<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
June 12, 1995 (March 31.1995)
Quest Medical, Inc.
-------------------
(Exact name of registrant as specified in its charter)
Texas 0-10521 75-1646002
----- ------- ----------
(State or other (Commission File Number) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
One Allentown Parkway, Allen, Texas 75002
-----------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(214) 390-9800
1
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
a. Financial Statements of Businesses Acquired. This item is
amended to provide financial statements of Neuromed, Inc., which are filed as
Exhibit 99.1 to this Current Report on Form 8-K;
(i) Audited Annual Financial Statements
Report of Independent Auditors
Consolidated Balance Sheet as of October 31, 1994
Consolidated Statements of Income and Retained
Earnings for the years ended October 31, 1994 and 1993
Consolidated Statements of Cash Flows for the years
ended October 31, 1994 and 1993
Notes to Consolidated Financial Statements
(ii) Unaudited Interim Financial Statements
Consolidated Balance Sheets as of January 31, 1995
and October 31, 1994
Consolidated Statement of Income and Retained
Earnings for the three months ended January 31, 1995
and 1994
Consolidated Statements of Cash Flows for the three
months ended January 31, 1995 and 1994
Notes to Consolidated Financial Statements
b. Pro Forma Financial Information. This item is amended to
provide the following unaudited pro forma consolidated financial statements,
which are filed as Exhibit 99.2 to this Current Report on Form 8-K:
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1994
Pro Forma Condensed Consolidated Statement of Income
for the twelve months ended December 31, 1994
Pro Forma Condensed Consolidated Statement of Income
for the three months ended March 31, 1995
Notes to Pro Forma Condensed Consolidated Financial
Statements
2
<PAGE> 3
c. Exhibits
<TABLE>
<S> <C>
2.1 Agreement for the Purchase and Sale of All of the Issued Capital Stock of Neuromed, Inc. dated February 10, 1995,
between Quest Medical, Inc. and Mr. William Borkan(1)
2.2 Amendment Agreement dated March 17, 1995, between Quest Medical, Inc, and Mr. William Borkan(1)
10.21 First Amended and Restated Credit Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank
of Texas, N.A.(2)
10.22 Promissory Note (Facility A Note) in the original principal amount of $5 million dated March 31, 1995.(2)
10.23 Promissory Note (Facility B Note) in the original principal amount of $15 million dated March 31, 1995.(2)
10.24 Security Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank of Texas, N.A.(2)
10.25 Security Agreement dated as of March 31, 1995 between Neuromed, Inc. and NationsBank of Texas, N.A.(2)
10.26 Intellectual Property Security Agreement and Assignment dated as of March 31, 1995 between Quest Medical, Inc. and
NationsBank of Texas, N.A.(2)
10.27 Intellectual Property Security Agreement and Assignment dated as of March 31, 1995 between Neuromed, Inc. and
NationsBank of Texas, N.A.(2)
10.28 License Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank of Texas, N.A.(2)
10.29 License Agreement dated as of March 31, 1995 between Neuromed, Inc. and NationsBank of Texas, N.A.(2)
10.30 Guaranty of Neuromed, Inc. in favor of NationsBank of Texas, N.A. under the First Amendment and Restated Credit
Agreement dated as of March 31, 1995.(2)
23.1 Consent of Independent Auditors(3)
99.1 Financial Statements of Business Acquired(3)
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C>
99.2 PRO FORMA FINANCIAL INFORMATION(3)
</TABLE>
- -------------------
(1) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1994, and incorporated herein by
reference.
(2) Filed as an Exhibit to the report of the Company on Form 8-K dated
April 13, 1995, and incorporated herein by reference.
(3) Filed herewith.
4
<PAGE> 5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 12, 1995 QUEST MEDICAL, INC.
