<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 JUNE 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 JULY 31, 1995
---------------------------- -------------------------------
COMMON STOCK, $.05 PAR VALUE 6,205,306
<PAGE> 2
QUEST MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION 2
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994 3-4
Consolidated Statements of Earnings
For the Three Months and Six Months
ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows
For the Six Months ended
June 30, 1995 and 1994 6
Consolidated Statements of Stockholders'
Equity 7
Notes to Condensed Consolidated
Financial Statements 8-15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-20
PART II. OTHER INFORMATION 21-24
Item 4. Submission of Matters to a
Vote of Security Holders 21
Item 6. Exhibits and Reports on
Form 8-K 21-24
SIGNATURES 25
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
2
<PAGE> 4
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
ASSETS (UNAUDITED)
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 298,886 $ 87,963
Marketable securities 4,407,627 5,174,470
Receivables:
Trade accounts, less allowance for doubtful accounts of
$114,337 in 1995 and $14,337 in 1994 4,464,941 1,671,684
Interest and other 294,805 172,969
----------- -----------
Total receivables 4,759,746 1,844,653
----------- -----------
Inventories:
Raw materials 2,420,492 1,322,498
Work-in-process 1,164,654 580,432
Finished goods 2,740,156 2,084,522
----------- -----------
Total inventories 6,325,302 3,987,452
----------- -----------
Prepaid expenses and other current assets 781,567 484,406
----------- -----------
Total current assets 16,573,128 11,578,944
----------- -----------
Property, plant and equipment:
Land 1,930,289 1,930,289
Building 5,221,434 5,215,454
Leasehold improvements 43,522 43,522
Furniture and fixtures 2,858,236 2,587,738
Machinery and equipment 3,554,697 2,722,868
----------- -----------
13,608,178 12,499,871
Less accumulated depreciation and
amortization 3,331,750 2,867,453
----------- -----------
Net property, plant and equipment 10,276,428 9,632,418
----------- -----------
Cost in excess of net assets acquired, net of
accumulated amortization of $159,359 in 1995
and $99,550 in 1994 3,929,186 913,656
Patents, net of accumulated amortization of
$972,199 in 1995 and $857,965 in 1994 1,403,200 1,517,434
Purchased technology from acquisitions, net of
accumulated amortization of $254,950 in 1995
and $163,007 in 1994 4,443,050 534,993
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 $185,763 in 1995 and $141,167 in 1994 474,801 57,464
----------- -----------
$41,651,969 $24,234,909
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 5
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
------------------------------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,584,844 $ 951,208
Loans payable and current maturities
of notes payable 2,307,573 2,759,241
Accrued salary and employee benefit costs 552,968 392,397
Other accrued expenses 315,611 65,393
----------- -----------
Total current liabilities 5,760,996 4,168,239
----------- -----------
Notes payable 20,830,456 4,123,853
Deferred income taxes 2,560,173 11,837
Stockholders' equity:
Common stock of $.05 par value. Authorized
10,000,000 shares; issued 8,072,994 shares
in 1995 and 7,982,498 in 1994 403,650 399,125
Additional paid-in capital 24,443,640 19,514,171
Retained (deficit) earnings (7,819,188) 2,794,118
Unrealized loss on marketable securities (473,653) (917,634)
Cost of common shares in treasury;
1,872,238 shares in 1995 and
2,705,816 shares in 1994 (4,054,105) (5,858,800)
----------- -----------
Total stockholders' equity 12,500,344 15,930,980
Commitments and contingencies
----------- -----------
$41,651,969 $24,234,909
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 6
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1995 1994 1995 1994
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenue $7,231,494 $3,742,194 $11,303,134 $ 7,223,316
Cost of revenue 2,883,138 2,016,493 4,910,490 4,027,812
------------ ---------- ------------ -----------
Gross profit 4,348,356 1,725,701 6,392,644 3,195,504
------------ ---------- ------------ -----------
Operating expenses:
Marketing 1,064,933 467,273 1,593,570 890,433
General and administrative 1,150,895 772,770 1,917,753 1,485,021
Research and development 1,407,906 900,579 2,493,643 1,538,856
Purchased research and development 10,500,000 -- 10,500,000 --
------------ ---------- ------------ -----------
14,123,734 2,140,622 16,504,966 3,914,310
------------ ---------- ------------ -----------
Loss from operations (9,775,378) (414,921) (10,112,322) (718,806)
------------ ---------- ------------ -----------
Other income (expenses):
Interest expense (573,705) (137,172) (730,971) (252,724)
