<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, 1996
TRANSITION 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 26, 1996
- ---------------------------- --------------------------------
COMMON STOCK, $.05 PAR VALUE 8,283,885
<PAGE> 2
QUEST MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION 2
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3-4
Consolidated Statements of Operations
For the Three Months and Six Months
ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows
For the Six Months ended
June 30, 1996 and 1995 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 16-21
PART II. OTHER INFORMATION 22-23
Item 4. Submission of Matters to a
Vote of Security Holders 22
Item 6. Exhibits and Reports on
Form 8-K 23
SIGNATURES 24
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
2
<PAGE> 4
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
ASSETS (UNAUDITED)
------ ---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 337,928 $ 1,325,630
Marketable securities 2,336,544 2,588,547
Receivables:
Trade accounts, less allowance for doubtful accounts of
$114,337 in 1996 and $114,337 in 1995 5,172,416 4,955,235
Interest and other 232,965 128,492
----------- -----------
Total receivables 5,405,381 5,083,727
----------- -----------
Inventories:
Raw materials 2,509,862 2,743,702
Work-in-process 2,169,201 1,077,529
Finished goods 2,246,172 2,285,961
----------- -----------
Total inventories 6,925,235 6,107,192
----------- -----------
Deferred income taxes 446,346 356,703
Prepaid expenses and other current assets 1,195,420 1,226,268
----------- -----------
Total current assets 16,646,854 16,688,067
----------- -----------
Property, plant and equipment:
Land 1,930,289 1,930,289
Building and improvements 5,298,224 5,271,718
Furniture and fixtures 3,453,425 2,964,471
Machinery and equipment 4,404,521 3,879,802
----------- -----------
15,086,459 14,046,280
Less accumulated depreciation and amortization 4,273,312 3,784,510
----------- -----------
Net property, plant and equipment 10,813,147 10,261,770
----------- -----------
Cost in excess of net assets acquired, net of
accumulated amortization of $571,212 in 1996
and $340,300 in 1995 9,569,047 9,546,298
Patents, net of accumulated amortization of
$1,199,210 in 1996 and $1,086,433 in 1995 1,176,189 1,288,966
Purchased technology from acquisitions, net of
accumulated amortization of $572,166 in 1996
and $413,558 in 1995 4,125,834 4,284,442
Tradenames, net of accumulated amortization
of $156,250 in 1996 and $93,750 in 1995 2,343,750 2,406,250
Other assets, at cost, less accumulated amortization
of $190,000 in 1996 and $178,667 in 1995 9,931 19,964
----------- -----------
$44,684,752 $44,495,757
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 5
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
------------------------------------ ----------------- -----------------
<S> <C> <C>
Current liabilities:
Accounts payable 1,173,030 1,210,265
Short-term notes payable and current maturities
of long-term notes payable 1,889,553 1,616,311
Accrued salary and employee benefit costs 631,954 630,908
Accrued relocation costs 35,297 291,370
Other accrued expenses 648,431 755,976
----------- -----------
Total current liabilities 4,378,265 4,504,830
----------- -----------
Notes payable 8,445,309 8,558,297
Deferred income taxes 495,998 562,580
Stockholders' equity:
Common stock of $.05 par value. Authorized
25,000,000 shares in 1996 and 10,000,000 in 1995;
issued 8,276,158 shares in 1996 and 8,147,349 in 1995 413,808 407,367
Additional paid-in capital 38,642,959 38,253,670
Retained earnings (deficit) (7,560,174) (7,579,925)
Unrealized loss on marketable securities net of
tax benefit of $67,697 in 1996 and $108,729 in 1995 (131,413) (211,062)
----------- -----------
Total stockholders' equity 31,365,180 30,870,050
Commitments and contingencies
----------- -----------
$44,684,752 $44,495,757
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 6
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
1996 1995 1996 1995
---------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net revenue $6,669,619 $ 7,231,494 $12,818,745 $ 11,303,134
Cost of revenue 2,737,704 2,883,138 5,389,854 4,910,490
---------- ------------- ------------ -------------
Gross profit 3,931,915 4,348,356 7,428,891 6,392,644
---------- ------------- ------------ -------------
Operating expenses:
Marketing 1,649,590 1,064,933 3,061,583 1,593,570
General and administrative 1,191,502 1,150,895 2,355,346 1,917,753
Research and development 872,845 1,407,906 1,769,188 2,493,643