By: /s/ F. Robert Merrill III
F. Robert Merrill III
Chief Financial Officer
5
<PAGE> 6
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Agreement for the Purchase and Sale of All of the Issued Capital Stock of Neuromed, Inc. dated February 10, 1995, between
Quest Medical, Inc. and Mr. William Borkan(1)
2.2 Amendment Agreement dated March 17, 1995, between Quest Medical, Inc. and Mr. William Borkan(1)
10.21 First Amended and Restated Credit Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank of
Texas, N.A.(2)
10.22 Promissory Note (Facility A Note) in the original principal amount of $5 million dated March 31, 1995.(2)
10.23 Promissory Note (Facility B Note) in the original principal amount of $15 million dated March 31, 1995.(2)
10.24 Security Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank of Texas, N.A.(2)
10.25 Security Agreement dated as of March 31, 1995 between Neuromed, Inc. and NationsBank of Texas, N.A.(2)
10.26 Intellectual Property Security Agreement and Assignment dated as of March 31, 1995 between Quest Medical, Inc. and
NationsBank of Texas, N.A.(2)
10.27 Intellectual Property Security Agreement and Assignment dated as of March 31, 1995 between Neuromed, Inc. and NationsBank
of Texas, N.A.(2)
10.28 License Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank of Texas, N.A.(2)
10.29 License Agreement dated as of March 31, 1995 between Neuromed, Inc. and NationsBank of Texas, N.A.(2)
10.30 Guaranty of Neuromed, Inc. in favor of NationsBank of Texas, N.A. under the First Amendment and Restated Credit Agreement
dated as of March 31, 1995.(2)
23.1 Consent of Independent Auditors(3)
99.1 Financial Statements of Business Acquired(3)
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
99.2 Pro Forma Financial Information(3)
</TABLE>
- --------------------
(1) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1994, and incorporated herein by
reference.
(2) Filed as an Exhibit to the report of the Company on Form 8-K dated
April 13, 1995, and incorporated herein by reference.
(3) Filed herewith.
7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-82414, 2-91410, and 33-23512) pertaining to the Quest
Medical, Inc. Amended and Restated Stock Option Plan; the Quest Medical, Inc.
Directors' Stock Option Plan; and the Quest Medical, Inc. 1987 Employees' Stock
Option Plan, respectively, and the related Prospectuses of our report dated
April 1, 1995, with respect to the consolidated financial statements of
Neuromed, Inc. included in the Form 8-K dated March 31, 1995 of Quest Medical,
Inc. filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Dallas, Texas
June 12, 1995
8
<PAGE> 1
Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Neuromed, Inc.
We have audited the accompanying consolidated balance sheet of Neuromed, Inc.
and subsidiaries (the "Company") as of October 31, 1994, and the related
consolidated statements of income and retained earnings and cash flows for each
of the two years in the period ended October 31, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Neuromed, Inc.
and subsidiaries at October 31, 1994, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
October 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, in fiscal 1994, the Company
changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Dallas, Texas
April 1, 1995
9
<PAGE> 2
NEUROMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
1994
-----------
<S> <C>
ASSETS
Current assets: $1,834,399
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful
accounts of $100,000 1,383,178
Inventories 1,488,418
Loan receivable, shareholder 656,586
Deferred income taxes 506,493
Other current assets 108,422
----------
Total current assets 5,977,496
----------
Property, plant and equipment, net 244,283
Other assets 7,467
----------
$6,229,246
==========
</TABLE>
10
<PAGE> 3
<TABLE>
<CAPTION>
OCTOBER 31,
1994
-----------
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of loan payable $ 1,634
Accounts payable and accrued expenses 1,106,581
Accrued royalty expense 853,115
Income taxes payable 784,539
----------
Total current liabilities 2,745,869
----------
Deferred income taxes payable 32,979
Shareholders' equity:
Common stock, Class A voting;
$.004 par value; 9,000,000 shares authorized; 5,819,250
shares issued 23,277
Common stock, Class B non-voting;
$.01 par value; 100,000 shares authorized; 94,850 shares
issued and outstanding 948
Capital in excess of par value 48,337
Retained earnings 3,397,836
----------
3,470,398
Less common stock, Class A voting, held in treasury,
at cost, 16,926 shares (20,000)
----------
3,450,398
----------
$6,229,246
==========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 4
NEUROMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
---------------------
1994 1993
--------- --------
<S> <C> <C>
Net sales $8,044,353 $7,182,073
Operating costs and expenses:
Cost of sales 1,932,763 1,579,647
Selling 1,968,342 1,769,327
General and administrative 1,448,256 1,500,487
Research and development 1,713,316 1,530,091
---------- ----------
7,062,677 6,379,552
Income from operations 981,676 802,521
Other:
Interest, net 62 20,125
Foreign currency transaction loss -- (8,149)
Other income (loss) (17,951) 215,464
---------- ----------
(17,889) 227,440
Income before income taxes and cumulative
effect of change in accounting principle 963,787 1,029,961
Provision for income taxes (383,765) (286,255)
---------- ----------
Income before cumulative effect of
change in accounting principle 580,022 743,706
Cumulative effect of change
in accounting principle 261,285 --
---------- ----------
Net income 841,307 743,706
Retained earnings, beginning of year 2,556,529 1,812,823
---------- ----------
Retained earnings, end of year $3,397,836 $2,556,529
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 5
NEUROMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------
1994 1993
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 841,307 $ 743,706
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting
principle (261,285) --
Gain on damaged inventory -- (91,433)
Depreciation and amortization 83,001 90,966
Changes in operating assets and liabilities:
Accounts receivable 398,994 (580,947)
Inventory (526,000) (53,180)
Other current assets (50,001) 11,069
Other assets 28,985 28,756
Accounts payable and accrued
expenses 567,684 (127,967)
Accrued royalty expense 508,182 (360,340)
Income taxes 67,886 211,521
---------- ---------
Net cash provided by (used in) operating
activities 1,658,753 (127,849)
---------- ---------
</TABLE>
13
<PAGE> 6
NEUROMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-------------------------------
1994 1993
---------- ------------
<S> <C> <C>
Cash flows from investing activities
Additions to property, plant and equipment $ (72,008) $ (251,534)
Redemption of preferred stock investment 67,336 88,364
Insurance proceeds from casualty loss 331,477 738,311
---------- -----------
Net cash provided by investing activities 326,805 575,141
---------- -----------
Cash flows from financing activities
Loan to Shareholder (649,686) (6,900)
Proceeds from loans payable 857,528 2,246,133
Repayment of loans payable (864,004) (2,452,886)
---------- -----------
Net cash used in financing activities (656,162) (213,653)
---------- -----------
Net Increase in Cash 1,329,396 233,639
Cash and cash equivalents, beginning of year 505,003 271,364
---------- -----------
Cash and cash equivalents, end of year $1,834,399 $ 505,003
========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest $ 34,969 $ 18,206
========== ==========
Cash paid during the year for income taxes $ 364,027 $ 63,034
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 7
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Neuromed, Inc. and subsidiaries manufacture implantable medical devices used
for neurostimulation. The devices manufactured include multi-programmable
spinal cord stimulators using various electrode types and multi-programmable
deep brain stimulators. They are used primarily for the treatment of chronic
pain.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Neuromed, Inc.
and its wholly-owned subsidiaries ("Neuromed" or the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents. The carrying amount of cash and cash equivalents
approximate their fair value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets. Amortization of leasehold improvements is computed on a
straight-line basis over the lesser of the useful life of the asset or the term
of the lease.
INCOME TAXES
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this
statement, deferred tax assets and liabilities are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
15
<PAGE> 8
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories as of October 31, 1994 are comprised of the following:
<TABLE>
<S> <C>
Raw materials $ 753,903
Work in process 187,100
Finished goods 547,415
----------
$1,488,418
==========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of October 31, 1994 is comprised of the
following:
<TABLE>
<S> <C>
Furniture and fixtures $ 154,496
Machinery and equipment 507,392
Leasehold improvements 408,584
Vehicles 44,666
----------
1,115,138
Less accumulated depreciation and amortization 870,855
----------
$ 244,283
==========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Neuromed occupies its manufacturing facility and administrative office under
the terms of a noncancelable operating lease. The lease expires on February 28,
1996 and provides for annual rental payments of $92,380. The following is a
schedule of the future rental payments:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31
<S> <C>
1995 $ 92,380
1996 30,794
--------
$123,174
========
</TABLE>
Rent expense under all operating leases was $127,568 and $108,640 for the years
ended October 31, 1994 and 1993, respectively.
16
<PAGE> 9
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Neuromed has an employment agreement with its principal shareholder. Among
other things, the agreement entitles the employee to additional compensation
equal to 10% of net operating income before income taxes between $250,000 and
$1,000,000, and 5% on such income above $1,000,000. This deferred compensation
aggregates approximately $373,000 at October 31, 1994 and is included in
accounts payable and other accrued expenses in the accompanying balance sheet.
General and administrative expenses include approximately $112,000 and $83,000
in 1994 and 1993, respectively, related to this agreement.
Neuromed has agreed to pay its principal shareholder, the inventor of its
medical devices, royalties of 10% of net sales of such devices for the
acquisition of the patents and technology. Included in selling expenses is
$824,290 and $725,674 of royalty expense for the years ended October 31, 1994
and 1993, respectively, related to this agreement.
Under its defined contribution pension plan, Neuromed's required contributions
to the plan are 2% of each eligible participant's compensation up to $37,800,
plus 7.6% of compensation in excess of such amount, and totaled $56,576 and
$43,641 for the years ended October 31, 1994 and 1993, respectively. All
employees, other than commissioned employees, are eligible for the plan after
meeting a minimum hours of service requirement with the Company.
Under agreements with affiliated companies, Neuromed agreed to pay certain
research and development expenses for products being developed. Accordingly,
included in research and development expenses is $668,051 and $374,721 of
expenses related to these products for the years ended October 31, 1994 and
1993, respectively.