Interest and other income 94,646 124,234 217,956 263,635
Gain on sale of marketable securities
and assets 5,729 70,776 12,031 167,451
------------ ---------- ------------ -----------
(473,330) 57,838 (500,984) 178,362
------------ ---------- ------------ -----------
Loss before income taxes (10,248,708) (357,083) (10,613,306) (540,444)
Income taxes -- -- -- --
------------ ---------- ------------ -----------
Net loss $(10,248,708) $ (357,083) $(10,613,306) $ (540,444)
============ ========== ============ ===========
Net loss per common and
common equivalent share:
Primary $ (1.66) $ (.07) $ (1.85) $ (.10)
------------ ---------- ------------ -----------
Fully diluted $ (1.66) $ (.07) $ (1.85) $ (.10)
------------ ---------- ------------ -----------
Weighted average number of shares
used in computing loss per share:
Primary 6,175,188 5,245,159 5,738,825 5,240,490
============ ========== ============ ===========
Fully diluted 6,175,188 5,245,159 5,738,825 5,240,490
============ ========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 7
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,613,306) $ (540,444)
------------ -----------
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization 806,163 547,280
Purchased research and development 10,500,000 --
Gain on sale of assets and marketable
securities (12,031) (178,804)
Changes in assets and liabilities, net of assets acquired
and liabilities assumed:
Receivables (1,173,982) 225,207
Inventories (564,376) 228,827
Prepaid expenses and other assets (297,415) 50,300
Accounts payable 1,028,402 (180,123)
Other 11,555 --
Accrued expenses 89,835 (283,257)
------------ -----------
Total adjustments 10,388,151 409,430
------------ -----------
Net cash used by operating activities (225,155) (131,014)
------------ -----------
Cash flows from investing activities:
Purchases of marketable securities (1,082,992) (5,560,866)
Proceeds from sales of marketable securities 2,305,969 4,331,439
Receivable due from broker/dealer -- 637,390
Acquisition of Neuromed, Inc. (16,330,085) --
Additions to property, plant and equipment (994,707) (702,448)
Net proceeds from sale of assets 2,600 11,350
------------ -----------
Net cash used by investing activities (16,099,215) (1,283,135)
------------ -----------
Cash flows from financing activities:
Exercise of stock options 279,829 41,496
Proceeds from short-term obligations 633,588 970,674
Proceeds of long-term debt 16,550,000 106,978
Payment of short-term obligations (387,656) (58,022)
Payment of long-term debt (540,997) (63,862)
Issuance of treasury stock 529 --
------------ -----------
Net cash provided by financing activities 16,535,293 997,264
------------ -----------
Net increase (decrease) in cash and cash equivalents 210,923 (416,885)
Cash and cash equivalents at beginning of year 87,963 594,448
------------ -----------
Cash and cash equivalents at June 30 $ 298,886 $ 177,563
============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 8
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Additional Retained loss on
Common Stock paid-in earnings marketable
Shares Amount capital (deficit) securities
--------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991 7,639,668 $ 381,983 17,935,461 4,420,328 --
Shares issued upon exercise of
stock options 231,875 11,594 359,351 -- --
Purchase of 29,519 common shares,
at cost -- -- -- -- --
Tax effect of stock option exercise -- -- 189,219 -- --
Net earnings -- -- -- 193,613 --
--------- ----------- ---------- ---------- ---------
Balance at December 31, 1992 7,871,543 393,577 18,484,031 4,613,941 --
Shares issued upon exercise
of stock options 67,898 3,395 116,361 -- --
Purchase of 100,000
common shares, at cost -- -- -- -- --
Issuance of 1,490
common shares -- -- -- -- --
Tax effect of stock option
exercise -- -- 187,236 -- --
Adjustment to unrealized losses
on marketable securities -- -- -- -- (169,308)
Net earnings -- -- -- 816,345 --
--------- ----------- ---------- ---------- ---------
Balance at December 31, 1993 7,939,441 396,972 18,787,628 5,430,286 (169,308)
Shares issued upon exercise
of stock options 43,057 2,153 134,894 -- --
Issuance of 1,882 common shares
from treasury -- -- 5,595 -- --
Adjustment to unrealized losses
on marketable securities -- -- -- -- (748,236)
Stock dividend -- -- 586,054 (916,975) --
Net loss -- -- -- (1,719,193) --
--------- ----------- ---------- ---------- ---------
Balance at December 31, 1994 7,982,498 399,125 19,514,171 2,794,118 (917,634)
Shares issued upon exercise
of stock options 90,496 4,525 274,088 -- --
Issuance of 245 common shares
from treasury -- -- 1,216 -- --
Adjustment to unrealized losses
on marketable securities -- -- -- -- 443,981
Issuance of 833,333 common shares
from treasury for acquisition -- -- 4,654,165 -- --
Net loss -- -- -- (10,613,306) --
--------- ----------- ---------- ---------- ---------
