<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
- ------- TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934
FOR THE TRANSITION PERIOD FROM TO
------------ ---------
Commission file number 0-10521
QUEST MEDICAL, INC.
------------------------------
(Exact name of Small Business Issuer as specified in its charter)
TEXAS 75-1646002
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ALLENTOWN PARKWAY, ALLEN, TEXAS 75002
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 390-9800
-----------------------------------------------
(Issuer's Telephone Number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
NUMBER OF SHARES OUTSTANDING AT
TITLE OF EACH CLASS NOVEMBER 13, 1995
---------------------------- -------------------------------
COMMON STOCK, $.05 PAR VALUE 7,754,121
<PAGE> 2
QUEST MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION 2
Condensed Consolidated Balance Sheets
September 30, 1995 and December 31, 1994 3-4
Condensed Consolidated Statements of Operations
For the Three Months and Nine Months
ended September 30, 1995 and 1994 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended
September 30, 1995 and 1994 6
Condensed Consolidated Statements of Stockholders,
Equity 7
Notes to Condensed Consolidated
Financial Statements 8-16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17-21
PART II. OTHER INFORMATION 22
Item 6. Exhibits and Reports on
Form 8-K 22
SIGNATURES 23
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
2
<PAGE> 4
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
ASSETS (UNAUDITED)
- ------ ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 255,996 $ 87,963
Marketable securities 3,401,674 5,174,470
Receivables:
Trade accounts, less allowance for doubtful accounts of $114,337
in 1995 and $14,337 in 1994 3,869,120 1,671,684
Interest and other 226,602 172,969
------------ -------------
Total receivables 4,095,722 1,844,653
------------ -------------
Inventories:
Raw materials 2,404,364 1,322,498
Work-in-process 1,157,524 580,432
Finished goods 2,988,508 2,084,522
------------ -------------
Total inventories 6,550,396 3,987,452
------------ -------------
Prepaid expenses and other current assets 1,033,520 484,406
------------ -------------
Total current assets 15,337,308 11,578,944
------------ -------------
Property, plant and equipment:
Land 1,930,289 1,930,289
Building 5,223,693 5,215,454
Leasehold improvements 43,522 43,522
Furniture and fixtures 2,874,048 2,587,738
Machinery and equipment 3,819,417 2,722,868
------------ -------------
13,890,969 12,499,871
Less accumulated depreciation and
amortization 3,541,331 2,867,453
------------ -------------
Net property, plant and equipment 10,349,638 9,632,418
------------ -------------
Cost in excess of net assets acquired, net of
accumulated amortization of $226,298 in 1995
and $99,550 in 1994 9,052,419 913,656
Patents, net of accumulated amortization of
$1,029,316 in 1995 and $857,965 in 1994 1,346,083 1,517,434
Purchased technology from acquisitions, net of
accumulated amortization of $334,254 in 1995
and $163,007 in 1994 4,363,746 534,993
Tradenames, net of accumulated amortization
of $62,500 in 1995 2,437,500 --
Deferred income taxes 2,083,426 --
Other assets, at cost, less accumulated amortization
of $170,667 in 1995 and $141,167 in 1994 450,538 57,464
------------ -------------
$ 45,420,658 $ 24,234,909
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 5
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------ ------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,551,497 $ 951,208
Loans payable and current maturities
of notes payable 3,687,307 2,759,241
Accrued salary and employee benefit costs 750,453 392,397
Accrued relocation 812,620 -
Other accrued expenses 405,205 65,393
----------- -----------
Total current liabilities 7,207,082 4,168,239
----------- -----------
Notes payable 20,661,998 4,123,853
Deferred income taxes 2,220,173 11,837
Stockholders' equity:
Common stock of $.05 par value. Authorized
10,000,000 shares; issued 8,082,102 shares
in 1995 and 7,982,498 in 1994 404,105 399,125
Additional paid-in capital 26,602,687 19,514,171
Retained (deficit) earnings (7,728,647) 2,794,118
Unrealized loss on marketable securities (325,715) (917,634)
Cost of common shares in treasury;
1,672,238 shares in 1995 and
2,705,816 shares in 1994 (3,621,025) (5,858,800)
----------- -----------
Total stockholders' equity 15,331,405 15,930,980
Contingencies
----------- -----------
$45,420,658 $24,234,909
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 6
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net revenue $6,818,923 $3,457,971 $ 18,122,057 $10,681,287
Cost of revenue 2,850,038 1,829,406 7,760,528 5,857,218
---------- ---------- ------------ -----------
Gross profit 3,968,885 1,628,565 10,361,529 4,824,069
---------- ---------- ------------ -----------
Operating expenses:
Marketing 1,158,818 494, 293 2,752,388 1,384,726
