work in process............................................... 187,100 205,164
Finished goods................................................ 547,415 568,146
---------- ----------
$1,488,418 $1,578,183
========== ==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of October 31, 1994 is comprised of the
following:
<TABLE>
<S> <C>
Furniture and fixtures................................................... $ 154,496
Machinery and equipment.................................................. 507,392
Leasehold improvements................................................... 408,584
Vehicles................................................................. 44,666
---------
1,115,138
Less accumulated depreciation and amortization........................... 870,855
---------
$ 244,283
=========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Neuromed occupies its manufacturing facility and administrative office
under the terms of a noncancelable operating lease. The lease expires on
February 28, 1996 and provides for annual rental payments of $92,380. The
following is a schedule of the future rental payments:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31
----------------------
<S> <C>
1995.................................... $ 92,380
1996.................................... 30,794
--------
$123,174
========
</TABLE>
Rent expense under all operating leases was $108,640 and $127,568 for the
years ended October 31, 1993 and 1994, respectively.
Neuromed has an employment agreement with its principal shareholder. Among
other things, the agreement entitles the employee to additional compensation
equal to 10% of net operating income before income taxes between $250,000 and
$1,000,000, and 5% on such income above $1,000,000. This deferred compensation
aggregates approximately $373,000 at October 31, 1994 and is included in
accounts payable and other accrued expenses in the accompanying balance sheet.
General and administrative expenses include approximately $83,000 and $112,000
in 1993 and 1994, respectively, related to this agreement.
Neuromed has agreed to pay its principal shareholder, the inventor of its
medical devices, royalties of 10% of net sales of such devices for the
acquisition of the patents and technology. Included in selling expenses is
$725,674 and $824,290 of royalty expense for the years ended October 31, 1993
and 1994, respectively, related to this agreement.
F-23
<PAGE> 76
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under its defined contribution pension plan, Neuromed's required
contributions to the plan are 2% of each eligible participant's compensation up
to $37,800, plus 7.6% of compensation in excess of such amount, and totaled
$43,641 and $56,576 for the years ended October 31, 1993 and 1994, respectively.
All employees, other than commissioned employees, are eligible for the plan
after meeting a minimum hours of service requirement with the Company.
Under agreements with affiliated companies, Neuromed agreed to pay certain
research and development expenses for products being developed. Research and
development expense includes $374,721 and $668,051 of such expenses for the
years ended October 31, 1993 and 1994, respectively.
The Company is involved in various lawsuits and claims, the ultimate
disposition of which management believes will not have a material adverse effect
upon the Company's business or consolidated financial position.
5. COMMON STOCK
Neuromed has issued 4,750 incentive stock shares to certain key employees.
Under the terms of the agreements pertaining to these shares, the employees are
entitled to receive 100% of the excess of the fair market value, as defined, of
a share of common stock of Neuromed on the date the right is exercised, over
$1.96 per share. All of the issued incentive stock shares are exercisable.
Amounts due from the exercise of the incentive stock shares are payable in cash,
common stock of Neuromed or both over the twelve months following the month they
are exercised. Management of the Company has estimated that aggregate
appreciation of the shares approximates $14,250 and $17,520 as of October 31,
1993 and 1994, respectively.
6. RELATED PARTIES
During fiscal year 1994, the Company advanced approximately $650,000 to its
major shareholder. The advances, with interest at 5% per annum, are due on
demand. The advance was repaid in full January 1995.
7. OTHER INCOME
During March 1993, Neuromed sustained damage to its primary production
facility from a tornado. Neuromed collected insurance proceeds attributable to
the tornado of $200,000 during the year ended October 31, 1993 and an additional
$331,477 during December 1993. Included in other income for fiscal year 1993 is
approximately $91,000 attributable to inventory damage.
8. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------
1993 1994
-------- --------
<S> <C> <C>
Current:
Federal...................................................... $183,099 $616,757
State........................................................ 18,319 64,074
-------- --------
201,418 680,831
Deferred..................................................... 84,837 (297,066)
-------- --------
$286,255 $383,765
======== ========
</TABLE>
F-24
<PAGE> 77
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective November 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method required by
SFAS No. 109. As permitted under the new rules, prior years' financial
statements have not been restated. The cumulative effect of adopting SFAS No.
109 as of November 1, 1993 was to increase net income by $261,285.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of October 31, 1994 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets
Accounts receivable..................................................... $ 16,971
Allowance for doubtful accounts......................................... 35,800
Accrued royalties....................................................... 296,696
Accrued salaries........................................................ 23,657
Deferred compensation................................................... 133,369
--------
506,493
Deferred tax liabilities
Depreciable property.................................................... 32,979
--------
Net deferred tax asset.................................................... $473,514
========
</TABLE>
In 1993, the Company's effective tax rate was less than the federal
statutory rate of 34% primarily because of the utilization of research and
development credits. The Company's effective tax rate for 1994 and for the three
months ended January 31, 1994 and 1995 differs from the federal statutory rate
of 34% primarily because of state income taxes.
9. MAJOR CUSTOMER
In 1993 a major customer accounted for 13% of sales. The Company's major
customer in 1994 accounted for 18% of sales. During 1993 and 1994, a company in
which the principal shareholder of Neuromed holds a minority interest accounted
for 18% and 7% of sales, respectively.
10. SUBSEQUENT EVENT
On March 31, 1995, the sale of all the capital stock of the Company to
Quest Medical, Inc. was closed. Pursuant to the agreement, all of the cash on
hand at that date was distributed to the principal shareholder of the Company.
Also pursuant to such closing, the agreement by Neuromed to pay certain research
and development expenses for an affiliated company was terminated and the
deferred compensation described in Note 4 was cancelled.
F-25
<PAGE> 78
QUEST MEDICAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEUROMED, PRO FORMA PRO FORMA
MEDICAL, INC. INC. ADJUSTMENTS COMBINED
------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue............................ $ 13,999,165 $8,044,353 $ -- $22,043,518
Cost of revenue........................ 7,617,932 1,932,763 145,603(1) 9,867,828
(29,400)(2)
(27,300)(3)
228,230(4)
------------ ---------- ----------- -----------
Gross Profit...................... 6,381,233 6,111,590 (317,133) 12,175,690
------------ ---------- ----------- -----------
Operating Expenses:
General and administrative........... 3,063,296 1,448,256 4,856,654
545,434(5)
184,000(6)
(112,032)(7)
(51,500)(8)
(220,800)(3)
Marketing............................ 1,913,793 1,968,342 (824,290)(9) 3,002,845
(55,000)(3)
Research and development............. 3,542,193 1,713,316 (184,800)(3) 4,402,658
(668,051)(8)
------------ ---------- ----------- -----------
8,519,282 5,129,914 (1,387,039) 12,262,157
------------ ---------- ----------- -----------
Earnings (loss) from operations... (2,138,049) 981,676 1,069,906 (86,467)
------------ ---------- ----------- -----------
Other income (expense):
Gain on sale of marketable
securities........................ 464,113 -- -- 464,113
Interest expense..................... (569,428) -- (1,378,094)(10) (2,039,909)
(92,387)(11)
Interest income and other............ 524,171 (17,889) -- 506,282
------------ ---------- ----------- -----------
418,856 (17,889) (1,470,481) (1,069,514)
------------ ---------- ----------- -----------
Earnings (loss) before income
taxes and cumulative effect of
change in accounting
principle....................... (1,719,193) 963,787 (400,575) (1,155,981)
Income taxes........................... -- 383,765 (319,691)(12) 64,074
------------ ---------- ----------- -----------
Earnings (loss) before cumulative
effect of change in accounting
principle....................... $ (1,719,193) $ 580,022 $ (80,884) $(1,220,055)
============ ========== =========== ===========
Loss before cumulative effect of change
in accounting principle per share.... $ (0.33) $ (0.20)
============ ===========
Weighted average common shares
outstanding.......................... 5,256,683 833,333 6,090,016
============ =========== ===========
</TABLE>
F-26
<PAGE> 79
QUEST MEDICAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEUROMED, PRO FORMA PRO FORMA
MEDICAL, INC. INC. ADJUSTMENTS COMBINED
------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenue.......................... $ 11,303,134 $2,658,299 $ -- $13,961,433
Cost of revenue...................... 4,910,490 637,303 48,115(1) 5,394,592
(193,966)(4)
(7,350)(2)
------------ ---------- ------------ -----------
Gross Profit.................... 6,392,644 2,020,996 153,201 8,566,841
------------ ---------- ------------ -----------
Operating Expenses:
General and administrative......... 1,917,753 434,957 136,358(5) 2,308,268
46,000(6)
(226,800)(3)
Marketing.......................... 1,593,570 618,643 (265,345)(9) 1,923,358
(23,510)(3)
Research and development........... 2,493,643 296,182 (61,447)(8) 2,728,378
Non-recurring charge............... 10,500,000 -- (10,500,000)(13) --
------------ ---------- ------------ -----------
16,504,966 1,349,782 (10,894,744) 6,960,004
------------ ---------- ------------ -----------
Earnings (loss) from
operations.................... (10,112,322) 671,214 11,047,945 1,606,837
------------ ---------- ------------ -----------
Other income (expense):
Gain on sale of marketable
securities...................... 12,031 -- -- 12,031
Interest expense................... (730,971) (7,500) (257,255)(10) (1,018,823)
(23,097)(11)
Interest income and other.......... 217,956 47,387 -- 265,343
------------ ---------- ------------ -----------
(500,984) 39,887 (280,352) (741,449)
------------ ---------- ------------ -----------
Earnings (loss) before income
taxes......................... (10,613,306) 711,101 10,767,593 865,388
Income taxes......................... -- 283,018 11,214(12) 294,232
------------ ---------- ------------ -----------
Net earnings (loss)............. $(10,613,306) $ 428,083 $ 10,756,379 $ 571,156
============ ========== ============ ===========
Net earnings (loss) per share........ $ (1.85) $ 0.08
============ ===========
Weighted average common and common
equivalent shares outstanding...... 5,738,825 1,034,443 6,773,268
============ ============ ===========
</TABLE>
F-27
<PAGE> 80
QUEST MEDICAL, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NOTE A. BASIS OF PRESENTATION
On March 31, 1995, pursuant to the terms of an Agreement for the Purchase
and Sale of all of the Issued Capital Stock of Neuromed, Inc. between Quest
Medical, Inc. ("the Company") and Mr. William Borkan dated February 10, 1995,
the Company acquired all of the issued and outstanding stock of Neuromed, Inc.
("Neuromed"). In consideration for its purchase of the Neuromed capital stock,
the Company paid $15,403,265 in cash and 833,333 shares of Quest common stock
valued at $6,458,331. The Company may also be required to pay contingent
consideration of up to $6 million over the next two years payable in January
1996 and January 1997, depending on sales of Neuromed's products reaching
certain established objectives. The contingent considerations may be paid in a
combination of cash and additional shares of Quest Common stock. In addition,
the Company incurred $926,824 of acquisition-related expenses (including debt
issuance cost). In connection with the acquisition of Neuromed, the Company
entered into the First Amended and Restated Credit Agreement dated March 31,
1995 with NationsBank of Texas, N.A. (the "Loan Agreement"). The Loan Agreement
provided the Company with $15 million in senior term financing, which was
utilized to pay most of the cash portion of the Neuromed purchase price. The
Loan Agreement also expanded the Company's existing $3 million working capital
line of credit to $5 million. The acquisition has been accounted for using the
purchase method of accounting.
The pro forma condensed consolidated statements of operations for the year
ended December 31, 1994 and the six months ended June 30, 1995 have been
prepared as if the acquisition of Neuromed had occurred on January 1, 1994. The
pro forma condensed consolidated statement of operations for the year ended
December 31, 1994 combines the statement of operations of Quest Medical for the
twelve months ended December 31, 1994 and the statement of income of Neuromed
for the twelve months ended October 31, 1994. The pro forma condensed
consolidated statement of operations for the six months ended June 30, 1995
combines the statement of operations of Quest Medical for the six months ended
June 30, 1995 and the statement of income of Neuromed for the three months ended
January 31, 1995.
The unaudited pro forma condensed consolidated financial statements have
been prepared based on estimates and assumptions deemed by the Company to be
appropriate and do not purport to be indicative of the financial position or
results of operations which would actually have been obtained had the
acquisition occurred as presented in such statements or which may be obtained in
the future. The unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the financial statements of Neuromed, Inc.
included elsewhere herein, the consolidated financial statements and related
notes of the Company, included herein and in its Annual Report on Form 10-KSB
for the year ended December 31, 1994 and the Company's Quarterly Report on Form
10-QSB for the quarterly and year-to-date periods ended June 30, 1995.
See Note 2 to the Company's Consolidated Financial Statements included
elsewhere herein for a description of additional "earn-out" consideration earned
in July 1995 and amendments to the terms of the acquisition agreement. Because
of the prospective nature of these items, no effect has been given in these pro
forma financial statements.
NOTE B. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma condensed consolidated statements of
operations reflect the following adjustments:
(1) To adjust insurance expense resulting from increased products
liability coverage on Neuromed products.
F-28
<PAGE> 81
QUEST MEDICAL, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(2) To adjust depreciation expense related to leasehold improvements of
Neuromed's facility which were revalued at acquisition.
(3) Elimination of salary, benefit, and travel and entertainment expense
for two ex-officers of Neuromed, Mr. William Borkan (former principal
owner of Neuromed) and Mr. Burt Borkan, who were not retained as
employees.
(4) To record write-off in 1994 of manufacturing profits capitalized in
inventory at acquisition of Neuromed and, for 1995, reversal of
write-off included in the Company's historical results.
(5) To record amortization expense for Neuromed intangible assets which
are being amortized over estimated useful lives of 15 to 20 years
computed on a straight line method. The preliminary purchase price
allocation is subject to change when additional information concerning
asset and liability valuations is obtained. Therefore, the final
allocation will differ from the preliminary amounts recorded.
(6) To adjust compensation expense resulting from a change in compensation
program for key Neuromed employees.
(7) Elimination of deferred compensation program for Mr. William Borkan,
which has been terminated.
(8) Elimination of expenses pursuant to agreements obligating Neuromed to
pay certain research and development expenses for affiliated
companies, which has been terminated.
(9) Elimination of royalty expense under an agreement between Mr. William
Borkan and Neuromed, which has been terminated.
(10) To record interest expense for borrowings utilized to purchase
Neuromed, Inc. Average interest rate of approximately 9.50% (LIBOR
plus 300 basis points).
(11) To record amortization expense for capitalized financing costs
incurred in securing financing to consummate the Neuromed Acquisition.
(12) To adjust income tax expense for the change in financial taxable
income from the combination of Neuromed and Quest.
(13) To eliminate material non-recurring charge related to purchased
in-process research and development incurred in connection with the
Neuromed Acquisition.
F-29
<PAGE> 82
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained herein and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the Common Stock offered hereby, nor does it constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
to any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 5
The Company................................ 10
Use of Proceeds............................ 10
Price Range of Common Stock................ 11
Dividend Policy............................ 11
Capitalization............................. 12
Selected Consolidated Financial Data....... 13
Selected Pro Forma Financial Data.......... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 16
Business................................... 24
Management................................. 39
Certain Transactions....................... 44
Principal and Selling Shareholders......... 45
Description of Capital Stock............... 46
Underwriting............................... 48
Legal Matters.............................. 49
Experts.................................... 49
Additional Information..................... 50
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,600,000 SHARES
LOGO
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
LOGO
, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 83
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Consistent with the Texas Business Corporation Act, the Company's Articles
of Incorporation include a provision limiting director liability to the Company
or its shareholders for monetary damages arising from certain acts or omissions
in the director's capacity as a director. In addition, the Company maintains
insurance on behalf of its directors and executive officers insuring them
against any liability asserted against them in their capacities as directors or
officers or arising out of such status. See "Management -- Indemnification and
Limitation of Liability."
The Underwriting Agreement filed as Exhibit 1.1 hereto contains reciprocal
agreements of indemnity between the Company, the Selling Shareholders and the
Underwriters as to certain liabilities, including liabilities under the
Securities Act and in certain circumstances provides for indemnification of the
Company's directors and officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the estimated expenses to be incurred in
connection with the Offering, all of which will be paid by the Company.
<TABLE>
<S> <C>
Registration fee........................................................... $13,533
NASD fee................................................................... 4,425
Accounting fees and expenses............................................... *
Legal fees and expenses.................................................... *
Printing and engraving..................................................... *
Transfer Agent's fees...................................................... *
Blue Sky fees and expenses (including counsel fees)........................ *
Miscellaneous expenses..................................................... *
-----
Total............................................................ $ *
=====
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth information as of September 26, 1995 regarding all
sales of unregistered securities of the Registrant during the past three years.
All such shares were exempt from registration under the Securities Act by reason
of Section 4(2) of the Securities Act.
On March 31, 1995, the Company issued 833,333 shares of Common Stock to Mr.
William Borkan and Mr. Burt Borkan in connection with the Neuromed Acquisition.
Concurrently with the closing of the Offering, the Company will issue the
Borkans an additional 200,000 shares as additional "earn-out" consideration,
which was earned in July 1995. See "Certain Transactions."
In connection with this transaction, the Borkans were provided access to
all relevant information regarding the Company and represented to the Company
that they were "sophisticated" investors purchasing the shares for investment
purposes only and with no view toward distribution.
II-1
<PAGE> 84
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
*1.1 -- Form of Underwriting Agreement
2.1 -- Agreement for the Purchase and Sale of All of the Issued Capital
Stock of Neuromed, Inc. dated February 10, 1995, between Quest
Medical, Inc. and William N. Borkan(1)
2.2 -- Amendment Agreement dated March 17, 1995, between Quest Medical, Inc.
and William N. Borkan(1)
*2.3 -- Letter Agreement dated as of September 23, 1995 by and between Quest
Medical, Inc. and William N. Borkan
*3.1 -- Articles of Incorporation, as amended
3.2 -- Bylaws(2)
*4.1 -- Rights Agreement between Quest Medical, Inc. and MTrust Corp., N.A.
as Rights Agent dated as of October 12, 1989
4.2 -- Amendment of Rights Agreement dated as of February 9, 1995, between
Quest Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights
Agent(1)
*5.1 -- Opinion of Hughes & Luce, L.L.P.
*10.1 -- Quest Medical, Inc. 1979 Amended and Restated Employees Stock Option
Plan, as amended
*10.2 -- Form of 1979 Employees Stock Option Agreement
*10.3 -- Quest Medical, Inc. Directors Stock Option Plan, as amended
10.4 -- Form of Directors Stock Option Agreement(2)
*10.5 -- Quest Medical, Inc. 1987 Stock Option Plan
*10.6 -- Form of 1987 Employee Stock Option Agreement
*10.7 -- Quest Medical, Inc. 1995 Stock Option Plan
*10.8 -- Form of 1995 Employee 1995 Stock Option Agreement
10.9 -- Form of Employment Agreement and Covenant Not to Compete, between the
Company and key employees(2)
10.10 -- Sublease Agreement dated July 2, 1992, effective September 1, 1992,
between the Company and Unistor Corporation(3)
10.11 -- Promissory Note dated December 28, 1993, between Quest Medical, Inc.
and MetLife Capital Financial Corporation(4)
10.12 -- Commercial Deed of Trust, Security Agreement and Assignment of Leases
and Rents and Fixture Filing dated December 28, 1993, between Quest
Medical, Inc. and MetLife Capital Financial Corporation(4)
10.13 -- Term Promissory Note dated December 28, 1993, between Quest Medical,
Inc. and MetLife Capital Corporation(4)
10.14 -- Loan and Security Agreement dated December 28, 1993, between Quest
Medical, Inc. and MetLife Capital Corporation(4)
10.15 -- Supplemental Security Agreement Number One dated December 28, 1993,
between Quest Medical, Inc. and MetLife Capital Corporation(4)
10.16 -- First Amended and Restated Credit Agreement dated as of March 31,
1995 between Quest Medical, Inc. and NationsBank of Texas, N.A.(5)
</TABLE>
II-2
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.17 -- Promissory Note (Facility A Note) in the original principal amount of
$5 million dated March 31, 1995(5)
10.18 -- Promissory Note (Facility B Note) in the original principal amount of
$15 million dated March 31, 1995(5)
10.19 -- Security Agreement dated as of March 31, 1995 between Quest Medical,
Inc. and NationsBank of Texas, N.A.(5)
10.20 -- Security Agreement dated as of March 31, 1995 between Neuromed, Inc.
and NationsBank of Texas, N.A.(5)
10.21 -- Intellectual Property Security Agreement and Assignment dated as of
March 31, 1995 between Quest Medical, Inc. and NationsBank of Texas,
N.A.(5)
10.22 -- Intellectual Property Security Agreement and Assignment dated as of
March 31, 1995 between Neuromed, Inc. and NationsBank of Texas,
N.A.(5)
10.23 -- License Agreement dated as of March 31, 1995 between Quest Medical,
Inc. and NationsBank of Texas, N.A.(5)
10.24 -- License Agreement dated as of March 31, 1995 between Neuromed, Inc.
and NationsBank of Texas, N.A.(5)
10.25 -- Guaranty of Neuromed, Inc. in favor of NationsBank of Texas, N.A.
under the First Amended and Restated Credit Agreement dated as of
March 31, 1995(5)
*10.26 -- Commitment Letter dated September 25, 1995 from NationsBank of Texas,
N.A. relating to the proposed working capital and acquisition lines
of credit
*11.1 -- Computation of Earnings Per Share
*21.1 -- Subsidiaries
*23.1 -- Consent of Hughes & Luce, L.L.P. (contained in Exhibit 5.1)
*23.2 -- Consent of Ross, Clapp, Korn & Montgomery, L.L.P.
*23.3 -- Consent of Independent Auditors
*25.1 -- Powers of Attorney (contained on page II-5 of Part II)
</TABLE>
- ---------------
* Filed herewith
(1) Filed as an Exhibit to the Report of the Company on Form 10-KSB for the year
ended December 31, 1994, and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-18,
Registration No. 2-71198-FW, and incorporated herein by reference.
(3) Filed as an Exhibit to the Report of the Company on Form 10-KSB for the year
ended December 31, 1992, and incorporated herein by reference.
(4) Filed as an Exhibit to the Report of the Company on Form 10-KSB for the year
ended December 31, 1993, and incorporated herein by reference.
(5) Filed as an Exhibit to the Report of the Company on Form 8-K dated April 13,
1995, and incorporated herein by reference.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to the underwriting agreements, the
Company's Articles of Incorporation, Bylaws, Texas law or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such
II-3
<PAGE> 86
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 87
SIGNATURES
In accordance with the requirements of the Securities Act of 1993, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Allen, State of Texas, on September 27, 1995.
QUEST MEDICAL, INC.
By: /s/ THOMAS C. THOMPSON
Thomas C. Thompson,
President and Chief Executive
Officer
Each person whose signature appears below hereby constitutes and appoints
Thomas C. Thompson and F. Robert Merrill III, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to such attorneys-in-fact and agents, and each of
the, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that the
attorneys-in-fact and agents or any of them or his or their substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form SB-2 has been signed below by the following
persons on behalf of the Registrant in the capacities indicated on September 27,
1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- -----------------------------------------------
<S> <C>
/s/ THOMAS C. THOMPSON President and Chief Executive Officer and
Thomas C. Thompson Director (Principal Executive Officer)
/s/ F. ROBERT MERRILL III Chief Financial Officer (Principal Financial
F. Robert Merrill III and Accounting Officer)
/s/ LINTON E. BARBEE Director
Linton E. Barbee
/s/ ROBERT C. EBERHART, PH.D. Director
Robert C. Eberhart, Ph.D.
/s/ JOHN A. GULA Director
John A. Gula
/s/ HUGH M. MORRISON Director
Hugh M. Morrison
/s/ MICHAEL J. TORMA, M.D. Director
Michael J. Torma, M.D.
</TABLE>
II-5
<PAGE> 88
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
*1.1 -- Form of Underwriting Agreement
2.1 -- Agreement for the Purchase and Sale of All of the Issued Capital
Stock of Neuromed, Inc. dated February 10, 1995, between Quest
Medical, Inc. and William N. Borkan(1)
2.2 -- Amendment Agreement dated March 17, 1995, between Quest Medical,
Inc. and William N. Borkan(1)
*2.3 -- Letter Agreement dated as of September 23, 1995 by and between
Quest Medical, Inc. and William N. Borkan
*3.1 -- Articles of Incorporation, as amended
3.2 -- Bylaws(2)
*4.1 -- Rights Agreement between Quest Medical, Inc. and MTrust Corp., N.A.
as Rights Agent dated as of October 12, 1989 79575
4.2 -- Amendment of Rights Agreement dated as of February 9, 1995, between
Quest Medical, Inc. and KeyCorp Shareholder Services, Inc. as
Rights Agent(1)
*5.1 -- Opinion of Hughes & Luce, L.L.P.
*10.1 -- Quest Medical, Inc. 1979 Amended and Restated Employees Stock
Option Plan, as amended
*10.2 -- Form of 1979 Employees Stock Option Agreement
*10.3 -- Quest Medical, Inc. Directors Stock Option Plan, as amended
10.4 -- Form of Directors Stock Option Agreement(2)
*10.5 -- Quest Medical, Inc. 1987 Stock Option Plan
*10.6 -- Form of 1987 Employee Stock Option Agreement
*10.7 -- Quest Medical, Inc. 1995 Stock Option Plan
*10.8 -- Form of 1995 Employee 1995 Stock Option Agreement
10.9 -- Form of Employment Agreement and Covenant Not to Compete, between
the Company and key employees(2)
10.10 -- Sublease Agreement dated July 2, 1992, effective September 1, 1992,
between the Company and Unistor Corporation(3)
10.11 -- Promissory Note dated December 28, 1993, between Quest Medical,
Inc. and MetLife Capital Financial Corporation(4)
10.12 -- Commercial Deed of Trust, Security Agreement and Assignment of
Leases and Rents and Fixture Filing dated December 28, 1993,
between Quest Medical, Inc. and MetLife Capital Financial
Corporation(4)
10.13 -- Term Promissory Note dated December 28, 1993, between Quest
Medical, Inc. and MetLife Capital Corporation(4)
10.14 -- Loan and Security Agreement dated December 28, 1993, between Quest
Medical, Inc. and MetLife Capital Corporation(4)
10.15 -- Supplemental Security Agreement Number One dated December 28, 1993,
between Quest Medical, Inc. and MetLife Capital Corporation(4)
10.16 -- First Amended and Restated Credit Agreement dated as of March 31,
1995 between Quest Medical, Inc. and NationsBank of Texas, N.A.(5)
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
10.17 -- Promissory Note (Facility A Note) in the original principal amount
of $5 million dated March 31, 1995(5)
10.18 -- Promissory Note (Facility B Note) in the original principal amount
of $15 million dated March 31, 1995(5)
10.19 -- Security Agreement dated as of March 31, 1995 between Quest
Medical, Inc. and NationsBank of Texas, N.A.(5)
10.20 -- Security Agreement dated as of March 31, 1995 between Neuromed,
Inc. and NationsBank of Texas, N.A.(5)
10.21 -- Intellectual Property Security Agreement and Assignment dated as of
March 31, 1995 between Quest Medical, Inc. and NationsBank of
Texas, N.A.(5)
10.22 -- Intellectual Property Security Agreement and Assignment dated as of
March 31, 1995 between Neuromed, Inc. and NationsBank of Texas,
N.A.(5)
10.23 -- License Agreement dated as of March 31, 1995 between Quest Medical,
Inc. and NationsBank of Texas, N.A.(5)
10.24 -- License Agreement dated as of March 31, 1995 between Neuromed, Inc.
and NationsBank of Texas, N.A.(5)
10.25 -- Guaranty of Neuromed, Inc. in favor of NationsBank of Texas, N.A.
under the First Amended and Restated Credit Agreement dated as of
March 31, 1995(5)
*10.26 -- Commitment Letter dated September 25, 1995 from NationsBank of
Texas, N.A. relating to the proposed working capital and
acquisition lines of credit
*11.1 -- Computation of Earnings Per Share
*21.1 -- Subsidiaries
*23.1 -- Consent of Hughes & Luce, L.L.P. (contained in Exhibit 5.1)
*23.2 -- Consent of Ross, Clapp, Korn & Montgomery, L.L.P.
*23.3 -- Consent of Independent Auditors
*25.1 -- Powers of Attorney (contained on page II-5 of Part II)
</TABLE>
- ---------------
* Filed herewith
(1) Filed as an Exhibit to the Report of the Company on Form 10-KSB for the year
ended December 31, 1994, and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-18,
Registration No. 2-71198-FW, and incorporated herein by reference.
(3) Filed as an Exhibit to the Report of the Company on Form 10-KSB for the year
ended December 31, 1992, and incorporated herein by reference.
(4) Filed as an Exhibit to the Report of the Company on Form 10-KSB for the year
ended December 31, 1993, and incorporated herein by reference.
(5) Filed as an Exhibit to the Report of the Company on Form 8-K dated April 13,
1995, and incorporated herein by reference.
<PAGE> 1
[FORM OF UNDERWRITING AGREEMENT]
2,600,000 Shares
Quest Medical, Inc.
Common Stock
UNDERWRITING AGREEMENT
, 1995
VECTOR SECURITIES INTERNATIONAL, INC.
RAUSCHER PIERCE REFSNES, INC.
As Representatives of the Several Underwriters
c/o VECTOR SECURITIES INTERNATIONAL, INC.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Dear Sirs:
Quest Medical, Inc., a Texas corporation (the "Company"), proposes to
issue and sell an aggregate of 1,516,667 shares of its common stock, par value
$0.05 per share, and the persons named in Schedule I hereto (the "Selling
Stockholders") propose to sell an aggregate of 1,083,333 shares of common stock
of the Company (together with the 1,516,667 shares of common stock to be issued
and sold by the Company, the "Initial Securities") to the several Underwriters
named in Schedule II hereto (the "Underwriters") for whom Vector Securities
International, Inc., ("Vector") and Rauscher Pierce Refsnes, Inc. acting as
representatives (the "Representatives"). In addition, solely for the purpose
of covering over-allotments, the Company proposes to sell to the several
Underwriters, upon the terms and conditions set forth in Section 2 hereof, up
to an additional 390,000 shares of Common Stock of the Company (the "Option
Securities"). The Company and the Selling Stockholders are hereinafter
sometimes referred to as the "Sellers." The Initial Securities and the Option
Securities are hereinafter collectively referred to as the "Securities." The
Company's common stock, par value $0.05 per share, including the Securities, is
hereinafter referred to as the "Common Stock."
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") a
registration statement on Form SB-2 covering the registration of the Securities
under the Securities
<PAGE> 2
Act of 1933, as amended (the "1933 Act"), including the related preliminary
prospectus, or prospectuses, and either (A) has prepared and proposes to file,
prior to the effective date of such registration statement, an amendment to
such registration statement, including a final prospectus or (B) if the Company
has elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations
of the Commission under the 1933 Act (the "1933 Act Regulations"), will prepare
and file a prospectus, in accordance with the provisions of Rule 430A and Rule
424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution
and delivery of this Agreement. Additionally, if the Company has elected to
rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will
prepare and file a term sheet (a "Term Sheet") in accordance with the
provisions of Rule 434 and Rule 424(b), promptly after execution and delivery
of this Agreement. The information, if any, included in such prospectus that
was omitted from the prospectus included in such registration statement at the
time it becomes effective but that is deemed, (i) pursuant to paragraph (b) of
Rule 430A, to be part of such registration statement at the time it becomes
effective is referred to herein as the "Rule 430A Information," and (ii)
pursuant to paragraph (d) of Rule 434, to be part of such registration
statement at the time it becomes effective is referred to herein as the "Rule
434 Information." Each prospectus used before the time such registration
statement becomes effective, and any prospectus that omits the Rule 430A
Information or the Rule 434 Information, if applicable, that is used after such
effectiveness and prior to the execution and delivery of this Agreement, is
herein called a "preliminary prospectus." Such registration statement,
including the exhibits thereto at the time it becomes effective and including,
if applicable, the Rule 430A Information or the Rule 434 Information, is herein
called the "Original Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as
the "Rule 462(b) Registration Statement," and the Original Registration
Statement and any Rule 462(b) Registration Statement are herein referred to
collectively as the "Registration Statement." The prospectus included in the
Original Registration Statement at the time it becomes effective is herein
called the "Prospectus," except that, (i) if the final prospectus first
furnished to the Underwriters after the execution of this Agreement for use in
connection with the offering of the Securities differs from the prospectus
included in the Original Registration Statement at the time it becomes
effective (whether or not such prospectus is required to be filed pursuant to
Rule 424(b)), the term "Prospectus" shall refer to the final Prospectus first
furnished to the Underwriters for such use, and (ii) if Rule 434 is relied
upon, the term "Prospectus" shall refer to the preliminary prospectus last
furnished to the Underwriters in connection with the offering of the
Securities, together with the Term Sheet.
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and
2
<PAGE> 3
subject to all the terms and conditions set forth herein and to such
adjustments as you may determine to avoid fractional shares, the Company hereby
agrees to issue and sell to each Underwriter and each Underwriter agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
$ per share (the "purchase price per share"), the number of Initial
Securities set forth in Schedule II opposite the name of such Underwriter (or
such number of Initial Securities increased as set forth in Section 12 hereof).
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and conditions set forth herein
and to such adjustments as you may determine to avoid fractional shares, each
Selling Stockholder agrees to sell to each Underwriter and each Underwriter
agrees, severally and not jointly, to purchase from each Selling Stockholder,
at the purchase price per share, that number of Initial Securities which bears
the same proportion to the number of Initial Securities set forth opposite the
name of such Selling Stockholder as the number of Initial Securities set forth
opposite the name of such Underwriter in Schedule II hereto (or such number of
Initial Securities increased as set forth in Section 12 hereof) bears to the
aggregate number of Initial Securities to be sold by the Company.
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and conditions set forth herein,
the Company also agrees to sell to the Underwriters, and the Underwriters shall
have the right to purchase from the Company, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised
prior to 5:00 P.M., Chicago time, on the 30th day after (i) the later of the
date upon which the Original Registration Statement and any Rule 462(b)
Registration Statement become effective, if the Company has elected not to rely
on Rule 430A, or (ii) the date of this Agreement, if the Company has elected to
rely on Rule 430A (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange
is open for trading), up to an aggregate of 390,000 Option Securities. Option
Securities may be purchased solely for the purpose of covering over-allotments
made in connection with the offering of the Securities. Upon any exercise of
the over-allotment option, each Underwriter, severally and not jointly, agrees
to purchase from the Company the number of Option Securities (subject to such
adjustments as you may determine in order to avoid fractional shares) that
bears the same proportion to the total number of Option Securities to be sold
by the Company as the number of Initial Securities to be sold by the Company
set forth opposite the name of such Underwriter in Schedule II hereto (or such
number of Initial Securities increased as set forth in Section 12 hereof) bears
to the aggregate number of Initial Securities to be sold by the Company.
3
<PAGE> 4
Certificates in transferable form for the Securities that each of the
Selling Stockholders agrees to sell pursuant to this Agreement have been placed
in custody with [Name of Custodian] (the "Custodian") for delivery under this
Agreement pursuant to a Custody Agreement and Power of Attorney (collectively,
the "Custody Agreement") executed by each of the Selling Stockholders
appointing and as agents and
attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling Stockholder agrees
that (i) the Securities represented by the certificates held in custody
pursuant to the Custody Agreement are subject to the interests of the
Underwriters, the Company and each other Selling Stockholder, (ii) the
arrangements made by the Selling Stockholders for such custody are, except as
specifically provided in the Custody Agreement, irrevocable, and (iii) the
obligations of the Selling Stockholders hereunder and under the Custody
Agreement shall not be terminated by any act of such Selling Stockholder or by
operation of law, whether by the death or incapacity of any Selling Stockholder
or the occurrence of any other event or, if the Selling Stockholder is not a
natural person, upon any dissolution, winding up, distribution of assets or
other event affecting the legal existence of such Selling Stockholder. If any
Selling Stockholder shall die or be incapacitated or if any other event shall
occur before the delivery of the Securities hereunder or if the Selling
Stockholder is not a natural person, shall dissolve, wind up, distribute assets
or if any other event affecting the legal existence of such Selling Stockholder
shall occur before the delivery of the Securities hereunder, certificates for
the Securities of such Selling Stockholder shall be delivered to the
Underwriters by the Attorneys-in-Fact, or any of them, in accordance with the
terms and conditions of this Agreement and the Custody Agreement as if such
death or incapacity, dissolution, winding up or distribution of assets or other
event had not occurred, regardless of whether or not the Attorneys-in-Fact or
any Underwriter shall have received notice of such death, incapacity,
dissolution, winding up or distribution of assets or other event. Each
Attorney-in-Fact is authorized, on behalf of each of the Selling Stockholders,
to execute this Agreement and any other documents necessary or desirable in
connection with the sale of the Securities to be sold hereunder by such Selling
Stockholder, to make delivery of the certificates for such Securities, to
receive the proceeds of the sale of such Securities, to give receipts for such
proceeds, to pay therefrom any expenses to be borne by such Selling Stockholder
in connection with the sale and public offering of such Securities, to
distribute the balance thereof to such Selling Stockholder, and to take such
other action as may be necessary or desirable in connection with the
transactions contemplated by this Agreement. Each Attorney-in-Fact agrees to
perform his duties under the Custody Agreement.