Balance at June 30, 1995
(Unaudited) 8,072,994 $ 403,650 24,443,640 (7,819,188) (473,653)
========= =========== ========== ========== =========
<CAPTION>
Total stock-
Treasury holders'
stock equity
------------ -----------
<S> <C> <C>
Balance at December 31, 1991 (5,691,507) 17,046,265
Shares issued upon exercise of
stock options -- 370,945
Purchase of 29,519 common shares,
at cost (160,687) (160,687)
Tax effect of stock option exercise -- 189,219
Net earnings -- 193,613
------------ -----------
Balance at December 31, 1992 (5,852,194) 17,639,355
Shares issued upon exercise
of stock options -- 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
Adjustment to unrealized losses
on marketable securities -- (169,308)
Net earnings -- 816,345
------------ -----------
Balance at December 31, 1993 (6,193,796) 18,251,782
Shares issued upon exercise
of stock options -- 137,047
Issuance of 1,882 common shares
from treasury 4,075 9,670
Adjustment to unrealized losses
on marketable securities -- (748,236)
Stock dividend 330,921 --
Net loss -- (1,719,193)
------------ -----------
Balance at December 31, 1994 (5,858,800) 15,930,980
Shares issued upon exercise
of stock options -- 278,613
Issuance of 245 common shares
from treasury 529 1,745
Adjustment to unrealized losses
on marketable securities -- 443,981
Issuance of 833,333 common shares
from treasury for acquisition 1,804,166 6,458,331
Net loss -- (10,613,306)
------------ -----------
Balance at June 30, 1995
(Unaudited) (4,054,105) 12,500,344
============ ===========
</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 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. It is suggested
that these financial statements 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 June 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
six months ended June 30, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income taxes paid $ -- $ -- $ -- $ --
======== ======== ======== ========
Interest paid $543,329 $142,244 $699,953 $249,361
======== ======== ======== ========
</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 June
30, 1995:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses 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 sold or retired are removed from the accounts and any resulting
gain or loss is reflected in the statement of earnings.
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 a business acquired is
amortized on a straight line basis over the estimated useful life 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
June 30, 1995, the Company does not believe there has been any
impairment of its intangible assets. Amortization expense was $49,126
and $10,684 for the three months ended June 30, 1995 and 1994,
respectively, and $59,809 and $19,387 for the six months ended June
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 June 30, 1995 and 1994, respectively, and $114,234 and $114,234
for the six months ended June 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 $79,305 and $12,637 for
the three months ended June 30, 1995 and 1994, respectively, and
$91,943 and $25,275 for the six months ended June 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 for both the three and 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 stockholders 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 three months and six months ended June 30, 1994 were
increased to retroactively reflect the 3% stock dividend.
10 (CONTINUED)
<PAGE> 12
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Primary and fully diluted loss per share for the three months
and six months ended June 30, 1995 is based upon 6,175,188 and
5,738,825 weighted average common shares outstanding,
respectively. Primary and fully diluted loss per share for
the three months and six months ended June 30, 1994 is based
upon 5,245,159 and 5,240,490 weighted average common
shares outstanding, respectively.
(2) ACQUISITION
On March 31, 1995, the Company acquired for $15.2 million cash
(excluding $927,000 of related acquisition costs) and 833,333 shares
of Quest common stock, all of the capital stock of Neuromed, Inc.
("Neuromed"), a privately held corporation located in Fort Lauderdale,
Florida. During June 1995, an additional cash payment of
approximately $203,000 was paid relating to a purchase price
adjustment. The Company also may 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 objectives. The contingent consideration may
be paid in a combination of cash and additional shares of Quest common
stock. 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 as a purchase and, accordingly, the
excess of total consideration over net assets acquired, based upon the
fair value of such assets and liabilities at the date of acquisition,
is being amortized on a straight-line basis over twenty years.