General and administrative 1,120,697 775,311 3,038,450 2,260,332
Research and development 1,145,863 870,313 3,639,506 2,409,169
Non-recurring charge -- -- 10,500,000 --
---------- ---------- ------------ -----------
3,425,378 2,139,917 19,930,344 6,054,227
---------- ---------- ------------ -----------
Earnings (loss) from operations 543,507 (511,352) (9,568,815) (1,230,158)
Other income (expense):
Interest expense (552,002) (155,238) (1,282,973) (407,962)
Interest and other income 67,674 127,850 285,630 391,485
Gain on sale of marketable securities 31,362 49,984 43,393 217,435
---------- ---------- ------------ -----------
(452,966) 22,596 (953,950) 200,958
---------- ---------- ------------ -----------
Earnings (loss) before income taxes 90,541 (488,756) (10,522,765) (1,029,200)
Income taxes -- -- -- --
---------- ---------- ------------ -----------
Net earnings (loss) $ 90,541 $ (488,756) $(10,522,765) $(1,029,200)
========== ========== ============ ===========
Net earnings (loss) per common and
common equivalent share $ .01 $ (.09) $ (1.69) $ (.20)
========== ========== ============ ===========
Weighted average number of common and common
equivalent shares used in computing
earnings (loss) per share 7,158,275 5,269,001 6,211,975 5,250,114
========== ========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 7
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,522,765) $(1,029,200)
------------ -----------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 1,317,294 826,989
Purchased research and development 10,500,000 --
Gain on sale of assets and marketable
securities (47,373) (228,787)
Changes in assets and liabilities, net of assets acquired
and liabilities assumed:
Receivables (728,839) 199,560
Inventories (906,745) 222,969
Prepaid expenses and other assets (549,370) (282,196)
Accounts payable (21,029) (69,025)
Other 11,556 --
Accrued expenses 149,025 (149,379)
------------ -----------
Total adjustments 9,724,519 520,131
------------ -----------
Net cash used by operating activities (798,246) (509,069)
------------ -----------
Cash flows from investing activities:
Purchases of marketable securities (1,129,896) (6,660,236)
Proceeds from sales of marketable securities 3,538,126 6,464,332
Receivable due from broker/dealer -- 637,390
Acquisition of Neuromed, Inc. (15,947,338) --
Additions to property, plant and equipment (1,313,422) (979,447)
Net proceeds from sale of assets 6,626 18,524
------------ -----------
Net cash used by investing activities (14,845,904) (519,437)
------------ -----------
Cash flows from financing activities:
Exercise of stock options 314,210 137,047
Proceeds from short-term obligations 597,787 1,583,675
Proceeds of long-term debt 16,900,000 106,978
Payment of short-term obligations (474,433) (942,894)
Payment of long-term debt (1,057,143) (89,582)
Debt issuance costs (468,767) --
Issuance of treasury stock 529 --
------------ -----------
Net cash provided by financing activities 15,812,183 795,224
------------ -----------
Net increase (decrease) in cash and cash equivalents 168,033 (233,282)
Cash and cash equivalents at beginning of period 87,963 594,448
------------ -----------
Cash and cash equivalents at September 30 $ 255,996 $ 361,166
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 8
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Total
Common Stock Additional Retained loss on stock-
------------------- paid-in earnings marketable Treasury holders'
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 -- -- -- -- -- 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
Adjustment to unrealized losses
on marketable securities -- -- -- -- (748,236) -- (748,236)
Stock dividend -- -- 586,054 (916,975) -- 330,921 --
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 99,604 4,980 308,015 -- -- -- 312,995
Issuance of 245 common shares
from treasury -- -- 1,216 -- -- 529 1,745
Adjustment to unrealized losses
on marketable securities -- -- -- -- 591,919 -- 591,919
Issuance of 1,033,333 common
shares from treasury for -- -- 6,779,285 -- -- 2,237,246 9,016,531
acquisition -- --
Net loss -- -- -- (10,522,765) -- -- (10,522,765)
--------- ---------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1995
(Unaudited) 8,082,102 $ 404,105 $26,602,687 $(7,728,647) $ (325,715) $(3,621,025) $15,331,405
========= ========== =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial
statements
7
<PAGE> 9
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) CONDENSED FINANCIAL STATEMENTS
The unaudited condensed consolidated financial information contained
in this report reflects all adjustments (consisting of normal
recurring accruals) considered necessary, in the opinion of
management, for a fair presentation of results for the interim periods
presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's December 31, 1994 Annual
Report on Form 10-KSB. The results of operations for periods ended
September 30 are not necessarily indicative of operations for the full
year.