Purchased research and development -- 10,500,000 -- 10,500,000
---------- ------------- ------------ -------------
3,713,937 14,123,734 7,186,117 16,504,966
---------- ------------- ------------ -------------
Earnings (loss) from operations 217,978 (9,775,378) 242,774 (10,112,322)
---------- ------------- ------------ -------------
Other income (expenses):
Interest expense (195,008) (573,705) (373,088) (730,971)
Interest and other income 47,400 94,646 114,235 217,956
Gain on sale of marketable securities
and assets 52,305 5,729 62,529 12,031
---------- ------------- ------------ -------------
(95,303) (473,330) (196,324) (500,984)
---------- ------------- ------------ -------------
Earnings (loss) before income taxes 122,675 (10,248,708) 46,450 (10,613,306)
Income taxes 8,352 -- 26,699 --
---------- ------------- ------------ -------------
Net earnings (loss) $ 114,323 $ (10,248,708) $ 19,751 $ (10,613,306)
========== ============= ============ =============
Net earnings (loss) per common and
common equivalent share: $ .01 $ (1.66) $ -- $ (1.85)
========== ============= ============ =============
Weighted average number of common and
common equivalent shares used in
computing earnings (loss) per share: 8,910,712 6,175,188 8,548,211 5,738,825
</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, 1996 AND 1995
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 19,751 $ (10,613,306)
------------ -------------
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,066,932 806,163
Purchased research and development -- 10,500,000
Gain on sale of assets and marketable
securities (62,529) (12,031)
Deferred income taxes (66,582) --
Changes in assets and liabilities, net of assets acquired
and liabilities assumed:
Receivables (321,654) (1,173,982)
Inventories (818,043) (564,376)
Prepaid expenses and other assets 27,548 (297,415)
Accounts payable (37,235) 1,028,402
Other -- 11,555
Accrued expenses (746,907) 89,835
------------ -------------
Total adjustments (958,470) 10,388,151
------------ -------------
Net cash used in operating activities (938,719) (225,155)
------------ -------------
Cash flows from investing activities:
Purchases of marketable securities (1,138,272) (1,082,992)
Proceeds from sales of marketable securities 1,571,679 2,305,969
Acquisition of Neuromed, Inc. -- (16,330,085)
Additions to property, plant and equipment (1,040,179) (994,707)
Net proceeds from sale of assets 1,805 2,600
------------ -------------
Net cash used by investing activities (604,967) (16,099,215)
------------ -------------
Cash flows from financing activities:
Exercise of stock options 395,730 279,829
Proceeds from short-term obligations 328,881 633,588
Proceeds of long-term debt -- 16,550,000
Payment of long-term debt (73,799) (540,997)
Payment of short-term obligations (94,828) (387,656)
Issuance of tresury stock -- 529
------------ -------------
Net cash provided by financing activities 555,984 16,535,293
------------ -------------
Net increase (decrease) in cash and cash equivalents (987,702) 210,923
Cash and cash equivalents at beginning of year 1,325,630 87,963
------------ -------------
Cash and cash equivalents at June 30 $337,928 $298,886
------------ -------------
Supplemental cash flow information is presented below:
Income taxes paid $ -- $ --
============ =============
Interest paid $ 330,067 $ 699,953
============ =============
</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 Total stock-
Common Stock paid-in earnings) marketable Treasury holders'
Shares Amount capital (deficit securities stock equity
------------------------ ---------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 7,871,543 $393,577 $18,484,031 $ 4,613,941 $ -- $(5,852,194) $ 17,639,355
Shares issued upon
exercise 67,898 3,395 116,361 -- -- -- 119,756
of stock
options
Purchase of 100,000
common shares, -- -- -- -- -- (349,004) (349,004)
at cost
Issuance of 1,490
common shares -- -- -- -- -- 7,402 7,402
Tax effect of stock
option -- -- 187,236 -- -- -- 187,236
exercise
Adjustment to
unrealized -- -- -- -- (169,308) -- (169,308)
losses
on marketable
securities
Net earnings -- -- 816,345 -- -- 816,345
--------- -------- ----------- ------------ ---------- ----------- ------------
Balance at December 31, 1993 7,939,441 396,972 18,787,628 5,430,286 (169,308) (6,193,796) 18,251,782
Shares issued upon
exercise 43,057 2,153 134,894 -- -- -- 137,047
of stock
options
Issuance of 1,882
common shares -- -- 5,595 -- -- 4,075 9,670
from treasury
Adjustment to