The Company is involved in various lawsuits and claims, the ultimate
disposition of which management believes will not have a material adverse
effect upon the Company's business or consolidated financial position.
17
<PAGE> 10
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK
Neuromed has issued 4,750 incentive stock shares to certain key employees.
Under the terms of the agreements pertaining to these shares, the employees are
entitled to receive 100% of the excess of the fair market value, as defined, of
a share of common stock of Neuromed on the date the right is exercised, over
$1.96 per share. All of the issued incentive stock shares are exercisable.
Amounts due from the exercise of the incentive stock shares are payable in
cash, common stock of Neuromed or both over the twelve months following the
month they are exercised. Management of the Company has estimated that
aggregate appreciation of the shares approximates $17,520 and $14,250 as of
October 31, 1994 and 1993, respectively.
6. RELATED PARTIES
During fiscal year 1994, the Company advanced approximately $650,000 to its
major shareholder. The advances, with interest at 5% per annum, are due on
demand. The advance was repaid in full January 1995.
7. Other Income
During March 1993, Neuromed sustained damage to its primary production facility
from a tornado. Neuromed collected insurance proceeds attributable to the
tornado of $200,000 during the year ended October 31, 1993 and an additional
$331,477 during December 1993. Included in other income for fiscal year 1993 is
approximately $91,000 attributable to inventory damage.
8. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
--------------------------------
1994 1993
---------- ----------
<S> <C> <C>
Current:
Federal $ 616,757 $ 183,099
State 64,074 18,319
-------------------------------
680,831 201,418
Deferred (297,066) 84,837
-------------------------------
$ 383,765 $ 286,255
===============================
</TABLE>
18
<PAGE> 11
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Effective November 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109. As permitted under the new rules, prior years' financial statements
have not been restated. The cumulative effect of adopting SFAS No. 109 as of
November 1, 1993 was to increase net income by $261,285.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of October 31, 1994
are as follows:
<TABLE>
<S> <C>
Deferred tax assets
Accounts receivable $ 16,971
Allowance for doubtful accounts 35,800
Accrued royalties 296,696
Accrued salaries 23,657
Deferred compensation 133,369
---------
506,493
Deferred tax liabilities
Depreciable property 32,979
---------
Net deferred tax asset $ 473,514
=========
</TABLE>
The Company's effective tax rate for 1994 differs from the federal statutory
rate of 34% primarily because of state income taxes. In 1993, the Company's
effective tax rate was less than the federal statutory rate of 34% primarily
because of the utilization of research and development credits.
9. MAJOR CUSTOMER
The Company's major customer in 1994 accounted for 18% of sales. In 1993 a
major customer accounted for 13% of sales. During 1994 and 1993, a company of
which the principal shareholder of Neuromed holds a minority interest accounted
for 7% and 18% of sales, respectively.
19
<PAGE> 12
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT
On March 31, 1995, the sale of all the capital stock of the Company
to Quest Medical, Inc. was closed. Pursuant to the agreement, all of the cash
on hand at that date was distributed to the principal shareholder of the
Company in order to settle the outstanding liabilities, through March 31, 1995,
to such shareholder for deferred compensation and royalties as further
described in Note 4. In addition, approximately $1.5 million of such cash was
used to buy out the remaining term of the royalty agreement. Also pursuant to
such closing, the agreement by Neuromed to pay certain research and development
expenses for an affiliated company was terminated.