3. TERMS OF PUBLIC OFFERING. The Sellers have been advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Securities as soon
4
<PAGE> 5
after the Registration Statement and this Agreement have become effective as in
your judgment is advisable and initially to offer the Securities upon the terms
set forth in the Prospectus.
4. DELIVERY OF THE SECURITIES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Initial Securities shall be made at the
office of ________________________ at 9:00 A.M., Chicago time, on , 1995 (the
"Closing Date"). The place of closing for the Initial Securities and the
Closing Date may be varied by agreement among you, the Company and the
Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Option Securities
to be purchased by the Underwriters shall be made at the aforementioned office
of ________________________ at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
Company of the Underwriters' determination to purchase a number, specified in
such notice, of Option Securities. The place of closing for any Option
Securities and the Option Closing Date for such Option Securities may be varied
by agreement between you and the Attorneys-in-Fact.
Certificates for the Initial Securities and for any Option Securities
to be purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice, it being understood that
a facsimile transmission shall be deemed written notice, prior to 9:30 A.M.,
Chicago time, on the second business day preceding the Closing Date or any
Option Closing Date, as the case may be. Such certificates shall be made
available to you in Chicago, Illinois for inspection and packaging not later
than 9:30 A.M., Chicago time, on the business day next preceding the Closing
Date or the Option Closing Date, as the case may be. The certificates and
stockpowers evidencing the Initial Securities and any Option Securities to be
purchased hereunder shall be delivered to you on the Closing Date or the Option
Closing Date, as the case may be, against payment of the purchase price
therefor by certified or official bank check or checks payable in New York
Clearing House (next day) funds to the order of the Company and the
Attorneys-in-Fact. It is understood that each Underwriter has authorized the
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial Securities and the Option
Securities, if any, which it has agreed to purchase. Vector, individually and
not as representative of the Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial Securities or the Option
Securities, if any, to be purchased by any Underwriter whose check has not been
received by the Closing Date or the Option Closing Date, as the case may be,
but such payment
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<PAGE> 6
shall not relieve such Underwriter from its obligations hereunder.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
a. The Company will notify the Underwriters immediately, and confirm
the notice in writing, (i) of the effectiveness of the Registration Statement
and any amendment thereto, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of qualification of the Securities for offering or sale in any
jurisdiction or the initiation of any proceedings for such purpose and (v)
during the period when the Prospectus is required to be delivered under the
1933 Act or Securities Exchange Act of 1934, as amended (the "1934 Act"), of
any change in the Company's condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company or the happening of any
event, including the filing of any information, documents or reports pursuant
to the 1934 Act, that makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus in order to state a material fact
required by the 1933 Act or the 1933 Act Regulations to be stated therein or
necessary in order to make the statements therein not misleading, or of the
necessity to amend or supplement the Prospectus to comply with the 1933 Act or
any other law. The Company shall use its best efforts to prevent the issuance
of any stop order or order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, and, if at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, or any state securities commission or other regulatory
authority shall issue an order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, the Company shall use
every reasonable effort to obtain the withdrawal or lifting of such order at
the earliest possible time.
b. The Company will give the Underwriters notice of its intention to
prepare or file any amendment to the Registration Statement (including any
post-effective amendment), any Rule 462(b) Registration Statement, any Term
Sheet or any amendment or supplement to the Prospectus (including any revised
prospectus or Term Sheet and preliminary prospectus which the Company proposes
for use by the Underwriters in connection with the offering of the Securities
which differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised
prospectus or Term Sheet and preliminary prospectus is required to be filed
pursuant to Rule
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<PAGE> 7
424(b)), whether pursuant to the 1933 Act, the 1934 Act or otherwise, will
furnish the Underwriters with copies of any Rule 462(b) Registration Statement,
Term Sheet, amendment or supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such Rule
462(b) Registration Statement, Term Sheet, amendment or supplement or use any
such prospectus to which the Underwriters or counsel for the Underwriters shall
object.
c. The Company will deliver to the Underwriters as many signed and
conformed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein) as the Underwriters may reasonably request.
d. The Company will furnish to each Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended
or supplemented) as such Underwriter may reasonably request for the purposes
contemplated by the 1933 Act or the 1934 Act or the respective applicable rules
and regulations of the Commission thereunder.
e. If any event shall occur as a result of which it is necessary, in
the opinion of counsel for the Underwriters, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Company
will forthwith amend or supplement the Prospectus (in form and substance
satisfactory to counsel for the Underwriters) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is delivered
to a purchaser, not misleading, and the Company will furnish to the
Underwriters a reasonable number of copies of such amendment or supplement.
f. During the period of five years hereafter, the Company will furnish
to you (i) as soon as available, a copy of each report of the Company mailed to
stockholders or filed with the Commission or Nasdaq National Market ("NASDAQ"),
and (ii) from time to time such other information concerning the Company as you
may request.
g. The Company will endeavor, in cooperation with the Underwriters, to
qualify the Securities for offering and sale under the applicable securities or
Blue Sky laws of such states and other jurisdictions of the United States as
the Underwriters may designate; provided, however, that the Company shall not
be obligated to qualify as a foreign corporation in any jurisdiction in which
it is not so qualified. In each jurisdiction in which the Securities have been
so qualified, the Company will file such
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<PAGE> 8
statements and reports as may be required by the laws of such jurisdiction to
continue such qualification in effect for a period of not less than one year
from the later of the effective date of the Original Registration Statement and
any Rule 462(b) Registration Statement.
h. The Company will make generally available to its security holders
as soon as practicable, but not later than 50 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-month
period beginning not later than the first day of the Company's fiscal quarter
next following the "effective date" (as defined in said Rule 158) of the
Registration Statement.
i. The Company will use the net proceeds received by it from the sale
of the Securities in the manner specified in the Prospectus under "Use of
Proceeds."
j. If, at the time that the Registration Statement becomes effective,
any Rule 430A Information or Rule 434 Information shall have been omitted
therefrom, then immediately following the execution of this Agreement, the
Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A or Rule 434 and Rule 424(b), copies of a Prospectus
or Term Sheet containing such Rule 430A Information and Rule 434 Information,
respectively, or, if required by Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Prospectus), containing such Rule
430A Information.
k. If the Company elects to rely upon Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with Rule
111 of the 1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern Time
on the date hereof and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
l. The Company, during the period when the Prospectus is required to
be delivered under the 1933 Act or the 1934 Act, will file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15 of
the 1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission under the 1934 Act (the "1934 Act Regulations").
8
<PAGE> 9
m. During a period of 180 days from the date of the Prospectus, the
Company will not, without Vector's prior written consent on behalf of the
Underwriters, directly or indirectly, sell, offer to sell, grant any option for
the sale of, or otherwise dispose of, Common Stock or any security convertible
into Common Stock (except for Common Stock issued pursuant to this Agreement or
pursuant to reservations, agreements, conversions or employee or director
benefit plans or the exercise of convertible securities referred to in Section
7(g) hereof).
n. The Company has furnished or will furnish to you "lock-up" letters,
in form and substance satisfactory to you, signed by each of its current
officers and directors and each of its stockholders designated by you.
o. The Company will supply the Underwriters with copies of all
correspondence to and from, and all documents issued to and by, the Commission
in connection with the registration of the Securities under the 1933 Act.
p. Prior to the Closing Date, the Company shall furnish to the
Underwriters, as soon as they have been prepared, copies of any unaudited
interim consolidated financial statements of the Company and its subsidiaries,
for any periods subsequent to the periods covered by the financial statements
appearing in the Registration Statement and the Prospectus.
q. Prior to the Closing Date, the Company will issue no press release
or other communications directly or indirectly and hold no press conference
with respect to the Company or any of its subsidiaries, the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of any of them, or the offering of the Securities, without the prior written
consent of the Representatives unless in the judgment of the Company and its
counsel, and after notification to the Representatives, such press release or
communication is required by law.
r. The Company has complied and will comply with all provisions of
Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to issuers doing business with
Cuba.
s. If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 or pursuant to clauses (ii), (iii), (iv) and (v)
of Section 13 hereof) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company or
any of the Selling Stockholders to comply, in any material respect, with the
terms or fulfill, in any material respect, any of the conditions of this
Agreement, the Company agrees to reimburse the
9
<PAGE> 10
Representatives for all reasonable out-of-pocket expenses (including reasonable
fees and expenses of counsel for the Underwriters) incurred by you in
connection herewith.
t. The Company has not taken, nor will it take, directly or
indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Securities.
u. The Company will use its best efforts to have the Securities
approved for listing on the NASDAQ.
6. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each of the Selling
Stockholders severally agrees with the several Underwriters as follows:
a. Such Selling Stockholder will cooperate to the extent necessary to
cause the Registration Statement or any post-effective amendment thereto to
become effective at the earliest possible time.
b. Such Selling Stockholder will pay all Federal, state and other
taxes, if any, on the transfer or sale of such Securities that are sold by the
Selling Stockholder to the Underwriters.
c. Such Selling Stockholder will do or perform all things required to
be done or performed by such Selling Stockholder prior to the Closing Date to
satisfy all conditions precedent to the delivery of the Securities pursuant to
this Agreement relating to such Selling Stockholder.
d. Such Selling Stockholder will not for a period of 270 days after
the date of the Prospectus, without Vector's prior written consent, on behalf
of the Underwriters, directly or indirectly, sell, offer to sell, grant any
option for the sale of, or otherwise dispose of, Common Stock or any security
convertible into Common Stock, except for Securities sold pursuant to this
Agreement.
e. Such Selling Stockholder has not taken, nor will it take, directly
or indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Securities.
f. Such Selling Stockholder promptly will advise you on behalf of the
several Underwriters, and immediately confirm such advice in writing, (i) of
receipt by such Selling Stockholder or by any representative or agent of such
Selling Stockholder, of any communication from the Commission relating to the
Registration
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<PAGE> 11
Statement or the Prospectus, or any notice or order of the Commission relating
to the Company or such Selling Stockholder in connection with the transactions
contemplated by this Agreement and (ii) of the happening of any event which
makes or may make any statement made in the Registration Statement or the
Prospectus untrue or that requires the making of any change in the Registration
Statement or Prospectus in order to make any such statement, in the light of
the circumstances in which it was made, not misleading or to comply with the
1933 Act or any other law.
7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
a. When the Registration Statement becomes effective, including at the
date of any post- effective amendment, at the date of the Prospectus, if
different, and at the Closing Date and the Option Closing Date, as the case may
be, (i) the Registration Statement will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus and any supplements or amendments thereto will
not at the date of the Prospectus, at the date of any such supplements or
amendments, and at the Closing Date and the Option Closing Date, if any,
include an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or Prospectus
relating to any Selling Stockholder or any Underwriter made in reliance upon
and in conformity with information furnished to the Company in writing by any
Underwriter, through Vector, expressly for use in the Registration Statement or
Prospectus.
b. The accountants who certified the financial statements and
supporting schedules included in the Registration Statement are independent
public accountants as required by the 1933 Act and the 1933 Act Regulations.
c. The financial statements included in the Registration Statement and
the Prospectus present fairly the financial position of the Company and its
consolidated subsidiaries as of the dates indicated and the results of their
operations for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. The
financial information and statistical data set forth in the Prospectus are
prepared on an
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<PAGE> 12
accounting basis consistent with such financial statements.
d. Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise stated therein,
(i) there has been no material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, (ii) there have been no
transactions entered into by the Company or any of its subsidiaries, other than
those in the ordinary course of business, which are material with respect to
the Company and its subsidiaries considered as one enterprise, and (iii) there
has been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock. The Company has no material
contingent obligations which are not disclosed in the Registration Statement.
e. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Texas with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure to so qualify would not, singly or in the aggregate, have a material
adverse effect on the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise.
f. Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in
the Prospectus and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise; all of the issued
and outstanding capital stock of each such subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity. There are no
outstanding subscriptions, rights,
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<PAGE> 13
warrants, commitments, convertible or exchangeable securities, or other options
outstanding entitling any person to acquire any shares of capital stock of or
ownership interests in any subsidiary of the Company.
g. The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement or pursuant to reservations,
agreements, employee or director benefit plans or the exercise of convertible
securities referred to in the Prospectus); the shares of issued and outstanding
capital stock of the Company, including the Common Stock, have been duly
authorized and validly issued and are fully paid and non-assessable and have
not been issued in violation of or are not otherwise subject to any preemptive
or other similar rights; the Securities have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and non-
assessable; the authorized capital stock of the Company, including the
Securities, conforms to all statements relating thereto contained in the
Prospectus; the issuance of the Securities is not subject to preemptive or
other similar rights. There are no outstanding options, warrants or other
rights granted to or by the Company to purchase shares of Common Stock or other
securities of the Company and there are no commitments, plans or arrangements
to issue any shares of Common Stock or any security convertible into Common
Stock, in each case other than as described in the Prospectus.
h. Except as disclosed in the Registration Statement and except as
would not, singly or in the aggregate, reasonably be expected to have a
material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise (a) the Company and its subsidiaries
are each in compliance with all applicable Environmental Laws, (B) the Company
and its subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with their
requirements, (C) to the best knowledge of the Company, there are no pending or
threatened Environmental Claims against the Company or any of its subsidiaries
and (D) under applicable law, there are no circumstances with respect to any
property or operations of the Company or its subsidiaries that are reasonably
likely to form the basis of an Environmental Claim against the Company or its
subsidiaries.
For purposes of this Agreement, the following terms shall have the
following meanings: "Environmental Law" means any United States (or other
applicable jurisdiction's) Federal, state, local or municipal statute, law,
rule, regulation, ordinance, code, policy or rule of common law and any
judicial or administrative
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<PAGE> 14
interpretation thereof, including any judicial or administrative order, consent
decree or judgement, relating to the environment, health, safety or any
chemical, material or substance, exposure to which is prohibited, limited or
regulated by any governmental authority. "Environmental Claims" means any and
all administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation, investigations
or proceedings relating in any way to any Environmental Law.
i. Neither the Company nor any of its subsidiaries is in violation of
its charter or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other instrument to which
the Company or any of its subsidiaries is a party or by which it or any of them
may be bound, or to which any of the property or assets of the Company or any
of its subsidiaries is subject; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein and
compliance by the Company with its obligations hereunder have been duly
authorized by all necessary corporate action and will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its subsidiaries pursuant to, any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the Company
or any of its subsidiaries is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the charter or bylaws of the Company or any applicable law, rule,
statute, ordinance, administrative regulation or administrative or court
decree.
j. No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the best knowledge of the Company, is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors which
might, singly or in the aggregate, be expected to result in any material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise.
k. There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or any
of its subsidiaries, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which, singly or in the
aggregate, might result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or
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<PAGE> 15
business prospects of the Company and its subsidiaries considered as one
enterprise, or which, singly or in the aggregate, might materially and
adversely affect the properties or assets thereof or which might materially and
adversely affect the consummation of this Agreement; all pending legal or
governmental proceedings to which the Company or any of its subsidiaries is a
party or of which any of their respective property or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, are, considered in the
aggregate, not material; and there are no contracts or documents of the Company
or any of its subsidiaries which are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act Regulations which
have not been so filed.
l. The Company owns or is licensed to use all patents, patent
applications, inventions, trademarks, tradenames, applications for registration
of trademarks, copyrights, know-how, trade secrets, licenses and rights in any
thereof (herein called the Proprietary Rights) which are material to the
businesses of the Company as now conducted and as proposed to be conducted, in
each case as described in the Prospectus. The Company does not have any
knowledge of, and the Company has not given or received any notice of, any
pending conflicts with or infringement of the rights of others with respect to
any Proprietary Rights or with respect to any license of Proprietary Rights.
No action, suit, arbitration, or legal, administrative or other proceeding, or
investigation is pending, or, to the best knowledge of the Company, threatened,
which involves any Proprietary Rights. Neither the Company nor any subsidiary
is subject to any judgment, order, writ, injunction or decree of any court or
any Federal, state, local, foreign or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or
any arbitrator, or has entered into or is a party to any contract which
restricts or impairs the use of any such Proprietary Rights in a manner which
would have a material adverse effect on the use of any of the Proprietary
Rights. To the best knowledge of the Company, no Proprietary Rights used by
the Company or any of its subsidiaries, and no services or products sold by the
Company or any of its subsidiaries, conflict with or infringe upon any
proprietary rights available to any third party. Neither the Company nor any
subsidiary has received written notice of any pending conflict with or
infringement upon such third party proprietary rights. Neither the Company nor
any subsidiary has entered into consent, indemnification, forbearance to sue or
settlement agreement with respect to Proprietary Rights other than in the
ordinary course of business. No claims have been asserted by any person with
respect to the validity of or the Company's or any of its subsidiaries'
ownership or right to use the Proprietary Rights and, to the best knowledge of
the Company, there is no reasonable basis for any such claim to be successful.
The Proprietary Rights are valid and enforceable and no registration relating
thereto has lapsed, expired or been abandoned or cancelled or is the subject of
cancellation or other
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<PAGE> 16
adversarial proceedings, and all applications therefore are pending and are in
good standing. The Company and its subsidiaries have complied, in all material
respects, with their respective contractual obligations relating to the
protection of the Proprietary Rights used pursuant to licenses. To the best
knowledge of the Company, no person is infringing on or violating the
Proprietary Rights owned or used by the Company or any of its subsidiaries.
m. No authorization, approval or consent of any court or governmental
authority or agency is necessary in connection with the offering, issuance or
sale of the Securities hereunder, except such as may be required under the 1933
Act or the 1933 Act Regulations or state securities or Blue Sky laws (or such
as may be required by the National Association of Securities Dealers, Inc.
("NASD").
n. The Company and its subsidiaries possess and are operating in
compliance with all certificates, authorities, consents, certificates,
approvals or permits (collectively, "permits") issued by the appropriate state,
Federal or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the revocation
or modification of any such permit or any circumstance which would lead them to
believe that any such proceedings are reasonably likely which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise; and, except as described in the
Prospectus, none of such permits contains any restriction that is materially
burdensome to the Company or any of its subsidiaries.
o. This Agreement has been duly executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as rights to indemnity
and contribution hereunder may be limited by state or Federal securities laws
or the public policy underlying such laws.
p. Except as described in the Prospectus, there are no persons with
registration or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under the
1933 Act.
q. No order preventing or suspending the use of any preliminary
prospectus has been issued and no proceedings for that purpose are pending,
threatened, or, to the knowledge of the Company, contemplated by the
Commission; and to the best knowledge of the Company, no order suspending the
offering of the Securities
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<PAGE> 17
in any jurisdiction designated by the Underwriters pursuant to Section 5(g) of
this Agreement has been issued and, to the best knowledge of the Company, no
proceedings for that purpose have been instituted or threatened or are
contemplated.
r. The Company and each of its subsidiaries have good and marketable
title to their respective properties, free and clear of all material liens,
charges and encumbrances and equities of record. The properties of the Company
and its subsidiaries are, in the aggregate, in good repair (reasonable wear and
tear excepted), and suitable for their respective uses. Any real properties
held under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the conduct of the business of the Company
and its subsidiaries taken as a whole.
s. The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access
to assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
t. The Company and its subsidiaries have conducted and are conducting
their business in compliance with all applicable Federal, state and local laws,
rules, regulations, decisions, directives and orders, except where the failure
to do so would not, singly or in the aggregate, have a material adverse effect
on the condition, financial or otherwise, or on the earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise.
u. To the Company's knowledge, neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any subsidiary has
made any payment of funds of the Company or any subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
v. The Company is not now, and after sale of the Securities to be sold
by it hereunder and application of the net proceeds from such sale as described
in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" within the meaning of the Investment Company Act of 1940,
as
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amended.
w. The Company has complied with all provisions of Florida Statutes,
Section 517.075, relating to issuers doing business with Cuba.
x. The Company and each of its subsidiaries have filed all material
tax returns required to be filed, which returns are true and correct in all
material respects, and neither the Company nor any of its subsidiaries is in
default in the payment of any taxes, including penalties and interest,
assessments, fees and other charges, shown thereon due or otherwise assessed,
other than those being contested in good faith and for which adequate reserves
have been provided or those currently payable without interest which were
payable pursuant to said returns or any assessments with respect thereto.
8. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder severally represents and warrants to each Underwriter that:
a. Such Selling Stockholder is not prompted to sell the Securities to
be sold by such Selling Stockholder pursuant to this Agreement by any
information concerning the Company or any of its subsidiaries that is not set
forth in the Prospectus or other documents filed with the Commission.
b. Such Selling Stockholder now has, and on the Closing Date will
have, good and marketable title to the Securities to be sold by such Selling
Stockholder, free and clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any restriction on transfer.
c. Such Selling Stockholder now has, and on the Closing Date will
have, full legal right, power and authorization to sell, assign, transfer and
deliver such Securities in the manner provided in this Agreement, and upon
delivery of and payment for such Securities hereunder, the several Underwriters
will acquire good and marketable title to such Securities free and clear of any
lien, claim, security interest, or other encumbrance.
d. Such Selling Stockholder has full power (corporate or other) to
enter into this Agreement and the Custody Agreement and to perform its
obligations hereunder and thereunder. This Agreement and the Custody Agreement
have been duly authorized, executed and delivered by or on behalf of such
Selling Stockholder and are the valid and binding agreements of such Selling
Stockholder enforceable against such Selling Stockholder in accordance with
their terms.
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<PAGE> 19
e. Neither the sale of the Securities, the execution, delivery or
performance of this Agreement or the Custody Agreement by or on behalf of such
Selling Stockholder, nor the consummation by or on behalf of such Selling
Stockholder of the transactions contemplated hereby and thereby (i) requires
any consent, approval, authorization registration or qualification of or with
any governmental instrumentality or court by such Selling Stockholder (except
such as may be required under the 1933 Act the securities or Blue Sky laws of
various jurisdictions in which the Securities are being distributed or pursuant
to the rules and regulations of the NASD) or (ii) conflicts or will conflict
with or constitutes or will constitute a breach of, or a default under, any
agreement, indenture, mortgage, deed, trust, lease or other instrument or
agreement to which such Selling Stockholder is a party or by which such Selling
Stockholder is or may be bound, or violates or will violate the charter
documents, by-laws, partnership agreement or comparable governing documents of
such Selling Stockholder or any statute, law, regulation ruling or judgment,
injunction, order or decree applicable to such Selling Stockholder, or will
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of such Selling Stockholder pursuant to the terms of any
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder may be bound or to which any of the property or
assets of such Selling Stockholder is subject.
f. The Registration Statement and the Prospectus insofar as they
relate to such Selling Stockholder, do not and will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
g. The representations and warranties of such Selling Stockholder in
the Custody Agreement are, and on the Closing Date will be, true and correct.
h. Such Selling Stockholder has not taken and will not take, directly
or indirectly, any action designed to, or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Securities; and such Selling
Stockholder has not distributed and will not distribute any prospectus or other
offering material in connection with the offering and sale of the Securities
other than the preliminary prospectus filed with the Commission or other
materials permitted by the 1933 Act and the 1933 Act Regulations.
i. Such Selling Stockholder does not have any knowledge or any reason
to believe that the Registration Statement or the Prospectus (or any amendment
or supplement thereto) contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make
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<PAGE> 20
the statements therein not misleading.
9. INDEMNIFICATION AND CONTRIBUTION.
a. The Company agrees to indemnify and hold harmless (i) each
Underwriter and (ii) each person, if any, who controls any Underwriter within
the meaning of Section 15 of the 1933 Act (any of the persons referred to in
this clause (ii) being hereinafter referred to as a "controlling person") and
(iii) the respective directors, officers, partners and employees of any of the
Underwriters or any controlling person (any person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the
fullest extent lawful, from and against any and all losses, claims, damages,
liabilities and expenses whatsoever (including, without limitation, all
reasonable costs of preparing, investigating and defending any claim, suit,
action or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to any Indemnified Person), directly or indirectly, caused by, related to,
based upon, arising out of or in connection with any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereto, including the Rule 430A Information and
Rule 434 Information, if applicable, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading or caused by, related to, based
upon, arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
b. If any action, suit or proceeding shall be brought against any
Indemnified Person in respect of which indemnity may be sought against the
Company or any Selling Stockholder, such Indemnified Person shall promptly
notify the parties against whom indemnification is being sought (the
"indemnifying parties"), and such indemnifying parties shall assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. Such Indemnified Person shall have the right to employ separate
counsel in any such action, suit or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Person unless (i) the indemnifying parties have
agreed in writing to pay such fees and expenses, (ii) the indemnifying parties
have failed to assume the defense and employ counsel or (iii) the named parties
to any such action, suit, investigation or proceeding (including any impleaded
parties) include both such Indemnified Person and the indemnifying parties and
representation of such Indemnified Person and any indemnifying party by the
same counsel would be inappropriate due to actual or potential differing
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<PAGE> 21
interests between them (in which case the indemnifying party shall not have the
right to assume the defense of such action, suit or proceeding on behalf of
such Indemnified Person. It is understood, however, that the indemnifying
parties shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Indemnified Persons not having actual or potential differing interests
with you or among themselves, which firm shall be designated in writing by
Vector, and that all such fees and expenses shall be reimbursed as they are
incurred. The indemnifying parties shall not be liable for any settlement of
any such action, suit or proceeding effected without their written consent,
which consent shall not be unreasonably withheld, but if settled with such
written consent, or if there be a final judgment for the plaintiff in any such
action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any Indemnified Person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
c. Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each Indemnified Person, the Company, its
directors, its officers who sign the Registration Statement, and any person who
controls the Company within the meaning of Section 15 of the 1933 Act to the
same extent as the foregoing indemnity from the Company to each Underwriter,
but only with respect to the information furnished in writing by or on behalf
of such Selling Stockholder expressly for use in the Registration Statement,
the Prospectus or any preliminary prospectus, or any amendment or supplement
thereto. If any action, suit, investigation or proceeding shall be brought
against any Indemnified Person, the Company, any of its directors, any such
officer, or any such controlling person of the Company, based on the
Registration Statement, the Prospectus or any preliminary Prospectus or any
amendment or supplement thereto, and in respect of which indemnity may be
sought against any Selling Stockholder pursuant to this paragraph (c), such
Selling Stockholder shall have the rights and duties given to the Company by
paragraph (b) above, and each Indemnified Person, the Company, its directors,
any such officer, and any such controlling person of the Company shall have the
rights and duties given to the Indemnified Persons by paragraph (b) above.
d. Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person who controls the Company within the meaning
of Section 15 of the 1933 Act and the Selling Stockholders, to the same extent
as the foregoing indemnity from the Company and the Selling Stockholders
21
<PAGE> 22
to each Underwriter, but only with respect to information relating to such
Underwriter furnished in writing by or on behalf of such Underwriter through
Vector expressly for use in the Registration Statement, the Prospectus or any
preliminary prospectus, or any amendment or supplement thereto. If any action,
suit, investigation or proceeding shall be brought against the Company, any of
its directors, any such officer, any such controlling person or any Selling
Stockholder based on the Registration Statement, the Prospectus or any
preliminary prospectus, or any amendment or supplement thereto, and in respect
of which indemnity may be sought against any Underwriter pursuant to this
paragraph (d), such Underwriter shall have the rights and duties given to the
Company and the Selling Stockholders by paragraph (b) above, and the Company,
its directors, any such officer, any such controlling person, and the Selling
Stockholders, shall have the rights and duties given to the Indemnified Persons
by paragraph (b) above.
e. If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Selling Stockholders on the one hand and the Underwriters
on the other hand from the offering of the Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Stockholders on the one hand and the Underwriters on the other hand, as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus or, if Rule 434 is used,
the corresponding location on the Term Sheet. The relative fault of the
Company and the Selling Stockholders on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Selling Stockholders on the one hand or by the Underwriters
on the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The indemnity and contribution obligations of the Company and the Selling
Stockholder
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<PAGE> 23
set forth herein shall be in addition to any liability or obligation the
Company or the Selling Stockholders may otherwise have to any Indemnified
Person.
f. The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities and
expenses referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 9, no Underwriter (or any of its
related Indemnified Persons) shall be required to contribute in the aggregate
any amount in excess of the amount by which the total price of the Securities
underwritten by such Underwriter and distributed to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 9 are several
in proportion to the respective numbers of Securities set forth opposite their
names in Schedule II hereto (or such numbers of Securities increased as set
forth in Section 12 hereof) and not joint.
g. No indemnifying party shall, without the prior written consent of
the Indemnified Person, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any Indemnified Person is or
could have been a party and indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement includes an unconditional release of
such Indemnified Person from all liability on claims that are the subject
matter of such action, suit or proceeding.
h. Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Indemnified
Person, the
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<PAGE> 24
Company, its directors or officers or the Selling Stockholders, any director,
officer or partner of a Selling Stockholder or any person controlling the
Company or any Selling Stockholder, (ii) acceptance of any Securities and
payment therefor hereunder and (iii) any termination of this Agreement.
10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Initial Securities hereunder
are subject to the following conditions:
a. The Original Registration Statement shall have become
effective not later than 5:30 P.M. on the date hereof, or with the consent of
Vector, at a later time and date, and if the Company has elected to rely upon
Rule 462(b), the Rule 462(b) Registration Statement shall have become effective
not later than the earlier of (i) 9:00 P.M. Chicago time on the date hereof and
(ii) the time confirmations are sent or given, as specified by Rule 462(b)(2),
or, with respect to the Rule 462(b) Registration Statement, at such later time
and date as may be approved by Vector; no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission. If
the Company has elected to rely upon Rule 430A, Rule 430A Information
previously omitted from the effective Registration Statement pursuant to Rule
430A shall have been transmitted to the Commission for filing pursuant to Rule
424(b) within the prescribed time period and the Company shall have provided
evidence satisfactory to the Underwriters of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A.
If the Company has elected to rely upon Rule 434, a Term Sheet shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) within the
prescribed time period.
b. The Underwriters shall have received:
(i) The favorable opinion, dated as of the Closing Date, of Hughes &
Luce, L.L.P., counsel for the Company, in form and substance satisfactory to
counsel for the Underwriters, to the effect that:
A. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Texas.
B. The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus and to enter into and perform its
obligations under this Agreement.
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<PAGE> 25
C. To the best of their knowledge and information, the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required.
D. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization" (except
for subsequent issuances, if any, pursuant to reservations, agreements,
employee benefit plans or the exercise of convertible securities referred
to in the Prospectus), and the shares of issued and outstanding capital
stock of the Company, including the Common Stock, have been duly authorized
and validly issued and are fully paid and non-assessable and, to their
knowledge, have not been issued in violation of or are not otherwise
subject to any preemptive rights or other similar rights.
E. The Securities have been duly authorized for issuance and sale to
the Underwriters pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and
non-assessable; and the issuance of the Securities is not subject to
preemptive or other similar rights.
F. Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and, to the best of their knowledge
and information, is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required; all of the issued and outstanding capital stock
of each such subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and, to the best of their knowledge and
information, is owned by the Company, directly or through subsidiaries,
free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
G. To the best of their knowledge and information, except as
described in the Prospectus, there are no outstanding options, warrants or
other
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<PAGE> 26
rights granted to or by the Company to purchase shares of Common Stock or
other securities of the Company and there are no commitments, plans or
arrangements to issue any shares of Common Stock.
H. This Agreement has been duly authorized, executed and delivered
by the Company.
I. The Registration Statement is effective under the 1933 Act and,
to the best of their knowledge and information, no stop order suspending
the effectiveness of the Registration Statement has been issued under the
1933 Act nor have proceedings therefor been initiated or threatened by the
Commission.
J. At the time the Registration Statement became effective and at
the Closing Date, the Registration Statement (other than the financial
statements and supporting schedules included therein, as to which no
opinion need be rendered) complied as to form in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations.
26
<PAGE> 27
K. The form of certificate used to evidence each of the Securities
is in due and proper form and complies with all applicable statutory
requirements.
L. To the best of their knowledge and information, there are no
legal or governmental proceedings pending or threatened which are required
to be disclosed in the Registration Statement other than those disclosed
therein, and all pending legal or governmental proceedings to which the
Company or any subsidiary is a party or to which any of their property is
subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, are, considered in
the aggregate, not material.
M. The information in the Prospectus under "Business--Government
Regulation," "Business--Litigation," "Management--Employment Agreements,"
"Description of Capital Stock" and "Shares Eligible for Future Sale"
[others] to the extent that it constitutes matters of law, summaries of
legal matters, documents or proceedings, or legal conclusions, has been
reviewed by them and is correct in all material respects and fairly and
correctly presents the information called for with respect thereto.
N. To the best of their knowledge and information, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, the descriptions thereof
or references thereto are correct; and to their knowledge and information,
no default exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other
instrument of the Company or any of its subsidiaries.
O. No authorization, approval, consent or order of any court or
governmental authority or agency is required in connection with the
offering, issuance or sale of the Securities to the Underwriters, except
such as may be required under the 1933 Act or the 1933 Act Regulations or
state
27
<PAGE> 28
securities or Blue Sky laws or such as may be required by the NASD; and the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein and compliance by the Company with
its obligations hereunder will not conflict with or constitute a breach of,
or default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or any of
its subsidiaries is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of
the provisions of the charter or bylaws of the Company, or any applicable
law, rule, statute, ordinance, administrative regulation or administrative
or court decree.
P. To the best of their knowledge and information, the Company and
its subsidiaries possess and are in compliance with all permits issued by
the appropriate regulatory body or agency necessary to conduct the
businesses now operated by them, except where the failure to so possess or
comply with any permit would not have, singly or in the aggregate, a
material adverse effect on the business or financial condition of the
Company and its subsidiaries considered as one enterprise. To the best of
their knowledge and information, there are no proceedings, pending or
threatened, which if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the business or financial
condition of the Company and its subsidiaries considered as one enterprise.
Q. Except as described in the Prospectus, to the best of their
knowledge and information, there are no persons with registration or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.
R. The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
S. All sales of the Company's capital stock during the three years
immediately prior to the
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<PAGE> 29
date hereof were at all relevant times duly registered or exempt from the
registration requirements of the 1933 Act.
(ii) The favorable opinion, dated as of
the Closing Date, of Venture Law Group & Professional Corporation,
counsel for the Underwriters with respect to the issuance and sale of
the Securities, the Registration Statement and the Prospectus and such
other related matters as the Underwriters shall reasonably request.
(iii) The favorable opinion, dated as of
the Closing Date, of Hughes & Luce, L.L.P., counsel for the Selling
Stockholders with respect to the sale of the Securities, the
Registration Statement and the Prospectus and such related matters as
the Underwriter shall reasonably request, in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
A. Each Custody Agreement has been duly executed and delivered by
each Selling Stockholder and the execution and delivery of this Agreement
on behalf of each of the Selling Stockholders by the Attorneys-in-Fact, or
any of them, has been duly authorized by all necessary action (whether
corporate or other) by each Selling Stockholder and constitutes legal,
valid, binding and enforceable instruments of each of the Selling
Stockholders.
B. To the best of their knowledge and information, each Selling
Stockholder has full right, power and authority and any approval required
by law to sell, transfer and deliver the Securities to be offered by such
Selling Stockholder pursuant to this Agreement.
C. By delivery of a certificate or certificates representing the
Securities to be offered by a Selling Stockholder pursuant to this
Agreement, and upon the receipt of payment therefor as contemplated herein,
such Selling Stockholder will transfer to the Underwriters who have
purchased such Securities good and marketable title to such Securities,
free and clear of any pledge, lien, security interest, charge, claim,
equity or encumbrance of any kind.