unrealized -- -- -- -- (748,236) -- (748,236)
losses
on marketable
securities
Stock dividend -- -- 586,054 (916,975) -- 330,921 --
Net loss -- -- -- (1,719,193) -- -- (1,719,193)
--------- -------- ----------- ------------ ---------- ----------- ------------
Balance at December 31, 1994 7,982,498 399,125 19,514,171 2,794,118 (917,634) (5,858,800) 15,930,980
Shares issued upon
exercise 160,422 8,021 361,429 -- -- -- 369,450
of stock
options
Issuance of 245 common
shares from -- -- 1,216 -- -- 529 1,745
treasury
Adjustment to
unrealized -- -- -- -- 706,572 -- 706,572
losses
on marketable
securities
Issuance of 1,033,333
common shares
from treasury -- -- 6,779,285 -- -- 2,237,246 9,016,531
for
acquisition
Sale of treasury and
new common
shares in 4,429 221 11,597,569 -- -- 3,621,025 15,218,815
public
offering, net
of offering
costs
Net loss -- -- -- (10,374,043) -- -- (10,374,043)
--------- -------- ----------- ------------ ---------- ----------- ------------
Balance at December 31, 1995 8,147,349 407,367 38,253,670 (7,579,925) (211,062) -- 30,870,050
Shares issued upon
exercise 128,809 6,441 389,289 -- -- -- 395,730
of stock
options
Adjustment to
unrealized -- -- -- -- 79,649 -- 79,649
losses
on marketable
securities
Net earnings -- -- -- 19,751 -- -- 19,751
--------- -------- ----------- ------------ ---------- ----------- ------------
Balance at June 30, 1996 8,276,158 $413,808 $38,642,959 $ (7,560,174) $ (131,413) $ -- $ 31,365,180
========= ======== =========== ============ ========== =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
7
<PAGE> 9
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
Quest Medical, Inc. and its subsidiaries (the "Company") design,
develop, manufacture and market a variety of healthcare products used
primarily in cardiovascular surgery, interventional pain management
and intravenous fluid delivery applications. The Company's revenues
are derived primarily from sales throughout the United States, Europe
and Australia.
The research and development, manufacture, sale and distribution of
medical devices is subject to extensive regulation by various public
agencies, principally the Food and Drug Administration and
corresponding state, local and foreign agencies. Product approvals
and clearances can be delayed or withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems
following initial marketing. While the Company received clearance for
the MPS system during March 1996, for example, there can be no
assurance that such clearance will not be withdrawn in the future.
In addition, the Company's products are purchased primarily by
hospitals and other users which then bill various third party payors
including Medicare, Medicaid, private insurance companies and managed
care organizations. These third party payors reimburse fixed amounts
for services based on a specific diagnosis. The impact of changes in
third party payor reimbursement policies and any amendments to
existing reimbursement rules and regulations which restrict or
terminate the eligibility of the Company's products could have an
adverse impact on the Company's financial condition and results of
operations.
(2) 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. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's December 31, 1995 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.
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.
Revenue from product sales is recognized at the time the product is
shipped.
8
<PAGE> 10
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cash equivalents include certificates of deposit and short-term,
highly liquid debt instruments with original maturities of three
months or less.
The Company's marketable equity and debt securities are classified as
available-for-sale and 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 are included in investment income.
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.
Property, plant and equipment are stated at cost. Major renewals and
betterments are capitalized; maintenance and repairs are charged to
operations as incurred. 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.
The excess of costs over the net assets of businesses acquired is
amortized on a straight line basis over the estimated useful lives of
20 to 25 years. The Company assesses the recoverability of this
intangible asset, as well as other intangible assets, primarily based
on its current and anticipated future undiscounted cash flows. At
June 30, 1996, the Company does not believe there has been any
impairment of its intangible assets.