(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 for the three months and
nine months ended September 30, 1995 and 1994 is presented
below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1995 1994 1995 1994
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Income taxes paid $ -- $ -- $ -- $ --
======== ======= ========== ========
Interest paid $533,046 $94,995 $1,232,999 $344,356
======== ======= ========== ========
</TABLE>
8 (Continued)
<PAGE> 10
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(D) MARKETABLE SECURITIES
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.
The following is a summary of available-for-sale securities at
September 30, 1995:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- --------- ------ ----------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $ 983,620 $ 2,500 $112,989 $ 873,131
Utility stocks 159,138 -- 19,638 139,500
Real estate investment trusts 1,404,392 13,264 106,780 1,310,876
Publicly traded limited
partnerships 506,447 -- 33,855 472,592
Other 673,792 8,263 76,480 605,575
---------- ------- -------- ----------
$3,727,389 $24,027 $349,742 $3,401,674
========== ======= ======== ==========
</TABLE>
At September 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 September 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 sold or retired are removed
from the accounts and any resulting gain or loss is reflected
in the statement of operations.
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.
9 (Continued)
<PAGE> 11
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 the 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 September 30,
1995, the Company does not believe there has been any
impairment of its intangible assets. Amortization expense was
$66,939 and $10,683 for the three months ended September 30,
1995 and 1994, respectively, and $126,748 and $30,070 for the
nine months ended September 30, 1995 and 1994, 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 $57,117 and $57,117 for the
three months ended September 30, 1995 and 1994, respectively,
and $171,351 and $171,351 for the nine months ended September
30, 1995 and 1994, respectively. 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 $79,304 and $12,638 for the three months ended
September 30, 1995 and 1994, respectively, and $171,247 and
$37,913 for the nine months ended September 30, 1995 and 1994,
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. Amortization expense was $31,250 and $62,500 for
the three and nine months ended September 30, 1995,
respectively. No amortization expense was recorded during the
three months and nine months ended September 30, 1994.
(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.
10 (Continued)
<PAGE> 12
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 loss per share for the nine months ended
September 30, 1994 were increased to retroactively reflect the
3% stock dividend.
Earnings (loss) per share for the three months and nine months
ended September 30, 1995 are based upon 7,158,275 and
6,211,975 weighted average common and common equivalent shares
outstanding, respectively. Loss per share for the three months
and nine months ended September 30, 1994 are based upon
5,269,001 and 5,250,114 weighted average common shares
outstanding, respectively.
(2) ACQUISITION
On March 31, 1995, the Company acquired for $15,403,263 cash
(including $203,263 paid in June 1995 as a purchase price adjustment,
and excluding $1,012,841 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 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.)
In July 1995, the sales objectives for 1995 were reached which
triggered a liability for the 1995 contingent consideration payments
with regard to the Neuromed acquisition. The Company recorded the
additional "earn-out" consideration of 200,000 shares of Quest 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 accelerate issuance of the 200,000 shares for the 1995
earn-out and the seller relinquished certain rights from the previous
agreement. The amended agreement sets the 1996 contingent
consideration, payable in January 1997, at a cash payment equal to
$3,370,000, if earned.
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 upon 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
11 (Continued)
<PAGE> 13
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
discounted taking into account economic risks 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 nine month period ended September 30,
1995.