D. The execution and delivery of this Agreement and the Custody
Agreement by the Selling Stockholders and the consummation of the
transactions contemplated herein and therein will
29
<PAGE> 30
not conflict with, constitute a breach of, or a default under any material
agreement, indenture, mortgage, deed, trust, lease or other instrument or
agreement known to such counsel to which any Selling Stockholder is a party
or by which any of them or any of their assets or property is bound, or
violate the charter documents, by-laws, partnership agreement or comparable
governing document of any Selling Stockholders or any statute, law,
regulation, filing, judgment, injunction, order or decree known to such
counsel to be applicable to any Selling Stockholder or to any of the
property or assets of any Selling Stockholder, except for any such
conflicts, breaches, defaults or violations that would not have a material
adverse effect on the ability of such Selling Stockholder to consummate the
transactions contemplated by this Agreement and by the Custody Agreement;
and
(iv) In giving their opinions required by
subsections (b)(i), b)(ii) and (b)(iii), respectively, of this Section
10, and Venture Law Group & Professional Corporation shall each
additionally state that nothing has come to their attention that would
lead them to believe that the Registration Statement (except for
financial statements and schedules and other financial included
therein, as to which counsel need make no statement), at the time it
became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (except for financial statements and schedules and other
financial data included therein, as to which counsel need make no
statement), at the date hereof (unless the term "Prospectus" refers to
a prospectus which has been provided to the Underwriters by the
Company for use in connection with the offering of the Securities
which differs from the Prospectus on file at the Commission at the
time the Registration Statement becomes effective, in which case at
the time it is first provided to the Underwriters for such use) or at
the Closing Date or the Option Closing Date, as the case may be,
included or includes an untrue statement of a material fact or omitted
or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
c. (i) There shall not have been, since the date hereof or since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, (ii) the representations and
warranties of the Company in Section 7 hereof shall be true and correct with
the same force and effect as though expressly made at and as of the Closing
Date, except to the extent that any such representation or warranty relates to
a specific date, (iii) the Company shall have complied in all material respects
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Date, (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been initiated or threatened by the Commission and (v)
Vector shall have received a certificate, dated the Closing Date and signed by
the President or any Vice President and the chief financial or accounting
officer of the Company to the effect set forth in clauses (i), (ii), (iii) and
(iv) above.
d. At the time of the execution of this Agreement, the Underwriters
shall have received from Ernst & Young L.L.P. a letter dated such date, in form
and substance satisfactory to the Underwriters, to the effect that (i) they are
independent public accountants with respect to the Company and its subsidiaries
within the meaning of the 1933 Act and the 1933 Act Regulations, (ii) it is
their opinion that the financial statements and supporting schedules included
in the Registration Statement and covered by their opinions therein comply as
to form in all material respects with the applicable accounting requirements of
the 1933 Act and the 1933 Act Regulations, (iii) based upon limited procedures
set forth in detail in such letter, nothing has come to their attention which
causes them to believe that (A) the unaudited financial statements and
supporting schedules of the Company and its subsidiaries included in the
Registration Statement do not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or are not presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement or (B)
at a specified date not more than five days prior to the date of this
Agreement, there has been any change in the capital stock of the Company or any
increase in the consolidated long-term debt of the Company and its subsidiaries
or any decrease in consolidated net current assets or net assets as compared
with the amounts shown in the [_____________] balance sheet included in the
Registration Statement or, during the period from [_____________] to a
specified date not more than five days prior to the date of this Agreement,
there were any decreases, as compared with the corresponding period in the
preceding year, in consolidated revenues, net income or net income per share of
the Company and its subsidiaries, except in all instances for changes,
increases or decreases which the
30
<PAGE> 31
Registration Statement and the Prospectus disclose have occurred or may occur
and (iv) in addition to the examination referred to in their opinions and the
limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to
certain amounts, percentages and financial information which are included in
the Registration Statement and Prospectus and which are specified by the
Underwriters, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and
other records of the Company and its subsidiaries identified in such letter.
e. The Underwriters shall have received from Ernst & Young L.L.P. a
letter, dated as of the Closing Date, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (d) of this
Section, except that the specified date referred to shall be a date not more
than five days prior to the Closing Date.
f. The Securities shall have been approved for listing on NASDAQ.
g. (i) the representations and warranties of each Selling Stockholder
set forth in Section 8 and in any certificate by or on behalf of any Selling
Stockholder delivered pursuant to the provisions hereof shall be true and
correct with the same force and effect as though expressly made at and as of
the Closing Date, except to the extent that any such representation or warranty
relates to a specific date, and (ii) each Selling Stockholder shall have
complied in all material respects with all agreements and satisfied in all
material respects all conditions on its part to be performed or satisfied at or
prior to the Closing Date.
h. In the event that the Underwriters exercise their option provided
in Section 2 hereof to purchase all or any portion of the Option Securities,
the representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company hereunder shall be true
and correct as of the Option Closing Date and, at the relevant Option Closing
Date, the Underwriters shall have received:
(1) A certificate, dated such Option Closing Date, of the President
or any Vice President of the Company and of the chief financial or
accounting officer of the Company confirming that the certificate delivered
at the Closing Date pursuant to Section 10(c) hereof remains true and
correct as of such Option Closing Date.
(2) The favorable opinion of counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated such Option
Closing
31
<PAGE> 32
Date, relating to the Option Securities to be purchased on such Option
Closing Date and otherwise to the same effect as the opinion required by
Sections 10(b)(i) and 10(b)(iii) hereof.
(3) The favorable opinion of Skadden, Arps, Slate, Meagher & Flom,
counsel for the Underwriters, dated such Option Closing Date, relating to
the Option Securities to be purchased on such Option Closing Date and
otherwise to the same effect as the opinion required by Sections 10(b)(ii)
and 10(b)(iv) hereof.
(4) A letter from Ernst & Young, L.L.P. in form and substance
satisfactory to the Underwriters and dated such Option Closing Date,
substantially the same in form and substance as the letter furnished to the
Underwriters pursuant to Section 10(e) hereof, except that the "specified
date" in the letter furnished pursuant to this Section 10(h)(4) shall be a
date not more than five days prior to such Option Closing Date.
i. Counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated and
related proceedings, or in order to evidence the accuracy of any of the
representations or warranties or the fulfillment of any of the conditions
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities as herein contemplated shall be
satisfactory in form and substance to the Underwriters and counsel for the
Underwriters.
Any certificate or document signed by any officer of the Company or any
Attorney-in-Fact or any Selling Stockholder and delivered to you, as
Representatives of the Underwriters, or to counsel for the Underwriters, shall
be deemed a representation and warranty by the Company, the Selling
Stockholders or the particular Selling Stockholder, as the case may be, to each
Underwriter as to the statements made therein.
11. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by them
it of their its obligations hereunder: (i) the preparation, printing or
reproduction, and filing with the Commission of the Registration Statement
(including financial statements and exhibits thereto), each preliminary
prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air
freight and charges for counting and packaging) of such copies of the
Registration Statement, each
32
<PAGE> 33
preliminary prospectus, the Prospectus, and all amendments or supplements to
any of them as may be reasonably requested for use in connection with the
offering and sale of the Securities; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Securities,
including any stamp taxes in connection with the original issuance and sale of
the Securities; (iv) the printing (or reproduction) and delivery of this
Agreement, the preliminary and supplemental Blue Sky Memoranda and all other
agreements or documents printed (or reproduced) and delivered in connection
with the original issuance and sale of the Securities; (v) the registration of
the Common Stock under the 1934 Act and the listing of the Securities on
NASDAQ; (vi) the registration or qualification of the Securities for offer and
sale under the securities or Blue Sky laws of the several states as provided in
Section 5(g) hereof (including the reasonable fees, expenses and disbursements
of counsel for the Underwriters relating to the preparation, printing or
reproduction, and delivery of the preliminary and supplemental Blue Sky
Memoranda and such registration and qualification); (vii) the filing fees and
the fees and expenses of counsel for the Underwriters incident to securing any
required review by the NASD; and (vii) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company and the Selling Stockholders.
12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by or on behalf of the
parties hereto; or (ii) if, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the
Securities may commence, when notification of the effectiveness of the
Registration Statement or such post-effective amendment has been released by
the Commission. Until such time as this Agreement shall have become effective,
it may be terminated by the Company, by notifying you, or by you, as
Representatives of the several Underwriters, by notifying the Company and the
Selling Stockholders.
If one or more of the Underwriters shall fail on the Closing Date to
purchase the Initial Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the Representatives shall
have the right, within 24 hours thereafter, to make arrangements for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
a. if the number of Defaulted Securities does not exceed 10% of the
number of Initial Securities, the non-defaulting
33
<PAGE> 34
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to
the underwriting obligations of all non-defaulting Underwriters, or
b. if the number of Defaulted Securities exceeds 10% of the number of
Initial Securities, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement, either the Representatives or the Company shall have the
right to postpone the Closing Date for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 12.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. TERMINATION OF AGREEMENT. The Underwriters may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing
Date or Option Closing Date, as the case may be, (i) if there has been, since
the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement, any material adverse
change, any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise, whether or not arising in the ordinary course of business, (ii)
if there has occurred any change in the financial markets in the United States
or elsewhere or any outbreak of hostilities or escalation thereof or other
calamity or crisis the effect of which is such as to make it, in your
judgement, impracticable or inadvisable to market the Securities or to enforce
contracts for the sale of the Securities, (iii) if trading in the Common Stock
has been suspended by the Commission, or if trading generally on such exchange
or markets the American Stock Exchange, the New York Stock Exchange or in the
over-the-counter markets has been suspended, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities have been
required, by such exchange or markets or by order of the Commission or any
other governmental authority, or if a banking moratorium has been declared by
either Federal, New York or Illinois authorities, (iv) the enactment,
publication,
34
<PAGE> 35
decree or other promulgation of any Federal or state statute, regulation, rule
or order of any court or other governmental authority which in your judgement
materially and adversely affects or will materially or adversely affect the
business or operations of the Company and its subsidiaries or (v) the taking of
any action by any Federal, state or local government or agency in respect of
its monetary or fiscal affairs which in your judgement has a material adverse
effect on the securities markets in the United States, and would in your
judgement make it impracticable or inadvisable to market the Securities or to
enforce any contract for the sale thereof.
Notice of such termination may be given by telegram, telecopy or
telephone and shall be subsequently confirmed by letter.
14. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside front cover page, and the statements in the first through [ ]
paragraphs under the caption "Underwriting" in any preliminary prospectus and
in the Prospectus constitute the only information furnished by or on behalf of
the Underwriters through you as such information is referred to in Sections
7(b) and 9 hereof.
15. MISCELLANEOUS. Except as otherwise provided in Sections 5, 12
and 13 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company or the Selling
Stockholders at the office of the Company at, Quest Medical, Inc., One
Allentown Parkway, Allen, Texas 75002, Attention: Thomas Thompson, Chairman; or
(ii) if to you, as Representatives of the several Underwriters, care of Vector
Securities International, Inc., 1751 Lake Cook Road, Suite 350, Deerfield,
Illinois 60015, Attention: .
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, the other
persons referred to in Section 9 hereof and the Selling Stockholders and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Securities in his status as such purchaser.
35
<PAGE> 36
16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois
applicable to contracts made and to be performed within the State of Illinois.
17. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers and directors and other persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
QUEST MEDICAL, INC.
By .......................
President and Chief
Executive Officer
Each of the Selling Stockholders
named in Schedule I hereto
By ..........................
Attorney-in-Fact
By .......................
Attorney-in-Fact
36
<PAGE> 37
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
VECTOR SECURITIES INTERNATIONAL, INC.
RAUSCHER PIERCE REFSNES, INC.
As Representatives of the Several Underwriters
By VECTOR SECURITIES INTERNATIONAL, INC.
By ............................
Vice President
37
<PAGE> 38
SCHEDULE I
[NAME OF COMPANY]
<TABLE>
<CAPTION>
Number of
Selling Stockholders Initial Securities
- -------------------- ------------------
<S> <C>
William Borkan
Burton Borkan
John Gula
--------------
Total........ ______________
</TABLE>
38
<PAGE> 1
EXHIBIT 2.3
September 23, 1995
Mr. William N. Borkan
3364 North East 167th Street
North Miami Beach, Florida 33160
RE: Neuromed, Inc.
Dear Bill:
Reference is made to the February 10, 1995 Agreement for the Purchase and Sale
of All of the Issued Capital Stock of Neuromed, Inc. between Quest Medical,
Inc. ("Quest") and you, as amended (the "Purchase Agreement"). When executed by
Quest and you, this letter will constitute an agreement between Quest and you
with respect to the matters covered herein.
In consideration of the mutual covenants contained herein, Quest and you agree
as follows:
1. You hereby agree to resign as a member of the board of directors of
Quest at the time this agreement is executed. You hereby fully and completely
release and discharge Quest and its management and directors of any and all
liability and obligations under Section 7.6 of the Purchase Agreement, and
Section 7.6 shall be null and void and of no further force and effect, subject
to possible reinstatement pursuant to 4.b. hereof. The obligations contained
in the Agreement Regarding Confidential Information and Solicitation dated June
22, 1995 signed by you will continue in full force and effect.
2. You agree to sign and deliver to Quest or Ernst & Young, at the time
this letter is executed, the management representations requested of you by
Ernst & Young with respect to their audits of the financial statements of
Neuromed for the fiscal years ended October 31, 1993 and 1994, in the form of
Exhibit 1 hereto.
3. Contemporaneously with (or immediately before if required by the
underwriters) the completion of the public offering referred to in 4 hereof,
Quest will issue to you 200,000 shares of Quest stock as the amount of stock
due to you (one-half of the Contingent Consideration) with respect to the First
Determination Period (as defined in Schedule 1.2) (the "1995 Additional
Stock"), and, on or before January 10, 1996, Quest will pay to you the sum of
$1,500,000 in satisfaction of the cash portion (one-half) of the Contingent
Consideration due to you with respect to the First Determination Period, in
full and complete satisfaction and discharge of Quest's
<PAGE> 2
Mr. William N. Borkan
September 23, 1995
Page 2
obligations under Section 1.2(iii) and Schedule 1.2 (Contingent Consideration)
of the Purchase Agreement with respect to the First Determination Period. If
the public offering referred to in paragraph 4 hereof is completed and all of
your stock is sold, Quest's obligations with respect to the Second
Determination Period (as defined in Schedule 1.2) are hereby converted solely
to a monetary obligation, and Quest will be obligated to pay to you, on or
before January 10, 1997, the sum of (a) an amount equal to the product of (1)
the price per share (net of underwriting and brokerage discounts, fees and
commissions and expenses of the offering) of Quest stock in such public
offering times (2) the number of shares of Quest stock (one-half of the
Contingent Consideration) to which you would have been entitled for the Second
Determination Period plus (b) the cash amount (the other half of the Contingent
Consideration) to which you are entitled for the Second Determination Period).
If and when Contingent Consideration for the Second Determination Period
becomes due and payable, if Quest determines that less than the maximum amount
is payable, you will be entitled, upon written request, to conduct, at your
expense, a reasonable examination of the books and records of Quest related to
the Neuromed Business (as defined on Schedule 1.2), during normal business
hours.
4. Quest has decided to commence preparation for a public offering of
common stock to be completed on or before November 30, 1995.
a. If, by September 30, 1995, Quest delivers to you a letter of
intent or underwriting commitment from an investment banker for a
public offering which includes all of your stock (including the 1995
Additional Stock) or files a registration statement which includes all
of your stock, you hereby commit and agree to and will include all of
your stock in such offering. As used in this letter, "your stock"
means your stock in Quest owned on the date hereof plus the 1995
Additional Stock.
b. If Quest delivers such letter of intent or underwriting
commitment or files such registration statement by September 30, 1995,
Quest will complete the offering by November 30, 1995, failing which 1
and 3 of this agreement will be null and void and of no force and
effect, and Quest and Borkan will be relegated to their respective
rights and obligations under the Purchase Agreement with respect to
the subject matter thereof.
c. Completion of a registration of your stock pursuant to
subparagraph (a) preceding will be deemed to satisfy Quest's
obligations under Section 2(a) of the Registration Rights Agreement
with respect to your existing Quest stock and the 1995
<PAGE> 3
Mr. William N. Borkan
September 23, 1995
Page 3
Additional Stock. The provisions of the Registration Rights Agreement
with respect to registration procedures, underwriting,
indemnification, payment of expenses and payment of underwriting
discounts, fees and other compensation in connection with any offering
or registration pursuant to the foregoing provisions of this paragraph
4 shall be applicable.
d. You acknowledge that you are aware of your contractual and
legal confidentiality obligations with respect to Quest and understand
that confidentiality with respect to Quest and the prospective public
offering is particularly important and sensitive until the completion
or abandonment of such offering and that you may not trade, and may
not aid, abet or encourage anyone else in the trading, of Quest stock
until the completion or abandonment of such offering. Nothing in the
foregoing sentence is intended to relieve you of any confidentiality
obligations which you may have after the completion or abandonment of
such offering. You also acknowledge that you understand that a copy
of this agreement may be filed with the Securities and Exchange
Commission by Quest.
If the foregoing correctly states our agreement, please sign in the space
provided below, whereupon this letter will become a binding agreement between
Quest and you.
QUEST MEDICAL, INC. ACCEPTED AND AGREED TO:
By /s/ THOMAS C. THOMPSON /s/ WILLIAM N. BORKAN
------------------------------ ------------------------------
Thomas C. Thompson, President William N. Borkan
cc: Jeffrey Lefcourt Kenneth Sawyer
Stephan Haimo Larry Martin
F. Robert Merrill III Linton E. Barbee
Kenneth Hawari
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
MEDICOR, INC.
________________________________________________________________________________
I, the undersigned natural person of the age of 18 years or more,
acting as an incorporator of a corporation (hereinafter called the
"Corporation") under the Texas Business Corporation Act, do hereby adopt the
following articles of incorporation for the Corporation:
ARTICLE ONE
The name of the Corporation is Medicor, Inc.
ARTICLE TWO
The period of duration of the Corporation is perpetual.
ARTICLE THREE
The purpose for which the Corporation is organized is to engage in the
transaction of any and all lawful business for which corporations may be
incorporated under the Texas Business Corporation Act.
ARTICLE FOUR
The Corporation shall have authority to issue two million shares of
common stock, no par value ("Common Stock"). Each share of Common Stock shall
have identical rights and privileges in every respect.
ARTICLE FIVE
No holder of any shares of Common Stock shall have any preemptive or
preferential right to receive, purchase, or subscribe to (a) any unissued or
treasury shares of any class of stock (whether now or hereafter authorized) of
the Corporation, (b) any obligations, evidences of indebtedness, or other
securities of the Corporation convertible into or exchangeable for, or carrying
or accompanied by any rights to receive, purchase, or subscribe to, any such
unissued or treasury shares, (c) any right of subscription to or right to
receive, or any warrant or option for the purchase of, any of the foregoing
securities, or (d) any other securities that may be issued or sold by the
Corporation.
1
<PAGE> 2
ARTICLE SIX
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of $1,000, consisting of
money, labor done, or property actually received.
ARTICLE SEVEN
Cumulative voting for the election of directors is expressly denied
and prohibited.
ARTICLE EIGHT
No contract or other transaction between the Corporation and any other
person (as used herein the term "person" means an individual, firm, trust,
partnership, joint venture, association, corporation, or other entity) shall be
affected or invalidated by the fact that any director of the Corporation is
interested in, or is a member, director, or an officer of, such other person,
and any director may be a party to or may be interested in any contract or
transaction of the Corporation or in which the Corporation is interested; and
no contract, act, or transaction of the Corporation with any person shall be
affected or invalidated by the fact that any director of the Corporation is a
party to, or interested in, such contract, act, or transaction, or in any way
connected with such person. Each and every person who may become a director of
the Corporation is hereby relieved from any liability that might otherwise
exist from contracting with the Corporation for the benefit of himself or any
person in which he may be in any way interested; provided that the fact of such
interest shall have been disclosed to or shall be known by the other directors
or the shareholders of the Corporation, as the case may be, acting upon or with
reference to such act, contract, or transaction, even though the presence at a
meeting or vote or votes of such interested director might have been necessary
to obligate the Corporation upon such act, contract, or transaction.
ARTICLE NINE
To the extent permitted by applicable law, and by resolution or other
proper action of the board of directors of the Corporation, the Corporation may
indemnify (a) any present or former director or officer of the Corporation, (b)
any other employee or agent of the Corporation, and (c) any other person
serving at the request of the Corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or
for profit, partnership, joint venture, association, trust, or other
enterprise, against expenses, including attorneys fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred in connection with
any threatened, pending, or completed action, suit, or proceeding to which any
such person is, or is threatened to be made, a party and which may arise by
reason of the fact he is or was a person occupying any such office or position.
2
<PAGE> 3
ARTICLE TEN
The Corporation shall have the authority to purchase, directly or
indirectly, its own shares to the extent of the aggregate of the unrestricted
capital surplus available therefor and unrestricted reduction surplus available
therefor, without submitting such purchase to a vote of the shareholders of the
Corporation.
ARTICLE ELEVEN
Any action of the Corporation which, under the provisions of the Texas
Business Corporation Act, is required to be authorized or approved by the
holders of two-thirds or any other specified fraction which is in excess of
one-half or any specified percentage which is in excess of 50%, of the
outstanding shares (or any class or series thereof) of the Corporation shall,
notwithstanding any such provisions of the Texas Business Corporation Act, be
deemed effectively and properly authorized or approved if authorized or
approved by the vote of the holders of more than 50% of the outstanding shares
entitled to vote thereon (or, if the holders of any class or series of the
Corporation's shares shall be entitled by the Texas Business Corporation Act to
vote thereon separately as a class, by the vote of the holders of more than 50%
of the outstanding shares of each such class or series). Nothing contained in
this article is intended to require shareholder authorization or approval of
any action of the Corporation whatsoever unless such authorization or approval
is specifically required by the other provisions of these articles of
incorporation, the bylaws of the Corporation, or by the Texas Business
Corporation Act.
ARTICLE TWELVE
The post office address of the initial registered office of the
Corporation is 725 S. Central Expressway, Suite B-5, Richardson, Texas 75080,
and the name of its initial registered agent at such address is Thomas C.
Thompson.
ARTICLE THIRTEEN
The number of directors constituting the initial board of directors of
the Corporation is three, and the names and addresses of the persons who are to
serve as directors until the first annual meeting of shareholders and until
their successors are elected and qualified are:
NAME ADDRESS
Thomas C. Thompson 725 S. Central Expressway, Suite B-5
Richardson, Texas 75080
John A. Gula 7621 LaSabrina
Dallas, Texas 75248
3
<PAGE> 4
William R. Hampton, M.D. 902 Frostwood
Houston, Texas 77024
ARTICLE FOURTEEN
The name and address of the incorporator is:
NAME ADDRESS
Phillip J. Kushner 4700 First International Building
Dallas, Texas 75270
IN WITNESS WHEREOF, I have hereunto set my hand this 2nd day of May,
1979.
/s/ Phillip J. Kushner
Phillip J. Kushner
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
I, FRANCES E. ERICKSON, a Notary Public, do hereby certify that on
this 2nd day of May, 1979, personally appeared before me PHILLIP J. KUSHNER,
who being by me first duly sworn, declared that he is the person who signed the
foregoing document as incorporator and that the statements therein contained
are true.
/s/ Frances E. Erickson
Notary Public in and for
Dallas County, Texas
4
<PAGE> 5
ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
MEDICOR, INC.
Pursuant to the provisions of the Texas Business Corporation Act, the
undersigned Corporation adopts the following Articles of Amendment to its
Articles of Incorporation, which change the corporate name of the Corporation.
ARTICLE ONE
The name of the corporation is Medicor, Inc.
ARTICLE TWO
As of January 4, 1980, the holders of all issued and outstanding
shares of capital stock of the Corporation adopted the following amendment to
the Articles of Incorporation of the Corporation, which amends ARTICLE ONE of
the Articles of Incorporation to read in its entirety as follows:
ARTICLE ONE
The name of the Corporation is Quest Medical, Inc.
ARTICLE THREE
The number of shares of capital stock of the Corporation outstanding
at the time of such adoption was 479,125; and the number of shares entitled to
vote thereon was 479,125.
ARTICLE FOUR
The holders of all of the shares outstanding and entitled to vote on
the foregoing amendment signed a consent in writing adopting such amendment.
ARTICLE FIVE
Such amendment does not effect a change in the amount of stated
capital.
1
<PAGE> 6
DATED: January 4, 1980
MEDICOR, INC.
By: /s/ Thomas C. Thompson
Thomas C. Thompson, President
By: /s/ John A. Gula
John A. Gula, Secretary
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
I, a Notary Public, do hereby certify that on this 4th day of January,
1980, personally appeared before me Thomas C. Thompson, who being by me first
duly sworn, declared he is the President of the corporation executing the
foregoing document in the capacity therein set forth and declared that the
statements therein contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal on day and
year before written.
/s/
Notary Public in and for
Dallas County, Texas
COMMISSION EXPIRES:
9/23/80
2
<PAGE> 7
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
QUEST MEDICAL, INC.
Pursuant to Articles 4.02 and 4.04 of the Texas Business Corporation
Act, Quest Medical, Inc., a Texas corporation (the "Corporation"), adopts the
following amendments to the Articles of Incorporation of the Corporation:
FIRST
The name of the Corporation is Quest Medical, Inc.
SECOND
On February 11, 1981, the board of directors of the Corporation
adopted a resolution setting forth the following amendments to the Articles of
Incorporation of the Corporation and directing that such amendments be
submitted to a vote at a meeting of the shareholders of the Corporation.
1. Article Four of the Corporation's Articles of Incorporation is
amended to read in its entirety as follows:
ARTICLE FOUR
The Corporation shall have authority to issue 10,000,000 shares of
Common Stock, $.05 par value. Each share of Common Stock shall have
identical rights and privileges in every respect.
2. Article Twelve of the Corporation's Articles of Incorporation
is hereby amended to read in its entirety as follows:
ARTICLE TWELVE
The post office address of the registered office of the Corporation is
3312 Wiley Post Road, Carrollton, Texas 75006, and the name of its
registered agent at such office is Thomas C. Thompson.
1
<PAGE> 8
THIRD
The above amendments were duly adopted by the shareholders of the
Corporation on February 20, 1981.
FOURTH
The number of shares of Common Stock, no par value, of the Corporation
outstanding at the time of such adoption was 994,125 shares, and the number of
shares of Common Stock entitled to vote thereon was 718,500 shares. No other
capital stock was outstanding.
FIFTH
The number of shares of Common Stock, voting as a class, voted for
such amendment was 718,500; and no shares of Common Stock voted against such
amendment.
SIXTH
The foregoing amendments effect an exchange, reclassification, and
cancellation of issued shares in the following manner:
Upon the adoption of the foregoing amendments by the holders of the
Corporation's Common Stock and the due execution and filing of the
Articles of Amendment incorporating such amendment with the Secretary
of State of Texas, every share of the Common Stock, no par value, of
the Corporation authorized and outstanding as of the effective date of
such amendment shall be automatically converted into, and deemed for
all purposes to be three shares of Common Stock, $.05 par value, of
the Corporation, and written notice thereof shall forthwith be given
by the secretary of the Corporation to the holders of the outstanding
shares of the Common Stock in person or at their latest addresses
reflected on the records of the Corporation, together with notice of
the procedures hereinafter specified for exchange or replacement of
the certificates representing the Corporation's Common Stock, no par
value; and that upon surrender of the certificate(s) representing
shares of the Corporation's Common Stock, no par value, in proper form
for exchange and cancellation, by the registered holder thereof, or
for transfer in properly endorsed and due form for exchange and
transfer (together with all necessary stock powers and other
appropriate documentation respecting the transfer), or upon receipt of
evidence reasonably satisfactory to the executive officers of the
Corporation of the loss, theft, or destruction of the certificate(s)
therefor from the registered holder of such stock (together with
delivery of an indemnity bond in appropriate amount, payable to the
Corporation, if the executive officers shall so require it in their
reasonable judgment), the executive officers of the Corporation or
their designee, shall accept and cancel the certificate(s)
surrendered, if applicable, and shall issue to such holder or
2
<PAGE> 9
transferee, as the case may be, certificate(s), endorsed with such
legends as are required or are appropriate, in such denominations as
such holder or transferee may request, amounting in the aggregate to
three shares of the Corporation's Common Stock, $.05 par value, for
every share of the Corporation's Common Stock, no par value, as shall
have been surrendered, transferred, or for which satisfactory evidence
of loss, theft, or destruction shall have been received, and the
executive officers, or their delegate, shall enter the fact of
cancellation of the old share certificate(s) and the issuance of the
new certificate(s) for Common Stock, $.05 par value, and the
appropriate name or names of the holders of such shares represented by
the new certificate(s) on its stock records and transfer books; and
finally, that to the extent that the holders of the shares of the
Corporation's Common Stock, $.05 par value, shall not present their
shares for exchange or transfer in the manner specified above, such
failure to act shall in no circumstance affect their status as holders
of the Common Stock of the Corporation or the validity of their
shares, except that each certificate they thereafter hold representing
the Corporation's Common Stock, no par value, shall be deemed to
represent the appropriate number as determined above of the authorized
and outstanding shares of the Corporation's Common Stock, $.05 par
value, for every purpose.
SEVENTH
The manner in which the change in stated capital is effected, and the
amount of stated capital as changed, are as follows:
The stated capital is automatically reduced by $918,985 and that
amount is added to the reduction surplus account. The amount of stated capital,
as changed, is $149,119.
Dated as of the 24th day of February, 1981.
QUEST MEDICAL, INC.
By: /s/ Thomas C. Thompson
Thomas C. Thompson, President
By: /s/ John A. Gula
John A. Gula, Secretary
3
<PAGE> 10
STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
I, Thelma B. Macedo, a notary public, do hereby certify that on this
24th day of February, 1981, personally appeared before me Thomas C. Thompson.
who, being by me first duly sworn, declared that he is the President of Quest
Medical, Inc., that he signed the foregoing document of the corporation, and
that the statements therein contained are true.
/s/Thelma B. Macedo
Notary Public
My Commission Expires:
February 5, 1984
4
<PAGE> 11
ARTICLES OF MERGER
OF
MEDTEK CORPORATION
WITH AND INTO
QUEST MEDICAL, INC.
Pursuant to the provisions of Article 5.16 of the Texas Business
Corporation Act, as amended, the undersigned Quest Medical, Inc., a Texas
corporation ("Quest"), and Medtek Corporation, a New York corporation and
wholly owned subsidiary of Quest ("Medtek"), hereby file the following Articles
of Merger with the Secretary of State of the State of Texas.
FIRST: Attached hereto as Exhibit A is the Agreement and Plan of
Merger for the merger of Medtek with and into Quest (the "Merger"). Quest will
be the surviving entity.
SECOND: Quest was organized under the laws of the State of Texas on
May 3, 1979 and Medtek was organized under the laws of the State of New York on
September 21, 1976.
THIRD: The number and designation of each class of shares of Medtek
outstanding and entitled to vote on the Merger as a class consisted of
1,784,140 shares of common stock, par value $.01 per share ("Medtek Common
Stock"). Quest owns 100% of the outstanding shares of Medtek Common Stock.
FOURTH: A copy of the resolution adopted by the Board of Directors of
Quest on December 27, 1984 is attached hereto as Exhibit B.
EXECUTED as of the 27th day of December, 1984.
QUEST MEDICAL, INC.
By: /s/ Thomas C. Thompson
Thomas C. Thompson, President
ATTEST:
/s/ John A. Gula
John A. Gula, Secretary
(SEAL)
1
<PAGE> 12
EXECUTED as of the 27th day of December, 1984.
MEDTEK CORPORATION
By: /s/ Thomas C. Thompson
Thomas C. Thompson, President
ATTEST:
/s/ John A. Gula
John A. Gula, Secretary
(SEAL)
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
I, Linda D. Moses, a Notary Public, do hereby certify that on this
27th day of December, 1984, personally appeared before me Thomas C. Thompson,
who being by me first duly sworn, declared that he is the person who signed the
foregoing document and that the statements therein contained are true.
/s/ Linda D. Moses
Notary Public in and for
Dallas County, Texas
My Commission Expires:
11/24/86
2
<PAGE> 13
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
I, Linda D. Moses, a Notary Public, do hereby certify that on this
27th day of December, 1984, personally appeared before me John A. Gula, who
being by me first duly sworn, declared that he is the person who signed the
foregoing document and that the statements therein contained are true.
/s/ Linda D. Moses
Notary Public in and for
Dallas County, Texas
My Commission Expires:
11/24/86
3
<PAGE> 14
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
December 27, 1984 is entered into by and between Quest Medical, Inc., a Texas
corporation ("Quest") , and Medtek Corporation, a New York corporation
("Medtek").
WHEREAS, Medtek is a wholly-owned subsidiary of Quest; and
WHEREAS, Quest and Medtek desire to have Medtek merge with and into
Quest; and
WHEREAS, the terms of such merger (herein called the "Merger"), the
mode of carrying the same into effect, and such other facts, details, or
provisions as may be required or permitted to be stated in this Agreement are
hereinbelow set forth; and
WHEREAS, the Board of Directors of Quest deems the Merger desirable
and in the best interests of its shareholders and the Board of Directors of
Quest by unanimous written consent, has approved the terms and conditions of
this Agreement and the mode of carrying such Agreement into effect, as well as
the manner and basis of cancelling the outstanding shares of the common stock,
$.01 par value, of Medtek ("Medtek Common Stock").
NOW THEREFORE, in consideration of the premises and the mutual
agreements, covenants, and provisions herein contained, the parties hereto
agree as follows:
ARTICLE I
1.01. MERGER. At the Effective Time (as defined in Section 1.02),
Medtek shall be merged into Quest, the separate existence of Medtek shall
cease, and Quest as the surviving corporation shall continue to exist by virtue
of and shall be governed by the laws of the State of Texas.
1.02 EFFECTIVE TIME OF MERGER. On January 2, 1985 (or such earlier
or later date as may be agreed upon by Medtek and Quest), a Certificate of
Merger setting forth the information required by, and otherwise in compliance
with, the New York Business Corporation Law, shall be delivered for filing with
the office of the Secretary of State of New York and Articles of Merger setting
forth the information required by, and otherwise in compliance with, the Texas
Business Corporation Law shall be delivered for filing with the Secretary of
State of Texas, and the Merger shall become effective on the date and at the
time the Secretary of State of both states files a certificate of merger with
respect to the Merger (the time of such effectiveness is herein called the
"Effective Time").
1.03. EFFECT OF MERGER. At the Effective Time, Quest without further
action, all as provided by the laws of the States of New York and Texas, shall
succeed to, possess and enjoy all the rights, privileges, powers, immunities,
and franchises, of a public as well as of a private nature, of Medtek, all
debts due to Medtek on whatever account, and all and every other interest
4
<PAGE> 15
and asset of or belonging to Medtek shall be taken and deemed to be transferred
to and vested in Quest as effectually as they were vested in Medtek, without
further act or deed; the title to any real estate vested by deed or otherwise
in Medtek shall not revert or be in any way impaired by reason of the Merger;
all rights of creditors, and all liens upon property of Medtek shall be
preserved and unimpaired; all debts, obligations, liabilities, and duties of
Medtek shall thenceforth attach to Quest and may be enforced against Quest, and
Quest shall thenceforth be responsible and liable therefor to the same extent
as if such debts, obligations, liabilities, and duties had been incurred or
contracted by it; and any claim existing or action or proceeding pending by or
against Medtek may be prosecuted as if the Merger had not taken place, or Quest
may be substituted in place of Medtek. At any time or from time to time after
the Effective Time the last acting officers of Medtek shall, in the name of
Medtek, execute and deliver all such proper deeds, assignments, and other
instruments as Quest may deem necessary of desirable in order to vest, perfect,
or confirm Quest's title to and possession of all Medtek's property, rights,
privileges, powers, immunities, and franchises and otherwise to carry out the
purposes of this Merger Agreement.
1.04. ARTICLES OF INCORPORATION; BYLAWS.
(a) The Articles of Incorporation of Quest as in effect
at the Effective Time shall be and remain the Articles of
Incorporation of Quest, as the surviving corporation, until the same
shall be amended as provided by law.
(b) The Bylaws of Quest as in effect at the Effective
Time shall be and remain the bylaws of Quest, as the surviving
corporation, until the same shall thereafter be altered, amended, or
repealed in accordance with law, Quest's Articles of Incorporation,
and such Bylaws.
ARTICLE II
2.01. MEDTEK CAPITAL STOCK. All Medtek Common Stock owned by Quest
will automatically be canceled, without consideration, at the Effective Time.
ARTICLE III
3.01. EXPENSES. The parties shall pay their respective expenses
(including, without limitation, the fees, disbursement, and expenses of their
attorneys and accountants) in connection with the negotiation and preparation
of this Agreement and consummation of the transactions contemplated hereby.
3.02. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding between the parties hereto relating to the subject matter
hereof and supersedes any prior agreements and understandings relating to the
subject matter hereof.
5
<PAGE> 16
3.03. NOTICES. Any notice or other communication required or which
may be given hereunder shall be in writing and either be delivered personally
or deposited in the United States mail, first class, certified, return receipt
requested, postage pre-paid, and shall be deemed given when so delivered
personally, or if mailed, three business days after the date of such mailing,
and shall be addressed as follows:
If to Quest to: Quest Medical, Inc.
3312 Wiley Post Road
Carrollton, Texas 75006
If to Medtek to: Medtek Corporation
3312 Wiley Post Road
Carrollton, Texas 75006
Any party may change its address to which notices or other
communications are to be sent by giving written notice of any such change in
the manner provided herein for giving notice.
3.04. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas, except to the
extent that the New York Business Corporation Law governs the internal
corporate affairs of Medtek.
3.05. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute, collectively, one and the same instrument.
3.06. SECTION HEADINGS. The section headings contained in this
Agreement are inserted for convenience of reference only and shall not affect
the meaning or interpretation hereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the 27th day of December, 1984.
QUEST MEDICAL, INC.
ATTEST: /s/ John A. Gula By: /s/ Thomas C. Thompson
John A. Gula Thomas C. Thompson
Secretary President
6
<PAGE> 17
MEDTEK CORPORATION
ATTEST: /s/ John A. Gula By: /s/ Thomas C. Thompson
John A. Gula Thomas C. Thompson
Secretary President
7
<PAGE> 18
ARTICLES OF MERGER
OF
QUEST HOLDING CORPORATION
WITH AND INTO
QUEST MEDICAL, INC.
Pursuant to the provisions of Article 5.16 of the Texas Business
Corporation Act, as amended, the undersigned Quest Medical, Inc., a Texas
corporation ("Quest"), and Quest Holding Corporation, a Texas corporation and
wholly owned subsidiary of Quest ("QHC"), hereby file the following Articles of
Merger with the Secretary of State of the State of Texas.