Cost of purchased patents is amortized on a straight-line basis over
the estimated useful lives (4 to 14 years) of such patents. Costs of
patents which are the result of internal development are charged to
current operations.
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.
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.
Product development costs including start-up, research and
development, advertising and promotional costs are charged to
operations in the year in which such costs are incurred.
Primary and fully diluted loss per share for the three months and six
months ended June 30, 1996 are based upon 8,910,712 and 8,548,211
common and common equivalent shares outstanding, respectively. 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. Common stock
equivalents are outstanding stock options and are included in average
common and
9
<PAGE> 11
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
common equivalent shares outstanding using the treasury stock method
except during periods where their effect would be antidilutive.
Deferred income taxes are recorded based on the liability method and
represent the tax effect of the differences between the financial and
tax basis of assets and liabilities other than costs in excess of the
net assets of businesses acquired.
(3) ACQUISITION
On March 31, 1995, the Company acquired for $15,403,263 cash
(excluding $1,062,414 of related acquisition and financing costs) and
833,333 shares of Quest common stock valued at $6,458,331, all of the
capital stock of Neuromed, Inc. ("Neuromed"). The transaction also
provided for contingent consideration over the following two years,
payable in a combination of cash and additional shares of Quest common
stock in January 1996 and January 1997, depending on sales of
Neuromed's products reaching certain objectives. Financing for the
cash portion of the purchase price was provided by a bank. (See Note
5.)
In July 1995, the sales objectives for 1995 were reached which
triggered a liability for the 1995 contingent consideration payments
with regard to the Neuromed acquisition. The Company recorded the
additional "earn-out" consideration of 200,000 shares of Quest common
stock valued at $2,558,200 and a $1,500,000 liability. In addition,
in September 1995, the Company amended certain terms of the
acquisition agreement whereby the Company agreed to accelerate
issuance of the 200,000 shares for the 1995 earn-out and the seller
relinquished certain rights from the previous agreement. The amended
agreement sets the 1996 contingent consideration, payable in January
1997, at a cash payment equal to $3,370,000, if earned.
The acquisition was accounted for by the purchase method of
accounting. The allocation of the purchase price among identifiable
tangible and intangible assets was based upon a risk adjusted income
approach. The cost in excess of net assets acquired is being
amortized on a straight line basis over twenty years.
Purchased in-process research and development was identified and
valued through extensive interviews and analysis of data concerning
Neuromed's products under development. Expected future cash flows for
products under development were discounted taking into account
economic risks associated with the inherent difficulties and
uncertainty in completing the products, and thereby achieving
technological feasibility, and risks related to the viability of and
potential changes in future target markets. This resulted in
$10,500,000 of purchased research and development which had not yet
achieved technological feasibility and does not have alternative uses.
Therefore, in accordance with generally accepted accounting
principles, the $10,500,000, with no related tax benefit, was charged
to expense during the three months ended June 30, 1995.
10
<PAGE> 12
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The purchase price allocation for the acquisition of Neuromed, as of
June 30, 1996, is summarized below:
<TABLE>
<S> <C>
Tradenames $ 2,500,000
Purchased technology 4,000,000
Cost in excess of net assets acquired 9,127,052
Purchased research and development 10,500,000
Net tangible assets acquired 386,389
Deferred financing costs 468,767
------------
$ 26,982,208
============
</TABLE>
In connection with the purchase, the Company determined that the
operations of Neuromed would be relocated to the Company's facility in
Allen, Texas by the end of the first quarter of 1996. The relocation
was completed in March 1996 and the Company incurred $1,234,335 of
relocation costs which were recorded as an adjustment to cost in
excess of net assets acquired.
The following unaudited pro forma summary presents the results of
operations as if the acquisition had occurred on January 1, 1995.
This summary does not purport to be indicative of what would have
occurred had the acquisition been made as of this date or of results
which may occur in the future. This method of combining the companies
is for the presentation of unaudited pro forma summary results of
operations. Actual statements of operations of Quest Medical and of
Neuromed have been combined from the effective date of the acquisition
forward.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1995
------------- -------------
<S> <C> <C>
Pro forma revenue $7,231,494 $13,961,433
Pro forma earnings from operations 724,622 1,398,081
---------- -----------
Pro forma net earnings 262,451 532,876
---------- -----------
Pro forma net earnings per common
and equivalent share $.04 $.09
========== ===========
</TABLE>
The pro forma operations information excludes the charge of
$10,500,000 ($1.72 per share) related to purchased in-process research
and development which was expensed at the date of acquisition.