The preliminary purchase price allocation for the acquisition of
Neuromed, as of September 30, 1995 is summarized below:
<TABLE>
<S> <C>
Tradenames $ 2,500,000
Purchased technology 4,000,000
Cost in excess of net assets acquired 8,265,510
Purchased research and development 10,500,000
Net tangible assets acquired 1,198,358
-----------
$26,463,868
===========
</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 the Company's facility in Allen, Texas by the end of the first
quarter of 1996. As such, $850,000 of estimated costs of the
relocation were recorded during the third quarter of 1995 as an
adjustment to cost 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. The
pro forma operations information for the nine month period ended
September 30, 1994 includes the non-recurring charge of $10,500,000
related to purchased in-process research and development which is
expensed at the date of acquisition. This summary does not purport to
be indicative of what would have occurred had the acquisition been
made as of these dates 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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Revenue $ 20,529,356 $ 16,176,186
============ ============
Income (loss) from operations 1,847,148 (10,807,548)
============ ============
Net income (loss) 167,220 (11,660,010)
============ ============
Net income (loss) per common
and common equivalent share $ .02 $ (1.92)
============ ============
</TABLE>
12 (Continued)
<PAGE> 14
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) CURRENT AND LONG-TERM DEBT/CREDIT LINES
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 50 basis points, or
at the Company's option, LIBOR plus 200 basis points. The interest
rate can vary based on the Company achieving certain ratios of senior
bank debt to EBITDA (earnings before interest, taxes, depreciation,
and amortization). At September 30, 1995, the Company had an
outstanding principal balance of $14,025,000 under the senior term
debt, including a current portion of $1,950,000, with a weighted
average interest rate of 8.51%. At September 30, 1995, the Company
had borrowings under the working capital line of $4,550,000 with a
weighted average interest rate of 7.90%. The Company intends to
reduce its senior term debt to $2.0 million after applying net
proceeds from a public offering to repay $11,862,500 of such debt.
See Note 10.
The aforementioned facilities with NationsBank are secured by certain
of the Companys 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.
On December 28, 1993, the Company entered into two agreements with
MetLife Capital Corporation for long-term financing on the Company's
facility located in Allen, Texas in the amount of $4,248,093 and
during March 1994, amended the second agreement which provided an
additional $106,978 in financing. This brought the total long-term
financing by MetLife Capital Corporation to $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. At September 30, 1995, the Company had
not exercised its option to fix the rate and the principal balance of
the note was $2,967,658 including a current portion of $10,950. The
interest rate in effect at September 30, 1995 was 8.80%. The loan is
collateralized by the Allen facility building and land. 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
13 (Continued)
<PAGE> 15
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
rate plus 250 basis points. This note has a 10-year amortization. At
September 30, 1995, the Company had not exercised its option to fix the
rate under this loan and the principal balance of the note was
$1,183,294 including a current portion of $103,004. The interest rate
in effect at September 30, 1995 was 8.30%. This loan is collateralized
by the equipment and furnishings purchased with the proceeds.
At September 30, 1995, the Company had a 8.25% note payable for
$123,353. This note was secured by certain of the Company's
investments, held by the investment company, which had a carrying
value of $905,100. Borrowings under this note is restricted to 50% of
the market value of certain of the Company's investments held by the
investment company. At September 30, 1995, the amount available for
additional borrowing under this note was $329,197.
At September 30, 1995, the Company had a note payable in the amount of
$1,500,000 related to "earn-out" consideration for Neuromed, Inc.
(See Note 2.) The note is due in January 1996 and is non-interest
bearing.
(4) FEDERAL INCOME TAXES
During the nine months ended September 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 the
acquisition of Neuromed, Inc.
(5) COMMITMENTS AND CONTINGENCIES
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.
In addition, the Company rents certain autos under the terms of
noncancelable leases. As of September 30, 1995, future minimum rental
payments under noncancelable auto leases and the aforementioned
facility lease are $36,789 in 1995, $28,946 in 1996, and $3,016 in
1997. Total rent expense under operating leases for the three months
ended September 30, 1995 and 1994 was $36,789 and $9,167,
respectively, and $84,459 and $29,214 for the nine months ended
September 30, 1995 and 1994, respectively.
The Company is also involved in various lawsuits and claims occurring
in the normal course of business, the ultimate disposition of which
management believes will not have a material adverse effect upon the
Company's business or consolidated financial position.
(6) FINANCIAL INSTRUMENTS AND RISK CONCENTRATION
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash investments and
accounts receivable. The Company places its cash investments primarily
in publicly traded investment grade preferred securities, utility
14 (Continued)
<PAGE> 16
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
stocks, real estate investment trusts and energy related limited
partnerships and limits the amount of credit exposure to any one
issuer.