20
<PAGE> 13
NEUROMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1995 and October 31, 1994
<TABLE>
<CAPTION>
JANUARY 31,
1995 October 31,
(UNAUDITED) 1994
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,374,390 $1,834,399
Accounts receivable, net of allowance for
doubtful accounts of $100,000 in 1995 and
$100,000 in 1994 1,778,183 1,383,178
Inventories 1,578,183 1,488,418
Loan receivable, shareholder -- 656,586
Deferred income taxes 506,493 506,493
Other current assets 100,478 108,422
---------- ----------
Total current assets 5,337,727 5,977,496
---------- ----------
Property, plant and equipment, net 243,675 244,283
Other assets 2,695 7,467
---------- ----------
$5,584,097 $6,229,246
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
21
<PAGE> 14
NEUROMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1995 AND OCTOBER 31, 1994
<TABLE>
<CAPTION>
January 31,
1995 October 31,
(Unaudited) 1994
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of loan payable $ 408 $ 1,634
Accounts payable and accrued expenses 866,317 1,106,581
Accrued royalty expense 218,355 853,115
Income taxes payable 587,557 784,539
---------- ----------
Total current liabilities 1,672,637 2,745,869
---------- ----------
Deferred income taxes payable 32,979 32,979
Shareholders' equity:
Common stock, Class A voting 23,277 23,277
Common stock, Class B non-voting 948 948
Capital in excess of par value 48,337 48,337
Retained earnings 3,825,919 3,397,836
---------- ----------
3,898,481 3,470,398
Less common stock, Class A voting, held in
treasury at cost, 16,926 shares (20,000) (20,000)
---------- ----------
3,878,481 3,450,398
---------- ----------
$5,584,097 $6,229,246
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
22
<PAGE> 15
NEUROMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED JANUARY 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31
---------------------------------
1995 1994
------------- ------------
<S> <C> <C>
Net revenue $ 2,658,299 $ 1,512,942
Cost of revenue 637,303 460,034
----------- -----------
Gross profit 2,020,996 1,052,908
----------- -----------
Operating expenses:
Research and development 296,182 390,417
Marketing 618,643 437,517
General and administrative 434,957 367,641
----------- -----------
1,349,782 1,195,575
----------- -----------
Earnings (loss) from operations 671,214 (142,667)
Other income (expense);
Interest expense (7,500) (23,187)
Interest income 17,444 163
Other 29,943 (18,059)
----------- -----------
39,887 (41,083)
----------- -----------
Earnings (loss) before income taxes 711,101 (183,750)
Income taxes 283,018 --
----------- -----------
Net earnings (loss) 428,083 (183,750)
Retained earnings, beginning of year 3,397,836 2,556,529
----------- -----------
Retained earnings, at January 31 $ 3,825,919 $ 2,372,779
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
23
<PAGE> 16
NEUROMED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31
----------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 428,083 $ (183,750)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 20,865 20,700
Changes in operating assets and liabilities:
Accounts receivable (395,005) (135,670)
Inventory (89,765) (98,076)
Other current assets 7,944 7,705
Other assets 4,772 (25,353)
Accounts payable and accrued expenses (240,264) (64,080)
Accrued royalty expense (634,760) 147,510
Income taxes (196,982) (315,879)
----------- -----------
Net cash used in operating activities (1,095,112) (646,893)
----------- -----------
Cash flows from investing activities
Additions to property, plant and equipment (20,257) (4,743)
Redemption of preferred stock investment -- 6,942
Insurance proceeds from casualty loss -- 331,477
----------- -----------
Net cash (used in) provided by investing
activities (20,257) 333,676
----------- -----------
Cash flows from financing activities
Proceeds from loan receivable, shareholder 656,586 1,700
Proceeds from loans payable -- 617,651
Repayment of loans payable (1,226) (381,640)
----------- -----------
Net cash provided by financing activities 655,360 237,711
----------- -----------
Net decrease in cash (460,009) (75,506)
Cash and cash equivalents, beginning of period 1,834,399 505,003
----------- -----------
Cash and cash equivalents, end of period $ 1,374,390 $ 429,497
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
24
<PAGE> 17
NEUROMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JANUARY 31,1995
(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. It is suggested
that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's
October 31, 1994 Annual Financial Statements. The results of
operations for periods ended January 31 are not necessarily indicative
of operations for the full year.
(2) INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
January 31,
1995
----------
<S> <C>
Raw materials $ 804,873
Work in process 205,164
Finished Goods 568,146
----------
$1,578,183
</TABLE>
(3) SUBSEQUENT EVENT
On March 31, 1995, an agreement to sell all of the capital stock of
the Company to Quest Medical, Inc. was closed. Pursuant to the
agreement, all of the cash on hand at that date was distributed to the
principal shareholder of the Company in order to settle the
outstanding liabilities, through March 31, 1995, to such shareholder
for deferred compensation and royalties. In addition, approximately
$1.5 million of such cash was used to buy out the remaining term of a
royalty agreement. Also pursuant to such closing, the agreement by
Neuromed to pay certain research and development expenses for an
affiliated company was terminated.