FIRST: Attached hereto as Exhibit A is the Agreement and Plan of
Merger for the merger of QHC with and into Quest (the "Merger"). Quest will be
the surviving entity.
SECOND: Quest was organized under the laws of the State of Texas in
May 1979 and QHC was organized under the laws of the State of Texas in
September 1982.
THIRD: The number and designation of each class of shares of QHC
outstanding and entitled to vote on the Merger as a class consisted of 1,000
shares of common stock, par value $.01 per share ("QHC Common Stock"). Quest
owns 100% of the outstanding shares of QHC Common Stock.
FOURTH: A copy of the resolutions adopted by the Board of Directors of
Quest effective as of January 10, 1985 is attached hereto as Exhibit B.
EXECUTED as of the 10th day of January, 1985.
QUEST MEDICAL, INC.
By: /s/ Thomas C. Thompson
Thomas C. Thompson, President
1
<PAGE> 19
ATTEST:
/s/ John A. Gula
John A. Gula, Secretary
(SEAL)
EXECUTED as of the 10th day of January, 1985.
QUEST HOLDING CORPORATION
By: /s/ Thomas C. Thompson
Thomas C. Thompson, President
ATTEST:
/s/ Robert R. Merrill
Robert R. Merrill, Secretary
(SEAL)
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
I, Thelma B. Macedo, a Notary Public, do hereby certify that on this
10th day of January, 1985, personally appeared before me Thomas C. Thompson,
who being by me first duly sworn, declared that he is the person who signed the
foregoing document and that the statements therein contained are true.
/s/Thelma B. Macedo
Notary Public in and for
________ County, Texas
My Commission Expires:
2/5/88
2
<PAGE> 20
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
I, Thelma B. Macedo, a Notary Public, do hereby certify that on this
10th day of January, 1985, personally appeared before me John A. Gula, who
being by me first duly sworn, declared that he is the person who signed the
foregoing document and that the statements therein contained are true.
/s/ Thelma B. Macedo
Notary Public in and for
________ County,Texas
My Commission Expires:
2/5/88
3
<PAGE> 21
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
January 10, 1985 is entered into by and between Quest Medical, Inc., a Texas
corporation ("Quest"), and Quest Holding Corporation, a Texas corporation
("QHC").
WHEREAS, QHC is a wholly-owned subsidiary of Quest; and
WHEREAS, Quest and QHC desire to have QHC merge with and into Quest;
and
WHEREAS, the terms of such merger (herein called the "Merger"), the
mode of carrying the same into effect, and such other facts, details, or
provisions as may be required or permitted to be stated in this Agreement are
hereinbelow set forth; and
WHEREAS, the Board of Directors of Quest deems the Merger desirable
and in the best interests of its shareholders and the Board of Directors of
Quest by unanimous written consent, has approved the terms and conditions of
this Agreement and the mode of carrying such Agreement into effect, as well as
the manner and basis of cancelling the outstanding shares of the common stock,
$.01 par value, of QHC ("QHC Common Stock").
NOW THEREFORE, in consideration of the premises and the mutual
agreements, covenants, and provisions herein contained, the parties hereto
agree as follows:
ARTICLE I
1.01. MERGER. At the Effective Time (as defined in Section 1.02),
QHC shall be merged into Quest, the separate existence of QHC shall cease, and
Quest as the surviving corporation shall continue to exist by virtue of and
shall be governed by the laws of the State of Texas.
1.02. EFFECTIVE TIME OF MERGER. On January 14, 1985 (or such earlier
or later date as may be agreed upon by QHC and Quest), Articles of Merger
setting forth the information required by, and otherwise in compliance with,
the Texas Business Corporation Law shall be delivered for filing with the
Secretary of State of Texas, and the Merger shall become effective on the date
and at the time the Secretary of State of Texas files a certificate of merger
with respect to the Merger (the time of such effectiveness is herein called the
"Effective Time").
1.03. EFFECT OF MERGER. At the Effective Time, Quest without further
action, all as provided by the laws of the State of Texas, shall succeed to,
possess and enjoy all the rights, privileges, powers, immunities, and
franchises, of a public as well as of a private nature, of QHC, all debts due
to QHC on whatever account, and all and every other interest and asset of or
belonging to QHC shall be taken and deemed to be transferred to and vested in
Quest as effectually as they were vested in QHC, without further act or deed;
the title to any real estate vested by deed or otherwise in QHC shall not
revert or be in any way impaired by reason of the Merger; all rights of
creditors, and all liens upon property of QHC shall be preserved unimpaired;
1
<PAGE> 22
all debts, obligations, liabilities, and duties of QHC shall thenceforth attach
to Quest and may be enforced against Quest, and Quest shall thenceforth be
responsible and liable therefor to the same extent as if such debts,
obligations, liabilities, and duties had been incurred or contracted by it; and
any claim existing or action or proceeding pending by or against QHC may be
prosecuted as if the Merger had not taken place, or Quest may be substituted in
place of QHC. At any time or from time to time after the Effective Time the
last acting officers of QHC shall, in the name of QHC, execute and deliver all
such proper deeds, assignments, and other instruments as Quest may deem
necessary of desirable in order to vest, perfect, or confirm Quest's title to
and possession of all QHC's property, rights, privileges, powers, immunities,
and franchises and otherwise to carry out the purposes of this Merger
Agreement.
1.04. ARTICLES OF INCORPORATION; BYLAWS.
(a) The Articles of Incorporation of Quest as in effect
at the Effective Time shall be and remain the Articles of
Incorporation of Quest, as the surviving corporation, until the same
shall be amended as provided by law.
(b) The Bylaws of Quest as in effect at the Effective
Time shall be and remain the bylaws of Quest, as the surviving
corporation, until the same shall thereafter be altered, amended, or
repealed in accordance with law, Quest's Articles of Incorporation,
and such Bylaws.
ARTICLE II
2.01. QHC CAPITAL STOCK. All QHC Common Stock owned by Quest will
automatically be canceled, without consideration, at the Effective Time.
ARTICLE III
3.01. EXPENSES. The parties shall pay their respective expenses
(including, without limitation, the fees, disbursement, and expenses of their
attorneys and accountants) in connection with the negotiation and preparation
of this Agreement and consummation of the transactions contemplated hereby.
3.02. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding between the parties hereto relating to the subject matter
hereof and supersedes any prior agreements and understandings relating to the
subject matter hereof.
3.03. NOTICES. Any notice or other communication required or which
may be given hereunder shall be in writing and either be delivered personally
or deposited in the United States mail, first class, certified, return receipt
requested, postage pre-paid, and shall be deemed given when so delivered
personally, or if mailed, three business days after the date of such mailing,
and shall be addressed as follows:
2
<PAGE> 23
If to Quest to: Quest Medical, Inc.
3312 Wiley Post Road
Carrollton, Texas 75006
If to QHC to: Quest Holding Corporation
3312 Wiley Post Road
Carrollton, Texas 75006
Any party may change its address to which notices or other
communications are to be sent by giving written notice of any such change in
the manner provided herein for giving notice.
3.04. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Texas.
3.05. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute, collectively, one and the same instrument.
3.06. SECTION HEADINGS. The section headings contained in
this Agreement are inserted for convenience of reference only and shall not
affect the meaning or interpretation hereof.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the 10th day of January, 1985.
QUEST MEDICAL, INC.
ATTEST: /s/ John S. Gula By: /s/ Thomas C. Thompson
John A. Gula Thomas C. Thompson
Secretary President
QUEST HOLDING CORPORATION
Attest: /s/ Robert R. Merrill By: /s/ Thomas C. Thompson
Robert R. Merrill Thomas C. Thompson
Secretary President
3
<PAGE> 24
RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS OF
QUEST MEDICAL, INC. ON JANUARY 10, 1985
1. APPROVAL OF MERGER AGREEMENT. RESOLVED, that each and every
term, provision and condition of, and all actions effected by, that certain
Agreement and Plan of Merger (the "Merger Agreement") attached as Exhibit A
hereto, by and between Medtek Corporation and the Corporation, a copy of which
has been previously submitted to and reviewed by each of the undersigned
directors of the Corporation, is hereby adopted and approved, and that the
officers of the Corporation are authorized, directed and empowered, on behalf
of the Corporation, to execute and deliver the Merger Agreement and to execute
and file the Articles of Merger described in the Merger Agreement.
2. GENERAL. RESOLVED, that the proper officers of the Corporation
hereby are severally authorized, empowered, and directed to sign, execute,
certify to, verify, acknowledge, deliver, accept, file, and record any and all
such instruments, agreements, and documents, and to take, or cause to be taken,
any and all such action, in the name and on behalf of the Corporation or
otherwise, as any such officer shall, in such officer's sole discretion, deem
necessary or desirable and in the best interest of the Corporation in order to
effect the purposes of the foregoing resolutions, and such officer's signature,
or such actions taken by such officer, shall be conclusive evidence that such
officer did deem same to be necessary or desirable and in the best interest of
the Corporation in order to effect such purposes.
<PAGE> 25
RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS OF
QUEST MEDICAL, INC. ON DECEMBER 27, 1984
1. APPROVAL OF MERGER AGREEMENT. RESOLVED, that each and every term,
provision and condition of, and all actions effected by, that certain Agreement
and Plan of Merger (the "Merger Agreement") attached as Exhibit A hereto, by
and between Medtek Corporation and the Corporation, a copy of which has been
previously submitted to and reviewed by each of the undersigned directors of
the Corporation, is hereby adopted and approved, and that the officers of the
Corporation are authorized, directed and empowered, on behalf of the
Corporation, to execute and deliver the Merger Agreement and to execute and
file the Articles of Merger described in the Merger Agreement.
2. GENERAL. RESOLVED, that the proper officers of the Corporation
hereby are severally authorized, empowered, and directed to sign, execute,
certify to, verify, acknowledge, deliver, accept, file, and record any and all
such instruments, agreements, and documents, and to take, or cause to be taken,
any and all such action, in the name and on behalf of the Corporation or
otherwise, as any such officer shall, in such officer's sole discretion, deem
necessary or desirable and in the best interest of the Corporation in order to
effect the purposes of the foregoing resolutions, and such officer's signature,
or such actions taken by such officer, shall be conclusive evidence that such
officer did deem same to be necessary or desirable and in the best interest of
the Corporation in order to effect such purposes.
<PAGE> 26
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF QUEST MEDICAL, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, Quest Medical, Inc. (the "Corporation") adopts the following
Articles of Amendment to the Articles of Incorporation of the Corporation:
ARTICLE ONE
The name of the corporation is Quest Medical, Inc.
ARTICLE TWO
The following amendment to the Articles of Incorporation was adopted
by the shareholders of the Corporation on November l9, 1987. The Amendment is
an addition of Article Fifteen to the Articles of Incorporation and reads in
its entirety as follows:
ARTICLE FIFTEEN
A director of the Corporation is not liable to the Corporation or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director, except that this article does not eliminate or limit
the liability of a director for:
(1) a breach of a director's duty of loyalty to the Corporation or
its shareholders;
(2) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law;
(3) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action
taken within the scope of the director's office;
(4) an act or omission for which the liability of a director is
expressly provided for by statute; or
(5) an act related to an unlawful stock repurchase or payment of a
dividend.
If the Texas Business Corporation Act, Texas Miscellaneous Corporation
Laws or related laws are amended after approval by the shareholders of this
Article Fifteen to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
applicable Texas law, as so amended. Any repeal or modification of the
foregoing paragraph by
1
<PAGE> 27
the shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE THREE
The number of shares of the corporation outstanding at the time of
such adoption was 7,433,476; and the number of shares entitled to vote thereon
was 7,433,476.
ARTICLE FOUR
The number of shares voted for the addition of Article Fifteen was
4,228,141; the number of shares voted against such addition was 195,379; and
the number of shares abstaining was 23,155.
Dated December 4, 1987.
QUEST MEDICAL, INC.
By: /s/Thomas C. Thompson
Title: President
2
<PAGE> 1
EXHIBIT 4.1
RIGHTS AGREEMENT
BETWEEN
QUEST MEDICAL, INC.
AND
MTRUST CORP, N.A.
AS
RIGHTS AGENT
Dated as of October 12, 1989
<PAGE> 2
QUEST MEDICAL, INC. RIGHTS AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3. Issue of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4. Form of Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6. Transfer, Split Up, Combination,
and Exchange of Right Certificates;
Mutilated, Destroyed, Lost, or Stolen
Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8. Cancellation and Destruction of
Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 9. Reservation and Availability of
Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 10. Preferred Shares Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 11. Adjustment of Purchase Price, Number
of Shares, or Number of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 12. Certificate of Adjusted Purchase Price
or Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 13. Consolidation, Merger, or Sale or Transfer
of Assets or Earning Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 15. Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 16. Agreement of Right Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 17. Right Certificate Holder Not Deemed
a Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 19. Merger, Consolidation, or Change of
Name of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 20. Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 21. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 22. Issuance of New Right Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 23. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 24. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 25. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 26. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 27. Successor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 28. Benefits of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 29. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 30. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 31. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 32. Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
Exhibit A - Form of Right Certificate
Exhibit B - Summary of Rights
ii
<PAGE> 4
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of October 12, 1989 (the "Agreement"),
between QUEST MEDICAL, INC., a Texas corporation (the "Company"), and MTRUST
CORP, N.A., a national banking association (the "Rights Agent").
RECITAL
WHEREAS, the Board of Directors of the Company has authorized and
declared a dividend of one common share purchase right (a "Right") for each
Common Share (as defined below) of the Company outstanding at the Close of
Business (as defined below) on October 23, 1989 (the "Record Date"), each Right
representing the right to purchase one-half Common Share, upon the terms and
subject to the conditions set forth in this Agreement, and has further
authorized and directed the issuance of one Right with respect to each Common
Share that becomes outstanding between the Record Date and the earliest of the
Distribution Date, the Redemption Date, and the Final Expiration Date (as such
terms are defined below).
THEREFORE, In consideration of the foregoing and the mutual agreements
set forth below, the parties to this Agreement hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS.
For purposes of this Agreement, the following terms have the indicated
meanings:
(a) "Acquiring Person" means any Person that, together with all
Affiliates and Associates of such Person, is the Beneficial Owner of 15% or
more of the Common Shares then outstanding. The term "Acquiring Person" shall
not include the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or any Subsidiary of the Company, or any Person holding
Common Shares for or pursuant to the terms of any such plan. For the purposes
of this Agreement, a Person who becomes an Acquiring Person by acquiring
beneficial ownership of 15% or more of the Common Shares at any time after the
date of this Agreement shall continue to be an Acquiring Person whether or not
such Person continues to be the Beneficial Owner of 15% or more of the Common
Shares outstanding.
(b) "Affiliate" and "Associate" have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act in effect on the date of this Agreement.
(c) A Person will be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities that:
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<PAGE> 5
(i) such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly in accordance
with the regulations under the Exchange Act in effect on the date of
this Agreement;
(ii) such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time or the
occurrence of any events or conditions) pursuant to any written or
oral agreement, arrangement, or understanding (other than the
ownership by underwriters or selling group members under customary
agreements with respect to abona fide public offering of securities),
or upon the exercise of conversion rights, exchange rights, rights
(other than these Rights), warrants, options, or otherwise; provided,
however, that a Person will not be deemed the Beneficial Owner of, or
to beneficially own, any security tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote or direct
or influence the voting of pursuant to any written or oral agreement,
arrangement, or understanding;provided, however, that a Person will
not be deemed the Beneficial Owner of, or to beneficially own, any
security if the agreement, arrangement, or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to
such Person in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable rules and
regulations of the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's
Affiliates or Associates has any written or oral agreement,
arrangement, or understanding (other than the ownership by
underwriters or selling group members under customary agreements with
respect to a bonafide public offering of securities) for the purpose
of acquiring, holding, voting (except to the extent contemplated by
the proviso t oSection 1(c)(ii)(B)), or disposing of any such
securities.
(d) "Board Approval" means that an action or the resolution
authorizing an action has been approved by both (i) a majority of the members
of the Board of Directors of the Company and (ii) a majority (but not less than
one) of the Continuing Directors then serving on the Company's Board of
Directors.
(e) "Business Day" means any day other than a Saturday, a Sunday,
or a day on which the Rights Agent is authorized or obligated by law or
executive order to close.
(f) "Close of Business" on any given date means 5:00 p.m., Dallas,
Texas time, on such date; provided, however, that if such date is not a
Business Day it means 5:00 p.m., Dallas, Texas time, on the next succeeding
Business Day.
(g) "Common Shares" when used with reference to the Company means
the shares of common stock, $0.05 par value, of the Company. "Common Shares"
when used with reference to any Person other than the Company means the capital
stock (or equity interest) with the greatest voting power of such other Person
or, if such other Person is a Subsidiary of another Person, the capital stock
(or equity interest) with the
2
<PAGE> 6
greatest voting power of the Person or Persons which ultimately control such
first-mentioned Person.
(h) "Continuing Director" means a director of the Company who (i)
is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person
and (ii) was either a member of the Board of Directors of the Company on the
date of this Agreement or who subsequently became a director of the Company and
whose initial election or initial nomination for election by the Company's
shareholders was approved by a majority of the Continuing Directors then on the
Board of Directors of the Company.
(i) The "current per share market price" of any security (a
"Security" for the purpose of this definition) on any date for the purpose of
any computation under this Agreement, will be deemed to be the average of the
daily closing prices per share of such Security for the thirty (30) consecutive
Trading Days immediately prior to such date; provided, however, that in the
event that the current per share market price of the Security is determined
during a period following (A) the announcement by the issuer of such Security
of (i) a dividend or distribution on such Security payable in shares of such
Security or securities convertible, directly or indirectly, into shares of such
Security, or (ii) any subdivision, combination, or reclassification of such
Security and (B) prior to the expiration of thirty (30) Trading Days after the
ex-dividend date for such dividend or distribution, or the record date for such
subdivision, combination, or reclassification, then, and in each such case,
the current per share market price will be appropriately adjusted to reflect
the current market price per share equivalent of such Security. The closing
price for each day will be the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Security is not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Security is
listed or admitted to trading or, if the Security is not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in
use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Security selected by the Board
of Directors of the Company.
(j) "Distribution Date" means the Close of Business on the tenth
(10th) day after the earlier to occur of (i) the Shares Acquisition Date or
(ii) the date any Person commences or publicly announces an intention to
commence a tender offer or exchange offer for the Common Shares which would
result in, upon the consummation of such offer, the Person making such offer,
together with all of its Affiliates and Associates, being the Beneficial Owner
of 20% or more of the Common Shares then outstanding (including any such date
that is after the date of this Agreement and prior to the issuance of the
Rights); provided, however, that if the tender offer or exchange offer that
gave rise to the Distribution Date is cancelled, terminated or
3
<PAGE> 7
otherwise withdrawn within ten (10) days of its announcement, such offer shall
be deemed never to have been made and no Distribution Date shall occur with
respect thereto.
(k) "Equivalent Common Shares" means any shares of the Company's
capital stock having substantially the same rights, privileges and preferences
as the Common Shares.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Final Expiration Date" means the Close of Business on October
12, 1999.
(n) "NASDAQ" means the National Association of Securities Dealers,
Inc. Automated Quotations System.
(o) "Permitted Transaction" means a stock acquisition or a tender
or exchange offer pursuant to a definitive agreement by which a Person (who is
not at the time an Acquiring Person) would become an Acquiring Person and which
has received Board Approval prior to the execution of the definitive agreement
providing for the acquisition or the public announcement of the offer, as the
case may be.
(p) "Person" means any individual, firm, corporation, partnership,
trust or other entity, and includes any successor (by merger or otherwise) of
such Person.
(q) "Purchase Price" means the price per Common Share at which the
Rights can initially be exercised as set forth on the Rights Certificate,
subject to adjustment as provided in this Agreement.
(r) A "Qualifying Offer" means an all-cash tender offer by a
Person who, at the time such offer is made and during the pendency of such
offer, is not an Acquiring Person or an Affiliate or Associate of an Acquiring
Person, for all outstanding shares of Voting Stock of the Company that are not
beneficially owned by such Person, which offer is made pursuant to Schedule
14D-1 (or any successor form) filed with the Securities and Exchange Commission
and which tender offer:
(i) provides that such tender offer will remain open for
at least ninety (90) days;
(ii) provides for the payment to tendering shareholders of
per share consideration at least equal to the highest per share
consideration paid (including all commissions, taxes, fees and other
costs paid on a per share basis) by the Person or Persons making the
tender offer and its/their Affiliates and Associates for such Voting
Stock within the twelve (12) month period preceding the commencement
of the tender offer;
(iii) results in the acquisition of at least a majority of
each class of the outstanding Voting Stock; and
4
<PAGE> 8
(iv) contains in the tender offer materials an
unconditional undertaking to acquire all of the remaining outstanding
Voting Stock of the Company in a second-step merger within 120 days
after the closing of the offer pursuant to which non-tendering
shareholders would be entitled to receive at least the same cash
consideration being offered in such tender offer.
(s) "Record Date" has the meaning set forth in the preamble to
this Agreement.
(t) "Redemption Date" means the Close of Business on the date at
which the Rights are redeemed as provided in Section 23 of this Agreement.
(u) "Redemption Price" means, initially, $0.01 per Right; provided
that the Redemption Price shall be appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date of this
Agreement.
(v) "Right" has the meaning set forth in the preamble to this
Agreement.
(w) "Right Certificate" means a certificate in substantially the
form of Exhibit A to this Agreement issued after the Distribution Date in
accordance with Section 3 of this Agreement.
(x) "Rights Agent" has the meaning set forth in the preamble to
this Agreement.
(y) "Securities Act" means the Securities Act of 1933, as amended.
(z) "Shares Acquisition Date" means the first date of a public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(aa) "Subsidiary" of any Person means any Person of which a
majority of the voting power of the voting equity securities or equity interest
is owned or controlled, directly or indirectly, by such Person.
(bb) "Summary of the Rights" means a summary of the terms of the
Rights in substantially the form of Exhibit B to this Agreement.
(cc) "Trading Day" means a day on which the principal national
securities exchange on which a security is listed or admitted to trading is
open for the transaction of business or, if a security is not listed or
admitted to trading on any national securities exchange, a Business Day.
(dd) "Trigger Event" means one or more of the following occurring
on or after a Shares Acquisition Date:
(i) any Acquiring Person or any Associate or Affiliate of
any Acquiring Person shall directly or indirectly (A) consolidate with
or merge with and into the
5
<PAGE> 9
Company or otherwise combine with the Company and the Company shall be
the continuing or surviving corporation of such merger or combination
and the Common Shares of the Company shall remain outstanding and
unchanged; (B) in one or more transactions transfer any assets to the
Company in exchange (in whole or in part) for shares of any Voting
Stock of the Company or for securities exercisable for or convertible,
directly or indirectly, into shares of Voting Stock of the Company or
otherwise obtain from the Company, with or without consideration, any
additional shares of any Voting Stock of the Company or securities,
rights or warrants exercisable for or convertible, directly or
indirectly, into shares of any Voting Stock of the Company (other than
in connection with (1) the exercise of a Right or Rights, (2) the
exercise or conversion of securities exercisable for or convertible
into Voting Stock of the Company which securities were outstanding
prior to the time the Acquiring Person became such and (3) a pro rata
distribution to all holders of any class of capital stock of the
Company or of its Subsidiaries); (C) sell, purchase, lease, exchange,
mortgage, pledge, license, transfer or otherwise dispose, in one or
more transactions, of, to, from or with, as the case may be, the
Company or any of its Subsidiaries, assets (including securities) on
terms and conditions less favorable to the Company or its Subsidiaries
than the Company or its Subsidiaries could reasonably be expected to
obtain in arm's length negotiation with an unaffiliated third party;
(D) engage in one or more transactions with the Company or any of its
Subsidiaries involving the sale, purchase, lease, exchange, mortgage,
pledge, transfer or other disposition of assets having an aggregate
fair market value of more than $5,000,000; or (E) receive the benefit,
directly or indirectly (except proportionately as a shareholder), of
any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Company or
any of its Subsidiaries; or
(ii) any Person (other than the Company, any of its
Subsidiaries, any employee benefit plan of the Company or its
Subsidiaries or any entity organized, appointed or established
pursuant to the terms of such plan), alone or together with its
Affiliates and Associates, shall beneficially own 20% or more of the
Common Shares then outstanding (unless each acquisition of Common
Shares which results in the beneficial ownership of such Person
equaling or exceeding 20% of the Common Shares is a Qualifying Offer
or a Permitted Transaction); or
(iii) any reclassification of securities (including any
reverse stock split), or recapitalization of the Company, or any
merger or consolidation of the Company with any of its Subsidiaries or
any other transaction or series of transactions (whether or not with
or into or otherwise involving an Acquiring Person or any of its
Affiliates or Associates) which has the effect, directly or
indirectly, of increasing by more than 1% the proportionate share of
any class of outstanding Voting Stock of the Company or any of its
Subsidiaries which is beneficially owned by any Acquiring Person and
its Affiliates and Associates.
(ee) "Voting Stock" shall mean (i) the Common Shares and (ii) any
other shares of capital stock of the Company entitled to vote generally in the
election of directors or entitled to
6
<PAGE> 10
vote together with the Common Shares in respect of any merger, consolidation,
sale of all or substantially all of the Company's assets, liquidation,
dissolution or winding up.
SECTION 2. APPOINTMENT OF RIGHTS AGENT.
The Company hereby appoints the Rights Agent to act as agent for the
Company and the holders of the Rights (who will prior to the Distribution Date
also be the holders of the Common Shares in accordance with Section 3 of this
Agreement) subject to the terms and conditions of this Agreement, and the
Rights Agent hereby accepts such appointment. The Company may from time to
time appoint such co-Rights Agents as it may deem necessary, appropriate or
desirable.
SECTION 3. ISSUE OF RIGHT CERTIFICATES.
(a) Until the Distribution Date, (i) the Rights will be evidenced
(subject to the provisions of Section 3(b) of this Agreement) by the
certificates for Common Shares registered in the names of the holders of such
certificates (which certificates will also be deemed to be Right Certificates)
and not by separate Right Certificates, and (ii) the right to receive Right
Certificates will be transferable only in connection with the transfer of
Common Shares. The Company shall give the Rights Agent prior written notice of
the Distribution Date and the circumstances giving rise thereto. As soon as
practicable after the Distribution Date, the Company will prepare and execute,
the Rights Agent will countersign, and the Company will send or cause to be
sent (and the Rights Agent will, if requested, send) by first-class, insured,
postage-prepaid mail, to each record holder of Common Shares (except as
otherwise provided in Section 11(a)(iii) of this Agreement) as of the Close of
Business on the Distribution Date, at the address of such holder shown on the
records of the Company, a Right Certificate evidencing one Right for each
Common Share so held, subject to the adjustments as provided herein. As of the
Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) On the Record Date or as soon as practicable thereafter, the
Company will send a copy of the Summary of Rights by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the Close of
Business on the Record Date, at the address of such holder shown on the records
of the Company. With respect to certificates for Common Shares outstanding as
of the Record Date, until the Distribution Date, the Rights will be evidenced
by such certificates registered in the names of the holders of such
certificates together with a copy of the Summary of Rights attached to such
certificates. Until the Distribution Date (or the earlier of the Redemption
Date or Final Expiration Date), the surrender for transfer of any certificate
for Common Shares outstanding on the Record Date, with or without a copy of the
Summary of Rights attached to such certificates, will also constitute the
transfer of the Rights associated with the Common Shares represented by such
certificates.
(c) Certificates for Common Shares that become outstanding
(including, without limitation, reacquired Common Shares referred to in the
last sentence of this Section 3 (c)) after the Record Date but prior to the
Close of Business on the earlier of the Distribution Date, the
7
<PAGE> 11
Redemption Date, or the Final Expiration Date will have impressed on, printed
on, written on, or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder of
this certificate to certain rights as set forth in a Rights
Agreement between Quest Medical, Inc. and MTrust Corp, N.A.,
dated as of October 12, 1989 (the "Rights Agreement"), the
terms of which are hereby incorporated in this certificate by
reference and a copy of which is on file at the principal
executive offices of Quest Medical, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. Quest Medical, Inc.
will mail to the holder of this certificate a copy of the
Rights Agreement without charge after receipt of a written
request for a copy of the Rights Agreement. As described in
the Rights Agreement, Rights issued to Acquiring Persons (as
defined in the Rights Agreement) may under certain
circumstances become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates will be evidenced by such certificates alone, and the
surrender for transfer of any such certificate will also constitute the
transfer of the Rights associated with the Common Shares represented by such
certificate. In the event that the Company purchases or acquires any Common
Shares after the Record Date but prior to the Distribution Date, any Rights
associated with such Common Shares will be deemed cancelled and retired so that
the Company will not be entitled to exercise any Rights associated with the
Common Shares that are no longer outstanding.
SECTION 4. FORM OF RIGHT CERTIFICATES.
The Right Certificates (and the forms of election to purchase Common
Shares and of assignment to be printed on the reverse of the Right
Certificates) will be substantially in the form of Exhibit A to this Agreement
and, in addition, may have such marks of identification or designation and such
legends, summaries, or endorsements printed on such Right Certificates as the
Company may deem necessary or appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any
applicable law, rule, or regulation, to comply with any rule or regulation of
any stock exchange or interdealer quotation system on which the Rights may from
time to time be listed or traded, or to conform to usage. Subject to the
provisions of Section 22 of this Agreement, the Right Certificates will entitle
the holders of such certificates to purchase such number of Common Shares as
will be set forth in such certificates at the Purchase Price, but the number of
such Common Shares and the Purchase Price shall be subject to adjustment as
provided in this Agreement.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Right Certificates will be executed on behalf of the
Company by its Chairman of the Board, its Chief Executive Officer, its
President, its Chief Operating Officer, or any of its Vice Presidents, either
manually or by facsimile signature, will have affixed the Company's seal or a
facsimile of the Company's seal, and will be attested by the Secretary or an
Assistant
8
<PAGE> 12
Secretary or the Treasurer or an Assistant Treasurer of the Company, either
manually or by facsimile signature. Upon an order or request of the Company,
the Right Certificates will be countersigned manually or by facsimile signature
by the Rights Agent and will not be valid for any purpose unless countersigned.
In case any officer of the Company who has signed any of the Right Certificates
ceases to be such officer of the Company before countersignature by the Rights
Agent and issuance and delivery by the Company, such Right Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the person who signed
such Right Certificates had not ceased to be such officer of the Company; and
any Right Certificate may be signed on behalf of the Company by any officer
who, at the actual date of the execution of such Right Certificate, is a proper
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its shareholder services offices, books for registration
and transfer of the Right Certificates issued under this Agreement. Such books
will show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates, and the date of each of the Right Certificates.
SECTION 6. TRANSFER, SPLIT-UP, COMBINATION, AND EXCHANGE OF
RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST, OR STOLEN RIGHT CERTIFICATES.
(a) Subject to the provisions of Section 14 of this Agreement, at
any time after the Close of Business on the Distribution Date, and at or prior
to the Close of Business on the earlier of the Redemption Date or the Final
Expiration Date, any Right Certificate or Right Certificates may be
transferred, split up, combined, or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase in the
aggregate a like number of Common Shares as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right
Certificate or Right Certificates will make such request in writing delivered
to the Rights Agent, and will surrender the Right Certificate or Right
Certificates to be transferred, split up, combined, or exchanged with the form
of assignment thereon duly executed at the shareholder services office of the
Rights Agent. Thereupon the Rights Agent will countersign and deliver to the
Person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company or the Rights Agent may require payment
of a sum sufficient to cover any tax or governmental charge that may be imposed
in connection with any transfer, split up, combination, or exchange of Right
Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction, or mutilation
of a Right Certificate, and, in case of loss, theft, or destruction, of
indemnity or security reasonably satisfactory to them, and, at the Company's
request, reimbursement to the Company and the Rights Agent of all reasonable
expenses incidental to such indemnity or security, and upon surrender to the
Rights Agent and the cancellation of the Right Certificate if mutilated, the
Company will make and deliver a new
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Right Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed, or mutilated.
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE
OF RIGHTS.
(a) The registered holder of any Right Certificate may exercise
the Rights evidenced by such certificate (except as otherwise provided in this
Agreement) in whole or in part at any time after the Distribution Date upon
surrender of the Right Certificate, with the form of election to purchase on
the reverse side of such certificate duly executed, to the Rights Agent at the
shareholder services office of the Rights Agent designated for such purpose,
together with payment of the Purchase Price for each one-half Common Share as
to which the Rights are exercised, at or prior to the earlier of (i) the Final
Expiration Date or (ii) the Redemption Date.
(b) The Purchase Price for each one-half Common Share purchased
pursuant to the exercise of a Right will initially be $5.00, will be subject to
adjustment from time to time as provided in Sections 11 and 13 of this
Agreement and will be payable in lawful money of the United States of America
in accordance with Section 7(c) of this Agreement.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount
equal to any applicable transfer tax required to be paid by the holder of such
Right Certificate in accordance with Section 9 of this Agreement by certified
check, cashier's check, bank draft, or money order payable to the order of the
Company or the Rights Agent, the Rights Agent will thereupon promptly (i)
requisition from any transfer agent of the Common Shares certificates (or make
available certificates if the Rights Agent is the transfer agent for such
shares) for the number of Common Shares to be purchased and the Company hereby
irrevocably authorizes its transfer agent to comply with all such requests;
(ii) when appropriate, requisition from the Company the amount of cash to be
paid in lieu of issuance of fractional shares in accordance with Section 14 of
this Agreement; (iii) after receipt of such Common Shares certificates, cause
the same to be delivered to or upon the order of the registered holder of such
Right Certificate, registered in such name or names as may be designated by
such holder; and (iv) when appropriate, after receipt, deliver such cash to or
upon the order of the registered holder of such Right Certificate. In the
event the Company is obligated to issue other securities (including Common
Shares) of the Company, pay cash and/or distribute other property pursuant to
Section 11(a) of this Rights Agreement, the Company will make all arrangements
necessary so that other securities, cash and/or other property are available
for distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Right Certificate
exercises less than all the Rights evidenced by such certificate, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
will be countersigned by the Rights Agent and delivered to the registered
holder of such Right Certificate or to his duly authorized assigns, subject to
the provisions of Section 14 of this Agreement.
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SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES.
All Right Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange will, if surrendered to the Company
or to any of its agents, be delivered to the Rights Agent for cancellation or
in cancelled form, or, if surrendered to the Rights Agent, will be cancelled by
it, and no Right Certificates will be issued in lieu of such certificates
except as expressly permitted by the provisions of this Agreement. The Company
will deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent will so cancel and retire, any other Right Certificate purchased
or acquired by the Company otherwise than upon the exercise of such
certificates. The Rights Agent will deliver all cancelled Right Certificates
to the Company, or, at the written request of the Company, will destroy such
cancelled Right Certificates, and in such case will deliver a certificate of
destruction of such certificates to the Company.
SECTION 9. RESERVATION AND AVAILABILITY OF COMMON SHARES.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued Common Shares or
any Common Shares held in its treasury, the number of Common Shares that will
be sufficient to permit the exercise in full of all outstanding Rights.
(b) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Common Shares delivered upon
exercise of Rights will be, at the time of delivery of the certificates for
such Common Shares (subject to payment of the Purchase Price), duly and validly
authorized and issued, fully paid, and nonassessable shares.
(c) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges that
may be payable in respect of the issuance or delivery of the Right Certificates
or of any Common Shares upon the exercise of Rights. The Company will not,
however, be required to pay any transfer tax that may be payable in respect of
any transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of Common Shares or other securities in a name other than
that of, the registered holder of the Right Certificate evidencing Rights
surrendered for exercise. Further, the Company will not be required to issue
or deliver any certificates for Common Shares or other securities upon the
exercise of any Rights until any such tax has been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's satisfaction that no such tax is
due.
(d) The Company also covenants and agrees to use its best efforts
to (i) file, as soon as practicable following the first occurrence of a Trigger
Event or as soon as is required by applicable law following the Distribution
Date, as the case may be, a registration statement under the Securities Act
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the earlier of (A) the date as of
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which the Rights are no longer exercisable for such securities and (B) the
Final Expiration Date. The Company will also take such action as may be
appropriate under, or to ensure compliance with the applicable securities or
"blue sky" laws of the various states in connection with the exercisability of
the Rights. All of the Company's actions under this Section 9(d) shall be at
the Company's expense.
(e) If the Common Shares or other securities issuable upon the
exercise of the Rights are listed on any national securities exchange or
interdealer quotation system of a registered national securities association,
the Company shall use its best efforts to cause, from and after such time as
the Rights become exercisable, all Common Shares or other securities reserved
for such issuance to be listed on such exchange or quotation system upon
official notice of issuance.
SECTION 10. COMMON SHARES RECORD DATE.
Each Person in whose name any certificate for Common Shares is issued
upon the exercise of Rights will, for all purposes, be deemed to have become
the holder of record of the Common Shares represented by such certificate on,
and such certificate will be dated, the date on which the Right Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Common Shares
transfer books of the Company are closed, such Person will be deemed to have
become the record holder of such shares on, and such certificate will be dated,
the next succeeding Business Day on which the Common Shares transfer books of
the Company are open.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES, OR
NUMBER OF RIGHTS.