11
<PAGE> 13
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at June
30, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $ 885,600 $ -- $(122,588) $ 763,012
Publicly traded limited
partnerships 211,250 500 (11,250) 200,500
Real estate investment
trusts 772,058 10,182 (94,743) 687,497
Other 666,747 88,652 (69,864) 685,535
---------- ------- --------- ----------
$2,535,655 $99,334 $ 298,445 $2,336,544
========== ======= ========== ==========
</TABLE>
At June 30, 1996, no individual security represented more than 15% of
the total portfolio or 2% of total assets. The Company did not have
any investments in derivative financial instruments at June 30, 1996.
(5) CURRENT AND LONG-TERM DEBT
On March 31, 1995, the Company entered into a loan agreement (the
"Loan Agreement") with a bank providing for $15 million in senior term
financing, which was utilized to pay substantially all of the cash
portion of the Neuromed purchase price and a working capital line of
up to $5 million. Borrowings under both facilities bore interest at
prime plus 125 basis points, or at the Company's option, LIBOR plus
300 basis points. The interest rate could be reduced based on the
Company achieving certain ratios of senior bank debt to EBITDA
(earnings before interest, taxes, depreciation and amortization). The
facilities were collateralized by certain of the Company's assets,
including 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 which collateralize their long-term financing described
below. The Company was subject to certain covenants related to the
Loan Agreement including the maintenance of a minimum current ratio,
ratio of debt to net worth (as defined) and restrictions on the
payment of cash dividends. During December 1995, the Company repaid in
its entirety the senior term loan utilizing net proceeds it received
from a public offering (See Note 7).
In February 1996, the Company amended the working capital line of
credit and added a $15 million acquisition line of credit with the
same bank. Under the amended agreement, the working capital line of
credit is collateralized by the Company's accounts receivable and
inventory and the acquisition line, if drawn upon, will be
collateralized by the Company's remaining unencumbered assets. These
facilities will expire on December 31, 1997 and will bear interest at
the prime rate plus 25 basis points or LIBOR plus 200 basis points, at
the Company's discretion. The interest rate can be reduced based on
the Company achieving certain ratios of senior bank debt to EBITDA.
Advances under the
12
<PAGE> 14
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
acquisition line are immediately converted to a five-year term loan.
The Company is subject to certain covenants related to these
facilities. Significant covenants include the maintenance of minimum
ratios of current maturities coverage ratio, fixed charge ratio and
total liabilities to tangible net worth ratio (as defined). The
Company is also restricted on the payment of cash dividends to 75% of
annual net earnings if no draws exist under the acquisition line and
25% of annual net earnings if the acquisition line has been drawn
upon. At June 30, 1996, the Company had advances in the amount of
$4,550,000 outstanding under the working capital line with a weighted
average interest rate of 7.13%. The Company has not drawn upon the
acquisition line of credit.
At June 30, 1996, the Company had a note payable in the amount of
$1,500,000 related to "earn-out" consideration for Neuromed, Inc. (See
Note 3). Although the note was due and payable in January 1996 and
was non-interest bearing, the Company has withheld payment of the note
pending arbitration of certain purchase price adjustment disputes
between the Company and Neuromed's former principal owner, Mr. William
Borkan.
On December 28, 1993, the Company entered into two agreements for
long-term financing on their principal office and manufacturing
facility in the amount of $4,355,071. The first agreement, in the
amount of $3,000,000, is related to the building. This loan bore
interest through 1995 at an adjustable rate based on the 30-day
commercial paper rate plus 300 basis points. Effective January 1996,
the Company fixed the rate of interest for the remainder of the term
of the loan at 8.59%. This note has a 25-year amortization. The
Company has the option of prepaying this note during years 6-10,
subject to certain provisions. The loan is collateralized by the Allen
facility building and land and has an unpaid balance of $2,945,233 at
June 30, 1996. The second agreement, in the amount of $1,355,071, is
related to certain equipment and furnishings. This loan bore interest
through 1995 at an adjustable rate based on the 30-day commercial
paper rate plus 250 basis points. Effective January 1996, the Company
fixed the rate of interest for the remainder of the term of the loan
at 7.94%. This note has a 10-year amortization. This loan is
collateralized by the equipment and furnishings purchased with the
proceeds and has an unpaid balance of $1,105,576 at June 30, 1996.