25
<PAGE> 1
EXHIBIT 99.2
QUEST MEDICAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEUROMED, PRO FORMA PRO FORMA
MEDICAL, INC. INC. ADJUSTMENTS COMBINED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 87,963 $1,834,399 $ 656,586 (1) $ 87,963
(853,115) (2)
(784,539) (2)
(372,540) (2)
(480,791) (2)
15,200,000 (3)
(15,200,000) (4)
Marketable securities 5,174,470 -- -- 5,174,470
Receivables:
Trade accounts, net 1,671,684 1,383,178 -- 3,054,862
Other 172,969 -- -- 172,969
-------------------------------------------------------------------------------
Total receivables 1,844,653 1,383,178 -- 3,227,831
-------------------------------------------------------------------------------
Inventories 3,987,452 1,488,418 -- 5,475,870
Loan receivable, shareholder -- 656,586 (656,586) (1) --
Deferred income taxes -- 506,493 (506,493) (5)
Prepaids and other assets 484,406 108,422 (56,900) (5) 535,928
-------------------------------------------------------------------------------
Total current assets 11,578,944 5,977,496 (3,054,378) 14,502,062
-------------------------------------------------------------------------------
Net property, plant and equipment 9,632,418 244,283 (139,761) (5) 9,736,940
Intangible assets related to Neuromed, Inc.
acquisition -- -- 19,855,154 (5) 19,855,154
Purchased technology from acquisitions, net 534,993 -- -- 534,993
Cost in excess of net assets acquired, net 913,656 -- -- 913,656
Patents and patent applications, net 1,517,434 -- -- 1,517,434
Other assets, at cost, net 57,464 7,467 461,933 (5) 526,864
-------------------------------------------------------------------------------
$24,234,909 $6,229,246 $ 17,122,948 $47,587,103
===============================================================================
</TABLE>
26
<PAGE> 2
QUEST MEDICAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEUROMED, PRO FORMA PRO FORMA
MEDICAL, INC. INC. ADJUSTMENTS COMBINED
-------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Short-term obligations $ 2,650,000 $ -- $ (2,650,000) (6) $ --
Current portion of long-term debt 109,241 1,634 1,950,000 (3) 2,060,875
Accounts payable and accrued
expenses 1,408,998 1,106,581 (372,540) (2) 3,101,227
958,188 (5)
Accrued royalty expense -- 853,115 (853,115) (2) --
Income tax payable -- 784,539 (784,539) (2) --
-----------------------------------------------------------------
Total current liabilities 4,168,239 2,745,869 (1,752,006) 5,162,102
-----------------------------------------------------------------
Long-term debt, excluding current portion 4,123,853 -- 2,650,000 (6) 20,023,853
13,250,000 (3)
Deferred income taxes 11,837 32,979 (32,979) (5) 11,837
Stockholders' equity
Common stock, voting 399,125 23,277 (23,277) (5) 399,125
Common stock, non-voting -- 948 (948) (5) --
Additional paid-in capital 19,514,171 48,337 (48,337) (6) 24,168,336
4,654,165 (4)
Retained earnings 2,794,118 3,397,836 (3,397,836) (5) 2,794,118
Unrealized loss on marketable securities (917,634) -- -- (917,634)
Less cost of common shares in treasury (5,858,600) (20,000) 20,000 (5) (4,054,634)
1,804,166 (4)
-----------------------------------------------------------------
Total stockholders' equity 15,930,980 3,450,398 3,007,933 22,389,311
-----------------------------------------------------------------
$24,234,909 $6,229,246 $ 17,122,948 $47,587,103
=================================================================
</TABLE>
27
<PAGE> 3
QUEST MEDICAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEURORNED, PRO FORMA PRO FORMA
MEDICAL, INC. INC. ADJUSTMENTS COMBINED
----------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue $13,999,165 $8,044,353 $ -- $22,043,518
Cost of revenue 7,617,932 1,932,763 145,603 (7) 9,639,598
(29,400) (8)
(27,300) (9)
------------------------------------------------ -----------
Gross Profit 6,381,233 6,111,590 (88,903) 12,403,920
------------------------------------------------ -----------
Operating Expenses:
General and administrative 3,063,296 1,448,256 992,758 (10) 5,348,978
184,000 (11)
45,000 (12)
(112,032) (13)
(51,500) (14)
(220,800) (9)
Marketing 1,913,793 1,968,342 (824,290) (15) 3,002,845
(55,000) (9)
Research and development 3,542,193 1,713,316 (184,800) (9) 4,402,658
(668,051) (14)
------------------------------------------------ -----------
8,519,282 5,129,914 (894,715) 12,754,481
------------------------------------------------ -----------
(Loss) earnings from operations (2,138,049) 981,676 805,812 (350,561)
------------------------------------------------ -----------
Other income (expense):
Gain on sale of marketable securities 464,113 -- -- 464,113
Interest expense (569,428) -- (1,351,386) (16)
(92,387) (17) (2,013,201)
Interest income and other 524,171 (17,889) -- 506,282
------------------------------------------------ -----------
418,856 (17,889) (1,443,773) (1,042,806)