The Purchase Price, the number of Common Shares covered by each Right,
and the number of Rights outstanding are subject to adjustment from time to
time as provided in this Section 11.
(a) (i) In the event the Company, at any time after
the date of this Agreement, (A) declares a dividend on the
Common Shares payable in Common Shares, (B) subdivides the
outstanding Common Shares, (C) combines the outstanding Common
Shares into a smaller number of Common Shares, or (D) issues
any shares of its capital stock in a reclassification of the
Common Shares (including any such reclassification in
connection with a consolidation or merger in which the Company
is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) of this Agreement,
the Purchase Price in effect at the time of the record date
for such dividend or of the effective date of such
subdivision, combination, or reclassification, and the number
and kind of shares of capital stock covered by such Right on
such date, will be proportionately adjusted so that the holder
of any Right exercised after such time will be entitled to
receive the aggregate number and kind of shares of capital
stock that, if such Right had been exercised immediately prior
to such date and at a time when the
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<PAGE> 16
Common Shares transfer books of the Company were open, such
holder would have owned upon such exercise and been entitled
to receive by virtue of such dividend, subdivision,
combination, or reclassification.
(ii) Upon the effective date of a Trigger Event, proper
provision will be made so that each holder of a Right, except
as provided below, will thereafter have a right to receive,
upon exercise of such Right at a price equal to the then
current Purchase Price multiplied by the number of Common
Shares for which a Right is then exercisable, in accordance
with the terms of this Agreement, such number of Common Shares
(the "number of Adjustment Shares") of the Company as then
equal the result obtained by (A) multiplying the then current
Purchase Price by the then number of Common Shares for which a
Right is then exercisable and dividing that product by (B) 50%
of the then current per share market price of the
Company's Common Shares on the effective date of such Trigger
Event.
(iii) Notwithstanding the foregoing, from and after the
effective date of a Trigger Event, any Rights that are or were
acquired or beneficially owned by an Acquiring Person (or any
Associate or Affiliate of an Acquiring Person) will be void
and any holder or transferee of such Rights will thereafter
have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate will be issued pursuant
toSection 3 of this Agreement that represents Rights
beneficially owned by an Acquiring Person or any Associate or
Affiliate of an Acquiring Person and no Right Certificate will
be issued at any time upon the transfer of any Rights to an
Acquiring Person or any Associate or Affiliate of an Acquiring
Person or to any nominee or representative of such Acquiring
Person, Associate, or Affiliate. Any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring
Person or any Associate or Affiliate of an Acquiring
Person will be cancelled.
(iv) In the event that there are not sufficient Common
Shares issued but not outstanding or authorized but unissued
to permit the exercise in full of the Rights in accordance
with Section 11(a)(ii)of this Agreement, the Company shall:
(A) determine the excess of (1) the current market value of
the number of Adjustment Shares issuable upon the exercise of
a Right (the "Current Value") over (2) the Purchase Price
(such excess, the "Spread"), and (B) with respect to each
Right, make adequate provision to substitute for the number of
Adjustment Shares, upon payment of the applicable Purchase
Price, (1) cash, (2) a reduction in the Purchase Price (but
not below zero), (3) Common Shares or other equity securities
of the Company (including, without limitation, shares, or
units of shares which the Board of Directors of the Company
has deemed to have the same value and voting rights as shares
of Common Shares), (4) debt securities of the Company, (5)
other assets or (6) any combination of the foregoing, having
an aggregate value equal to the Current Value, where such
aggregate value has been determined by the Board of Directors
of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board
of Directors
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of the Company; provided, however, if the Company shall not
have made adequate provision to deliver value pursuant to
clause (B) above within 30 days following the effective date
of a Trigger Event, then the Company shall be obligated to
deliver, upon the surrender for exercise of a Right and
without requiring payment of the Purchase Price, Common Shares
(to the extent available) and then, if necessary, cash, which
shares and/or cash have an aggregate value equal to the
Spread. For purposes of this Section 11(a)(iv), the value of
the Common Shares shall be the current per share market price
of the Common Shares on the effective date of the Trigger
Event.
(b) In case the Company fixes a record date for the issuance of
rights, options, or warrants to all holders of Common Shares entitling them
(for a period expiring within forty-five (45) days after such record date) to
subscribe for or purchase Common Shares or Equivalent Common Shares or
securities convertible, directly or indirectly, into Common Shares or
Equivalent Common Shares at a price per Common Share or Equivalent Common Share
(or having a conversion price per share, if a security convertible into Common
Shares or Equivalent Common Shares) less than the then current per share market
price of the Common Shares on such record date, the Purchase Price to be in
effect after such record date will be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which is the number of Common Shares outstanding on such record
date plus the number of Common Shares that the aggregate offering price of the
total number of Common Shares and/or Equivalent Common Shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price and the denominator
of which is the number of Common Shares outstanding on such record date plus
the number of additional Common Shares and/or Equivalent Common Shares to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price
may be paid in a consideration part or all of which is in a form other than
cash, the value of such consideration will be as determined in good faith by
the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent. Common Shares owned by or held for
the account of the Company will not be deemed outstanding for the purpose of
any such computation. Such adjustment will be made successively whenever such
a record date is fixed; and in the event that such rights or warrants are not
so issued, the Purchase Price will be adjusted to be the Purchase Price that
would then be in effect if such record date had not been fixed.
(c) In case the Company fixes a record date for the making of a
distribution to all holders of the Common Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a dividend payable in Common Shares) or
subscription rights or warrants (excluding those referred to in Section 11(b)
of this Agreement), the Purchase Price to be in effect after such record date
will be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which is the then
current per share market price of the Common Shares on such record date, less
the fair market value (as determined in good faith by the Board of Directors of
the Company, whose determination will be described in a statement filed with
the Rights Agent) of the portion
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<PAGE> 18
of the assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to one Common Share and the
denominator of which is such current per share market price of the Common
Shares. Such adjustments will be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price will again be adjusted to be the Purchase Price that would then be in
effect if such record date had not been fixed.
(d) No adjustment in the Purchase Price will be required unless
such adjustment would require an increase or decrease of at least 1% in the
Purchase Price; provided, however, that any adjustments which by reason of this
Section 11(d) are not required to be made will be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
11 will be made to the nearest cent or to the nearest ten-thousandth of a
Common Share or of any other share or security, as the case may be.
Notwithstanding the first sentence of this Section 11(d), any adjustment
required by this Section 11(d) will be made no later than the earlier of (i)
three (3) years from the date of the transaction that requires such adjustment
or (ii) the date of the expiration of the right to exercise any Rights.
(e) If, as a result of an adjustment made pursuant to Section
11(a) of this Agreement, the holder of any Right thereafter exercised becomes
entitled to receive any shares of capital stock of the Company other than
Common Shares, the number of such other shares so receivable upon exercise of
any Right will be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Shares contained in Sections 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10, and 13 with respect to the Common Shares will
apply on like terms to any such other shares.
(f) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price under this Agreement will evidence the
right to purchase, at the adjusted Purchase Price, the number of Common Shares
purchasable from time to time under this Agreement upon exercise of the Rights,
all subject to further adjustment as provided in this Agreement.
(g) Unless the Company has exercised its election as provided in
Section 11(h) of this Agreement, upon each adjustment of the Purchase Price as
a result of the calculations made in Section 11(b) and (c) of this Agreement,
each Right outstanding immediately prior to the making of such adjustment will
thereafter evidence the right to purchase, at the adjusted Purchase Price, that
number of Common Shares (calculated to the nearest one ten-thousandth of a
Common Share) obtained by (i) multiplying (A) the number of Common Shares
covered by a Right immediately prior to this adjustment by (B) the Purchase
Price in effect immediately prior to such adjustment of the Purchase Price and
(ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(h) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of Common Shares purchasable upon the exercise of a
Right. Each of the Rights outstanding after such adjustment of the number of
Rights will be exercisable for the number of Common Shares
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<PAGE> 19
for which a Right was exercisable immediately prior to such adjustment. Each
Right held of record prior to such adjustment of the number of Rights will
become that number of Rights (calculated to the nearest one ten-thousandth)
obtained by dividing the Purchase Price in effect immediately prior to
adjustment of the Purchase Price by the Purchase Price in effect immediately
after adjustment of the Purchase Price. The Company will make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment to be made. Such record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the
Right Certificates have been issued, will be at least seven (7) Business Days
later than the date of the public announcement. If Right Certificates have
been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(h), the Company will, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date
Right Certificates evidencing, subject to Section 14 of this Agreement, the
additional Rights to which such holders are entitled as a result of such
adjustment, or, at the option of the Company, will cause to be distributed to
such holders of record in substitution and replacement for the Right
Certificates held by such holders prior to the date of adjustment, and upon
surrender of Right Certificates (if required by the Company) new Right
Certificates evidencing all the Rights to which such holders are entitled after
such adjustment. Right Certificates so to be distributed will be issued,
executed and countersigned in the manner provided for in this Agreement and
will be registered in the names of the holders of record of Right Certificates
on the record date specified in the public announcement.
(i) Irrespective of any adjustment or change in the Purchase Price
or the number of Common Shares issuable upon the exercise of the Rights, the
Right Certificates theretofore and thereafter issued may continue to express
the Purchase Price and the number of Common Shares that were expressed in the
initial Right Certificates issued under this Agreement.
(j) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-hundredth of the then par value, if
any, of the Common Shares or other securities issuable upon exercise of the
Rights, the Company will take all such action as may be necessary in order that
the Company may validly and legally issue fully paid and nonassessable Common
Shares or other securities at such adjusted Purchase Price.
(k) In any case in which this Section 11 requires that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date
of the Common Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Common Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company will deliver to such holder a due bill or
other appropriate instrument evidencing right of such holder to receive such
additional shares upon the occurrence of the event requiring such adjustment.
(l) Anything in this Section 11 to the contrary notwithstanding,
the Company will be entitled to make such adjustments in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion determines
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<PAGE> 20
to be advisable in order that any consolidation or subdivision of the Common
Shares, issuance wholly for cash of any Common Shares at less than the current
per share market price, issuance wholly for cash of any Common Shares or
securities that by their terms are directly or indirectly convertible into or
exchangeable for Common Shares, dividends in Common Shares payable in Common
Shares or issuance of rights, options, or warrants referred to in Section 11(b)
of this Agreement, hereafter made by the Company to holders of its Common
Shares will not be taxable to such shareholders.
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF
SHARES.
Whenever an adjustment is made as provided inSections 11 and 13 of
this Agreement, the Company will promptly (a) prepare a certificate setting
forth such adjustment and a brief statement of the facts accounting for such
adjustment, (b) file with the Rights Agent and with each transfer agent for the
Common Shares a copy of such certificate, and (c) mail a brief summary of such
certificate to each holder of a Right Certificate in accordance with Section 25
of this Agreement; provided, however, that the failure of the Company to make
such a certificate or give notice shall not affect the validity or the force or
effect of the requirement for such an adjustment. The Rights Agent shall be
fully protected in relying on such certificate and any adjustment therein
contained.
SECTION 13. CONSOLIDATION, MERGER, OR SALE OR TRANSFER OF ASSETS
OR EARNING POWER.
(a) In the event on or after the Shares Acquisition Date, directly
or indirectly, (i) the Company consolidates with or merges with and into any
other Person; (ii) any Person consolidates with the Company or merges with and
into the Company and the Company is the continuing or surviving corporation of
such merger and, in connection with such merger, all or part of the Common
Shares is changed into or exchanged for stock or other securities of any other
Person (or the Company) or cash or any other property; or (iii) the Company
sells or otherwise transfers (or one or more of its Subsidiaries sells or
otherwise transfers) in one or more transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person other than the Company or
one or more of its wholly owned Subsidiaries, then, and in each such case,
proper provision will be made so that (A) following the Distribution Date, each
holder of a Right (except as otherwise provided in this Agreement) will
thereafter have the right to receive, upon the exercise of such Rights at a
price equal to the then current Purchase Price multiplied by the number of
Common Shares for which a Right is then exercisable, in accordance with the
terms of this Agreement, such number of Common Shares of the Principal Person
(as defined below) as is equal to the result obtained by (1) multiplying the
then current Purchase Price by the number of Common Shares for which a Right is
then exercisable and dividing that product by (2) 50% of the then current per
share market price of the Common Shares of the Principal Person on the date of
consummation of such consolidation, merger, sale, or transfer; (B) the
Principal Person will thereafter be liable for, and will assume, by virtue of
such consolidation, merger, sale, or transfer, all the obligations and duties
of the Company pursuant to this Agreement; (C) the term "Company" will
thereafter be deemed to refer to the Principal Person; and (D) the Principal
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<PAGE> 21
Person will take all such steps (including, but not limited to, the reservation
of a sufficient number of its Common Shares in accordance with Section 9 of
this Agreement) in connection with such consummation as may be necessary to
assure that the provisions of this Agreement will thereafter be applicable, as
nearly as possible, in relation to the Common Shares thereafter deliverable
upon the exercise of the Rights.
(b) The term "Principal Person" shall mean
(i) In the case of any transaction described in
sub-clause (i) or (ii) of this Section 13(a), the Person that is the
issuer of any securities into which shares of Common Stock of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to the
merger or consolidation; and
(ii) in the case of any transaction described in the
sub-clause (iii) of this Section 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (A) if the Common Stock of such
Person is not at such time and has not been continuously over the preceding
12-month period registered under Section 12 of the Exchange Act, and such
Person is a direct or indirect subsidiary or Affiliate of another Person,
"Principal Person" shall refer to such other Person; (B) in case such Person is
a subsidiary, directly or indirectly, or Affiliate of more than one Person, the
Common Stock of two or more of which are and have been so registered,
"Principal Person" shall refer to whichever of such Persons is the issuer of
the Common Stock having the greatest aggregate market value; and (C) in case
such Person is owned, directly or indirectly, by a joint venture formed by two
or more Persons that are not owned, directly or indirectly, by the same Person,
the rules set forth in (A) and (B) above shall apply to each of the chains of
ownership having an interest in such joint venture as if such party were a
"Subsidiary" of both or all of such joint venturers and the Principal Persons
in each such chain shall bear the obligations set forth in this Section 13 in
the same ratio as their direct or indirect interests in such Person bear to the
total of such interests.
(c) The Company will not enter into any transaction of the kind
referred to in this Section 13 if at the time of such transaction there are any
rights, warrants, instruments, or securities outstanding or any written or oral
agreements, arrangements or understandings that, as a result of the
consummation of such transaction, would eliminate or substantially diminish the
benefits intended to be afforded by the Rights. The Company will not
consummate any such consolidation, merger, sale, or transfer unless prior to
such consummation the Company and the Principal Person shall have executed and
delivered to the Rights Agent a supplemental agreement so providing and further
providing that, as soon as practicable after the date of any consolidation,
merger, sale or transfer of assets mentioned in paragraph (a) of this Section
13, the Principal Person at its own expense will take each of the following
actions:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, will
use its best efforts to cause such registration statement to become
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<PAGE> 22
effective as soon as practicable after such filing and will use its
best efforts to cause such registration statement to remain effective
(with a prospectus at all times meeting the requirements of the
Securities Act) until the Final Expiration Date;
(ii) use its best efforts to qualify or register the
Rights and the securities purchasable upon exercise of the Rights
under the applicable securities or blue sky laws of such jurisdictions
as may be necessary or appropriate; and
(iii) deliver to holders of the Rights historical financial
statements for the Principal Person and each of its Affiliates which
comply in all material respects with the requirements for registration
on Form 10 (or any successor form) under the Exchange Act.
(d) The provisions of this Section 13 will similarly apply to
successive mergers, consolidations, sales, or other transfers. The rights
under this Section 13 shall be in addition to the rights to exercise Rights and
adjustments under Section 11(a)(ii) of this Agreement hereof and shall survive
any exercise thereunder.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company will not be required to issue fractions of Rights
or to distribute Right Certificates that evidence fractional Rights. In lieu
of such fractional Rights, the Company will pay to the registered holders of
the Right Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right will be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for
any day will be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Rights are
listed or admitted to trading or, if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors
of the Company or, if the rights are not publicly listed or traded, the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company will be used.
(b) The Company will not be required to issue fractions of Common
Shares upon exercise of the Rights or to distribute certificates that evidence
fractional Common Shares. In lieu of fractional Common Shares, the Company
will pay to the registered holders of Right
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<PAGE> 23
Certificates at the time such Rights are exercised as provided in this
Agreement an amount in cash equal to the same fraction of the current market
value of one Common Share. For purposes of this Section 14(b), the current
market value of a Common Share will be the closing price of a Common Share for
the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right,
expressly waives all right to receive any fractional Rights or any fractional
Common Shares upon exercise of a Right.
SECTION 15. RIGHTS OF ACTION.
All rights of action in respect of this Agreement, except the rights
of action given to the Rights Agent under Section 18 of this Agreement, are
vested in the respective registered holders of the Right Certificates (and,
prior to the Distribution Date, the registered holders of the Common Shares);
and any registered holder of any Right Certificate (or, prior to the
Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in its own behalf and for its
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, such
holder's right to exercise the Rights evidenced by such Right Certificate in
the manner provided in such Right Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it
is specifically acknowledged that the holders of Rights would not have an
adequate remedy at law for any breach of this Agreement and will be entitled to
specific performance of the obligations under, and injunctive relief against
actual or threatened violations of, the obligations of any Person subject to
this Agreement.
SECTION 16. AGREEMENT OF RIGHT HOLDERS.
Every holder of a Right, by accepting the Right, consents and agrees
with the Company and the Rights Agent and with every other holder of a Right
that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal offices of the Rights Agent or at its office in Dallas, Texas,
designated for such purpose, duly endorsed or accompanied by a proper
instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the Person
in whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner of
the Right Certificate and of the Rights evidenced by such certificate
(notwithstanding any notations of ownership or writing on the Right
Certificates or the associated Common Shares certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent will be affected by any notice to the
contrary.
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<PAGE> 24
(d) Notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or any other Person as a result of its inability to perform any of
its obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any other statute, rule, regulation or executive order
promulgated or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation.
SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER.
No holder, as such, of any Right Certificate will be entitled to vote,
receive dividends, or be deemed for any purpose the holder of the Common Shares
or any other securities of the Company that may at any time be issuable on the
exercise of the Rights represented by such Right Certificate, nor will anything
contained in this Agreement or in any Right Certificate be construed to confer
upon the holder of any Right Certificate, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors
or upon any matter submitted to shareholders at any meeting of shareholders, or
to give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting shareholders (except as provided in Section
24 of this Agreement), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Right Certificate have
been exercised in accordance with the provisions of this Agreement.
SECTION 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent promptly
reasonable compensation for all services rendered by it under this Agreement
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
under this Agreement. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless against, any loss, liability, or expense, incurred
without gross negligence, bad faith, or willful misconduct on the part of the
Rights Agent, for anything done or omitted by the Rights Agent in connection
with the acceptance and administration of its duties under this Agreement,
including the costs and expenses of defending against any claim of liability in
the premises, and including any loss, liability or expense incurred through the
Rights Agent's negligence (other than gross negligence).
(b) The Rights Agent will be protected and will incur no liability
for or in respect of any action taken, suffered, or omitted by it in connection
with its administration of this Agreement in reliance upon any Right
Certificate or certificate for the Common Shares or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed, and,
where necessary, verified or acknowledged, by the proper Person or Persons, or
otherwise upon the advice of counsel as set forth in Section 20 of this
Agreement.
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<PAGE> 25
SECTION 19. MERGER, CONSOLIDATION, OR CHANGE OF NAME OF RIGHTS
AGENT.
(a) Any Person into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any Person
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent is a party, or any Person succeeding to the corporate
trust business of the Rights Agent or any successor Rights Agent, will be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties to
this Agreement, provided that such Person would be eligible for appointment as
a successor Rights Agent under the provisions of Section 21 of this Agreement.
In case at the time such successor Rights Agent succeeds to the agency created
by this Agreement, any of the Right Certificates have been countersigned but
not delivered, any such successor Rights Agent may adopt the countersignature
of the predecessor Rights Agent and deliver such Right Certificates so
countersigned; and in case at that time any of the Right Certificates have not
been countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
will have the full force provided in the Right Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent is changed
and at such time any of the Right Certificates have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any
of the Right Certificates have not been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates will have the full force
provided in the Right Certificates and in this Agreement.
SECTION 20. DUTIES OF RIGHTS AGENT.
The Rights Agent undertakes the duties and obligations imposed by this
Agreement on the following terms and conditions, by all of which the Company
and the holders of Right Certificates (and prior to the Distribution Date, the
holders of the Common Shares), by their acceptance of this Agreement and the
Rights, agree to be bound:
(a) The Rights Agent may consult with legal counsel (which may be
legal counsel for the Company), and the opinion of such counsel will be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) The Rights Agent shall not be deemed to have knowledge of any
fact or matter pertaining to the performance of its duties under this
Agreement, except such facts or matters as are evidenced by records which are
required to be created and maintained by it hereunder, until it shall have been
advised thereof in writing by the Company or by a holder of the Rights.
Whenever in the performance of its duties under this Agreement the Rights Agent
deems it necessary or desirable that any fact or matter (including, without
limitation, the identity of any
22
<PAGE> 26
Acquiring Person or the determination of "current per share market price") be
proved or established by the Company prior to taking or suffering any action
under this Agreement, such fact or matter (unless other evidence in respect of
such fact or matter is specifically prescribed in this Agreement) may be deemed
to be conclusively proved and established by a certificate signed by any one of
the Chairman of the Board, the Chief Executive Officer, the President, the
Chief Operating Officer, any Vice President, the Treasurer, the Secretary, or
any Assistant Treasurer or Assistant Secretary of the Company and delivered to
the Rights Agent; and such certificate will be full authorization to the Rights
Agent for any action taken or suffered in good faith by it under the provisions
of this Agreement in reliance upon such certificate.
(c) The Rights Agent will be liable under this Agreement to the
Company and any other Person only for its gross negligence, bad faith, or
willful misconduct.
(d) The Rights Agent will not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the
Summary of Rights or in the Right Certificates (except its countersignature of
the Right Certificates) or be required to verify the same, but all such
statements and recitals are and will be deemed to have been made by the Company
only.
(e) The Rights Agent will not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery of this
Agreement (except the due execution of this Agreement by the Rights Agent) or
in respect of the validity or execution of any Right Certificate (except its
countersignature of a Right Certificate); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Right Certificate; nor will it be responsible for any change in the
exercisability of the Rights or any adjustment in the terms of the Rights
(including the manner, method or amount of such adjustment) provided for in
Sections 3, 11, 13 or 23 of this Agreement, or the ascertaining of the
existence of facts that would require any such change or adjustment (except
with respect to the exercise of Rights evidenced by Right Certificates after
actual notice that such change or adjustment is required); nor will it by any
act under this Agreement be deemed to make any representation or warranty as to
the authorization or reservation of any Common Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Common Shares
will, when issued, be validly authorized and issued, fully paid, and
nonassessable, or as to the value of any Common Shares or any Right
Certificate.
(f) The Company agrees that it will perform, execute, acknowledge,
and deliver or cause to be performed, executed, acknowledged, and delivered all
such further acts, instruments, and assurances as may reasonably be required by
the Rights Agent for the carrying out or performing by the Rights Agent of the
provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties under this Agreement
from any one of the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Operating Officer, any Vice President, the Secretary, the
Treasurer, or any Assistant Secretary or Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties,
23
<PAGE> 27
and it will not be liable for any action taken or suffered by it in good faith
in accordance with instructions of any such officer or for any delay in acting
while waiting for such instructions.
(h) The Rights Agent and any shareholder, director, officer, or
employee of the Rights Agent may buy, sell, or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing in this Agreement will preclude the
Rights Agent from acting in any other capacity for the Company or for any other
Person.
(i) The Rights Agent may execute and exercise any of the rights or
powers vested in it by this Agreement or perform any duty under this Agreement
either itself or by or through its attorneys or agents, and the Rights Agent
will not be answerable or accountable for any act, default, neglect, or
misconduct of any such attorneys or agents or for any loss to the Company
resulting from any such act, default, neglect or misconduct, provided
reasonable care was exercised in the selection and continued employment of such
attorneys or agents.
(j) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
SECTION 21. CHANGE OF RIGHTS AGENT.
The Rights Agent or any successor Rights Agent may resign and be
discharged from its duties under this Agreement upon thirty (30) days' notice
in writing mailed to the Company and to each transfer agent of the Common
Shares by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent upon thirty (30) days' notice in writing, mailed to
the Rights Agent or successor Rights Agent, as the case may be, and to each
transfer agent of the Common Shares by registered or certified mail, and to the
holders of the Right Certificates by first-class mail. If the Rights Agent
resigns or is removed or otherwise becomes incapable of acting, the Company
will appoint a successor to the Rights Agent. If the Company fails to make
such appointment within a period of thirty (30) days after giving notice of
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Right Certificate (who will, with such notice, submit his Right Certificate for
inspection by the Company), then the registered holder of any Right Certificate
may apply to any court of competent jurisdiction for the appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by the Company or
by such a court, will be (a) a corporation organized and doing business under
the laws of the United States or of the State of Texas or the State of New York
(or of any other state of the United States so long as such corporation is
authorized to do business as a banking institution in the State of Texas or the
State of New York), in good standing, having an office in the State of Texas or
the State of New York, which is authorized under such laws to exercise
corporate trust powers and is subject to supervision or
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<PAGE> 28
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$10,000,000, or (b) an Affiliate controlled by a corporation described in
clause (a) of this sentence, provided that such controlling corporation fully
guarantees the performance of such Affiliate's duties and obligations
hereunder. After appointment, the successor Rights Agent will be vested with
the same powers, rights, duties, and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent will deliver and transfer to the successor Rights
Agent any property at the time held by it under this Agreement and execute and
deliver any further assurance, conveyance, act, or deed necessary for such
purpose. Not later than the effective date of any such appointment, the
Company will file notice of such appointment in writing with the predecessor
Rights Agent and each transfer agent of the Common Shares, and mail a notice of
such appointment in writing to the registered holders of the Right
Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect in such notice, will not affect the legality or validity
of the resignation or removal of the Rights Agent or the appointment of the
successor Rights Agent, as the case may be.
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES.
Notwithstanding any of the provisions of this Agreement or of the
Right Certificate to the contrary, the Company may, at its option, issue new
Right Certificates evidencing Rights in such form as may be approved by its
Board of Directors to reflect any adjustment or change in the Purchase Price
and the number or kind or class of shares or other securities or property
purchasable under the Right Certificates made in accordance with the provisions
of this Agreement.
SECTION 23. REDEMPTION.
(a) The Rights may be redeemed by action of the Board of Directors
pursuant to Section 23(b) of this Agreement and cannot and will not be redeemed
in any other manner.
(b) The Board of Directors of the Company may, at its option, at
any time prior to the Close of Business on the tenth (10th) day following a
Shares Acquisition Date, by Board Approval, redeem all but not less than all of
the then outstanding Rights at the Redemption Price; provided, that the Board
of Directors of the Company may, by Board Approval, reduce or extend the period
during which it may redeem all but not less than all of the Rights so long as
the Rights are redeemable at the time such reduction or extension is adopted.
(c) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to Section 23(b) of this
Agreement, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights will be to receive the Redemption Price. Within ten (10) days after
such action of the Board of Directors ordering the redemption of the Rights
pursuant to Section 23(b) of this Agreement, the Company will give written
notice of redemption to the Rights Agent and the holders of the then
outstanding Rights by mailing such notice to all such holders at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
25
<PAGE> 29
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice that is mailed in the manner provided in this
Agreement be deemed given, whether or not the holder receives such notice.
Each such notice of redemption will state the method by which the payment of
the Redemption Price will be made. Neither the Company nor any of its
Affiliates or Associates may redeem, acquire, or purchase for value any Rights
at any time in any manner other than that specifically set forth in this
Section 23, and other than in connection with the purchase of Common Shares
prior to the Distribution Date.
SECTION 24. NOTICE OF CERTAIN EVENTS.
(a) In case the Company proposes (i) to pay any dividend payable
in stock of any class to the holders of its Common Shares or to make any other
distribution to the holders of its Common Shares; (ii) to offer to the holders
of its Common Shares rights or warrants to subscribe for or to purchase any
additional Common Shares or shares of stock of any class or any other
securities, rights or options; (iii) to effect any reclassification of its
Common Shares (iv) to effect any consolidation or merger into or with, or to
effect any sale or other transfer (or to permit one or more of its Subsidiaries
to effect any sale or other transfer), in one or more transactions, of 50% or
more of the assets or earning power of the Company and its Subsidiaries (taken
as a whole) to, any other Person; (v) to effect the liquidation, dissolution or
winding up of the Company; (vi) to effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise), then, in
each such case, the Company will give to each holder of a Right, in accordance
with Section 25 of this Agreement, a notice of such proposed action, which will
specify the record date for the purposes of such stock dividend, distribution
of rights or warrants, the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take
place and the date of participation in such transactions by the holders of the
Rights, if any such date is to be fixed, and such notice will be so given in
the case of any action covered by clause (i) or (ii) above at least 20 days
prior to the record date for determining holders of the Common Shares for
purposes of such action, and in the case of any such other action, at least 20
days prior to the date of the taking of such proposed action or the date of
participation in such transaction by the holders of the Common Shares,
whichever is earlier.
(b) In case a Trigger Event occurs, then, the Company will, as
soon as practicable thereafter, give to each holder of a Right, in accordance
with Section 25 of this Agreement, a notice of the occurrence of such Trigger
Event, which notice will describe the Trigger Event and the consequences of the
Trigger Event to holders of Rights under Section 11(a)(ii) of this Agreement.
SECTION 25. NOTICES.
Notices or demands authorized by this Agreement to be given or made by
the Rights Agent or by the holder of any Right to or on the Company will be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Rights Agent) as
follows:
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<PAGE> 30
Quest Medical, Inc.
4103 Billy Mitchell Drive
Dallas, Texas 75244
Attention: President
Subject to the provisions of Section 21 of this Agreement, any notice or demand
authorized by this Agreement to be given or made by the Company or by the
holder of any Right to or on the Rights Agent will be sufficiently given or
made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
MTrust Corp, N.A.
Momentum Place
1717 Main Street, 14th Floor
Dallas, Texas 75201
Attention: Trust Officer
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right will be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed to such
holder at the address of such holder as shown on the registry books of the
Company or the Rights Agent.
SECTION 26. SUPPLEMENTS AND AMENDMENTS.
The Company, by Board Approval, and the Rights Agent may from time to
time supplement or amend this Agreement without the approval of any holders of
Rights in order to cure any ambiguity, to correct or supplement any provision
contained in this Agreement that may be defective or inconsistent with any
other provisions in this Agreement, or to make any other provisions in regard
to matters or questions arising under this Agreement that the Company and the
Rights Agent may deem necessary or desirable and that will be consistent with,
and for the purpose of fulfilling, the objectives of the Board of Directors in
adopting this Agreement; provided, however, that following the Distribution
Date, this Agreement shall not be amended in any manner that would adversely
affect the basic economic terms of the Rights; provided, further, that, once
the Rights are no longer redeemable in accordance with Section 23 of this
Agreement, no amendment to this Agreement may have the effect of making the
Rights redeemable.
SECTION 27. SUCCESSORS.
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Rights Agent will bind and inure to the benefit
of their respective successors and assigns hereunder.
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<PAGE> 31
SECTION 28. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement will be construed to give to any Person
other than the Company, the Rights Agent, and the registered holders of the
Right Certificates (and, prior to the Distribution Date, the Common Shares) any
legal or equitable right, remedy, or claim under this Agreement; but this
Agreement will be for the sole and exclusive benefit of the Company, the Rights
Agent, and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares).
SECTION 29. SEVERABILITY.
If any term, provision, covenant, or restriction of this Agreement is
held by a court of competent jurisdiction or other authority to be invalid,
void, or unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Agreement shall remain in full force and effect and will
in no way be affected, impaired, or invalidated.
SECTION 30. GOVERNING LAW.
THIS AGREEMENT AND EACH RIGHT CERTIFICATE ISSUED UNDER THIS AGREEMENT
WILL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF TEXAS AND
FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF SUCH STATE APPLICABLE TO CONTRACTS TO BE MADE AND PERFORMED ENTIRELY WITHIN
SUCH STATE.
SECTION 31. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each
of such counterparts will for all purposes be deemed to be an original, and all
such counterparts will together constitute one and the same instrument.
SECTION 32. DESCRIPTIVE HEADINGS.
Descriptive headings of the several sections of this Agreement are
inserted for convenience only and will not control or affect the meaning or
construction of any of the provisions of this Agreement.
28
<PAGE> 32
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be duly executed as of the day and year first above written.
ATTEST: QUEST MEDICAL, INC.
By: /s/ LINDA MOSES By: /s/ THOMAS C. THOMPSON
---------------------------- ----------------------------
ATTEST: MTRUST CORP, N.A.
By: /s/ TOM R. GARCIA By: /s/ KELLY ADAMS
---------------------------- ----------------------------
29
<PAGE> 33
EXHIBIT A
FORM OF RIGHT CERTIFICATE
No. R- __________ Rights
NOT EXERCISABLE AFTER OCTOBER 12, 1999 OR
EARLIER IF REDEMPTION OCCURS. THE RIGHTS
ARE SUBJECT TO REDEMPTION AT $0.01 PER
RIGHT ON THE TERMS SET FORTH IN SECTION 23
OF THE RIGHTS AGREEMENT.
RIGHT CERTIFICATE
QUEST MEDICAL, INC.
This certifies that __________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner, subject to the terms, provisions, and conditions of the
Rights Agreement, dated as of October 12, 1989 (the "Rights Agreement"),
between Quest Medical, Inc., a Texas corporation (the "Company"), and MTrust
Corp, N.A., a national banking association, (the "Rights Agent"), to purchase
from the Company at any time after the Distribution Date (as such term is
defined in the Rights Agreement) and prior to 5:00 P.M., Dallas, Texas time, on
October 12, 1999 (unless extended or earlier redeemed by the Company in
accordance with the terms of the Rights Agreement) at the shareholders services
office of the Rights Agent, or at the office of its successor as Rights Agent,
one-half of a fully paid nonassessable share of Common Stock, par value $0.05
per share (the "Common Shares"), of the Company, at a purchase price of $5.00
(the "Purchase Price") per Right, upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed. The number of
Rights evidenced by this Right Certificate (and the number of Common Shares
that may be purchased upon exercise of the Rights evidenced by this Right
Certificate) set forth above, and the Purchase Price set forth above, are the
number and Purchase Price as of October 12, 1989, based on the Common Shares as
constituted at such date. As provided in the Rights Agreement, the Purchase
Price and the number of Common Shares that may be purchased upon the exercise
of the Rights evidenced by this Right Certificate are subject to modification
and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions, and
conditions of the Rights Agreement, which terms, provisions, and conditions are
incorporated in this Right Certificate by reference and made a part of this
Right Certificate for all purposes and to which Rights Agreement reference is
hereby made for a full description of the rights, limitations of rights,
obligations, duties, and immunities under this Right Certificate of the Rights
Agent, the Company, and the holders of the Right Certificates. Copies of the
Rights Agreement are on file
A-1
<PAGE> 34
at the principal executive offices of the Company and the above-mentioned
offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the shareholders services office of the Rights Agent, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of Common Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered have entitled such holder to purchase. If this Right
Certificate is exercised in part, the holder will be entitled to receive upon
surrender of this Right Certificate another Right Certificate or Right
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at a redemption
price of $0.01 per Right.
No fractional Common Shares will be issued upon the exercise of any
Right or Rights evidenced hereby, but in lieu of such fractional shares, a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate will be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Common Shares
or of any other securities of the Company that may at any time be issuable on
the exercise of the Rights evidenced by this Right Certificate, nor will
anything contained in the Rights Agreement or in this Right Certificate be
construed to confer upon the holder of this Right Certificate, as such, any of
the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting of shareholders, or to give or withhold consent to any corporate
action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in the Rights Agreement), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by this Right Certificate have been exercised as provided in the
Rights Agreement.
This Right Certificate will not be valid or obligatory for any purpose
until it has been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of __________, 19__.
ATTEST: QUEST MEDICAL, INC.
______________________________ By: _______________________________
A-2
<PAGE> 35
Countersigned:
MTRUST CORP, N.A.
By:_________________________________________
Authorized Signature
A-3
<PAGE> 36
FORM OF REVERSE SIDE OF RIGHT CERTIFICATE
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ____________________ hereby sells, assigns, and
transfers unto ________________________________________________________________
_______________________________________________________________________________
(Please print name and address of transferee)
_______________________________________________________________________________
this Right Certificate, together with all right, title and interest in this
Right Certificate, and does hereby irrevocably constitute and appoint Attorney,
to transfer the within Right Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ____________________, 19__
__________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having an
office or correspondent in the United States.
A-4
<PAGE> 37
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right represented by the
Right Certificate.)
To: Quest Medical, Inc.
The undersigned hereby irrevocably elects to exercise _________________
(number) Rights represented by this Right Certificate to purchase the Common
Shares issuable upon the exercise of such Rights and requests that certificates
for such Common Shares be issued in the name of:
Please print social security
or other identifying number ____________________
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
If such number of Rights are not all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
will be registered in the name of and delivered to:
Please print social security
or other identifying number ____________________
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
Dated: ____________________, 19__
___________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having an
office or correspondent in the United States.