The Company manufactures proprietary products for the healthcare
industry. 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
collectability of all accounts receivable. Any losses from bad debts
have historically been within management's expectations.
(7) 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 was $25,050 and $24,750 for the three months ended
September 30, 1995 and 1994, respectively, and $75,150 and $74,250 for
the nine months ended September 30, 1995 and 1994, respectively.
(8) 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. 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
William Borkan or his affiliates so long as their ownership does not
exceed 25% of the common shares outstanding at any time. Under the
rights agreement, 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, with the exception of William Borkan or his
affiliates (subject to the 25% limitation referred to above), 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 $.01
per right at any time prior to their expiration on October 12, 1999,
or prior to the point at which they become exercisable.
15 (Continued)
<PAGE> 17
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) STOCK OPTION PLAN
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. 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 September 30, 1995 follows:
<TABLE>
<CAPTION>
1995
--------
<S> <C> <C>
Granted 207,000
-------
Outstanding at end of period 207,000
=======
Price range of options
outstanding at end of period $7.125 - $12.125
</TABLE>
(10) SUBSEQUENT EVENT - SALE OF COMMON STOCK
On November 15, 1995, the Company expects to close the sale of
1,316,667 shares of common stock. The estimated net proceeds to the
Company are $11.86 million, after deducting estimated underwriters'
discounts and commissions and estimated offering expenses payable by
the Company. In addition, the Company may also receive up to an
additional $3.37 million if the over-allotment option of 360,000
shares granted to the underwriters, is exercised. The Company intends
to use the net proceeds to repay as much as possible of the $13.86
million of senior term bank indebtedness outstanding at October 31,
1995, which was incurred in March 1995 in connection with the Neuromed
acquisition, and if the over-allotment option is exercised, as much of
its working capital line of credit as possible.
16 (Continued)
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1994
REVENUES. Net revenue of $6.82 million for the three months ended September
30, 1995 was $3.36 million, or 97.1% above the level for the comparable 1994
period of $3.46 million. This increase in net revenue during the 1995 period
compared to 1994 was primarily attributable to revenue generated by Neuromed,
Inc. ("Neuromed") which was acquired on March 31, 1995. Neuromed develops,
manufactures and markets a line of electronic spinal cord stimulation ("SCS")
devices used to manage chronic severe pain. See Notes 2 and 3 of the Notes to
Condensed Consolidated Financial Statements. Net revenue from sales of the
Company's other products increased 3.8% during the three months ended September
30, 1995 compared to the same period a year ago, primarily due to higher unit
sales volume from the Company's cardiovascular products. Net revenue of $18.12
million for the nine months ended September 30, 1995 was $7.44 million, or
69.7% above the level for the comparable 1994 period of $10.68 million. This
increase in net revenue during the first nine months of 1995 compared to the
same period during 1994 was primarily attributable to revenue generated by
Neuromed. Net revenue from sales of the Company's other products increased
6.7% during the nine months ended September 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 quarter of 1995 to increase
over the comparable period during 1994 as a result of the inclusion of the
Neuromed revenue in the Company's financial statements. During August 1995,
the Company filed for FDA market clearance under a pre-market notification
("510(K)") on its MPS(TM) brand of myocardial protection system. Management
plans to introduce the MPS system and related products to commercial markets in
early 1996 upon the FDA's clearance of such products to market. There are no
assurances that such clearance will be obtained or that it will be obtained
without delay. Management expects that Neuromed and MPS (if approved for
marketing) should enhance the long-range growth objectives of the Company.
GROSS PROFIT. Gross profit of $3.97 million for the three months ended
September 30, 1995 was $2.34 million, or 144% above the level for the
comparable 1994 period. As a percentage of net revenue, gross profit increased
during the three months ended September 30, 1995 to 58.2% as compared to 47.1%
for the comparable 1994 period. Gross profit of $10.36 million for the nine
months ended September 30, 1995 was $5.54 million, or 114.8% above the level
for the comparable 1994 period. As a percentage of net revenue, gross profit
increased during the first nine months of 1995 to 57.2% as compared to 45.2%
for the comparable 1994 period. This increase in gross profit margin during
both the three months and nine months ended September 30, 1995 compared to the
same periods 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 quarter of 1995 to
increase compared to the same period a year ago.