The preliminary purchase price allocation for the acquisition of
Neuromed, Inc. 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 2,713,077
-----------
$22,788,416
===========
</TABLE>
The Company recorded a charge to expense during the three months ended
June 30, 1995, of $10,500,000 attributable to the purchased research
and development which is reflected in the Statements of Earnings.
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.
The following unaudited pro forma summary presents the results of
operations as if the acquisition had occurred at the beginning of the
periods presented. This summary does not purport to be indicative of
what would have occurred had the acquistion 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>
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------------
1995 1994 1995 1994
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue 7,231,494 5,127,029 13,961,433 10,121,094
========= ========= ========== ===========
Income (loss) from
operations 724,622 (315,365) (9,101,919) (11,205,375)
========= ========= ========== ===========
Net income (loss) 262,451 (621,508) (9,967,124) (11,765,734)
========= ========= ========== ===========
Net income (loss) per
common and common
equivalent share $.04 $(.10) $(1.62) $(1.94)
========= ========= ========== ===========
</TABLE>
(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
11 (CONTINUED)
<PAGE> 13
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 forementioned facilities with NationsBank are secured 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.
On December 28, 1993, the Company entered into two agreements with
MetLife Capital Corporation for permanent 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 permanent
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 June 30, 1995, the Company had not
exercised its option to fix the rate and the principal balance of the
note was $2,971,950, including a current portion of $10,715. The
interest rate in effect at June 30, 1995 was 9.07%. 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 rate plus 250 basis points. This note has
a 10-year amortization. At June 30, 1995, the Company had not
exercised its option to fix the rate under this loan and the principal
balance of the note was $1,207,647, including a current portion of
$100,926. The interest rate in effect at June 30, 1995 was 8.57%.
This loan is collateralized by the equipment and furnishings purchased
with the proceeds.
At June 30, 1995, the Company had a 9% note payable for $245,932.
This note was secured 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 is restricted to 50% of the
12 (CONTINUED)
<PAGE> 14
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
(4) FEDERAL INCOME TAXES
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 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 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 three months
ended June 30, 1995 and 1994 was $36,789 and $9,550, respectively, and
$47,670 and $20,047 for the six months ended June 30, 1995 and 1994,
respectively.
The Company is also 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.
(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
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.
13 (CONTINUED)
<PAGE> 15
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 June
30, 1995 and 1994, respectively, and $50,100 and $49,500 for the six
months ended June 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.
(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 Baord 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:
1995
-------
Outstanding at January 1, 1995 -
Granted 167,000
Rescinded -
Exercised -
-------
Outstanding at end of period 167,000
Price range of options outstanding
at end of period $7.125
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net revenue of $7,231,494 for the three months ended June 30, 1995, was
$3,489,300, or 93.2%, above the comparable 1994 level of $3,742,194. This
increase in net revenue during the 1995 period compared to 1994 was
attributable to revenue generated from Neuromed, Inc. which was acquired on
March 31, 1995. Neuromed develops, manufactures and markets electronic
neurostimulation devices used in the treatment of chronic severe pain. For the
year ended October 31, 1994, Neuromed's net revenue was approximately $8
million. See Notes 2 and 3 of the Notes to Condensed Consolidated Financial
Statements and Part II. - "Other Information." Net revenue of the Company's
other products remained essentially unchanged during the three months ended
June 30, 1995 compared to the same period a year ago. For the six months ended
June 30, 1995, net revenue of $11,303,134 was $4,079,818, or 56.5%, above the
comparable 1994 level of $7,223,316. This increase in net revenue during the
1995 period compared to 1994 was primarily attributable to revenue generated
from the acquisition of Neuromed. Net revenue 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 fiscal 1995
will increase compared to the same periods during 1994 as a result of the
Neuromed acquisition. In addition, management expects that the Company will
complete development of its MPS(TM) brand of myocardial protection system and
family of related products and file for FDA market clearance under a pre-market
notification ("510[k]") during mid-August 1995. Management would then plan to
introduce the MPS system and related products to commercial markets in late
1995 or 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 believes that Neuromed and MPS should
enhance the long-range growth objectives of the Company.