A-5
<PAGE> 38
NOTICE
The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.
A-6
<PAGE> 39
EXHIBIT B
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF QUEST MEDICAL, INC. COMMON STOCK
On October 12, 1989, the Board of Directors of Quest Medical, Inc.
(the "Company") declared a dividend of one common share purchase right (a
"Right") for each outstanding share of common stock, $0.05 par value (the
"Common Shares"), of the Company. The dividend is payable on October 23, 1989
(the "Record Date") to the shareholders of record at the close of business on
that date. Each Right entitles the registered holder to purchase from the
Company one-half of a share of Common Stock, par value $0.05 per share (the
"Common Shares"), of the Company, at a price of $5.00 (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth
in a Rights Agreement dated as of October 12, 1989 (the "Rights Agreement")
between the Company and MTrust Corp, N.A. as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Shares (an "Acquiring Person") or (ii) 10 days
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person or group of 20% or more of such outstanding
Common Shares (the earlier of such dates being the "Distribution Date"), the
Rights will be evidenced, with respect to any of the Common Share certificates
outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached to the certificate.
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Share certificates issued after the Record Date upon transfer or new
issuance of Common Shares will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Shares outstanding even without such notation or a copy of this Summary
of Rights being attached to such Certificate, will also constitute the transfer
of the Rights associated with the Common Shares represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the Common Shares as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on October 12, 1999 (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the Rights are earlier redeemed
by the Company, in each case, as described below.
B-1
<PAGE> 40
The Purchase Price payable and the number of Common Shares or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination, or reclassification of, the Common
Shares, (ii) upon the grant to holders of the Common Shares of certain rights
or warrants to subscribe for or purchase Common Shares at a price or securities
convertible into Common Shares with a conversion price less than the then
current market price of the Common Shares; or (iii) upon the distribution to
holders of the Common Shares of evidences of indebtedness or assets or of
subscription rights or warrants (other than those referred to above).
In the event that any person or entity becomes an Acquiring Person
(the beneficial owner of 15% or more of the Common Shares), and one of the
following has occurred: (1) the Company is the surviving corporation in a
merger with an Acquiring Person and the Common Shares are not changed or
exchanged, (2) an Acquiring Persons engages in certain self-dealing
transactions with the Company, (3) any person becomes the beneficial owner of
20% or more of the outstanding Common Shares (unless the event in which such
person acquired 20% or more of the outstanding Common Shares is a Qualifying
Offer or a Permitted Transaction (as such terms are described below)) or (4)
the Company engages in a reclassification or recapitalization that results in
an increase of 1% or more in the Acquiring Person's percentage ownership of the
Company, then proper provision will be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will then
be void), will have the right to receive upon exercise that number of Common
Shares having a market value of two times the applicable exercise price of the
Right.
For the purposes of the Rights Agreement, a Qualifying Offer is an
all-cash tender offer for all of the outstanding securities of the Company that
results in the acquisition of a majority of the outstanding securities of the
Company and meets certain other requirements. A Permitted Transaction is a
stock acquisition or tender or exchange offer pursuant to a definitive
agreement which would result in a person beneficially owning 15% or more of the
Common Shares and which was approved by the Board of Directors (including a
majority of the Directors not in association with an Acquiring Person) prior to
the execution of the agreement or the public announcement of the offer.
In the event that the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold, proper provisions will be made so that each holder of a
Right will have the right to receive, upon the exercise of the Right at the
then applicable exercise price, that number of shares of common stock of the
acquiring company that at the time of such transaction will have a market value
of two times the applicable exercise price of the Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Common Shares will be issued and in lieu of
such fractional shares, an adjustment in cash will be made based on the market
price of the Common Shares on the last trading day prior to the date of
exercise.
B-2
<PAGE> 41
At any time prior to the tenth day following an Acquiring Person's
acquisition of 15% or more of the outstanding Common Shares, the Board of
Directors of the Company may redeem the Rights in whole, but not in part, at a
price of $0.01 per Right (the "Redemption Price"). In addition, the Board of
Directors may extend or reduce the period during which the Rights are
redeemable, so long as the Rights are redeemable at the time of such extension
or reduction. Immediately upon any redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of
the Company without the consent of the holders of the Rights, including an
amendment to extend the Final Expiration Date, except that from and after the
Distribution Date no such amendment may adversely affect the economic interests
of the holders of the Rights.
Until a Right is exercised, the holder of the Right, as such, will
have no rights as a shareholder of the Company, including, without limitation,
the right to vote, or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Current Report on Form 8-K dated October
13, 1989. A copy of the Rights Agreement is available free of charge from the
Company.
B-3
<PAGE> 1
EXHIBIT 5.1
[HUGHES & LUCE, L.L.P. LETTERHEAD]
September 27, 1995
Quest Medical, Inc.
One Allentown Parkway
Allen, Texas 75002
Ladies and Gentlemen:
We have acted as counsel to Quest Medical, Inc., a Texas corporation
(the "Company"), in connection with the registration under the Securities Act
of 1933, as amended (the "Act"), of 2,600,000 shares of the Company's common
stock, par value $0.05 per share ("Common Stock"), by the Company and by
William Borkan, Burt Borkan and John Gula (the "Selling Shareholders"), and the
sale by the Company of up to 390,000 additional shares of Common Stock subject
to an over-allotment option to be granted to the Underwriters, pursuant to a
Registration Statement on Form SB-2 (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") (all 2,990,000 of
such shares of Common Stock, the "Shares").
In connection with this opinion, we have examined such documents and
records of the Company and such statutes, regulations, and other instruments
and certificates as we have deemed necessary or advisable for the purposes of
this opinion. We have assumed that all signatures on all documents presented
to us are genuine, that all documents submitted to us as originals are accurate
and complete, and that all documents submitted to us as copies are true and
correct copies of the originals thereof. We have also relied upon such
certificates of public officials, corporate agents, and officers of the Company
and the Selling Shareholders to the extent necessary or advisable with respect
to the accuracy of material factual matters contained therein which were not
independently established.
Based on the foregoing, we are of the opinion that the Shares being
sold by the Company and the Selling Shareholders, when sold to the Underwriters
as described in the Registration Statement, will be validly issued, fully paid,
and nonassessable.
This opinion may be filed as an exhibit to the Registration Statement.
Consent is also given to the reference to this firm as having passed on the
validity of the Shares under the caption "Legal Matters" in the prospectus
contained in the Registration Statement. In giving this consent, we do not
admit that we are included in the category of persons whose consent is required
under Section 7 of the Act or the rules and regulations of the Commission
promulgated thereunder.
Very truly yours,
/s/ HUGHES & LUCE, L.L.P.
<PAGE> 1
EXHIBIT 10.1
QUEST MEDICAL, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
Quest Medical, Inc., a Texas corporation (the "Corporation"), to
provide an incentive for key employees, including key employees who are
officers or directors, of the Corporation or of its subsidiary corporations, as
that term is defined in Section 3 hereof (the "Subsidiaries") to remain in the
employ of the Corporation or the Subsidiaries and to extend to such key
employees the opportunity to acquire a proprietary interest in the Corporation
so that they will apply their best efforts for the benefit of the Corporation,
and to aid the Corporation in attracting able persons to enter its employ and
that of the Subsidiaries continues the Quest Medical, Inc. Employees Stock
Option Plan (the "Prior Plan") that it previously adopted effective November 5,
1979.
Certain options granted under this Plan are intended to qualify as
"incentive stock options" (including certain options granted under the Prior
Plan and converted into incentive stock options) within the meaning of Section
422A of the Internal Revenue Code of 1986, as it may be amended (the "Code")
("Incentive Options"), while certain other options granted under this Plan will
constitute nonqualified stock options.
SECTION 1. STOCK AND MAXIMUM NUMBER OF SHARES SUBJECT TO THE PLAN
1.01 DESCRIPTION OF STOCK AND MAXIMUM SHARES ALLOCATED. Subject to
the adjustments provided for in Paragraph 5.07 hereof, the stock to which
options granted hereunder give the holder thereof the right to purchase shall
be shares of the Corporation's authorized common stock, $.05 par value
(together with any other securities with respect to which options granted
hereunder may become exercisable, hereinafter referred to as the "Stock"), and
may be unissued or reacquired shares, as the Board of Directors of the
Corporation (the "Board of Directors") may, in its sole and absolute
discretion, from time to time determine. Subject to the adjustments provided
for in Paragraph 5.07 hereof, the aggregate number of shares of Stock to be
issued pursuant to the exercise of all options granted hereunder shall not
exceed 1,000,000 shares.
1.02 RESTORATION OF UNPURCHASED SHARES. If an option granted
hereunder expires or terminates for any reason during the term of this Plan and
prior to the exercise thereof in full, the shares of Stock subject to but not
issued under such option shall again be available for options granted hereunder
subsequent thereto.
SECTION 2. ADMINISTRATION OF THE PLAN.
2.01 STOCK OPTION COMMITTEE. The Plan shall be administered by a
stock option committee (the "Committee"), the members of which shall be
appointed by the Board of
<PAGE> 2
Directors. The Committee shall consist of not less than three (3) members of
the Board of Directors.
2.02 DURATION, REMOVAL, ETC. The Members of the Committee shall
serve at the pleasure of the Board of Directors, which shall have the power, at
any time and from time to time, to remove members from the Committee or to add
members thereto. Vacancies on the Committee, however caused, shall be filled by
action of the Board of Directors.
2.03 MEETINGS AND ACTIONS OF ADMINISTRATION COMMITTEE. The
Committee shall elect one of its members as its Chairman and shall hold its
meeting at such times and places as it may determine. All decisions and
determinations of the Committee shall be made by the majority vote or decision
of all of its members, whether present at a meeting or not; provided, however,
that any decision or determination reduced to writing and signed by all of the
members of the Committee shall be as fully effective as if it had been made at
a meeting duly called and held. The Committee may make such rules and
regulations for the conduct of its business that are not inconsistent with the
provisions hereof as it may deem advisable.
2.04 COMMITTEE'S POWER. The Committee is authorized (but only to
the extent not contrary to the express provisions of the Plan) (a) to adopt,
amend and rescind rules and regulations relating to the Plan; (b) to determine
the terms and provisions of the respective option agreements (which need to be
identical), including provisions defining or otherwise relating to (i) the term
and the period or periods and extent of exercisability of the options, (ii) the
extent to which the transferability of shares issued upon exercise of options
is restricted, (iii) the effect of termination of employment, and (iv) the
effect of approved leaves of absence (consistent with any applicable
regulations of the Internal Revenue Service); (c) to construe the respective
option agreements and the Plan; and (d) to make all other determinations
necessary or advisable for administering the Plan. The Committee may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any option agreement in the manner and to the extent it shall deem expedient
to carry it into effect, and it shall be the sole and final judge of such
expediency. The determinations of the Committee on the matters referred to in
this Paragraph 2.04 shall be final and conclusive.
SECTION 3. ELIGIBILITY PARTICIPATION.
3.01 ELIGIBLE EMPLOYEES. Options may be granted hereunder only to
persons who, at the time of the grant thereof, are key employees (which term,
as used herein, shall be deemed to include officers and directors who are
employees of the Corporation and the Subsidiaries) of the Corporation or of any
of the Subsidiaries (as used herein, Subsidiary shall mean any corporation in
an unbroken chain of corporations beginning with the Corporation in which each
of the corporations (other than the last corporation) in the unbroken chain
owns stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock of one of the other corporations in such chain at
the date of grant of an option (such key executives, directors and key
employees are hereinafter referred to as "Eligible Employees"); provided,
however, that no Eligible Employee who is also a director of the Corporation
shall be eligible to receive an option hereunder if, immediately after such
option is granted, options then
2
<PAGE> 3
held by such person and all options previously granted to such person (whether
theretofore exercised or not) under the Plan would cover, in the aggregate,
more than that number of shares of Stock which would equal 3% of the
Corporation's then total outstanding shares of Stock. Notwithstanding any
provision contained herein to the contrary, a person shall not be eligible to
receive an Incentive Option hereunder if he, immediately after such option is
granted, would own (within the meaning of Sections 422A and 425 of the Code)
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of his employer corporation or of its parent or one of
its subsidiary corporations unless, at the time such Incentive Option is
granted, the exercise price per share of Stock is at least one hundred and ten
percent (110%) of the fair market value of each share of Stock to which the
Incentive Option relates and the Incentive Option is not exercisable after the
expiration of five (5) years from the date it is granted.
3.02 NO RIGHT TO OPTION. The adoption of the plan shall not be
deemed to give any person a right to be granted an option hereunder.
SECTION 4. GRANT OF OPTIONS.
Subject to the express provisions hereof, the Committee shall
determine which Eligible Employees shall be granted options hereunder from time
to time and the number of shares subject to such options and shall authorize
the granting of options in accordance with such determinations. Each option
granted hereunder shall be evidenced by an agreement (the "Agreement"),
executed by the Corporation and the Eligible Employee to whom the option is
granted (the "Holder"), incorporating such terms as the Committee shall deem
necessary or desirable. More than one option may be granted hereunder to the
same person and be outstanding concurrently hereunder. In the event an Eligible
Employee is granted both one or more Incentive Options and one or more
non-qualified stock options, such grants shall be evidenced by separate option
agreements, one for the Incentive Option grant and one for the nonqualified
option grant.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS.
All options granted hereunder shall comply with, be deemed to
include, and shall be subject to the following terms and conditions.
5.01 NUMBER OF SHARES. Each Agreement shall state the number of
shares of Stock to which it relates.
5.02 EXERCISE PRICE. Each Agreement shall state the exercise price
per share of the shares of Stock to which it relates. The exercise price per
share of stock subject to an option shall not be less than the greater of (a)
the par value per share of said Stock or (b) 100% of the fair market value per
share of said Stock on the date of the grant of the option or, in the case of
certain 10% shareholders, the amount specified in Paragraph 3.01, whichever is
applicable. The fair market value per share shall be determined by the
Committee in a manner that is consistent with all applicable requirements of
the Code, regulations issued thereunder, and administrative interpretations
thereof issued by the Internal Revenue Service.
3
<PAGE> 4
5.03 MEDIUM, TIME OF PAYMENT, AND METHOD OF EXERCISE. The exercise
price shall be payable upon the exercise of the option in cash, by certified or
cashier's check, or, with the consent of the Committee, with shares of stock of
the Corporation owned by the Holder immediately prior to such exercise.
Exercise of an option shall not be effective until the Corporation has received
written notice of exercise, specifying the number of whole shares to be
purchased, accompanied by payment in full of the aggregate option price of the
number of shares purchased. The Corporation shall not in any case be required
to issue and sell a fractional share.
5.04 TERM, TIME OF EXERCISE, AND TRANSFERABILITY OF OPTIONS. In
addition to such other terms and conditions as may be included in a particular
Agreement granting an option, an option shall be exercisable during a Holder's
lifetime only by him or by his guardian or legal representative, and an option
shall not be transferable other than by will or the laws of descent and
distribution.
(a) TERMINATION OF EMPLOYMENT. In the event that a Holder shall
cease to be in the employ of the Corporation or the Subsidiaries for any reason
other than death (and shall not thereupon become an employee of the
Subsidiaries or the Corporation), the unexercised portion of the option granted
to such Holder shall terminate on the date that is three (3) months from the
date of such Holder's termination of employment; provided, however, that (i) in
the event the employment of the Holder is terminated for dishonesty or other
acts detrimental to the interests of the Corporation or the Subsidiaries, or
for any breach by Holder of any employment contract with the Corporation or one
of the Subsidiaries, or (ii) if after Holder's employment is terminated, Holder
commits acts that are determined to be detrimental to the interests of the
Corporation or the Subsidiaries, then the options granted to such Holder
hereunder shall be null and void after such determination is made.
(b) DEATH. In the event a Holder dies while in the employ of the
Corporation or a Subsidiary, any option granted to him hereunder shall be
exercisable within the twelve (12) month period commencing on the date
following the date of his death or within the time permitted for the exercise
of the option set forth in the immediately following paragraph, whichever date
first occurs, and then only (i) by the person or persons (hereinafter sometimes
referred to as "Successors") to whom the Holder's rights under the option shall
pass by the Holder's will or the laws of descent and distribution, and (ii) if
and to the extent that the Holder was entitled to exercise the option on the
date of his death. Such option, to the extent not exercised within the above
period after the date of the Holder's death, shall, upon the expiration of the
period, terminate.
No Incentive Option granted hereunder shall be exercisable after the
termination of ten (10) years from the date it is granted (or, in the case of
certain 10% shareholders, the period specified in Paragraph 3.01). No
nonqualified stock option granted hereunder shall be exercisable after the
expiration of ten (10) years and one (1) day from the date it is granted.
Except as otherwise provided in the Plan, the Committee shall have authority to
prescribe in any Agreement (i) the term of the option and (ii) that the option
evidenced thereby may be exercised in full or in part as to any number of
shares subject thereto at any time or from time to time
4
<PAGE> 5
during the term of the option, or in such installments at such times during
said term as the Committee may prescribe. Except as provided above and unless
otherwise provided in any Agreement, an option may be exercised at any time or
from time to time during the term of the option as to any or all full (but not
fractional) shares which have become purchasable under the option.
Within a reasonable time after such notice is received, the
Corporation shall issue and deliver a certificate representing the shares so
purchased. In the event that a Holder exercises both an Incentive Option or
portion thereof, separate stock certificates shall be issued, one for the stock
subject to the Incentive Option and one for the stock subject to the
nonqualified stock option.
Nothing herein or in any option granted hereunder shall require the
Corporation to issue any shares upon exercise of any option if such issuance
would, in the opinion of counsel for the Corporation, constitute a violation of
the Securities Act of 1933, as amended, or any similar or superseding statute
or statutes, or any other applicable state or federal statute or regulation, as
then in effect. At the time of any exercise of an option, the Corporation may,
as a condition precedent to the exercise of such option, require from the
Holder of the option (or in the event of his death, his legal representatives,
legatees or distributees), such written representation, if any, concerning his
intentions with regard to the retention or disposition of the shares being
acquired by exercise of such option and such written covenants and agreements,
if any, as to the manner of disposal of such shares as, in the opinion of
counsel to the Corporation, may be necessary to ensure that any disposition by
such Holder (or in the event of his death, his legal representatives, legatees
or distributees), will not involve a violation of the Securities Act of 1933,
as amended, or any similar or superseding statute or statutes, or any other
applicable state or federal statute or regulation, as then in effect.
Certificates for shares of Stock, when issued, may have the following legend,
or statements of other applicable restrictions, endorsed thereon, and may not
be immediately transferable:
"The shares of Stock evidenced by this certificate have been issued to
the registered owner in reliance upon written representations that
these shares have been purchased for investment. These shares may not
be sold, transferred, or assigned unless, in the opinion of the
Corporation and its legal counsel, such sale, transfer, or assignment
will not be in violation of the Securities Act of 1933, as amended,
applicable rules and regulations of the Securities and Exchange
Commission, and any applicable state securities laws."
5.05 LIMITATION ON AGGREGATE VALUE OF SHARES SUBJECT TO OPTION.
With respect to Incentive Options granted prior to January 1, 1987, the
aggregate fair market value (determined as of the time such an Incentive Option
was granted) of the Stock for which an Eligible Employee may be granted
Incentive Options in any calendar year (under all plans described in Section
422A(b) of the Code of such person's employer corporation and its parent and
subsidiary corporations, as defined in Section 425 of the Code) shall not
exceed $100,000 plus any "unused limit carryover" to such year. For Incentive
Options granted after December 31, 1986, the aggregate fair market value
(determined at the time such an Incentive Stock Option
5
<PAGE> 6
is granted) of the Stock with respect to which Incentive Options are
exercisable for the first time by the Eligible Employee during any calendar
year (under all plans described in Section 422A(b) of the Code of such person's
employer corporation and its parent and subsidiary corporations, as defined in
Section 425 of the Code) shall not exceed $100,000.
5.06 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the stock options
granted hereunder shall not affect in any way the right or power of
the Corporation or its shareholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in
the Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or any issue of bonds, debentures,
preferred or prior preference stock ahead of or affecting the Stock or
the rights thereof, or the dissolution or liquidation of the
Corporation, or any sale or transfer of all or any part of its assets
or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(b) If the outstanding shares of the Stock of the
Corporation are increased, decreased, changed into, or exchanged for a
different number or kind of shares or securities of the Corporation
through reorganization, recapitalization, reclassification, stock
split-up or other similar event, an appropriate and proportionate
adjustment shall be made in the number and kind of shares as to which
stock options may be granted. A corresponding adjustment changing the
number or kind of shares allocated to unexercised stock options or
portions thereof, which shall have been granted prior to any such
change shall likewise be made. Any such adjustment, however, in the
outstanding stock options shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share covered by the
option.
(c) If the Corporation is merged or consolidated with
another corporation and is not the surviving entity or is dissolved or
liquidated while unexercised stock options remain outstanding under
the Plan, the Corporation must either (i) substitute for the shares
subject to the unexercised portions of such outstanding stock options
an appropriate number of shares of each class of stock or other
securities of the merged or consolidated corporation which were
distributed to the shareholders of the Corporation in respect of such
shares, except that all such substituted stock options shall be
immediately exercisable in full without regard to determinations of
periods or installments of exercisability made pursuant to Paragraph
5.11, or (ii) cancel all such stock options as of the effective date
of any merger, consolidation, dissolution or liquidation of the
Corporation by giving notice to each holder thereof or his personal
representatives of its intention to do so and by permitting the
exercise of all such outstanding stock options, without regard to
determinations of periods or installments of exercisability made
pursuant to Paragraph 5.11 during the thirty (30) day period next
preceding such effective date.
6
<PAGE> 7
(d) Notwithstanding the foregoing, the issue by the
Corporation of shares of stock of any class, or securities convertible
into shares of stock of any class, for cash or property, for labor or
services, either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or
obligations of the Corporation convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number of shares of Stock subject
to stock options granted under the Plan.
5.07 RIGHTS AS A SHAREHOLDER. A Holder shall have no right as a
shareholder with respect to any shares covered by his option until a
certificate representing such shares is issued to him. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash or in other
property) or distributions or other rights for which the record date is prior
to the date such certificate is issued, except as provided in Paragraph 5.06
hereof.
5.08 MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the
terms and conditions of and within the limitations of the Plan, the Committee
may modify, extend or renew outstanding options granted under the Plan, or
accept the surrender of options outstanding hereunder (to the extent not
theretofore exercised) and authorize the granting of new options hereunder in
substitution therefor. Notwithstanding the foregoing, however, no modification
of an option granted hereunder shall, without the consent of the Holder, alter
or impair any rights or obligations under any option theretofore granted
hereunder to such Holder under the plan. In addition, no changes may be made to
an Incentive Option if such changes would constitute a modification (within the
meaning of Code Section 425(h)(3)) of the Incentive Option, unless the Holder
first consents to such changes.
5.09 FURNISH INFORMATION. Each Holder shall furnish to the
Corporation all information requested by the Corporation to enable it to comply
with any reporting or other requirement imposed upon the Corporation by or
under any applicable statute or regulation.
5.10 OBLIGATION TO EXERCISE: TERMINATION OF EMPLOYMENT. The
granting of an option hereunder shall impose no obligation upon the holder to
exercise the same or any part thereof. In the event of a Holder's termination
of employment with the Corporation and its subsidiaries, the unexercised
portion of an option granted hereunder shall terminate in accordance with
Paragraph 5.04 hereof.
5.11 OTHER PROVISIONS. The Agreements authorized under the Plan
shall contain such other provisions (including, without limitation,
restrictions or the removal of restrictions upon the exercise of the option and
the transfer of shares thereby acquired) as the Committee shall deem advisable.
Each such Agreement relating to Incentive Options shall contain such
limitations and restrictions upon the exercise of the option to which it
relates as shall be necessary for the Incentive Option to which such Agreement
relates to constitute an incentive stock option as defined in Section 422A of
the Code.
SECTION 6. TERM OF PLAN.
7
<PAGE> 8
No Incentive Options may be granted hereunder after November 4, 1989.
SECTION 7. AMENDMENT OF PLAN.
The Board of Directors may, insofar as permitted by law, with respect
to any shares at the time not subject to options, suspend or discontinue the
Plan or revise or amend it in any respect whatsoever; provided, however, that,
without the approval of the holders of a majority of the outstanding shares of
voting stock of all classes of the Corporation, no such revision or amendment
shall (a) change the number of shares subject to the Plan, (b) change the
designation of the class of employees eligible to receive options, (c) decrease
the price at which Incentive Options may be granted, (d) remove the
administration of the Plan from the Committee, or (e) result in options granted
hereunder that satisfied the requirements of Section 422A of the Code no longer
satisfying such requirements. Furthermore, the Plan shall not, without such
approval of the shareholders, be amended in any manner that will cause
Incentive Options issued under it to fail to satisfy the requirements
applicable to incentive stock options as defined in Section 422A of the Code.
SECTION 8. GENERAL.
8.01 APPLICATION OF FUNDS. The proceeds received by the Corporation
from the sale of shares pursuant to options shall be used for general corporate
purposes.
8.02 RIGHT OF THE CORPORATION AND SUBSIDIARIES TO TERMINATE
EMPLOYMENT. Nothing contained in the Plan, or in any Agreement, shall confer
upon any Holder the right to continue in the employ of the Corporation or any
Subsidiary, or interfere in any way with the rights of the Corporation or any
Subsidiary to terminate his employment any time.
8.03 NO LIABILITY FOR GOOD FAITH DETERMINATIONS. Neither the
members of the Board of Directors nor any member of the Committee shall be
liable for any act, omission, or determination taken or made in good faith with
respect to the Plan or any option under it.
8.04 INFORMATION CONFIDENTIAL. As partial consideration for the
granting of each option hereunder, the Holder shall agree with the Corporation
that he will keep confidential all information and knowledge which he has
relating to the manner AND amount of his participation in the Plan; provided,
however, that such information may be given in confidence to the Holder's
spouse or to a financial institution to the extent that such information is
necessary in order to secure a loan. In the event any breach of this promise
comes to the attention of the Committee, it shall take into consideration such
breach, in determining whether to recommend the grant of any future option or
options to such Holder, as a factor militating against the advisability of
granting any such future option or options to such employee.
8.05 OTHER BENEFITS. Participation in the Plan shall not preclude
the Holder from eligibility in any other stock option plan of the Corporation
or any Subsidiary or any old age benefit, insurance pension, profit sharing
retirement, bonus or other extra compensation plans
8
<PAGE> 9
which the Corporation or any Subsidiary has adopted, or may, at any time, adopt
for the benefit of its employees.
8.06 EXECUTION OF RECEIPTS AND RELEASES. Any payment or any
issuance or transfer of shares of Stock to the Holder, or to his legal
representative, heir, legatee, or distributee in accordance with the provisions
hereof, shall, to the extent thereof, be in full satisfaction of all claims of
such persons hereunder. The Committee may require any Holder, legal
representative, heir, legatee, or distributee, as a condition precedent to such
payment, to execute a release and receipt therefor in such form as it shall
determine.
8.07 NO GUARANTEE OF INTERESTS. Neither the Committee nor the
Corporation guarantees the Stock of the Corporation from loss or depreciation.
8.08 PAYMENT OF EXPENSES. All expenses incident to the
administration, termination, or protection of the Plan, including, but not
limited to, legal and accounting fees, shall be paid by the Corporation or the
Subsidiaries.
8.09 CORPORATION RECORDS. Records of the Corporation or the
Subsidiaries regarding the Holder's period of employment, termination of
employment and the reason therefor, leaves of absence, re-employment, and other
matters shall be conclusive for all purposes hereunder, unless determined to be
incorrect.
8.10 INFORMATION. The Corporation and the Subsidiaries shall, upon
request or as may be specifically required hereunder, furnish or cause to be
furnished, all of the information or documentation which is necessary or
required by the Committee to perform its duties and functions under the Plan.
8.11 NO LIABILITY OF CORPORATION. The Corporation assumes no
obligation or responsibility to the Holder or his personal representative,
heirs, legatees, or distributees for any act of, or failure to act on the part
of, the Committee.
8.12 CORPORATION ACTION. Any action required of the Corporation
shall be by the resolution of its Board or by a person authorized to act by
Board resolution.
8.13 SEVERABILITY. In the event any provision of this Plan shall be
held to be illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining provisions hereof, but shall be fully severable
and the Plan shall be construed and enforced as if the illegal or invalid
provision had never been included herein.
8.14 NOTICES. Whenever any notice is required or permitted
hereunder, such notice must be in writing and personally delivered or sent by
mail. Any notice required or permitted to be delivered hereunder shall be
deemed to be delivered on the date which it is personally delivered, or,
whether actually received or not, on the third business day after it is
deposited in the United States mail, certified or registered, postage prepaid,
addressed to the person who is to receive it at the address which such person
has theretofore specified by written
9
<PAGE> 10
notice delivered in accordance herewith. The Corporation or a Holder may
change, at any time and from time to time, by written notice to the other, the
address which it or he had theretofore specified for receiving notices. Until
changed in accordance herewith, the Corporation and each Holder shall specify
as its and his address for receiving notices the address set forth in the
option agreement pertaining to the shares to which such notice relates.
8.15 WAIVER OF NOTICE. Any person entitled to notice hereunder may
waive such notice.
8.16 SUCCESSORS. The Plan shall be binding upon the Holder, his
heirs, legatees, and legal representatives, upon the Corporation, its
successors and assigns, and upon the Committee, and its successors.
8.17 HEADINGS. The titles and headings of Sections and Paragraphs
are included for convenience of reference only and are not to be considered in
construction of the provisions hereof.
8.18 GOVERNING LAW. All questions arising with respect to the
provisions of the Plan shall be determined by application of the laws of the
State of Texas except to the extent Texas law is preempted by federal statute.
The obligation of the Corporation to sell and deliver stock hereunder is
subject to applicable laws and to the approval of any governmental authority
required in connection with the authorization, issuance, sale or delivery of
such stock.
SECTION 9. APPROVAL OF SHAREHOLDERS.
This amended and restated Plan shall be effective as of June 18, 1992
(the date of approval by the holders of a majority of the shares of Stock
entitled to vote at a duly held Shareholder's meeting).
Amended through June 18, 1992.
10
<PAGE> 11
AMENDMENT TO THE QUEST MEDICAL, INC.
AMENDED AND RESTATED 1979 STOCK OPTION PLAN
This Amendment (this "Amendment") to the Quest Medical, Inc. Amended
and Restated 1979 Stock Option Plan (the "Plan") is made as of September 25,
1995.
WHEREAS, the Board of Directors of the Company believes that this
Amendment is in the best interest of the Company and has authorized and duly
adopted this Amendment in accordance with the Plan.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. ADMINISTRATION OF THE PLAN.
Section 2 of the Plan is hereby amended to read in its entirety as
follows:
"SECTION 2. ADMINISTRATION OF THE PLAN.
STOCK OPTION COMMITTEE. Notwithstanding anything to the
contrary herein, to the extent necessary to comply with the
requirements of Rule 16b-3, the Plan shall be administered by the
Board, if each member is a Disinterested Director, or by a committee
of two or more Disinterested Directors appointed by the Board (the
group responsible for administering the Plan is referred to herein as
the "Committee"). For purpose of this Agreement, the term
"Disinterested Director" shall mean a director of the Corporation who
is not, during the one year prior to service as a member of the
Committee, or during such service, granted or awarded an Option
pursuant to the Plan or any other plan of the Corporation or any of
its affiliates (except as may be permitted by Rule 16b-3 promulgated
under the Securities Exchange Act of 1934). Options may be granted
under Sections 4 and 5, respectively, only by majority agreement of
the members of the Committee. Subject to the limitations and
qualifications set forth in this Plan, the Committee shall also
determine the number of Options to be granted, the number of shares
subject to each Option grant, the exercise price or prices of each
Option, the vesting and exercise period of each Option, whether an
Option may be exercised as to less than all of the Common Stock
subject thereto, and such other terms and conditions of each Option,
if any, as are consistent with the provisions of this Plan. Except
with respect to Paragraph 2.02 of this Plan, the Committee shall have
complete authority to construe, interpret and administer the
provisions of this Plan and the provisions of the Option agreements
entered into hereunder; to prescribe, amend and rescind rules and
regulations pertaining to this Plan; to suspend or discontinue this
Plan; and to make all other determinations necessary or deemed
advisable in the administration of the Plan. The determinations,
interpretations and constructions made by the Committee shall be final
and conclusive. No member of the Committee shall be liable for any
action
1
<PAGE> 12
taken, or failed to be taken, made in good faith relating to the Plan
or any award thereunder, and the members of the Committee shall be
entitled to indemnification and reimbursement by the Corporation in
respect of any claim, loss, damage or expense (including attorneys'
fees) arising therefrom to the fullest extent permitted by law. "
2. CONTINUED EFFECT.
Except as specifically provided by this Amendment, the Plan shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the undersigned, as a duly authorized
representative of Quest Medical, Inc., has executed this Amendment to be
effective as of the date first set forth above.
QUEST MEDICAL, INC.
/s/ F. Robert Merrill III
------------------------------
F. Robert Merrill III
Secretary
2
<PAGE> 1
EXHIBIT 10.2
QUEST MEDICAL, INC
EMPLOYEE NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into as of the ((Date)) day of ((Month)),
((Year)), by QUEST MEDICAL, INC., a Texas corporation (the "Corporation"), and
((Name)) (the "Optionee").
W I T N E S S E T H :
WHEREAS, the Optionee is employed by the Corporation or one of its subsidiaries
in a key position and the Corporation desires the Optionee to remain in its
employ, to encourage the Optionee to own stock of the Corporation, and to give
the Optionee added incentive to advance the interests of the Corporation and
desires to give the Optionee an option under the Quest Medical, Inc. Amended
and Restated Employees' Stock Option Plan (the "Plan") to purchase shares of
Common Stock, $.05 par value (the "Common Stock"), of the Corporation.
NOW, THEREFORE, in consideration of these premises, the parties agree that the
following shall constitute the Option Agreement (the "Agreement") between the
Corporation and the Optionee:
1. The provisions of the Plan (a copy of which is attached hereto as
Exhibit A) also constitute provisions of this Agreement and are hereby
incorporated by reference and made a part hereof for all purposes. In
the event of any conflict between the terms of this Agreement and the
Plan, the terms of the Plan will control.
2. Subject to the terms and conditions set forth herein, the Corporation
grants to the Optionee, a nonqualified stock option (the "Option") to
purchase from the Corporation during the period ending at 5:00 p.m.,
Dallas, Texas time on ((ExpirationDate)) (unless a shorter period is
specified in Section 5.04 of the Plan) from the date of this
Agreement, ((NoShares)) shares of Common Stock at an exercise price of
$((Price)) per share, subject to adjustment as provided in Section
5.06 of the Plan. The Option is exercisable with respect to the
shares of Common Stock indicated as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<S> <C>
((PerYear)) On or after ((Year1))
((PerYear)) On or after ((Year2))
((PerYear)) On or after ((Year3))
((PerYear)) On or after ((Year4))
</TABLE>
3. The Option may be exercised in whole or in part from time to time, in
accordance with Section 5.03 of the Plan by written notice to the
Corporation at its principal executive office, which notice shall:
(a) specify the number of shares of Common Stock to be
-1-
<PAGE> 2
purchased and the purchase price to paid therefor; (b) if the person
exercising this Option is not the Optionee, contain or be accompanied
by satisfactory evidence of such person's right to exercise this
Option; and (c) be accompanied by payment in full of the purchase
price in cash or in the form of a certified or cashier's check payable
to the Corporation.
4. This Option may be exercised in whole or in part while there is
outstanding any option which may have been previously granted to the
Optionee to purchase Common Stock.
5. Any questions concerning the interpretation of this Agreement, any
adjustments required to be made under Section 5.06 of the Plan and any
controversy which may arise under this Agreement or the Plan shall be
determined by the Stock Option Committee of the Corporation in its
sole discretion, pursuant to Section 2 of the Plan. This Agreement
shall be governed by and construed in accordance with the laws of
Texas.
6. This Option is a nonqualified stock option, and shall be so construed.
IN WITNESS WHEREOF, this Agreement has been executed by the Optionee and by the
Corporation, effective as of the date first written above.
QUEST MEDICAL, INC.
By: ___________________________________
Thomas C. Thompson
President
___________________________________
((Name))
Optionee
-2-
<PAGE> 1
EXHIBIT 10.3
QUEST MEDICAL, INC.
DIRECTORS' STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The Quest Medical, Inc. Directors' Stock Option Plan (the "Plan") is
intended as an incentive to directors and advisory directors of Quest Medical,
Inc. (the "Company"). The purposes of the Plan are to attract directors and
advisory directors with a high degree of training, experience and ability,
whose services are considered unusually valuable to the Company, to provide an
opportunity to such directors and advisory directors to acquire a proprietary
interest in the success of the Company, to increase their interest in the
Company's welfare, and to encourage them to remain with the Company.