17
<PAGE> 19
OPERATING EXPENSES. Marketing, general and administrative expense as a
percentage of net revenue decreased to 33.4% for the three months ended
September 30, 1995, compared to 36.7% for the comparable period during 1994,
while the dollar amount increased by $1.01 million. Marketing expense as a
percentage of net revenue increased to 17.0% for the three months ended
September 30, 1995 compared to 14.3% for the same period during 1994, and the
dollar amount increased by $665,000. Of such increase, $548,000 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, commissions and convention expense, primarily
incurred in anticipation of the introduction of MPS to market. In anticipation
of MPS' 510(K) clearance, management anticipates hiring four additional direct
salespersons during the fourth quarter of 1995, and upon 510(K) clearance,
management expects to add five additional salespersons to market the MPS system
and related products. During October 1995, the Company received approval to
market its MPS system in Canada and anticipates commercial introduction in
Canada during early 1996. For the nine months ended September 30, 1995,
marketing expense as a percentage of net revenue increased to 15.2% compared to
13.0% for the comparable 1994 period, and the dollar amount increased by $1.37
million. Of such increase, $986,000 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, primarily incurred in anticipation
of the introduction of MPS to market.
General and administrative expense as a percentage of net revenue decreased to
16.4% for the three months ended September 30, 1995, compared to 22.4% for the
same period during 1994, while the dollar amount increased by $345,000. This
increase in expense for the three months ended September 30, 1995 compared to
the same period a year ago was entirely attributable to general and
administrative expense of Neuromed, including amortization expense of Neuromed
intangibles. For the nine months ended September 30, 1995, general and
administrative expense increased $778,000 compared to the same period in 1994,
but as a percentage of net revenue, decreased from 21.2% during the first nine
months of 1994 to 16.8% during the comparable 1995 period. This increase in
expense for the nine month period of 1995 compared to 1994 was primarily
attributable to general and administrative expense of Neuromed, including
amortization expense of Neuromed intangibles.
Research and development expense as a percentage of net revenue decreased from
25.2% during the three months ended September 30, 1994, to 16.8% for the same
period in 1995, while the dollar amount increased by $276,000. During the
third quarter of 1995, the Company completed validation testing on its MPS
system and, as previously noted, the Company filed the 510(K) with the FDA
during August 1995. Of the increase in research and development expense for
the three months ended September 30, 1995, $265,000 was research and
development expense attributable to Neuromed's products. During October 1995,
the Company received 510(K) clearance from the FDA on Neuromed's PainDoc(TM), 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. Research and development expense as a percentage of net
revenue decreased from 22.6% during the nine months ended September 30, 1994,
to 20.1% for the same period in 1995, while the dollar amount increased by
$1.23 million. Of such increase in research and development expense for the
nine months ended September 30, 1995, $447,000 was research and development
expense attributable to Neuromed's products. The remainder of the increase
during the first nine months of 1995 compared to the same period
18
<PAGE> 20
during 1994 was primarily the result of additional salary and contract labor
expense from personnel additions and increased consulting expense directed to
the development of the MPS system. Management expects research and development
expenditures for the fourth quarter of 1995 to decrease from the average
quarterly level of $1.21 million for the first three quarters of 1995 because of
substantial completion of the MPS system.
EARNINGS (LOSS) FROM OPERATIONS. Earnings from operations increased to
$544,000 during the three months ended September 30, 1995 compared to a net
loss of $511,000 for the comparable 1994 period, due to the favorable impact of
the Neuromed acquisition. On March 31, 1995, the Company acquired all of the
capital stock of Neuromed for $15.4 million cash (excluding $1.01 million of
related acquisition and financing costs) and 833,333 shares of common stock
valued at $6.5 million (plus additional contingent "earn-out" consideration).
Of the cash payment referred to above, $200,000 was made during June 1995 as a
result of a purchase price adjustment. In July 1995, the sales objectives for
1995 were reached which triggered a liability for the 1995 contingent
consideration payable in January 1996. See Note 2 of the Notes to Condensed
Consolidated Financial Statements. Of the aggregate purchase price for
Neuromed, $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 nine months ended September 30, 1995. As a result, the loss from
operations increased from $1.23 million for the nine months ended September 30,
1994 to $9.57 million for the comparable period during 1995. Excluding the
non-recurring charge, the Company generated earnings from operations of
$930,000 compared to a $1.23 million 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 fourth quarter of 1995 as compared to the same period during
1994, although there can be no assurances to this effect.