At June 30, 1996, the Company had a 7.75% note payable for $234,053.
This note was secured by certain of the Company's marketable
securities investments, held by an investment company, which had a
carrying value of $745,125. Borrowings under this note are restricted
to 50% of the market value of the Company's marketable securities held
by the investment company. At June 30, 1996, the amount available for
additional borrowing under this note was $138,059.
(6) FEDERAL INCOME TAXES
At June 30, 1996, general business credits of $834,348 and alternative
minimum tax credits of $134,284 are available to offset future tax
liabilities. If unused, the general business credits expire in
various amounts beginning in 1997 through 2010.
13
<PAGE> 15
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(7) STOCKHOLDERS' EQUITY
At June 30, 1996 the Company has outstanding stock purchase rights
attached to each outstanding share of common stock. 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 certain
exceptions, 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. 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 purchase price (as defined
in the rights agreement) for each one-half share of common stock
purchased pursuant to the exercise of the right is $12.50. Under
certain circumstances described in the rights agreement, the holder
will be entitled to receive, upon exercise of the right at the current
exercise price, that number of shares of common stock of the Company
or acquiring Company having a market value of two times the exercise
price of the right. The rights may be redeemed in whole by the
Company at a price of $0.01 per right at any time prior to their
expiration on October 12, 1999, or prior to the point at which they
become exercisable.
In the fourth quarter of 1995, the Company sold 1,676,667 shares in a
public offering. Net proceeds to the Company were $15.2 million of
which $13.9 million was used to repay the senior term bank debt
incurred in connection with the Neuromed acquisition.
(8) COMMITMENTS AND CONTINGENCIES
The Company has no material commitments under noncancellable operating
leases. Total rent expense under operating leases for the three months
ended June 30, 1996 and 1995 was $14,408 and $36,789, respectively,
and $51,625 and $47,670 for the six months ended June 30, 1996 and
1995, respectively.
As a consequence of the Neuromed Acquisition in March 1995, the
Company is currently a party to certain product liability claims
related to SCS devices sold by Neuromed prior to the acquisition.
Product liability insurers have assumed responsibility for defending
the Company against these claims, subject to reservation of rights in
certain cases. Although the Company is entitled to contractual
indemnification from Neuromed's former owner with respect to any
losses exceeding its product liability insurance coverage, there can
be no assurances that the Company will not incur significant monetary
liability to the claimants if such insurance or indemnification is
unavailable or inadequate for any reason, or that the Company's SCS
business and new SCS product lines will not be adversely affected by
these product liability claims.
Except for such product liability claims and other ordinary routine
litigation incidental or immaterial to its business, the Company is
not currently a party to any other pending legal proceeding. The
Company maintains general liability insurance against risks arising
out of the normal course of business.
14
<PAGE> 16
(9) FINANCIAL INSTRUMENTS, RISK CONCENTRATION, AND MAJOR CUSTOMERS
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 for trade receivables.
The Company maintains an allowance for doubtful accounts based upon
expected collectibility. Any losses from bad debts have historically
been within management's expectations.
(10) 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 $38,250 and $25,050 for the three months ended June
30, 1996 and 1995, respectively, and $76,500 and $50,100 for the six
months ended June 30, 1996 and 1995, respectively.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and the related Notes thereto.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues. Net revenue of $6.67 million for the three months ended June 30,
1996, was $562,000, or 7.8% below the level for the comparable 1995 period of
$7.23 million. This decrease was primarily the result of lower unit sales
volume at the Company's Neuromed subsidiary which was acquired on March 31,
1995 and provides electronic spinal cord stimulation ("SCS") devices used to
manage chronic severe pain. See Note 3 of the Notes to Condensed Consolidated
Financial Statements. SCS revenue decreased 14% during the three months ended
June 30, 1996 compared to the prior year same period. Net revenue from sales
of the Company's other products decreased 1.8%, or $67,000, during the three
months ended June 30, 1996 compared to the corresponding period a year ago,
primarily due to lower unit sales volume from the Company's specialized tubing
sets. For the six months ended June 30, 1996, net revenue of $12.82 million
was $1.52 million, or 13.5%, above the comparable 1995 level of $11.30 million.