Cost of revenue as a percentage of net revenue decreased to 39.9% for the three
months ended June 30, 1995, as compared to 53.9% for the same period a year
ago, thereby resulting in an increase in gross profit margin. For the six
months ended June 30, 1995, cost of revenue as a percentage of net revenue
decreased to 43.4% as compared to 55.8% for the same period during 1994,
thereby resulting in an increase in gross profit margin. This increase in
gross profit margin for both periods during 1995 compared to 1994 was primarily
attributable to the revenue generated from the acquisition of Neuromed
discussed above, since Neuromed's products contribute higher gross profit
margins than the Company's other existing product lines. Management expects the
Company's overall gross profit margin for the remaining two quarters of fiscal
1995 will increase compared to the same period during 1994 as a result of the
Neuromed products.
15
<PAGE> 17
Marketing expense increased as a percentage of net revenue from 12.5% during
the three months ended June 30, 1994, to 14.7% for the same period in 1995, and
the dollar amount increased by approximately $598,000. Of such increase,
approximately $439,000 was marketing expense of Neuromed. The remainder of the
increase was primarily the result of additional salary and benefit expense from
personnel additions, and increased travel, commission and convention expense.
For the six months ended June 30, 1995, marketing expense increased as a
percentage of net revenue to 14.1% compared to 12.3% for the same period during
1994, and the dollar amount increased by approximately $703,000. Of such
increase, approximately $439,000 was marketing expense of Neuromed. The
remainder of the increase was primarily the result of additional salary and
benefit expense from personnel additions, and increased travel, commission and
convention expense. Management anticipates hiring four additional direct
salespersons during the second half of fiscal 1995 in preparation for the
commercialization of the MPS System and related products upon the FDA's
clearance of such products.
General and administrative expense increased approximately $378,000 during the
three months ended June 30, 1995 compared to the same period in 1994, but as a
percentage of net revenue, decreased from 20.7% during 1994 to 15.9% during the
1995 period. The increased expense during 1995 compared to 1994 was entirely
attributable to general and administrative expense of Neuromed, including
amortization expense of Neuromed intangibles. For the six months ended June
30, 1995, general and administrative expense increased approximately $432,732
compared to the same period in 1994, but as a percentage of net revenues,
decreased from 20.6% during 1994 to 17.0% during the 1995 period. This
increase in expense for the six month period during 1995 compared to 1994 was
primarily attributable to general and administrative expense of Neuromed,
including amortization expense of Neuromed intangibles.
Research and development expense (excluding purchased research and
development discussed below) decreased as a percentage of net revenue from
24.1% during the three months ended June 30, 1994, to 19.5% for the same
period in 1995, although the dollar amount increased by approximately
$507,000. For the six months ended June 30, 1995, research and development
expense increased as a percentage of net revenue to 22.1% from 21.3% during
the same period in 1994, and the dollar amount increased by approximately
$955,000. During 1995, the Company continued development efforts on its
MPS(TM) brand of myocardial protection system and related products. This
innovative system consists of hardware and disposables that are designed to
automate and systematize certain myocardial protection functions for the
cardiovascular team. During the second quarter of fiscal 1995, the Company
assembled beta (pre-production) units of MPS which are necessary for the
validation testing needed for the 510(k) filing with the FDA. In a June 22,
1995 press release, the Company announced that its 510(k) submission on the MPS
System would be delayed an additional month due to delays in completion of
certain software modules of MPS which resulted in validation testing commencing
later than was originally planned. Currently, substantially all of the
validation testing is complete and the Company expects to file the 510(k) with
the FDA during mid-August. However, the Company still believes that there is a
high probability that it will receive 510(k) clearance prior to 1996 due, in
part, to the recent improved FDA 510(k) review times. Again, there are no
assurances that such clearance will be obtained or that it will be obtained
without delay. Part of the increase in research and development expense for
both the three months and six months ended June 30, 1995 was research and
development expense of Neuromed, approximately $182,000. The remainder of the
increase during the first half of 1995 compared to 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 fiscal 1995 will decrease to approximately
$1.4 million from the first half of fiscal 1995's level of $2.5 million,
reflecting completion of the development of MPS. On January 31, 1995, the
Company received its first patent on MPS and has three additional patent
applications pending that can offer further protection.