OTHER INCOME (EXPENSE). The Company incurred other expense of $453,000 during
the three months ended September 30, 1995 compared to other income of $23,000
during the comparable 1994 period. The Company incurred other expense of
$954,000 during the nine months ended September 30, 1995 compared to other
income of $201,000 during the comparable 1994 period. This decrease during
both periods of 1995 as compared to 1994 was primarily the result of increased
interest expense. The Company incurred $15 million of long-term bank debt on
March 31, 1995, which was utilized to fund most of the cash payment of the
Neuromed acquisition. See Notes 2 and 3 of the Notes to Condensed Consolidated
Financial Statements. Higher overall interest rates on borrowed money also
contributed to higher interest expense during both the three months and nine
months ended September 30, 1995 compared to the same periods during 1994. In
addition, interest income for both the three months and nine months ended
September 30, 1995 was lower than the comparable periods of 1994 due to reduced
funds available for investment, and lower gains were recognized on the sale of
the Company's investments.
On November 15, 1995, the Company expects to complete a public offering under a
Registration Statement on Form SB-2 of 2,400,000 shares of common stock. Of
such shares, 1,316,667 shares were sold by the Company and 1,083,333 shares were
sold by shareholders of the Company (1,033,333 shares by Mr. William Borkan and
Mr. Burt Borkan, former owners of Neuromed, Inc.). The Company expects to
receive net proceeds of $11.86 million (after deducting underwriters' discounts
and commissions and offering expenses payable by the Company) from the 1,316,667
shares offered on its behalf. (In addition, the Company also granted the
underwriters an over-allotment option of 360,000 shares, if exercised by the
underwriters, the
19
<PAGE> 21
Company would receive up to an additional $3.37 million in net proceeds.) The
Company will use the net proceeds from the offering to repay as much as possible
of the $13.86 million of senior term bank indebtedness outstanding at October
31, 1995, which was incurred in March 1995 in connection with the Neuromed
acquisition. Therefore, interest expense will decrease upon repayment of the
bank indebtedness.
NET EARNINGS (LOSS). Net earnings increased to $91,000 for the three months
ended September 30, 1995 compared to a net loss of $489,000 for the same period
in 1994 due to the increase in earnings from operations attributable to the
Neuromed acquisition. For the nine months ended September 30, 1995 the net
loss increased to $10.52 million compared to $1.03 million for the same period
during 1994 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 nine months ended September 30, 1995 was $23,000.
As a result of the public offering and the use of proceeds from such to repay
the bank indebtedness discussed above, the Company will record a pre-tax
extraordinary charge for the early extinguishment of debt of $408,000 during
the fourth quarter of 1995 from the write-off of capitalized financing costs
incurred during March 1995 to secure the bank financing utilized to consummate
the Neuromed acquisition.
LIQUIDITY AND FINANCIAL POSITION. Cash, cash equivalents and marketable
securities totaled $3.66 million at September 30, 1995, a decrease of $1.61
million from 1994 year-end. Working capital (current assets less current
liabilities) was $8.13 million with a current ratio of 2.1 to 1 at September
30, 1995.
In connection with the Neuromed acquisition completed on March 31, 1995, the
Company paid $15.40 million cash (including $203,000 paid in June 1995 as a
purchase price adjustment, and excluding $1.01 million of related acquisition
and financing costs), 833,333 shares of Quest common stock valued at $6.46
million, and agreed to pay contingent consideration over the next two years,
payable in January 1996 and January 1997, depending on sales of Neuromed's
products reaching certain objectives. The contingent consideration may be paid
in a combination of cash and additional shares of Quest common stock. In July
1995, the sales objectives for 1995 were reached which triggered a liability
for the 1995 contingent consideration payments. The Company recorded the
additional "earn-out" consideration of 200,000 shares of Quest common stock
valued at $2.56 million and a $1.5 million liability (payable in cash in
January 1996). In September 1995, the Company amended certain terms of the
acquisition agreement whereby the Company agreed to accelerate issuance of the
200,000 shares for the 1995 earn-out (which shares were sold in the public
offering by the former shareholders of Neuromed) and set the 1996 contingent
consideration, payable in January 1997, at a cash payment of $3.37 million, if
earned.