This increase during 1996 compared to 1995 was attributable to revenue
generated by Neuromed which provided six months of revenue during the 1996
period compared to only three months during the 1995 period. Net revenue from
sales of the Company's other products decreased 5.6%, or $434,000, primarily
due to lower unit sales volume from the Company's specialized tubing sets.
During the second quarter, management determined that to transform Neuromed
into an industry leader and compete effectively in the SCS market, Neuromed
must build an infrastructure to handle the future growth of the business.
Accordingly, the Company took the following steps toward that goal: (1)
relocated and integrated Neuromed's operations from Ft. Lauderdale, Florida to
the Company's corporate facility in Allen, Texas, (2) hired a new president of
Neuromed with significant experience in implantable devices, (3) reorganized
Neuromed's management team and distribution network, (4) improved Neuromed's
existing products to meet the Company's standard of quality, (5) began
designing training, customer support and sales and marketing materials and
videos, (6) completed customer requirements for next generation spinal cord
stimulation devices and (7) licensed implantable drug pump technology. For the
remainder of 1996 and into 1997, the Company expects to continue building
Neuromed's infrastructure to enable Neuromed to achieve its long-term
objectives of sustained and profitable growth.
16
<PAGE> 18
During March 1996, the Company received clearance from the FDA to commercially
market the Company's MPS brand of myocardial protection system and related
products. During the second quarter of 1996, the Company began clinically
validating the system at selected medical institutions and to date, has
completed over 100 human open-heart cases using MPS. On July 24, 1996, the
Company announced the release of MPS to market, which should contribute to the
Company's second half financial results.
Gross Profit. Gross profit of $3.93 million for the three months ended June 30,
1996 was $416,000, or 9.6% below the level for the comparable 1995 period of
$4.35 million. As a percentage of net revenue, gross profit decreased during
the three months ended June 30, 1996 to 59.0% as compared to 60.1% for the
comparable 1995 period. This decrease in gross profit and gross profit margin
during 1996 compared to 1995 was attributable to the decrease in revenue
generated by Neuromed, since Neuromed products contribute higher gross profit
margins than the Company's other product lines. For the six months ended June
30, 1996, gross profit increased to $7.43 million from $6.39 million for the
comparable 1995 period. As a percentage of net revenue, gross profit increased
during the six months ended June 30, 1996 to 58.0% as compared to 56.6% for the
comparable 1995 period. This increase in gross profit and gross profit margin
during the six month period of 1996 compared to 1995 was attributable to the
revenue generated by Neuromed, since the 1996 period includes six months of
revenue while the 1995 period includes only three months of revenue.
Operating Expenses. Research and development expense decreased to $873,000
during the three months ended June 30, 1996, compared to $1.41 million for the
same period a year ago, and decreased as a percentage of net revenue from 19.5%
in 1995 to 13.1% in 1996. Research and development expense decreased to $1.77
million during the six months ended June 30, 1996, compared to $2.49 million
for the same period during 1995, and decreased as a percentage of net revenue
from 22.1% in 1995 to 13.8% in 1996. This decrease during both periods of 1996
compared to 1995 was the result of a reduction in salary and contract labor
expense from staffing reductions due to the completion of the MPS system.
Management expects research and development expenditures to approximate $1.6
million for the remainder of 1996 and expects that about 60% of such
expenditures will be directed to the refining and redesigning of Neuromed
products, with the remainder directed primarily to continued development of MPS
and related products including modifications necessary to market the MPS
internationally. The Company anticipates launching MPS to international
markets during fiscal 1997. Management expects that most of its research and
development activities in 1996 will be financed through internally-generated
funds. During June 1996, the Company received a second patent on the MPS
system, and currently has two additional patent applications pending on MPS.