16
<PAGE> 18
On March 31, 1995, the Company acquired for $15.2 million cash (excluding
$927,000 of related acquisition costs) and 833,333 shares of Quest common
stock, all of the capital stock of Neuromed, Inc. An additional cash payment
of approximately $203,000 was made during June 1995 relating to a purchase
price adjustment. See Note 2 of the Notes to Condensed Consolidated Financial
Statements. Approximately $10,500,000 of the purchase price was attributable
to in- process research and development which resulted in a charge to expense,
with no related tax benefit, during the three months ended June 30, 1995. As a
result, the loss from operations increased from approximately $415,000 for the
three months ended June 30, 1994, to $9,775,000 for the same period during
1995. Adjusting for this charge, the Company generated earnings from
operations of $725,000 for the three months ended June 30, 1995, reflecting the
positive impact of the Neuromed acquisition. For the six months ended June 30,
1995, the loss from operations increased to $10,112,000 from $719,000 during
the same period during 1994. Adjusting for the charge discussed above, the
Company generated earnings from operations of $388,000 for the six months ended
June 30, 1995, 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 favorably impact
earnings from operations for the remainder of fiscal 1995 as compared to the
same periods during 1994 although there can be no assurances that such
improvements will occur.
Other income decreased from approximately $58,000 during the three months ended
June 30, 1994, to an expense of approximately $473,000 during the same period
in 1995. For the six months ended June 30, 1995, other income decreased to an
expense of approximately $501,000 compared to income of approximately $178,000
during the comparable 1994 period. This decrease during both periods of
1995 compared to 1994 was primarily the result of increased interest expense.
The Company incurred $15 million of long-term indebtedness on March 31, 1995,
which was used to fund the cash payment of the Neuromed acquisition. See Notes
2 and 3 of the Notes to Condensed Consolidated Financial Statements. Also
contributing to the higher interest expense was the fact that overall interest
rates on borrowed money were higher during 1995 as compared to 1994. In
addition, both periods during 1995 compared to 1994 reflected lower interest
income due to reduced funds available for investment and lower gains recognized
on the sale of the Company's investments.
As a consequence of the Neuromed acquisition and the incurrence of $15 million
in long-term indebtedness, interest expense will increase for the remaining
periods of fiscal 1995 compared to the same periods during 1994. At June 30,
1995, such indebtedness bore interest at the rate of 9.49%. Since the Company
has limited opportunity to fix the rate of interest on such indebtedness, the
rate of interest will float and thereby subject the Company to the risk of
higher interest rates, which could have a detrimental impact on net earnings.
The net loss increased from approximately $357,000 for the three months ended
June 30, 1994 to approximately $10,249,000 during the same period in 1995 as a
result of the aforementioned charge for purchased research and development of
$10,500,000 in connection with the Neuromed acquisition. Adjusting for this
charge, net income for the three months ended June 30, 1995 would be $251,000.
For the six months ended June 30, 1995, the net loss increased to approximately
$10,613,000 compared to a loss during the same period in 1994 of $540,000 as a
result of the charge for purchased research and development. Adjusting for
this charge, the net loss for the six months ended June 30, 1995 would be
$113,000.
17
<PAGE> 19
During April 1994, the Board of Directors approved a 3% stock dividend. The
distribution date was May 23, 1994, for stockholders of record as of May 6,
1994. The weighted average number of weighted average common shares
outstanding used in computing the loss per share for the three months and six
months ended June 30, 1994, were increased to retroactively reflect the stock
dividend. Primary and fully diluted loss per share for the three months and
six months ended June 30, 1995 are based upon 6,175,188 and 5,738,825 common
and common equivalent shares outstanding, respectively. Primary and fully
diluted loss per share for the three months and six months ended June 30, 1994
are based upon 5,245,159 and 5,240,490 weighted average common shares
outstanding, respectively.
LIQUIDITY AND FINANCIAL POSITION
Cash, cash equivalents and marketable securities totaled $4,706,500 at June 30,
1995, a decrease of $556,000 from 1994 year-end. Working capital (current
assets less current liabilities) was $10,812,000 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, Inc. The Company paid $15.2 million cash, 833,333 shares of Quest
common stock, and agreed 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 objectives. The contingent
consideration may be paid in a combination of cash and additional shares of
Quest common stock. The Company also, during June 1995, paid an additional
cash payment of approximately $203,000 relating to a purchase price adjustment.