2. ADMINISTRATION OF THE PLAN
The Board of Directors of the Company shall appoint and maintain a
committee (the "Committee") which shall consist of at least three persons
appointed by the Board of Directors, who shall serve without compensation at
the pleasure of the Board of Directors. Each Committee member shall be eligible
to receive stock options under the Plan while serving on the Committee, if the
Board of Directors unanimously (except for such Committee member, if a
director) grants a stock option to such Committee member and if such Committee
member is otherwise eligible to receive stock options under the Plan. All
actions taken and determinations made under the Plan regarding stock options
granted by the Board of Directors to a Committee member shall be made by the
Board of Directors unanimously (except for such Committee member, if a
director). Except as stated above, the Committee shall have full power and
authority to (a) designate recipients of stock options granted under the Plan,
(b) interpret and construe the provisions of the Plan and any stock options
granted hereunder and (c) do all things necessary or appropriate to administer
the Plan in accordance with its terms. All actions taken and determinations
made by the Committee pursuant to the provisions of the Plan shall be made by a
majority of its members and shall be conclusive. No member of the Committee
shall be liable for any action taken or determination made in good faith.
3. ELIGIBILITY
The individuals who shall be eligible to participate in the Plan shall
only be directors and advisory directors of the Company or of any corporation
(hereinafter called a "Subsidiary") in which the Company has a proprietary
interest by reason of stock ownership or otherwise (including any corporation
in which the Company acquires a proprietary interest after the adoption of this
Plan) but only if the Company owns, directly or indirectly, stock possessing
not less than 50% of the total combined voting power of all classes of stock of
such corporation, but excluding any director or advisory director who is also
an officer or employee of the company or any Subsidiary. More than one stock
option may be granted under the Plan from time to time to any director or
advisory director if the Committee shall so determine. However, no director
may hold at any time stock options granted under the Plan covering more than
25,000 shares of
<PAGE> 2
Common Stock that are subject to the Plan and no advisory director may hold at
any time options under the Plan covering more than 15,000 shares of Common
Stock that are subject to the Plan. Stock options granted to a director or
advisory director under the Plan shall be exercisable, subject to other
provisions hereof, while any other stock option which was previously granted to
such director or advisory director is outstanding. Neither the granting of a
stock option granted under this Plan to an individual, nor any provision
contained in this Plan, shall affect the individual's right to remain a
director or advisory director.
4. STOCK SUBJECT TO THE PLAN
The common stock subject to the stock options and other provisions of
the Plan shall be shares of the Company's authorized and unissued or reacquired
Common Stock, $.05 par value. Subject to adjustment in accordance with the
provisions of Paragraph 8, the total number of shares of Common Stock of the
Company which may be issued pursuant to the exercise of stock options granted
under the Plan shall not exceed in the aggregate 550,000 shares. In the event
that any outstanding stock option granted under the Plan for any reason expires
or is terminated, the shares of Common Stock allocable to the unexercised
portion of such stock option may again be subjected to a stock option granted
under the Plan.
5. STOCK OPTION PRICE
The purchase price for each share of Common Stock covered by a stock
option granted under the Plan shall be 100% of the fair market value of the
stock on the date of the grant of the stock option. The "fair market value" per
share of Common Stock on any date shall be the per share price of the Common
Stock on the date immediately prior to the date of the grant of the stock
option hereunder and shall be (i) if the principal trading market for such
securities is an exchange, the closing price on such exchange on such day,
provided if trading of such shares of Common Stock is listed on any
consolidated tape, the price shall be the closing price set forth on such
consolidated tape, or (ii) if the principal market for such securities is the
over-the-counter market, the average of the highest reported bid and lowest
reported asked price as furnished by the National Association of Securities
Dealers, Inc. ("NASD") or similar organization if the NASD is not reporting
such information. Notwithstanding the foregoing, if there is no reported
closing price or bid and asked prices, as the case may be, on the date
immediately prior to the grant of the stock option hereunder, then the fair
market value shall be determined as of the latest date prior to such day for
which such closing price or bid and asked prices are available. Further
provide, that if there is no reported closing price or bid and asked prices, as
the case may be, within 30 days of the date immediately prior to the grant of
the stock option hereunder, the fair market value shall be determined by the
Board of Directors, in its sole discretion, after consultation with the
Committee.
6. EXERCISE PERIOD
2
<PAGE> 3
Stock options granted under the Plan shall terminate and be of no
force and effect with respect to any portion of the stock option not previously
exercised by an individual upon the happening of the first of the following:
(a) the expiration of six years from the date of grant of such option; or
(b) the expiration of three months from the date the individual
ceases being a director or advisory director with the Company
or any Subsidiary for any reason other than the individual's
death; or
(c) the expiration of three months from the date the individual
becomes an officer or employee of the Company or any
Subsidiary; or
(d) the expiration of twelve months after the date of death of the
individual.
7. TERM AND EXERCISE OF OPTIONS
(a) The Committee in its discretion may provide that a stock
option may not be exercised in whole or in part for any period
or periods of time specified and may provide for other
restrictions, conditions, and limitations on the vesting and
exercise of a stock option. Except as may be so provided, any
option may be exercised in whole at any time or in part from
time to time during its term.
(b) Stock options may not be assigned or transferred and may be
exercised solely by the original recipient of a stock option
during his lifetime or by his guardian or legal
representative, or after his death by the person or persons
entitled thereto under his will or the laws of descent and
distribution. In the event of the death of the original
recipient of a stock option while such stock option is still
in force and unexpired under the terms of Paragraph 6, any
unmatured installments of such stock option may, in the
discretion of the Committee, be accelerated (in whole or in
part) as of the date of death. The unmatured installments
accelerated by the Committee shall thereupon be exercisable in
full or in part without regard to the installment provisions
of Paragraph 7(a).
(c) A stock option may be exercised in whole or in part from time
to time by giving written notice to the Company of such
exercise and complying with the terms and conditions contained
in the applicable stock option agreement. The purchase price
of the shares covered by the exercise of the stock option
shall be paid in full by certified or cashier's check at the
time of exercise and the Company shall deliver to the optionee
within 30 days of the exercise date the shares covered by the
exercise of the stock option. No holder of a stock option
shall be or have any of the rights or privileges of a
shareholder of the Company in respect of any shares covered by
the exercise of any part of a stock option unless and until
certificates representing such shares shall have been issued
by the Company to such holder.
3
<PAGE> 4
8. REORGANIZATIONS AND RECAPITALIZATIONS OF THE COMPANY
(a) The existence of this Plan and the stock options granted
hereunder shall not affect in any way the right or power of
the Company or its shareholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, or
any merger or consolidation of the Company, or any issue of
bonds, debentures, preferred or prior preference stock ahead
of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar
character or otherwise.
(b) If the outstanding shares of the Common Stock of the Company
are increased, decreased, changed into, or exchanged for a
different number or kind of shares or securities of the
Company through reorganization, merger, recapitalization,
reclassification, stock split-up or otherwise, an appropriate
and proportionate adjustment shall be made in the number and
kind of shares as to which stock options may be granted. A
corresponding adjustment changing the number or kind of shares
allocated to unexercised stock options or portions thereof,
which shall have been granted prior to any such change shall
likewise be made. Any such adjustment, however, in the
outstanding stock options shall be made without change in the
total price applicable to the unexercised portion of the
option but with a corresponding adjustment in the price for
each share covered by the option.
(c) If the Company is reorganized or merged or consolidated with
another corporation while unexercised stock options remain
outstanding under the Plan, the Company must either (i)
substitute for the shares subject to the unexercised portions
of such outstanding stock options an appropriate number of
shares of each class of stock or other securities of the
reorganized or merged or consolidated corporation which were
distributed to the shareholders of the company in respect of
such shares, except that all such substituted stock options
shall be immediately exercisable in full without regard to the
installment provisions set forth in Paragraph 7(a), or (ii)
cancel all such stock options as of the effective date of any
such reorganization, merger of consolidation or of any
dissolution or liquidation of the Company by giving notice to
each holder thereof or his personal representative of its
intention to do so and by permitting the exercise of all such
outstanding stock options, without regard to the installment
provisions set forth in Paragraph 7(a) during the thirty-day
period next preceding such effective date.
(d) Notwithstanding the foregoing, the issue by the Company of
shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible
into such shares or other securities, shall
4
<PAGE> 5
not affect, and no adjustment by reason thereof shall be made
with respect to, the number of shares of Common Stock subject
to stock options granted under the Plan.
9. OTHER PROVISIONS
Grants of stock options under the Plan may contain such other
provisions as the Committee may deem advisable and shall be evidenced by a
stock option agreement executed by the individual receiving the stock option
and an officer of the company.
10. SECURITIES REPRESENTATIONS
Each person exercising a stock option granted under the Plan may be
required by the Company to provide such representations in writing as the
Company may deem necessary to comply with applicable federal and state
securities laws.
11. REVIEW OF REFUSAL TO HONOR EXERCISE
If the Committee shall refuse to honor all or part of the exercise of
a stock option, the Committee shall notify the exercising participant in
writing of the refusal to honor the exercise and the reasons for the refusal,
citing any provisions of the Plan or stock option agreement on which the
refusal to honor was based. The written notice of refusal to honor shall also
inform the exercising participant that he or she has the right to appeal the
refusal within 60 days after receipt by the exercising participant of the
written notification of refusal to honor. A request for review must be
delivered by the exercising participant in writing to the Committee at the
address given in the notice of denial. Within 60 days after receipt of a
written request for review properly made by an exercising participant, the
Committee shall make a decision on the request and may, in its discretion,
afford the exercising participant a personal hearing. The decision of the
Committee shall be delivered to the exercising participant in writing and shall
include specific reasons for the decision, citing any provisions of the Plan or
applicable agreement on which the decision was based. The decision rendered by
the Committee shall be final and conclusive.
12. TAX MATTERS
The Company shall withhold such amounts from any payments made to a
participant (whether under this Plan or otherwise) and to deduct such amounts
from income as are necessary or desirable to ensure compliance, insofar as the
stock options are concerned, with applicable federal, state, and local tax laws
and to ensure that the Company may properly deduct all amounts deemed to be
compensation under applicable federal, state and local tax laws arising in
connection with the stock options.
13. EFFECTIVE DATE OF THE PLAN
The Plan shall be effective as of April 12, 1980.
5
<PAGE> 6
14. AMENDMENTS
The Board of Directors may at any time, without the consent of the
holders of stock options, alter, amend, revise, suspend, or discontinue the
Plan provided that such action shall not adversely affect stock options
previously granted under the Plan.
15. APPLICATION OF FUNDS
The proceeds received by the Company from the sale of Common Stock
pursuant to stock options will be used for general corporate purposes.
16. NO OBLIGATION TO EXERCISE STOCK OPTION
The grant of a stock option shall impose no obligation upon the holder
of the option to exercise such stock option.
17. GOVERNMENT REGULATIONS
Notwithstanding any of the provisions hereof, or of any stock option
granted hereunder, the obligation of the Company to sell and deliver shares
pursuant to the exercise of any stock option shall be subject to all applicable
laws, rules and regulations and to such approvals by any governmental agencies
or securities exchanges as may be required, and the holder of the stock option
hereby agrees that he will not exercise any stock option granted hereunder, and
that the Company will not be obligated to issue any shares under any such stock
option, if the exercise thereof or if the issuance of such shares shall
constitute a violation by such holder or the Company of any provision of any
law or regulation of any governmental authority.
Amended through July 23, 1992.
6
<PAGE> 7
AMENDMENT TO THE QUEST MEDICAL, INC.
DIRECTORS' STOCK OPTION PLAN
This Amendment (this "Amendment") to the Quest Medical, Inc.
Directors' Stock Option Plan (the "Plan") is made as of September 25, 1995.
WHEREAS, the Board of Directors of the Company believes that this
Amendment is in the best interest of the Company and has authorized and duly
adopted this Amendment in accordance with the Plan.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. ADMINISTRATION OF THE PLAN.
Paragraph 2 of the Plan is hereby amended to read in its entirety as
follows:
"2. ADMINISTRATION OF THE PLAN.
(a) Notwithstanding anything to the contrary herein, to
the extent necessary to comply with the requirements of Rule 16b-3,
the Plan shall be administered by a committee of two or more
Disinterested Directors appointed by the Board (the "Committee"). For
purpose of this Agreement, the term "Disinterested Director" shall
mean a director of the Corporation who is not, during the one year
prior to service as a member of the Committee, or during such service,
granted or awarded an Option pursuant to the Plan or any other plan of
the Corporation or any of its affiliates (except as may be permitted
by Rule 16b-3 promulgated under the Securities Exchange Act of 1934).
Options may be granted under the Plan, only by majority agreement of
the members of the Committee. Subject to the limitations and
qualifications set forth in this Plan, the Committee shall also
determine the number of Options to be granted, the number of shares
subject to each Option grant, the exercise price or prices of each
Option, the vesting and exercise period of each Option, whether an
Option may be exercised as to less than all of the Common Stock
subject thereto, and such other terms and conditions of each Option,
if any, as are consistent with the provisions of this Plan. Except
with respect to Subsection (b) below, the Committee shall have
complete authority to construe, interpret and administer the
provisions of this Plan and the provisions of the Option agreements
entered into hereunder; to prescribe, amend and rescind rules and
regulations pertaining to this Plan; to suspend or discontinue this
Plan; and to make all other determinations necessary or deemed
advisable in the administration of the Plan. The determinations,
interpretations and constructions made by the Committee shall be final
and conclusive. No member of the Committee shall be liable for any
action taken, or failed to be taken, made in good faith relating to
the Plan or any award thereunder, and the members of the Committee
shall be entitled to indemnification and
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<PAGE> 8
reimbursement by the Corporation in respect of any claim, loss, damage
or expense (including attorneys' fees) arising therefrom to the
fullest extent permitted by law.
(b) While serving as a member of the Committee, such
member shall not be eligible to receive Options to purchase Common
Stock pursuant to this Plan or any other plan of the Corporation or
any of its affiliates.
(c) Notwithstanding Subsection (a) and Paragraph 14, to
comply with Rule 16b-3, no amendment may be made without the approval
of the shareholders of the Corporation by the affirmative votes of the
holders of a majority of the shares of Common Stock then issued and
outstanding, which amendment would materially (i) increase the
benefits accruing to the individuals participating in the Plan, (ii)
increase the number of securities which may be issued under the Plan,
other than in accordance with Paragraph 8 hereof, or (iii) modify the
requirements as to eligibility for participation in the Plan."
2. CONTINUED EFFECT.
Except as specifically provided by this Amendment, the Plan shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the undersigned, as a duly authorized
representative of Quest Medical, Inc., has executed this Amendment to be
effective as of the date first set forth above.
QUEST MEDICAL, INC.
/s/ F. Robert Merrill II
F. Robert Merrill III
Secretary
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<PAGE> 1
EXHIBIT 10.5
UNANIMOUS CONSENT OF
THE BOARD OF DIRECTORS OF
QUEST MEDICAL, INC.
The undersigned, being all of the directors of Quest Medical, Inc., a
Texas corporation (the "Company"), pursuant to Article 9.10(B) of the Texas
Business Corporation Act, hereby execute this consent for the purpose of
adopting the following resolutions of the Board of Directors, to the same
extent and to have the same force and effect as a vote of all of the directors
at a formal meeting of the directors of the Company duly called and held for
the purpose of acting upon proposals to adopt such resolutions.
* * *
WHEREAS, the Board of Directors desires to retain certain key
employees, to encourage such employees to own stock of the Company and
to give such employees added incentive to advance the interest
of the Company;
RESOLVED, that the following key employees ("Employees") be,
and they hereby are, granted options to purchase the following number
of shares of Common Stock at an exercise price and on the terms and
conditions set forth below:
<TABLE>
<CAPTION>
Number of Shares
Subject to Exercise
Employee Option Price
-------- ------ -----
<S> <C> <C>
Thomas C. Thompson 100,000 $1.50
Jack E. Meyer 70,000 $1.50
F. Robert Merrill 50,000 $1.50
William A. Franklin 50,000 $1.50
Mark O. Samples 30,000 $1.50
</TABLE>
Such options shall be exercisable during the Employee's lifetime only
by him or by his guardian or legal representative, and an option shall
not be transferable other than by will or the laws of descent and
distribution. In the event that an Employee shall cease to be in the
employ of the Company or any of its subsidiaries for any reason other
than death (and shall not thereupon become an employee of the
subsidiaries or the Company), the unexercised portion of the option
granted to such Employee shall terminate on the date that is three (3)
months from the date of such Employee's termination of employment;
provided, however, that (i) in the event the employment of the
Employee is terminated for dishonesty or other acts detrimental to the
interests of the Company or the subsidiaries, or for any breach by
Employee of any employment contract with the Company or one of the
subsidiaries, or (ii) if after Employee's employment is terminated,
Employee commits acts that are determined by the Company to be
detrimental to the interests of the Company or the subsidiaries, then
the options granted to such Employee hereunder shall be null and void
after such determination is made. In the event an Employee dies
while
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<PAGE> 2
in the employ of the Company or a subsidiary, any option granted to
him hereunder shall be exercisable within the twelve (12) month period
commencing on the date following the date of his death or within the
time permitted for the exercise of the option set forth below,
whichever date first occurs, and then only (i) by the person or
persons (hereinafter sometimes referred to as "Successors") to whom
the Employee's rights under the option shall pass by the Employee's
will or the laws of descent and distribution, and (ii) if and to the
extent that the Employee was entitled to exercise the option on the
date of his death. Such option, to the extent not exercised within
the above period after the date of the Employee's death, shall, upon
the expiration of the period, terminate. No option granted hereunder
shall be exercisable after the expiration of ten (10) years and one
(1) day from the date hereof. Nothing herein or in any option granted
hereunder shall require the Company to issue any shares upon exercise
of any option if such issuance would, in the opinion of counsel for
the Company, constitute a violation of the Securities Act of 1933, as
amended, or any similar or superseding statute or statutes, or any
other applicable state or federal statute or regulation, as then in
effect. At the time of any exercise of an option, the Company may, as
a condition precedent to the exercise of such option, require from the
Employee (or in the event of his death, his legal representatives,
legatees or distributees), such written representations, if any,
concerning his intentions with regard to the retention or disposition
of the shares being acquired by exercise of such option and such
written covenants and agreements, if any, as to the manner of disposal
of such shares, as, in the opinion of counsel to the Company, may be
necessary to ensure that any disposition by such Employee (or in the
event of his death, his legal representatives, legatees or
distributees), will not involve a violation of the Securities Act of
1933, as amended, or any similar or superseding statute or statutes,
or any other applicable state of federal statute or regulation, as
then in effect.
RESOLVED, that in connection with the grant of the foregoing
options to the Employees, the Board of Directors hereby approves the
reservation of 300,000 shares of the Common Stock out of the
authorized shares of Common stock of the Company for the purpose of
issuing shares of Common Stock upon exercise of the foregoing options
granted to the Employees.
* * *
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<PAGE> 1
EXHIBIT 10.6
STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into effective as of the 22nd day of
December, 1987 by QUEST MEDICAL, INC., a Texas corporation (the "Company"), and
______________ (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Optionee is employed by the Company or one of its
subsidiaries in a key position and the Company desires the Optionee to remain
in its employ, to encourage the Optionee to own stock of the Company, and to
give the Optionee added incentive to advance the interests of the Company and
desires to grant the Optionee an option to purchase shares of the Common Stock,
$.05 par value (the "Common Stock") of the Company.
NOW, THEREFORE, in consideration of these premises, the parties agree
that the following shall constitute the Option Agreement (the "Agreement")
between the Company and the Optionee:
1. Subject to the terms and conditions set forth herein, the
Company grants to Optionee an option (the "Option") to purchase from the
Company, a total of _________ shares of Common Stock at an exercise price of
$1.50 per share.
2. The options shall be exercisable during the Optionee's
lifetime only by him or by his guardian or legal representative, and an option
shall not be transferable other than by will or the laws of descent and
distribution. In the event that the Optionee shall cease to be in the employ of
the Company or any of its subsidiaries for any reason other than death (and
shall not thereupon become an employee of the subsidiaries or the Company), the
unexercised portion of the option granted to the Optionee shall terminate on
the date that is three (3) months from the date of such Optionee's termination
of employment; provided, however, that (i) in the event the employment of the
Optionee is terminated for dishonesty or other acts detrimental to the
interests of the Company or the subsidiaries, or for any breach by Optionee of
any employment contract with the Company or one of the subsidiaries, or (ii) if
after Optionee's employment is terminated, Optionee commits acts that are
determined by the Company to be detrimental to the interests of the Company or
the subsidiaries, then the options granted to the Optionee hereunder shall be
null and void after such determination is made. In the event the Optionee dies
while in the employ of the Company or a subsidiary, any option granted
hereunder shall be exercisable within the twelve (12) month period commencing
on the date following the date of death or within the time permitted for the
exercise of the option set forth below, whichever date first occurs, and then
only (i) by the person or persons (hereinafter sometimes referred to as
"Successors" to whom the Optionee's rights under the option shall pass by the
Optionee's will or the laws of descent and distribution, and (ii) if and to the
extent that the Optionee was entitled to exercise the option on the date of his
death. Such option, to the extent not exercised within the above period after
the date of the Optionee's death, shall, upon the expiration of the period,
terminate.
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<PAGE> 2
3. No option granted hereunder shall be exercisable after the
expiration of ten (10) years and one (1) day from the date hereof.
4. Nothing herein or in any option granted hereunder shall
require the Company to issue any shares upon exercise of any option if such
issuance would, in the opinion of counsel for the Company, constitute a
violation of the Securities Act of 1933. as amended, or any similar or
superseding statute or statutes, or any other applicable state or federal
statute or regulation, as then in effect. At the time of any exercise of an
option, the Company may, as a condition precedent to the exercise of such
option, require from the Optionee (or in the event of his death, his legal
representatives, legatees or distributees), such written representations, if
any, concerning his intentions with regard to the retention or disposition of
the shares being acquired by exercise of such option and such written covenants
and agreements, if any, as to the manner of disposal of such shares as, in the
opinion of counsel to the Company, may be necessary to ensure that any
disposition by the Optionee (or in the event of his death, his legal
representatives, legatees or distributees), will not involve a violation of the
Securities Act of 1933, as amended, or any similar or superseding statute or
statutes, or any other applicable state of federal statute or regulation, as
then in effect.
IN WITNESS WHEREOF, this Agreement has been executed by the Optionee
and by the Company, effective as of the date first written above.
QUEST MEDICAL, INC.
By: _______________________________
Thomas C. Thompson
President
_______________________________
Optionee
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<PAGE> 1
EXHIBIT 10.7
QUEST MEDICAL, INC.
1995 STOCK OPTION PLAN
1. Purpose of the Plan. This Plan shall be known as the Quest
Medical, Inc. 1995 Stock Option Plan. The purpose of the Plan is to attract
and retain the best available personnel for positions of substantial
responsibility and to provide incentives to such personnel to promote the
success of the business of Quest Medical, Inc. and its subsidiaries.
Certain options granted under this Plan are intended to qualify as
"incentive stock options" pursuant to Section 422 of the Internal Revenue Code
of 1986, as amended from time to time, while certain other options granted
under the Plan will constitute nonqualified options.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Board of Directors of the
Corporation.
(b) "Common Stock" shall mean the Common Stock, $.05 par
value per share, of the Corporation. Except as otherwise provided
herein, all Common Stock issued pursuant to the Plan shall have the
same rights as all other issued and outstanding shares of Common
Stock, including but not limited to voting rights, the right to
dividends, if declared and paid, and the right to pro rata
distributions of the Corporation's assets in the event of liquidation.
(c) "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time.
(d) "Committee" shall mean the committee described in
Section 18 that administers the Plan.
(e) "Corporation" shall mean Quest Medical, Inc., a Texas
corporation.
(f) "Date of Grant" shall mean the date on which an
Option is granted pursuant to this Plan or, if the Committee so
determines, the date specified by the Committee as the date the award
is to be effective.
(g) "Disinterested Director" shall mean a director who is
not, during the one year prior to service as an administrator of the
Plan, or during such service, granted or awarded an Option pursuant to
the Plan or any other plan of the Corporation or any of its affiliates
(except as may be permitted by Rule 16b-3 promulgated under the
Exchange Act).
(h) "Employee" shall mean any officer or other key
employee of the Corporation or one of its Subsidiaries (including any
director who is also an officer or key employee of the Corporation or
one of its Subsidiaries).
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<PAGE> 2
(i) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(j) "Fair Market Value" shall mean the closing sale price
(or average of the quoted closing bid and asked prices if there is no
closing sale price reported) of the Common Stock on the date specified
as reported by NASDAQ or by the principal national stock exchange on
which the Common Stock is then listed. If there is no reported price
information for the Common Stock, the Fair Market Value will be
determined by the Committee, in its sole discretion. In making such
determination, the Committee may, but shall not be obligated to,
commission and rely upon an independent appraisal of the Common Stock.
(k) "Nonqualified Option" shall mean any Option that is
not a Qualified Option.
(l) "Option" shall mean a stock option granted pursuant
to Section 6 of this Plan.
(m) "Optionee" and "Participant" shall each mean an
individual who receives an Option pursuant to this Plan.
(n) "Plan" shall mean the Quest Medical, Inc. 1995 Stock
Option Plan, as amended from time to time.
(o) "Qualified Option" shall mean any Option that is
intended to qualify as an "incentive stock option" within the meaning
of Section 422 of the Code.
(p) "Rule 16b-3" shall mean Rule 16b-3 of the rules and
regulations under the Exchange Act as Rule 16b-3 may be amended from
time to time and any successor provisions to Rule 16b-3 under the
Exchange Act.
(q) "Subsidiary" shall mean any now existing or
hereinafter organized or acquired company of which more than fifty
percent (50%) of the issued and outstanding voting stock is owned or
controlled directly or indirectly by the Corporation or through one or
more Subsidiaries of the Corporation.
3. Term of Plan. The Plan was adopted by the Board effective as
of March 30, 1995 and, to qualify for the benefits of Rule 16b-3 and to permit
the granting of Qualified Options under the Code, will be submitted for
approval by the shareholders of the Corporation by the affirmative votes of the
holders of a majority of the shares of Common Stock then issued and
outstanding. The Plan shall continue in effect until terminated pursuant to
Section 18(a).
4. Shares Subject to the Plan. Subject to adjustment as provided
in Section 17 hereof, the aggregate number of shares of Common Stock issuable
upon the exercise of Options
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<PAGE> 3
pursuant to this Plan shall be 250,000 shares; provided, however, that on
January 1 of each year (commencing on January 1, 1996), the aggregate number of
shares of Common Stock then issuable upon the exercise of Options shall be
increased by the same percentage that the total number of issued and
outstanding shares of Common Stock increased from the preceding January 1 to
the following December 31 (if such percentage is positive). For example, if
the total number of issued and outstanding shares of Common Stock on January 1,
1996 were 5,000,000, the total number of issued and outstanding shares of the
Corporation on December 31, 1996 were 5,500,000, and the aggregate number of
shares of Common Stock then issuable upon the exercise of Options pursuant to
this Plan were 250,000, the aggregate number of shares of Common Stock issuable
under the Plan effective January 1, 1997 would be 275,000 (a 10% increase).
Shares issuable upon the exercise of Options may either be authorized but
unissued shares or treasury shares. The Corporation shall, during the term of
this Plan, reserve and keep available a number of shares of Common Stock
sufficient to satisfy the requirements of the Plan. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
then the shares that were subject thereto shall, unless the Plan shall have
terminated, become immediately available for the grant of additional Options
under this Plan, subject to the limitations set forth above. In addition, for
purposes of calculating the aggregate number of shares that may be issued under
this Plan, only the net shares issued (including the shares, if any, withheld
for tax withholding requirements) shall be counted when shares of Common Stock
are used as full or partial payment for shares issued upon exercise of a
Qualified Option or a Nonqualified Stock Option. Shares tendered by a
Participant as payment for shares issued upon such exercise shall be available
for reissuance under the Plan.
5. Eligibility. Qualified Options may be granted under Section 6
of the Plan to such Employees of the Corporation or its Subsidiaries as shall
be determined by the Committee. Nonqualified Options may be granted under
Section 6 of the Plan to such Employees of the Corporation or its Subsidiaries
as shall be determined by the Committee. In connection with the granting of
Qualified Options, the aggregate Fair Market Value (determined at the Date of
Grant of a Qualified Option) of the shares with respect to which Qualified
Options are exercisable for the first time by an Optionee during any calendar
year (under all such plans of the Optionee's employer corporation and its
parent and subsidiary corporations as defined in Section 424(e) and (f) of the
Code, or a corporation or a parent or subsidiary corporation of such
corporation issuing or assuming an Option in a transaction to which Section
424(a) of the Code applies (collectively, such corporations described in this
sentence are hereinafter referred to as "Related Corporations")) shall not
exceed $100,000 or such other amount as from time to time provided in Section
422(d) of the Code or any successor provision. In connection with the
granting of any Options under the Plan, the aggregate number of shares of
Common Stock issuable to any single Employee shall not exceed the number of
shares subject to the Plan referred to in Section 4.
6. Grant of Options. The Committee shall determine the number of
shares of Common Stock to be offered from time to time pursuant to Options
granted hereunder and shall grant Options under the Plan. The grant of Options
shall be evidenced by Option agreements containing such terms and provisions as
are approved by the Committee and executed on behalf of the Corporation by an
appropriate officer.
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<PAGE> 4
7. Time of Grant of Options. The date of grant of an Option
under the Plan shall be the date on which the Committee awards the Option or,
if the Committee so determines, the date specified by the Committee as the date
the award is to be effective. Notice of the grant shall be given to each
Participant to whom an Option is granted promptly after the date of such grant.
8. Price. The Option price for each share of Common Stock
subject to an Option (the "Exercise Price") granted pursuant to Section 6 of
the Plan shall be determined by the Committee at the Date of Grant; provided,
however, that (a) the Exercise Price for any Option shall not be less than 100%
of the Fair Market Value of the Common Stock at the Date of Grant, and (b) if
the Optionee owns on the Date of Grant more than 10 percent of the total
combined voting power of all classes of stock of the Corporation or its parent
or any of its subsidiaries, as more fully described in Section 422(b)(6) of the
Code or any successor provision (such shareholder is referred to herein as a
"10-Percent Stockholder"), the Exercise Price for any Qualified Option granted
to such Optionee shall not be less than 110% of the Fair Market Value of the
Common Stock at the Date of Grant.
9. Vesting. Subject to Section 11 of this Plan, each Option
award under the Plan shall vest in accordance with the vesting provisions set
forth in the applicable Option agreement. The Committee may, but shall not be
required to, permit acceleration of vesting upon any sale of the Corporation or
similar transaction. A Participant's Option agreement may contain such
additional provisions with respect to vesting as the Committee shall specify.
10. Exercise. A Participant may pay the Exercise Price of the
shares of Common Stock as to which an Option is being exercised by the delivery
of (a) cash, (b) check, (c) at the Committee's option, previously owned shares
of Common Stock having a Fair Market Value on the date immediately preceding
the exercise date equal to the Exercise Price or (d) at the Committee's option,
any other consideration that the Committee determines is consistent with the
Plan's purpose and applicable law. If the shares to be purchased are covered
by an effective registration statement under the Securities Act of 1933, as
amended, any Option granted under the Plan may be exercised by a broker-dealer
acting on behalf of an Optionee if (a) the broker-dealer has received from the
Optionee or the Corporation a fully- and duly-endorsed agreement evidencing
such Option, together with instructions signed by the Optionee requesting the
Corporation to deliver the shares of Common Stock subject to such Option to the
broker-dealer on behalf of the Optionee and specifying the account into which
such shares should be deposited, (b) adequate provision has been made with
respect to the payment of any withholding taxes due upon such exercise, and (c)
the broker-dealer and the Optionee have otherwise complied with Section
220.3(e)(4) of Regulation T, 12 CFR Part 220, or any successor provision.
11. When Qualified Options May be Exercised. No Qualified Option
shall be exercisable at any time after the expiration of ten (10) years from
the Date of Grant; provided, however, that if the Optionee with respect to a
Qualified Option is a 10-Percent Stockholder on the Date of Grant of such
Qualified Option, then such Option shall not be exercisable after the
expiration of five (5) years from its Date of Grant. In addition, if an
Optionee of a Qualified Option ceases to be an employee of the Corporation or
any Related Corporation for any reason,
4
<PAGE> 5
such Optionee's vested Qualified Options shall not be exercisable after (a) 90
days following the date such Optionee ceases to be an employee of the
Corporation or any Related Corporation, if such cessation of service is not due
to the death or permanent and total disability (within the meaning of Section
22(e)(3) of the Code) of the Optionee, or (b) twelve months following the date
such Optionee ceases to be an employee of the Corporation or any Related
Corporation, if such cessation of service is due to the death or permanent and
total disability (as defined above) of the Optionee. Upon the death of an
Optionee, any vested Qualified Option exercisable on the date of death may be
exercised by the Optionee's estate or by a person who acquires the right to
exercise such Qualified Option by bequest or inheritance or by reason of the
death of the Optionee, provided that such exercise occurs within both the
remaining option term of the Qualified Option and twelve months after the date
of the Optionee's death. This Section 11 only provides the outer limits of
allowable exercise dates with respect to Qualified Options; the Committee may
determine that the exercise period for a Qualified Option shall have a shorter
duration than as specified above.
12. Option Financing. Upon the exercise of any Option granted
under the Plan, the Corporation may, but shall not be required to, make
financing available to the Participant for the purchase of shares of Common
Stock pursuant to such Option on such terms as the Committee shall specify.
13. Withholding of Taxes. The Committee shall make such
provisions and take such steps as it may deem necessary or appropriate for the
withholding of any taxes that the Corporation is required by any law or
regulation of any governmental authority to withhold in connection with any
Option including, but not limited to, withholding the issuance of all or any
portion of the shares of Common Stock subject to such Option until the
Participant reimburses the Corporation for the amount it is required to
withhold with respect to such taxes, cancelling any portion of such issuance in
an amount sufficient to reimburse the Corporation for the amount it is required
to withhold or taking any other action reasonably required to satisfy the
Corporation's withholding obligation.
14. Conditions Upon Issuance of Shares. The Corporation shall not
be obligated to sell or issue any shares upon the exercise of any Option
granted under the Plan unless the issuance and delivery of shares shall comply
with all provisions of applicable federal and state securities laws and the
requirements of NASDAQ or any stock exchange upon which shares of the Common
Stock may then be listed.
As a condition to the exercise of an Option, the Corporation
may require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of applicable federal and state securities laws.
The Corporation shall not be liable for refusing to sell or
issue any shares covered by any Option if the Corporation cannot obtain
authority from the appropriate regulatory bodies deemed by the Corporation to
be necessary to lawfully sell or issue such shares. In addition, the
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<PAGE> 6
Corporation shall have no obligation to any Participant, express or implied, to
list, register or otherwise qualify the shares of Common Stock covered by any
Option.
No Participant will be, or will be deemed to be, a holder of
any Common Stock subject to an Option unless and until such Participant has
exercised his or her Option and paid the purchase price for the subject shares
of Common Stock. Each Option under this Plan shall be transferable only by
will or the laws of descent and distribution and shall be exercisable during
the Participant's lifetime only by such Participant.
Any Common Stock issued pursuant to the exercise of an Option
to a person who would be deemed an officer or director of the Corporation under
Rule 16b-3 shall not be transferred until at least six months have elapsed from
the Date of Grant to the date of disposition of the Common Stock.
15. Restrictions on Shares. Shares of Common Stock issued
pursuant to the Plan shall be subject to restrictions on transfer under
applicable federal and state securities laws. The Board may impose such
additional restrictions on the ownership and transfer of shares of Common Stock
issued pursuant to the Plan as it deems desirable; any such restrictions shall
be set forth in any Option agreement entered into hereunder.
16. Modification of Options. At any time and from time to time,
the Committee may execute an instrument providing for modification, extension
or renewal of any outstanding Option, provided that no such modification,
extension or renewal shall impair the Option without the consent of the holder
of the Option or conflict with the provisions of Rule 16b-3. Notwithstanding
the foregoing, (a) in the event of such a modification, substitution, extension
or renewal of a Qualified Option, the Committee may increase the exercise price
of such Option if necessary to retain the qualified status of such Option, and
(b) the Committee may, in its discretion and without the holder's consent,
convert any Qualified Option into a Nonqualified Option.
17. Effect of Change in Stock Subject to the Plan. In the event
that each of the outstanding shares of Common Stock (other than shares held by
dissenting stockholders) shall be changed into or exchanged for a different
number or kind of shares of stock of the Corporation or of another corporation
(whether by reason of merger, consolidation, recapitalization,
reclassification, split-up, combination of shares or otherwise), or in the
event a stock split or stock dividend shall have occurred, then the Corporation
may either (a) substitute for each share of Common Stock then subject to
Options or available for Options the number and kind of shares of stock into
which each outstanding share of Common Stock (other than shares held by
dissenting stockholders) shall be so changed or exchanged, or the number of
shares of Common Stock as is equitably required in the event of a stock split
or stock dividend, together with an appropriate adjustment of the Exercise
Price, or (b) cancel all such Options as of the effective date of any merger,
consolidation, recapitalization, reclassification, split-up or combination of
shares by giving written notice to each holder thereof or his personal
representatives of its intention to do so and by permitting the exercise of all
such Options, without regard to determinations of periods or installments of
exercisability during the thirty (30) day period
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<PAGE> 7
immediately preceding such effective date. The Committee may, but shall not be
required to, provide additional anti-dilution protection to a Participant under
the terms of the Participant's Option agreement or otherwise.