On March 31, 1995, the Company entered into a First Amended and Restated Credit
Agreement with NationsBank of Texas, N.A., which provided $15 million of senior
term financing, which was utilized to pay the cash portion of the Neuromed
purchase price, and a working capital line of up to $5 million. Amortization
of the senior term debt is $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 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 50
basis points, or at the Company's option, LIBOR plus 200 basis points. The
20
<PAGE> 22
interest rate may vary based on the Company achieving certain ratios of senior
bank debt to EBITDA (earnings before interest, taxes, depreciation and
amortization). At September 30, 1995, the Company had an outstanding principal
balance of $14.03 million under the senior term debt, including a current
portion of $1.95 million with a weighted average interest rate of 8.51%. At
September 30, 1995, the Company had borrowings under the working capital line of
$4.55 million with a weighted average interest rate of 7.90%.
Upon completion of the public offering (on or about November 15, 1995) the
Company will receive net proceeds of $11.86 million (after deducting
underwriters' discounts and commissions and offering expenses payable by the
Company) from the 1,316,667 shares sold on its behalf. If the over-allotment
option granted to the underwriters is exercised, the Company may also receive
additional net proceeds of up to $3.37 million. The Company intends to use the
net proceeds of the offering to repay as much as possible of the NationsBank
senior term debt discussed above, and if the over-allotment option is
exercised, as much of the working capital debt as possible. The Company had
received a commitment letter from NationsBank that provided for the amendment
of the working capital line of credit and the addition of an acquisition line
of credit if the offering were consummated and raised net proceeds to the
Company of at least $17 million. Although the net proceeds from the offering
are less than such stipulated amount, the Company believes it should be able to
obtain satisfactory working capital and acquisition lines of credit from
NationsBank or another lender.
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. As such, 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
the monetary policy by the Federal Reserve during 1994 to moderate economic
growth and thus thwart inflation pressures led to a significant rise in both
short-term and long-term interest rates, thereby negatively affecting the value
of interest-sensitive investments. Consequently, at December 31, 1994, the
Company's investment portfolio had declined in value by approximately $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 nine months of 1995, interest rates have fallen,
resulting in an increase in the value of the Company's portfolio of $592,000,
thereby decreasing the unrealized loss component of stockholders' equity to
$326,000 at September 30, 1995. During the first nine months of 1995, the
Company was a net seller of marketable securities in the amount of
approximately $2.41 million. The Company's investment strategy has realized
gains on its investments of over $1 million during the past three fiscal years
while continuously realizing higher interest and dividend yields compared to
certificates of deposit or treasury bills. At September 30, 1995, no
individual security represented more than 10% of the total portfolio or 1% of
total assets. The Company's investment policies prohibit the use of derivative
financial instruments.
The Company spent approximately $1.31 million for additions to property, plant
and equipment during the nine months ended September 30, 1995, most of which
were for manufacturing toolings and equipment for the myocardial protection
products the Company has developed and is planning to introduce to commercial
markets, in early 1996. Management expects capital expenditures for the
remainder of 1995 will approximate $200,000.
21
<PAGE> 23
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 -- Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1995.
22
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QUEST MEDICAL, INC.
Date: November 13, 1995 By: /s/ F. Robert Merrill III
----------------------------------
F. Robert Merrill III
Senior Vice President Finance/
Treasurer
23
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 255,996
<SECURITIES> 3,401,674
<RECEIVABLES> 3,983,457
<ALLOWANCES> 114,337
<INVENTORY> 6,550,396
<CURRENT-ASSETS> 15,337,308
<PP&E> 13,890,969
<DEPRECIATION> 3,541,331
<TOTAL-ASSETS> 45,420,658
<CURRENT-LIABILITIES> 7,207,082
<BONDS> 0
<COMMON> 404,105
0
0
<OTHER-SE> 14,927,300
<TOTAL-LIABILITY-AND-EQUITY> 45,420,658
<SALES> 18,122,057
<TOTAL-REVENUES> 18,122,057
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<INCOME-CONTINUING> (10,522,765)
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<NET-INCOME> (10,522,765)
<EPS-PRIMARY> (1.69)
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</TABLE>