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 $1,950,000 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 may
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 acquisition of Neuromed significantly altered the debt structure of the
Company. Management believes, however, that its current cash, cash equivalent
and marketable securities, its working capital line, and funds generated from
the combined operations will be sufficient to service the acquisition-related
debt and satisfy normal cash operating requirements.
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
18
<PAGE> 20
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 half of fiscal
1995, interest rates have fallen, 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 fiscal 1995, the Company was a net seller of marketable
securities in the amount of approximately $1,223,000. 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 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 approximately $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 myocardial protection products the
Company is developing. Management expects capital expenditures for the
remainder of fiscal 1995 will approximate $200,000.
Under the terms of the NationsBank credit agreement, without NationsBank
consent, the Company is not permitted to acquire additional product lines or
companies during the twelve months ended March 31, 1996. However, the Company
intends to continue seeking such acquisitions, and if the Company identifies an
attractive acquisition candidate, management would expect to pursue such
acquisition, subject to NationsBank approval. No assurances can be given that
the Company will identify attractive candidates or be able to consummate
acquisitions on favorable terms.
19
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1995 Annual Meeting of Shareholders ("Annual Meeting") on
June 22, 1995 at the Company's corporate office in Allen, Texas. The meeting
was adjourned and continued on June 26, 1995. At the Annual Meeting the
following matters were voted on and approved:
<TABLE>
<CAPTION>
VOTES
VOTES FOR VOTES AGAINST ABSTAINED
PROPOSAL NOMINEE/PROPOSAL NOMINEE/PROPOSAL OR NOT VOTED
-------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
1) Election of
seven directors
for a one-year term.
Linton E. Barbee 5,063,296 20,631 --
Willliam N. Borkan 5,063,250 20,677 --
Robert C. Eberhart 5,063,296 20,631 --
John A. Gula 5,063,296 20,631 --
Hugh M. Morrison 5,063,296 20,631 --
Thomas C. Thompson 5,063,186 20,741 --
Michael J. Torma 5,063,296 20,631 --
2) Approval of the
Quest Medical, Inc.
1995 Stock Option
Plan. 4,815,930 235,776 32,221
</TABLE>
There were present at the Annual Meeting in person or by proxy, shareholders
holding 5,083,927 shares, or approximately 82.3% of the eligible voting shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule
(b) (1) The Company filed a current report on Form 8-K, dated
April 13, 1995, reporting pursuant to Item 2. "Acquisition or
Disposition of Assets," that 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 the Company
and Mr. William Borkan, dated February 10, 1995, the
Company
20
<PAGE> 22
acquired all of the issued and outstanding capital stock of Neuromed,
Inc. ("Neuromed"), all of which was held by Mr. Borkan and his
brother, Burt Borkan. The assets of Neuromed consist principally of
accounts receivable; inventory; equipment, furniture and other fixed
assets; and United States and foreign patents, trademarks and other
intellectual property. In addition, Neuromed leases approximately
18,000 square feet in an office and manufacturing facility in Davie
(Ft. Lauderdale), Florida.
In consideration for its purchase of the Neuromed capital stock, the
Company paid the Borkans $15.2 million in cash, and issued and
delivered to the Borkans 833,333 shares of Quest common stock, par
value $.05. These shares were issued from the Company's treasury.
Depending on Neuromed's attainment of certain sales objectives (as set
forth in Schedule 1.2 to the Agreement), the Company may be required
to pay the Borkans up to $3.0 million of additional consideration in
January 1996 and up to $3.0 million in January 1997. The contingent
consideration will be paid one-half in cash and one-half in Quest
common stock (valued prior to issuance). Depending on the trading
price of Quest common stock at the time of issuance, however, the
allocation between cash and stock may vary at the time of payment.
The determination of the amount of consideration resulted from
arms-length negotiations between the Company and William Borkan, based
on such factors as Neuromed's historical and projected revenues and
cash flow, Neuromed's current and potential customer base and certain
other financial and operating information of Neuromed. There was no
material relationship between Quest and the Borkans or any of their
respective affiliates or associates prior to the transaction.
Financing for the cash portion of the purchase consideration was
provided by NationsBank of Texas, N.A., through $15 million of senior
debt financing.
In connection with the acquisition, the Company granted William Borkan
certain registration rights. During calendar 1996, Mr. Borkan may
make a single written request that the Company register his shares
under Form S-3 and Rule 415 under the Securities Act of 1933. In
addition, if the Company files a registration statement to register
its or another shareholder's sale of Quest common stock (other than
under a Form S-4, Form S-8 or other limited purpose form), Mr. Borkan
is entitled to include his shares in such offering, subject to the
managing underwriter's right to reduce the number of shares to be
included in the offering or to exclude such shares from the offering.