18. Administration.
(a) Notwithstanding anything to the contrary herein, to
the extent necessary to comply with the requirements of Rule 16b-3,
the Plan shall be administered by the Board, if each member is a
Disinterested Director, or by a committee of two or more Disinterested
Directors appointed by the Board (the group responsible for
administering the Plan is referred to herein as the "Committee").
Options may be granted under Sections 6 and 7, respectively, only by
majority agreement of the members of the Committee. Subject to the
limitations and qualifications set forth in this Plan, the Committee
shall also determine the number of Options to be granted, the number
of shares subject to each Option grant, the exercise price or prices
of each Option, the vesting and exercise period of each Option,
whether an Option may be exercised as to less than all of the Common
Stock subject thereto, and such other terms and conditions of each
Option, if any, as are consistent with the provisions of this Plan.
Except with respect to Section 18(b) of this Plan, the Committee shall
have complete authority to construe, interpret and administer the
provisions of this Plan and the provisions of the Option agreements
entered into hereunder; to prescribe, amend and rescind rules and
regulations pertaining to this Plan; to suspend or discontinue this
Plan (subject to Section 18(d)); and to make all other determinations
necessary or deemed advisable in the administration of the Plan. The
determinations, interpretations and constructions made by the
Committee shall be final and conclusive. No member of the Committee
shall be liable for any action taken, or failed to be taken, made in
good faith relating to the Plan or any award thereunder, and the
members of the Committee shall be entitled to indemnification and
reimbursement by the Corporation in respect of any claim, loss, damage
or expense (including attorneys' fees) arising therefrom to the
fullest extent permitted by law.
(b) Members of the Committee shall be specified by the
Board, and shall consist solely of Disinterested Directors.
Disinterested Directors shall not be eligible to receive Options to
purchase Common Stock pursuant to Section 6 of this Plan.
(c) Notwithstanding Section 18(a), to comply with Rule
16b-3, no amendment may be made without the approval of the
shareholders of the Corporation by the affirmative votes of the
holders of a majority of the shares of Common Stock then issued and
outstanding, which amendment would materially (i) increase the
benefits accruing to Participants, (ii) increase the number of
securities which may be issued under the Plan, other than in
accordance with Section 17 hereof, or (iii) modify the requirements as
to eligibility for participation in the Plan.
(d) Although the Committee may suspend or discontinue the
Plan at any time, all Qualified Options must be granted within ten
(10) years from the effective date of the
7
<PAGE> 8
Plan or the date the Plan is approved by the shareholders of the
Corporation, whichever is earlier.
19. Continued Employment Not Presumed. Nothing in this Plan or
any document describing it nor the grant of any Option shall give any
Participant the right to continue in the employment of the Corporation or
affect the right of the Corporation to terminate the employment of any such
person with or without cause.
20. Liability of the Corporation. Neither the Corporation, its
directors, officers or employees or the Committee, nor any Subsidiary which is
in existence or hereafter comes into existence, shall be liable to any
Participant or other person if it is determined for any reason by the Internal
Revenue Service or any court having jurisdiction that any Qualified Option
granted hereunder does not qualify for tax treatment as an incentive stock
option under Section 422 of the Code.
21. GOVERNING LAW. THE PLAN SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF STATE OF TEXAS AND THE UNITED STATES, AS
APPLICABLE, WITHOUT REFERENCE TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
22. Severability of Provisions. If any provision of this Plan is
determined to be invalid, illegal or unenforceable, such invalidity, illegality
or unenforceability shall not affect the remaining provisions of the Plan, but
such invalid, illegal or unenforceable provision shall be fully severable, and
the Plan shall be construed and enforced as if such provision had never been
inserted herein.
8
<PAGE> 1
EXHIBIT 10.8
QUEST MEDICAL, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT (the "Agreement"), effective as of ____________, 199__,
is made and entered into by and between Quest Medical, Inc., a Texas
corporation (the "Corporation"), and _________________________ (the
"Participant").
WITNESSETH:
WHEREAS, the Corporation has implemented the Quest Medical, Inc. 1995
Stock Option Plan (the "Plan"), which was adopted by the Corporation's Board of
Directors (the "Board") and approved by the Corporation's shareholders, and
which provides for the grant of stock options to selected officers or key
employees of the Corporation or its Subsidiaries to purchase shares of Common
Stock, $.05 par value, of the Corporation (the "Common Stock");
WHEREAS, in the case of grants to officers and directors who are
subject to Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the stock options provided for under the Plan are
intended to comply with the requirements of Rule 16b-3 under the Exchange Act.
WHEREAS, the Stock Option Committee (the "Committee") appointed by the
Board has selected the Participant to participate in the Plan and has awarded
the non-qualified stock option herein described (the "Option") to the
Participant; and
WHEREAS, the parties hereto desire to evidence in writing the terms
and conditions of the Option.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements herein contained, and as an inducement to the
Participant to continue as an employee of the Corporation or its Subsidiary and
to promote the success of the business of the Corporation and its Subsidiaries,
the parties hereby agree as follows:
1. Grant of Option. The Corporation hereby grants to the
Participant, upon the terms and subject to the conditions, limitations and
restrictions set forth in the Plan and in this Agreement, the Option to acquire
________ shares of Common Stock, at an exercise price per share of $________,
effective as of the date of this Agreement (the "Award Date"). The Participant
hereby accepts the Option from the Corporation.
2. Vesting. The shares of Common Stock subject to the Option
shall vest ratably in ________ equal annual increments commencing on the first
anniversary of the Award Date. Notwithstanding the preceding sentence, the
Option shall immediately vest in full as to all shares of Common Stock subject
hereto upon any "Sale of the Corporation." A "Sale of the Corporation" shall
occur if the Corporation engages in a merger, consolidation, recapitalization,
reorganization or sale, lease or transfer of all or substantially all of the
Corporation's assets and
1
<PAGE> 2
the Corporation or its stockholders or affiliates immediately before such
transaction beneficially own, immediately after or as a result of such
transaction, equity securities of the surviving or acquiring corporation or
such corporation's parent corporation possessing less than fifty-one percent
(51%) of the voting power of the surviving or acquiring corporation or such
corporation's parent corporation, provided that a Sale of the Corporation shall
not be deemed to occur upon any public offering or series of such offerings of
securities of the Corporation or its affiliates that results in any such change
in beneficial ownership.
3. Exercise. In order to exercise the Option with respect to any
vested shares of Common Stock hereunder, the Participant shall provide written
notice to the Corporation at its principal executive office. At the time of
exercise, the Participant shall pay to the Corporation the Option price per
share set forth in Section 1 times the number of vested shares as to which the
Option is being exercised. The Participant shall make such payment by
delivering (a) cash, (b) a check, (c) at the Committee's option, previously
owned shares of Common Stock having a Fair Market Value on the date immediately
preceding the exercise date equal to the aggregate exercise price or (d) at the
Committee's option, any other consideration that the Committee determines is
consistent with the Plan and applicable law. If the Option is exercised in
full, the Participant shall surrender this Agreement to the Corporation for
cancellation. If the Option is exercised in part, the Participant shall
surrender this Agreement to the Corporation so that the Corporation may make
appropriate notation hereon or cancel this Agreement and issue a new agreement
representing the unexercised portion of the Option.
If the shares to be purchased are covered by an effective registration
statement under the Securities Act of 1933, as amended, the Option may be
exercised by a broker-dealer acting on behalf of the Participant if (a) the
broker-dealer has received from the Participant or the Corporation a fully- and
duly-endorsed agreement evidencing such option, together with instructions
signed by the Participant requesting the Corporation to deliver the shares of
Common Stock subject to such option to the broker-dealer on behalf of the
Participant and specifying the account into which such shares should be
deposited, (b) adequate provision has been made with respect to the payment of
any withholding taxes due upon such exercise, and (c) the broker-dealer and the
Participant have otherwise complied with Section 220.3(e)(4) of Regulation T,
12 CFR Part 220, or any successor provision.
4. Who May Exercise. The Option shall be exercisable during the
lifetime of the Participant only by the Participant. To the extent exercisable
after the Participant's death, the Option shall be exercised only by the
Participant's representatives, executors, successors or beneficiaries.
5. Expiration of Option. The Option shall expire, and shall not
be exercisable with respect to any vested shares of Common Stock hereunder as
to which the Option has not been exercised, on the first to occur of: (a) the
tenth anniversary of the Award Date; or (b) 90 days after any termination of
the Participant's employment with the Corporation for any reason other than
death (or within twelve months after any such death); provided, however, that
(i) if the Participant is terminated for dishonesty or other acts detrimental
to the interests of the Corporation or its
2
<PAGE> 3
Subsidiaries, or (ii) if Participant competes with the Corporation or its
Subsidiaries or solicits the Corporation's or the Subsidiaries' employees to
leave the employ of the Corporation or the Subsidiaries, the Committee may, by
written notice to the Participant, immediately terminate the Option. The
Option shall expire, and shall not be exercisable, with respect to any unvested
shares of Common Stock hereunder, immediately upon the termination of the
Participant's employment with the Corporation for any reason, including death.
6. Tax Withholding. Any provision of this Agreement to the
contrary notwithstanding, the Corporation may take such steps as it deems
necessary or desirable for the withholding of any taxes that it is required by
law or regulation of any governmental authority, federal, state or local,
domestic or foreign, to withhold in connection with any of the shares of Common
Stock subject hereto.
7. Dilution. The number of shares of Common Stock subject to the
Option and the Option price therefor set forth in Section 1 shall be subject to
adjustment for any Dilutive Event. A "Dilutive Event" shall include any of the
following events that results in dilution to the shares of Common Stock
acquired or acquirable upon exercise of the Option: any increase or decrease
in the shares of Common Stock or any other capital stock of the Corporation or
any change or exchange of any such securities for a different number or kind of
securities, any of which results from one or more stock splits, reverse stock
splits, stock dividends, recapitalizations, reorganizations or other corporate
actions with a similar effect. A "Dilutive Event" shall not include, however,
among other things: (i) the issuance or exercise of options granted pursuant
to the Plan; or (ii) any issuance of capital stock by the Corporation for fair
market value or any issuance or grant to any person or entity of any right to
subscribe for or to purchase any capital stock or securities convertible into
any capital stock of the Corporation for fair market value.
8. Transfer of Option. The Participant shall not, directly or
indirectly, sell, transfer, pledge, encumber or hypothecate ("Transfer") the
Option or the rights and privileges pertaining thereto other than by will or
the laws of descent and distribution. Any permitted transferee to whom the
Participant shall Transfer the Option pursuant to this Section 8 shall agree to
be bound by this Agreement. The Option is not liable for or subject to, in
whole or in part, the debts, contracts, liabilities or torts of the
Participant, nor shall it be subject to garnishment, attachment, execution,
levy or other legal or equitable process.
9. Certain Legal Restrictions. The Corporation shall not be
obligated to sell or issue any shares of Common Stock upon the exercise of the
Option or otherwise unless the issuance and delivery of such shares shall
comply with all relevant provisions of law and other legal requirements
including, without limitation, any applicable federal or state securities laws
and the requirements of any stock exchange upon which shares of the Common
Stock may then be listed. As a condition to the exercise of the Option or the
sale by the Corporation of any additional shares of Common Stock to the
Participant, the Corporation may require the Participant to make such
representations and warranties as may be necessary to assure the availability
of an exemption from the registration requirements of applicable federal or
state securities laws. The Corporation shall not be liable for refusing to
sell or issue any shares if the Corporation cannot obtain authority from the
appropriate regulatory bodies deemed by the Corporation to be necessary to
lawfully sell or issue such shares. In addition, the Corporation shall have no
3
<PAGE> 4
obligation to the Participant, express or implied, to list, register or
otherwise qualify any of the Participant's shares of Common Stock. The shares
of Common Stock issued upon the exercise of the Option may not be transferred
except in accordance with applicable federal or state securities laws. At the
Corporation's option, the certificate evidencing shares of Common Stock issued
to the Participant may be legended as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE
APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY
NOT BE SOLD, ASSIGNED, TRANSFERRED OR PLEDGED EXCEPT IN COMPLIANCE
WITH THE REQUIREMENTS OF SUCH ACT AND THE APPLICABLE SECURITIES LAWS
OF ANY STATE OR OTHER JURISDICTION.
Any Common Stock issued pursuant to the exercise of Options granted
pursuant to this Agreement to a person who would be deemed an officer or
director of the Corporation under Rule 16b-3 shall not be transferred until at
least six months have elapsed from the date of grant of such Option to the date
of disposition of the Common Stock underlying such Option.
10. Plan Incorporated. The Participant accepts the Option herein
subject to all the provisions of the Plan, which are incorporated herein,
including the provisions that authorize the Committee to administer and
interpret the Plan and that provide that the Committee's decisions,
determinations and interpretations with respect to the Plan are final and
conclusive on all persons affected thereby. Except as otherwise set forth in
this Agreement, terms defined in the Plan have the same meanings herein.
11. Miscellaneous.
(a) The Option herein is intended to be a non-qualified
stock option under applicable tax laws, and it is not to be
characterized or treated as an incentive stock option under such laws.
(b) The granting of the Option herein shall impose no
obligation upon the Participant to exercise the Option or any part
thereof. Nothing herein contained shall affect the right of the
Corporation to terminate the Participant at any time, with or without
cause, or shall be deemed to create any rights to employment on the
part of the Participant.
(c) The rights and obligations arising under this
Agreement are not intended to and do not affect the employment
relationship that otherwise exists between the Corporation and the
Participant, whether such employment relationship is at will or
defined by an employment contract. Moreover, this Agreement is not
intended to and does not amend any existing employment contract
between the Corporation and the Participant; to the extent there is a
conflict between this Agreement and such an employment contract, the
employment contract shall govern and take priority.
4
<PAGE> 5
(d) Neither the Participant nor any person claiming under
or through the Participant shall be or shall have any of the rights or
privileges of a stockholder of the Corporation in respect of any of
the shares issuable upon the exercise of the Option herein unless and
until certificates representing such shares shall have been issued and
delivered to the Participant or such Participant's agent.
(e) Any notice to be given to the Corporation under the
terms of this Agreement or any delivery of the Option herein to the
Corporation shall be addressed to the Corporation at its principal
executive offices, and any notice to be given to the Participant shall
be addressed to the Participant at the address set forth beneath his
or her signature hereto, or at such other address for a party as such
party may hereafter designate in writing to the other. Any such
notice shall be deemed to have been duly given if mailed, postage
prepaid, addressed as aforesaid.
(f) Subject to the limitations herein on the
transferability by the Participant of the Option and any shares of
Common Stock, this Agreement shall be binding upon and inure to the
benefit of the representatives, executors, successors or beneficiaries
of the parties hereto.
(g) THE INTERPRETATION, PERFORMANCE AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND
THE UNITED STATES, AS APPLICABLE, WITHOUT REFERENCE TO THE CONFLICT OF
LAWS PROVISIONS THEREOF.
(h) If any provision of this Agreement is declared or
found to be illegal, unenforceable or void, in whole or in part, then
the parties shall be relieved of all obligations arising under such
provision, but only to the extent that it is illegal, unenforceable or
void, it being the intent and agreement of the parties that this
Agreement shall be deemed amended by modifying such provision to the
extent necessary to make it legal and enforceable while preserving its
intent or, if that is not possible, by substituting therefor another
provision that is legal and enforceable and achieves the same
objectives.
(i) All section titles and captions in this Agreement are
for convenience only, shall not be deemed part of this Agreement, and
in no way shall define, limit, extend or describe the scope or intent
of any provisions of this Agreement.
(j) The parties shall execute all documents, provide all
information, and take or refrain from taking all actions as may be
necessary or appropriate to achieve the purposes of this Agreement.
(k) This Agreement constitutes the entire agreement among
the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining thereto.
5
<PAGE> 6
(l) No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this
Agreement or to exercise any right or remedy consequent upon a breach
thereof shall constitute waiver of any such breach or any other
covenant, duty, agreement or condition.
(m) This Agreement may be executed in counterparts, all
of which together shall constitute one agreement binding on all the
parties hereto, notwithstanding that all such parties are not
signatories to the original or the same counterpart.
(n) At any time and from time to time the Committee may
execute an instrument providing for modification, extension, or
renewal of any outstanding option, provided that no such modification,
extension or renewal shall (i) impair the option in any respect
without the consent of the holder of the option or (ii) conflict with
the provisions of Rule 16b-3. Except as provided in the preceding
sentence, no supplement, modification or amendment of this Agreement
or waiver of any provision of this Agreement shall be binding unless
executed in writing by all parties to this Agreement. No waiver of
any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision of this Agreement
(regardless of whether similar), nor shall any such waiver constitute
a continuing waiver unless otherwise expressly provided.
(o) In addition to all other rights or remedies available
at law or in equity, the Corporation shall be entitled to injunctive
and other equitable relief to prevent or enjoin any violation of the
provisions of this Agreement.
(p) The Participant's spouse joins this Agreement for the
purpose of agreeing to and accepting the terms of this Agreement and
to bind any community property interest he or she has or may have in
the Option, any vested portion or any unvested portion of the Option,
any shares of Common Stock acquired upon exercise of the Option and
any other shares of Common Stock held by the Participant.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CORPORATION:
Quest Medical, Inc.
By: _________________________________
Name: _________________________________
Title: _________________________________
6
<PAGE> 7
PARTICIPANT:
_______________________________________
Name: ______________________________
Address: ______________________________
______________________________
______________________________
PARTICIPANT'S SPOUSE:
_______________________________________
Name: _________________________________
7
<PAGE> 1
EXHIBIT 10.26
September 25, 1995
Quest Medical, Inc.
One Allentown Parkway
Allen, Texas 75002
Attention: Mr. F. Robert Merrill III
Ladies and Gentlemen:
In accordance with recent discussions, NationsBank of Texas, N.A.
("Lender") is pleased to make the following commitment to Quest Medical, Inc.
("Borrower"). THIS COMMITMENT LETTER SUPERSEDES AND REPLACES ANY COMMITMENT
LETTERS PREVIOUSLY DELIVERED TO BORROWER BY LENDER WITH RESPECT TO THE FACILITY
DESCRIBED BELOW, AND ANY RELATED ORAL OR WRITTEN COMMITMENTS OR OFFERS.
Lender and Borrower previously entered into the First Amended and
Restated Credit Agreement dated as of March 31, 1995 (the "Existing Credit
Agreement"), pursuant to which Lender extended to Borrower a revolving credit
and term loan facility, subject to the terms and conditions set forth therein.
Subject to the terms of this agreement, Lender agrees to amend or restate the
Existing Credit Agreement to delete Facility B and add a new $15,000,000
facility, the proceeds of which will be used to make acquisitions described in
this agreement ("Acquisition Facility"). Facility A in the Existing Credit
Agreement will be retained, and amended or restated.
The Acquisition Facility is contingent upon the occurrence of a public
offering of Borrower's common capital stock which is registered under the
Securities Act of 1933 and underwritten by a nationally recognized investment
banking firm resulting in net proceeds to Borrower of not less than
$17,000,000.00 (a "Qualified Offering").
The Acquisition Facility, and the Existing Credit Agreement (as
amended or restated), shall include the basic terms and conditions set forth
below. Capitalized terms used herein shall, unless otherwise indicated, have
the respective meanings set forth in the Existing Credit Agreement.
A. ACQUISITION FACILITY
1. Commitment Amount. The Acquisition Facility shall be in an
amount of up to $15,000,000.00 (the "Commitment").
2. Availability. Subject to the conditions outlined below, the
Commitment shall be available in multiple advances on or after the closing date
and prior to maturity.
<PAGE> 2
Quest Medical, Inc.
September 25, 1995
Page 2
3. Use of Proceeds. The Commitment shall be used by Borrower for
the acquisition of (a) all of the outstanding equity interest of any Person or
(b) all or a portion of the assets of any Person; provided, (i) the board of
directors of such Person has approved such acquisition and such approval has
not been revoked, and (ii) such Person or the assets of such Person the subject
of the proposed acquisition are used in the research, development, design,
production or marketing of Devices (as that term is defined in the Federal
Food, Drug and Cosmetic Act, 21 U.S.C. Section 301, et seq.) (each, a
"Permitted Acquisition").
4. Interest Rate and Interest Payments.
(a) Interest on advances under the Acquisition Facility
shall accrue at the lesser of: (i) at Borrower's option (A) the Prime
Base Rate plus the Applicable Margin (defined below), or (B) the LIBOR
Rate Basis plus the Applicable Margin; and (ii) the Highest Lawful
Rate. Past-due principal of, and to the extent permitted by
Applicable Law, interest on, the Acquisition Facility shall bear
interest at the Highest Lawful Rate.
(b) The "Applicable Margin" means, at the time of
determination thereof, the interest margin over the Prime Base Rate or
the LIBOR Rate Basis, as the case may be, based on the Margin Ratio
described below as follows:
<TABLE>
<CAPTION>
=====================================================================================================
Applicable Margin
Prime Base Rate Borrowings Applicable Margin
Margin Ratio LIBOR Borrowings
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Equal to or greater than 2.0 to 1.0 .25% 2.0%
-----------------------------------------------------------------------------------------------------
Equal to or greater than 1.5 to 1.0 0% 1.75%
-----------------------------------------------------------------------------------------------------
Less than 1.5 to 1.0 0% 1.50%
=====================================================================================================
</TABLE>
(c) "Margin Ratio" means the ratio, as at any date of
determination, of (i) the sum of the aggregate unpaid principal of all
outstanding Advances, plus all accrued, unpaid interest on all
Advances, plus all other Obligations to (ii) EBITDA.
(d) Interest with respect to any portion of the
Acquisition Facility subject to the Prime Base Rate shall be due and
payable quarterly as it accrues. Interest with respect to any portion
of the Acquisition Facility subject to the LIBOR Rate Basis shall be
payable at the end of each Interest Period, but not less frequently
than quarterly.
5. Term. The outstanding principal of, and any unpaid interest
on, the Acquisition Facility not evidenced by a Term Note (as defined below)
will be repaid at maturity (being the
<PAGE> 3
Quest Medical, Inc.
September 25, 1995
Page 3
second anniversary of the Qualified Offering). The outstanding principal of,
and any unpaid interest on, the Acquisition Facility evidenced by a Term Note
will be repaid in equal quarterly installments, commencing with the first
quarterly date occurring after the date of such Term Note, with the final
payment due on the fifth anniversary of the date of such Term Note.
6. Commitment Fee. Borrower shall pay to Lender a non-refundable
commitment fee equal to $50,000.00 upon execution of the definitive loan and
collateral documents. In addition, Borrower shall pay to Lender, quarterly in
arrears, a commitment fee equal to one forth of one percent (1/4%) per annum
(calculated on the basis of actual number of days elapsed in a year consisting
of 360 days) on the unused portion of the Commitment.
7. Conditions to Advances. In addition to the conditions
precedent described in Section D.1., the obligation of Lender to make advances
under the Acquisition Facility, is subject to the following additional
conditions:
(a) Borrower shall have provided to Lender (i) current
financial statements of and historical operating information on the
Person which, or the assets of which, is the proposed Permitted
Acquisition, (ii) a pro-forma balance sheet of Borrower, together with
pro-forma operating projections of the three year period following the
acquisition, (iii) pro forma financial statements which consolidate
the financial statements of Borrower and the Person of which is the
proposed Permitted Acquisition (or if assets, only, of such Person are
to be acquired, financial statements based on the operations of such
assets as a stand-alone entity), prepared as if Borrower and such
Person (or its assets) had operated as a single entity during the
twelve-month period preceding the effective date of proposed Permitted
Acquisition, (iv) a pro-forma compliance certificate showing
calculations of all financial covenants set forth in the loan
agreement, based on the financial statements described inclause (iii),
(v) a copy of the results of Borrower's due diligence with respect to
the Person which, or the assets of which, is the proposed Permitted
Acquisition and (vi) such other documents and information as Lender
may reasonably request;
(b) If the aggregate consideration payable by Borrower in
respect of the specific Permitted Acquisition equals or exceeds
$5,000,000, Lender shall have notified Borrower within ten days of
receipt of the information described in Section A.7.(a) in form and
substance acceptable to Lender that Lender has approved the Permitted
Acquisition;
(c) If the principal amount of any single proposed
advance equals or exceeds $3,000,000, Borrower shall execute and
deliver to Lender a promissory note (a "Term Note"), dated as of the
date of the proposed advance. If after giving effect to a proposed
advance the principal amount of which is less than $3,000,000, the
aggregate outstanding
<PAGE> 4
Quest Medical, Inc.
September 25, 1995
Page 4
principal of all advances not evidenced by a Term Note equals or
exceeds $3,000,000, Borrower shall execute and deliver to Lender a
Term Note, dated as of the date of the proposed advance, in the
principal amount of the sum of the proposed advance plus the principal
amount of existing advances not evidenced by a Term Note; and
(d) No Default or Event of Default exists, or will exist
after giving effect to the Permitted Acquisition.
8. Other Terms. The Commitment shall otherwise be generally
subject to the same basic terms and conditions set forth in the Existing Credit
Agreement.
B. COLLATERAL
The Acquisition Facility, if and when drawn upon, shall be secured by
the assets referred to in the Collateral Documents.
C. CONDITIONS, REPRESENTATIONS, COVENANTS, AND EVENTS OF DEFAULT
1. Conditions Precedent. Lender's obligations to amend or
restate the Existing Credit Agreement and to make the loans described above
shall be subject to conditions precedent that are standard in loan
documentation for similar loans made by Lender, including the conditions that:
(a) Lender has received loan and collateral documents in form and substance
satisfactory to Lender; (b) all representations and warranties made by Borrower
to Lender shall be true and correct as of the date of such amendment or
restatement and funding; (c) as of the date of such amendment or restatement
and funding, no material adverse change has occurred in the business or
financial condition of Borrower; and (d) as of the date of such amendment or
restatement and funding, there exists no Event of Default (or event with which
notice or lapse of time or both could constitute an Event of Default) under the
loan agreement.
2. Representations and Warranties. The loan documentation will
include representations and warranties similar to those set forth in the
Existing Credit Agreement.
3. Affirmative Covenants. The loan documentation will include
affirmative covenants similar to those set forth in the Existing Credit
Agreement.
4. Negative Covenants. The loan documentation will include
negative covenants similar to those set forth in the Existing Credit Agreement,
which shall be applicable if and when the Acquisition Facility is drawn upon.
<PAGE> 5
Quest Medical, Inc.
September 25, 1995
Page 5
5. Financial Covenants. The Existing Credit Agreement, as
amended or restated shall include the following financial covenants. Each of
the following ratios shall be determined on a consolidated basis pursuant to
GAAP.
(a) Fixed Charges Coverage Ratio. Borrower shall not
permit the Fixed Charges Coverage Ratio to be less than as indicated
below, as at the end of each fiscal quarter ending during the period
indicated:
Effective Date and thereafter 2.50 to 1.00
(b) Total Liabilities to Tangible Net Worth Ratio.
Borrower shall not permit the ratio of Total Liabilities to Tangible
Net Worth to be greater than as indicated below, as at the end of each
fiscal quarter ending on the date or during the period indicated:
Effective Date through September 30, 1996 2.50 to 1.00
October 1, 1996 and thereafter 1.75 to 1.00
(c) Current Maturities Coverage Ratio. Borrower shall
not permit the Current Maturities Coverage Ratio to be less than as
indicated below, as at the end of each fiscal quarter ending during
the period indicated:
Effective Date and thereafter 2.00 to 1.00
(d) Margin Ratio. Borrower shall not permit the ratio of
(i) the sum of the aggregate unpaid principal of all outstanding
Advances, plus all accrued, unpaid interest on all Advances, plus all
other Obligations to (ii) EBITDA, to be greater than 2.50 to 1.00 as
at the end of each fiscal quarter.
6. Defaults. The loan documentation will include events of
default similar to the Events of Default set forth in the Existing Credit
Agreement.
D. GENERAL PROVISIONS
1. Financing Documents. The loan documents to be executed in
connection with the Acquisition Facility shall be in form and substance
mutually acceptable to Lender and Borrower. Borrower shall deliver certified
resolutions, opinions of counsel, incumbency certificates, collateral documents
and related instruments, in form and substance reasonably satisfactory to
Lender and its counsel, as Lender shall require.
2. Expenses. Borrower agrees to pay the reasonable costs,
expenses and fees (including reasonable attorney's fees) incurred or suffered
by Lender in connection with the
<PAGE> 6
Quest Medical, Inc.
September 25, 1995
Page 6
negotiation, preparation and documentation of the Acquisition Facility and the
amendment or restatement of the Existing Credit Agreement. If the negotiations
concerning the Acquisition Facility and the amendment or restatement of the
Existing Credit Agreement are terminated prior to execution of final
documentation, Borrower shall pay the above- mentioned costs, expenses and fees
of Lender incurred prior to, or as a result of, such termination.
3. Reliance. There are not third party beneficiaries of this
commitment letter, and no party other than Borrower shall be entitled to rely
on this commitment letter. This commitment letter is not assignable.
4. Texas law. This document shall be deemed to be executed and
performable in, and governed by the substantive laws of, the State of Texas.
5. Scope of Commitment. The foregoing is intended to provide a
substantive outline of Lender's commitment rather than a complete statement of
all terms, conditions and documents which would be required in connection with
the Acquisition Facility and the amendment or restatement of the Existing
Credit Agreement. It is possible that substantive terms or conditions may be
changed in order to account for or reflect changes in statutory or regulatory
authorities governing the subject matter of the transaction.
6. Increased Costs. In addition, and without limiting the
generality of the foregoing, if any law, regulation or the interpretation
thereof by any court or administrative or governmental authority shall either
impose, modify or deem applicable any capital reserve, insurance premium, or
similar requirement against commitments or loans made by Lender and the result
thereof shall be to increase the cost to Lender of making, funding, or
maintaining this commitment or the Acquisition Facility, then, on demand by
Lender, Borrower further promises to pay to Lender, from time to time,
additional amounts which shall be sufficient to compensate Lender for the
portion of such increased costs allocable to this commitment or the Acquisition
Facility. Written notice setting forth in reasonable detail such costs
incurred by Lender, submitted to Borrower from time to time, shall be
conclusive, absent manifest error, as to the amount thereof.
E. CONDITIONS PRECEDENT
In addition to the other requirements described herein, Lender's
obligation to sign loan documents amending or restating the Existing Credit
Agreement and make the Acquisition Facility available to Borrower is subject to
the following conditions:
(1) a Qualified Offering shall have occurred and Borrower
shall have received all net proceeds of such offering on or before
November 30, 1995;
<PAGE> 7
Quest Medical, Inc.
September 25, 1995
Page 7
(2) the outstanding principal balance of, and accrued
unpaid interest on, and all fees related to, Facility B pursuant to
the Existing Credit Agreement shall be paid in full and Facility B
shall be terminated.
(3) the documents and information previously delivered to
Lender by Borrower shall be accurate, and there shall have been no
material adverse changes in the matters covered by such documents and
information prior to the execution of the loan documents; without
limiting the foregoing, Borrower understands that Lender has relied
upon documents and information furnished by Borrower to Lender
regarding; the financial condition of Borrower and its subsidiaries
(including financial statements dated as of December 31, 1994 and June
30, 1995); financial projections for Borrower and its Subsidiaries;
material contracts; and the existing and prospective management of
Borrower and its Subsidiaries;
(4) Lender shall be satisfied with regulatory matters
affecting Borrower and its Consolidated Subsidiaries, including
licenses and authorities to operate their businesses as previously and
proposed to be conducted, the ability of Borrower to receive dividends
from its direct and indirect subsidiaries, the absence of material
regulatory violations, and, generally, the absence of material adverse
regulatory events;
(5) there shall have occurred no litigation or
administrative proceedings, challenging the power or authority of
Borrower or any of its Subsidiaries to operate their businesses as
previously conducted and proposed to be conducted;
(6) no Default or Event of Default under the Existing
Credit Agreement shall have occurred; and
(7) generally, no material adverse change shall have
occurred int he business, financial condition, projections or
prospects of Borrower and its Subsidiaries, taken as a whole.
F. TERMINATION AND EXPIRATION
1. Expiration. The proposal described above shall remain
effective until the close of business on September 29, 1995. If Borrower
desires to accept this proposal, an authorized officer should execute a copy of
this letter and return it to the undersigned by such time, together with the
commitment fee described in Section A.6..
2. Termination. If Borrower accepts this proposal, then the
commitment of Lender contained herein shall terminate upon the earliest to
occur of (a) January 15, 1996, (b) the occurrence of a material adverse change
in the financial condition of Borrower or its
<PAGE> 8
Quest Medical, Inc.
September 25, 1995
Page 8
subsidiaries, taken as a whole, and (c) the execution of definitive loan and
collateral documents pursuant to this Commitment.
G. FINAL AGREEMENT
THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
Sincerely,
NATIONSBANK OF TEXAS, N.A.
By: /s/ BRIAN K. SCHNEIDER
-----------------------------------
Brian K. Schneider
Vice President
AGREED TO AND ACCEPTED
THIS 25th DAY OF SEPTEMBER, 1995
QUEST MEDICAL, INC.
By: /s/ F. ROBERT MERRILL III
-----------------------------------
F. Robert Merrill III
Vice President
<PAGE> 1
EXHIBIT 11.1
QUEST MEDICAL, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
------------------------------------------- ----------------------------
1994 1993 1992 1995 1994
----------- ---------- ---------- ------------ ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Primary:
Weighted average common shares
outstanding 5,256,683 5,253,062 5,163,800 5,738,825 5,240,490
Stock options and warrants - based on
the treasury stock method using
average market price - 306,360 430,341 - -
----------- ---------- ---------- ------------ ----------
Primary weighted average common and
common equivalent shares outstanding 5,256,683 5,559,422 5,594,141 5,738,825 5,240,490
=========== ========== ========== ============ ==========
(Loss) earnings before cumulative effect
of change in accounting principle $(1,719,193) $ 647,037 $ 193,613 $(10,613,306) $ (540,444)
=========== ========== ========== ============ ==========
Cumulative effect of change in accounting
principle $ - $ 169,308 $ - $ - $ -
=========== ========== ========== ============ ==========
Net (loss) earnings $(1,719,193) $ 816,345 $ 193,613 $(10,613,306) $ (540,444)
=========== ========== ========== ============ ==========
(Loss) earnings before cumulative effect
of change in accounting principle
per share $ (0.33) $ 0.12 $ 0.03 $ (1.85) $ (0.10)
=========== ========== ========== ============ ==========
Cumulative effect of change in accounting
principle $ 0.00 $ 0.03 $ 0.00 $ 0.00 $ 0.00
=========== ========== ========== ============ ==========
Net (loss) earnings per share $ (0.33) $ 0.15 $ 0.03 $ (1.85) $ (0.10)
=========== ========== ========== ============ ==========
Fully diluted:
Weighted average common shares
outstanding 5,256,683 5,253,062 5,163,800 5,738,825 5,240,490
Stock options and warrants - based on
the treasury stock method using
period-end market price if higher
than average - 306,360 430,341 - -
----------- ---------- ---------- ------------ ----------
Fully diluted weighted average common and
common equivalent shares outstanding 5,256,683 5,559,422 5,594,141 5,738,825 5,240,490
=========== ========== ========== ============ ==========
(Loss) earnings before cumulative effect
of change in accounting principle $(1,719,193) $ 647,037 $ 193,613 $(10,613,306) $(540,444)
=========== ========== ========== ============ ==========
Cumulative effect of change in accounting
principle $ - $ 169,308 $ - $ - $ -
=========== ========== ========== ============ ==========
Net (loss) earnings $(1,719,193) $ 816,345 $ 193,613 $(10,613,306) $ (540,444)
=========== ========== ========== ============ ==========
(Loss) earnings before cumulative effect
of change in accounting principle
per share $ (0.33) $ 0.12 $ 0.03 $ (1.85) $ (0.10)
=========== ========== ========== ============ ==========
Cumulative effect of change in accounting
principle $ 0.00 $ 0.03 $ 0.00 $ 0.00 $ 0.00
=========== ========== ========== ============ ==========
Net (loss) earnings per share $ (0.33) $ 0.15 $ 0.03 $ (1.85) $ (0.10)
=========== ========== ========== ============ ==========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
Neuromed, Inc. Florida
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ROSS, CLAPP, KORN & MONTGOMERY, L.L.P.
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement on Form SB-2 and related Prospectus of Quest
Medical, Inc. for the registration of 2,990,000 shares of its common stock.
Ross, Clapp, Korn & Montgomery, L.L.P.
Dallas, Texas
September 26, 1995
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts"
and to the use of our reports dated February 24, 1995 and April 1, 1995 related
to the consolidated financial statements of Quest Medical, Inc. and
subsidiaries and Neuromed, Inc. and subsidiaries, respectively, in the
Registration Statement on Form SB-2 and related Prospectus of Quest Medical,
Inc. for the registration of 2,990,000 shares of its common stock.
Ernst & Young LLP
Dallas, Texas
September 27, 1995