------------------------------------------------ -----------
(Loss) earnings before income taxes
and cumulative effect of change in
accounting principle (1,719,193) 963,787 (637,961) (1,393,367)
Income taxes -- 383,765 (383,765) (18) --
------------------------------------------------ -----------
(Loss) earnings before cumulative
effect of change in accounting
principle $(1,719,193) $ 580,022 $ (254,196) $(1,393,367)
================================================ ===========
Loss before cumulative effect of change in
accounting principle per common and common
equivalent share:
Primary $ (0.33) $ (0.23)
=========== ===========
Fully diluted $ (0.33) $ (0.23)
=========== ===========
Weighted average common and common
equivalent shares outstanding 5,256,683 833,333 6,090,016
=========== =========== ===========
</TABLE>
28
<PAGE> 4
QUEST MEDICAL,INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
QUEST NEUROMED, PRO FORMA PRO FORMA
MEDICAL, INC. INC. ADJUSTMENTS COMBINED
------------------------------------------------------------ ----------
<S> <C> <C> <C> <C>
Net revenue $4,071,640 $2,658,299 $ -- $6,729,939
Cost of revenue 2,027,352 637,303 48,115 (7) 2,705,420
(7,350) (8)
------------------------------------------------------------ ----------
Gross Profit 2,044,288 2,020,996 (40,765) 4,024,519
------------------------------------------------------------ ----------
Operating Expenses:
General and administrative 766,858 434,957 248,189 (10) 1,284,204
46,000 (11)
15,000 (12)
(226,800) (9)
Marketing 528,637 618,643 (265,345) (15) 858,425
(23,510) (9)
Research and development 1,085,737 296,182 (61,447) (14) 1,320,472
------------------------------------------------------------ ----------
2,381,232 1,349,782 (267,913) 3,463,101
------------------------------------------------------------ ----------
(Loss) earnings from operations (336,944) 671,214 227,148 561,418
------------------------------------------------------------ ----------
Other income (expense):
Gain on sale of marketable securities 6,302 -- -- 6,302
Interest expense (157,266) (7,500) (357,198) (16) (545,061)
(23,097) (17)
Interest income and other 123,310 47,387 -- 170,697
------------------------------------------------------------ ----------
(27,654) 39,887 (380,295) (368,062)
------------------------------------------------------------ ----------
(Loss) earnings before income
taxes (364,598) 711,101 (153,147) 193,356
Income taxes -- 283,018 (244,347) (18) 38,671
------------------------------------------------------------ ----------
Net (loss) earnings $ (364,598) $ 428,083 $ 91,200 $ 154,685
============================================================ ==========
Net (loss) earnings per common and common
equivalent share:
Primary $ (0.07) $ 0.02
========== ==========
Fully diluted $ (0.07) $ 0.02
========== ==========
Weighted average common and common
equivalent shares outstanding 5,302,463 1,364,216 6,666,679
========== ========== ==========
</TABLE>
29
<PAGE> 5
QUEST MEDICAL, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION
On March 31, 1995, pursuant to the terms of an Agreement for the Purchase and
Sale of all of the Issued Capital Stock of Neuromed, Inc. between Quest
Medical, Inc. ("the Company') and Mr. William Borkan dated February 10, 1995,
the Company acquired all of the issued and outstanding stock of Neuromed, Inc.
("Neuromed"), In consideration for its purchase of the Neuromed capital stock,
the Company paid $15,200,000 in cash and 833,333 shares of Quest common stock
valued at $6,458,331. The Company may also be required to pay contingent
consideration of up to $6 million over the next two years payable in January
1996 and January 1997, depending on sales of Neuromed's products reaching
certain established objectives. The contingent considerations may be paid in a
combination of cash and additional shares of Quest Common stock. In addition,
the Company incurred $958,188 of acquisition-related expenses (including debt
issuance cost). In connection with the acquisition of Neuromed, the Company
entered into the First Amended and Restated Credit Agreement dated March 31,
1995 with NationsBank of Texas, N.A. (the "Loan Agreement"). The Loan
Agreement provided the Company with $15 million in senior term financing,
which was utilized to pay the cash portion of the Neuromed purchase price.
The Loan Agreement also expanded the Company's existing $3 million working
capital line of credit to $5 million. The acquisition has been accounted for
using the purchase method of accounting.
The unaudited pro forma condensed consolidated balance sheet as of December 31,
1994 has been prepared as if the acquisition of Neuromed had occurred on that
date. This balance sheet combines the balance sheet of Quest Medical at
December 31, 1994 and the balance sheet of Neuromed at October 31, 1994.