Under the Agreement, the Company also agreed that for three years
following the closing, and thereafter so long as William Borkan owns
at least 5% of the then issued and outstanding shares of Quest common
stock, William Borkan will be entitled to designate himself or another
nominee for election as a member of the Company's Board of Directors,
and the Company will use its best efforts to cause Mr. Borkan or his
nominee to be so elected. It is expected that Mr. Borkan will be
nominated and considered for election as a director at the Company's
next annual meeting.
21
<PAGE> 23
The Company and William Borkan also entered into a consulting
agreement whereby 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.
The Company also reported pursuant to Item 5. "Other Events," that in
connection with the acquisition of Neuromed, Inc., 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 provides for $15 million in senior term financing,
which was utilized to pay the cash portion of the Neuromed purchase
price. 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. The senior term
loan bears 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). NationsBank also agreed to expand the Company's
existing $3 million working capital line of credit to $5 million.
The Loan Agreement contains restrictive covenants which impose
limitations on the Company and its subsidiaries with respect to, among
other things: (i) the creation or incurrence of liens, (ii)
consolidations, mergers, sales, leases or conveyances of assets, (iii)
entering new industries or types of business, (iv) the incurrence of
additional indebtedness; or (v) making loans or certain investments.
In addition, the Loan Agreement restricts the Company from declaring
and paying cash dividends on its common stock in excess of 25% of the
prior year's net income or from repurchasing Quest capital stock in
excess of $1 million in any calendar year. The Loan Agreement also
requires the Company to satisfy certain financial tests and maintains
certain financial ratios.
The Loan Agreement contains customary default provisions, including
defaults resulting from nonpayment of principal when due, nonpayment
of interest and fees, material misrepresentations, default in
performance of any covenant, bankruptcy or insolvency, FDA bans,
recalls or seizures involving 5% or more of gross sales revenue, and
judgments. The Loan Agreement is secured 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.
22
<PAGE> 24
The Company also reported pursuant to Item 7. "Financial Statements,
Pro Forma Financial Information and Exhibits," that as of the date
this report on Form 8-K is being filed (April 13, 1995), it is
impracticable for the Company to provide the financial statements of
Neuromed or the pro forma financial information of Neuromed required
by Item 310(a) of Regulation S-B. The Company expects that the
required financial statements and pro forma financial information will
be available and will be filed by June 1, 1995, but in any event, not
later than 60 days after the date that this report on Form 8-K was
filed.
(2) The Company filed a current report on Form 8-K/A, Amendment No. 1 to
Form 8-K, dated June 12, 1995, which amended Item 7. "Financial
Statements, Pro Forma Financial Information and Exhibits" of the
Company's Form 8-K dated April 13, 1995. This amendment on Form 8-K/A
provided the financial statements of Neuromed, Inc. and the pro forma
financial information of Neuromed, Inc. required by Item 310(a) of
Regulation of S-B.
23
<PAGE> 25
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: AUGUST 11, 1995 BY: /S/ F. ROBERT MERRILL III
-------------------------------
F. ROBERT MERRILL III
VICE PRESIDENT FINANCE/
TREASURER
24
<PAGE> 26
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 298,886
<SECURITIES> 4,407,627
<RECEIVABLES> 4,579,278
<ALLOWANCES> 114,337
<INVENTORY> 6,325,302
<CURRENT-ASSETS> 16,573,128
<PP&E> 13,608,178
<DEPRECIATION> 3,331,750
<TOTAL-ASSETS> 41,651,969
<CURRENT-LIABILITIES> 5,760,996
<BONDS> 0
<COMMON> 403,650
0
0
<OTHER-SE> 12,096,694
<TOTAL-LIABILITY-AND-EQUITY> 41,651,969
<SALES> 113,031,134
<TOTAL-REVENUES> 113,031,134
<CGS> 4,910,490
<TOTAL-COSTS> 165,049,966
<OTHER-EXPENSES> 500,984
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 730,971
<INCOME-PRETAX> (10,613,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,613,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,613,306)
<EPS-PRIMARY> (1.85)
<EPS-DILUTED> (1.85)
</TABLE>