The pro forma condensed consolidated statements of operations for the year
ended December 31, 1994 and the three months ended March 31, 1995 have been
prepared as if the acquisition of Neuromed had occurred at the beginning of the
period presented. The pro forma condensed consolidated statement of operations
for the year ended December 31, 1994 combines the statement of operations of
Quest Medical for the twelve months ended December 31, 1994 and the statement
of operations of Neuromed for the twelve months ended October 31, 1994. The
pro forma condensed consolidated statement of operations for the three months
ended March 31, 1995 combines the statement of operations of Quest Medical for
the three months ended March 31, 1995 and the statement of operations of
Neuromed for the three months ended January 31, 1995.
The unaudited pro forma condensed consolidated financial statements have been
prepared based on estimates and assumptions deemed by the Company to be
appropriate and do not purport to be indicative of the financial position or
results of operations which would actually have been obtained had the
acquisition occurred as
30
<PAGE> 6
presented in such statements or which may be obtained in the future. The
unaudited interim financial statements of Neuromed have not been reviewed by
the Company's independent public accountants nor have they performed any
procedures with respect thereto. The unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the
financial statements of Neuromed, Inc. included elsewhere herein, the
consolidated financial statements and related notes of the Company, included in
its Annual Report on Form 1O-KSB for the year ended December 31, 1994 and the
Company's Quarterly Report on Form 1O-QSB for the quarterly period ended March
31, 1995.
NOTE B. PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma condensed consolidated balance sheet
reflects the following adjustments;
(1) To record payment of a loan receivable due from Neuromed's
principal shareholder prior to closing of the transaction.
(2) To record payment of certain Neuromed liabilities prior to
closing of the transaction and distribution of the remaining
cash at Neuromed to its principal shareholder.
(3) To record borrowings under a First Amended and Restated Credit
Agreement with NationsBank of Texas, N.A.
(4) To record the purchase of all of the capital stock of
Neuromed, Inc. for $15,200,000 cash and 833,333 shares of
Quest common stock valued at $6,458,331.
(5) To record acquisition-related expenses (including debt
issuance cost) of $958,188 and the elimination of
Neuromed's historical stockholders' equity and adjustment to
other asset balances resulting from the allocation of purchase
price. The excess of the purchase price over the carrying
value of the net assets acquired has been allocated
preliminarily to "intangible assets related to Neuromed, Inc.
acquisition" on the pro forma balance sheet. A valuation and
allocation of such intangible assets is being performed to
determine their relative fair value. The preliminary purchase
price allocation is subject to change when additional
information concerning asset and liability valuations is
obtained. Therefore, the final allocation will differ from the
preliminary amounts recorded.
(6) To reclass borrowings under Quest's working capital line to
long-term debt in accordance with the terms of the First
Amended and Restated Credit Agreement with NationsBank of
Texas, N.A.
The accompanying unaudited pro forma condensed consolidated statements of
operations reflect the following adjustments:
31
<PAGE> 7
(7) To adjust insurance expense resulting from increased products
liability coverage on Neuromed products.
(8) To adjust depreciation expense related to leasehold
improvements of Neuromed's facility which were revalued at
acquisition.
(9) Elimination of salary, benefit, and travel and entertainment
expense for two ex-officers of Neuromed, Mr. William Borkan
(former principal owner of Neuromed) and Mr. Burt Borkan, who
were not retained as employees.
(10) To adjust amortization expense for Neuromed intangible assets
which are being amortized over 20 years computed on a
straight line method. A valuation and allocation of such
intangible assets is being performed to determine their
relative fair value. The preliminary purchase price
allocation is subject to change when additional information
concerning asset and liability valuations is obtained.
Therefore, the final allocation will differ from the
preliminary amounts recorded.
(11) To adjust compensation expense resulting from a change in
compensation program for key Neuromed employees.
(12) To record consulting expense pursuant to a consulting
agreement between Quest Medical and Mr. William Borkan.
(13) Elimination of deferred compensation program for Mr. William
Borkan, terminated at consummation of Neuromed acquisition.
(14) Elimination of expenses pursuant to agreements obligating
Neuromed to pay certain research and development expenses for
affiliated companies, which were terminated at consummation of
the Neuromed acquisition,
(15) Elimination of royalty expense under an agreement between Mr.
William Borkan and Neuromed, which was terminated at
consummation of the Neuromed acquisition.
(16) To adjust interest expense for borrowings utilized to purchase
Neuromed, Inc. Average interest rate of approximately 9.50%
(LIBOR plus 300 basis points).
(17) To adjust amortization expense for financing costs incurred in
securing financing to consummate the Neuromed acquisition.
(18) To adjust income tax expense for the change in financial
taxable income from the combination of Neuromed and Quest.
32