In connection with the March 31, 1995 acquisition of Neuromed, $10.5 million of
the aggregate purchase price was identified as purchased in-process research
and development. In accordance with generally accepted accounting principles,
an expense of $10.5 million was recorded during the three months and six
months ended June 30, 1995, with no related tax benefit.
Marketing, general and administrative expenses as a percentage of net revenue
increased to 42.6% for the three months ended June 30, 1996, compared to 30.6%
for the comparable period during 1995, while the dollar amount increased by
$625,000. Marketing expense as a percentage of net revenue increased to 24.7%
for the 1996 period compared to 14.7% during
17
<PAGE> 19
the same period in 1995, and the dollar amount increased by $585,000. Of such
increase, $451,000 was additional marketing expense of Neuromed primarily
related to higher salary, benefit and commission expense from personnel
additions, increased travel, samples and promotional expense. During 1996, the
Company reorganized part of its distribution network for Neuromed products and
discontinued several distributors in certain areas of the United States,
replacing them with six direct salespersons who are principally compensated on
commission. The Company also began designing training, customer support and
sales and marketing materials and videos and will continue those efforts during
the second half of 1996. The remainder of the increase in marketing expense
during the 1996 period compared to 1995 was primarily the result of additional
salary, benefit and travel expense from four additional direct salespersons
hired during the fourth quarter of 1995 in preparation of the commercial
introduction of the MPS system. The Company currently employs five direct
salespersons to market MPS and its related products. Management anticipates
hiring additional salespersons to market the MPS system and related products as
circumstances warrant. For the six months ended June 30, 1996, marketing
expense increased as a percentage of net revenue to 23.9% compared to 14.1% for
the same period during 1995, and the dollar amount increased by $1,468,000. Of
such increase, $1,139,000 was additional marketing expense of Neuromed
primarily, as mentioned above, related to higher salary, benefit, commission,
travel, samples and promotional expense. The 1995 six-month period included
only three months marketing expense of Neuromed from acquisition date of March
31, 1995, while the 1996 period included six months of expense. The remainder
of the increase in marketing expense during the six-month 1996 period compared
to 1995 was primarily the result, as mentioned earlier, of additional salary,
benefit and travel expense from four additional direct salespersons hired
during the fourth quarter of 1995 in preparation for the commercial
introduction of the MPS system. General and administrative expense as a
percentage of net revenue increased to 17.9% for the three months ended June
30, 1996, compared to 15.9% for the comparable period during 1995, and the
dollar amount increased by $41,000 primarily due to higher recruiting and
relocation expenses. For the six months ended June 30, 1996, general and
administrative expense increased $438,000 compared to the same period in 1995,
and as a percentage of net revenue increased from 17.0% in 1995 to 18.4% during
1996. The largest contributor to this increase was amortization expense of
Neuromed intangibles which were included in the 1995 period for only three
months from date of acquisition of March 31, 1995, while the 1996 period
included six months of amortization expense. The remainder of the increase
during 1996 compared to 1995 was primarily the result of higher recruiting,
relocation, franchise tax and 401(K) Company match expenses.
Earnings (Loss) from Operations. Earnings from operations increased to
$218,000 during the three months ended June 30, 1996, compared to a net loss
from operations of $9.78 million for the comparable 1995 period. The 1995 loss
was due to the charge of $10.5 million for purchased research and development
discussed above. Excluding such charge, however, earnings from operations
decreased from $725,000 in 1995 to $218,000 during 1996, due for the most part,
as discussed above, to the reduction in revenue and gross profit contributed by
Neuromed combined with higher Neuromed marketing costs. Earnings from
operations increased to $243,000 during the six months ended June 30, 1996,
compared to a net loss from operations of $10.11 million for the comparable
1995 period again due to the 1995 charge of $10.5 million for purchased
research and development. Excluding such charge, however, earnings from
operations decreased from $388,000 in 1995 to $243,000 during 1996 primarily
due to higher marketing expense and the other factors discussed above.
18
<PAGE> 20
Other Income (Expense). Other expense decreased to $95,000 during the three
months ended June 30, 1996, compared to an expense of $473,000 during the same
1995 period, a reduction of $378,000. For the six months ended June 30, 1996,
other expense decreased to $196,000 compared to $501,000 for the same period in
1995, a reduction of $305,000. This decrease in expense during both periods in
1996 compared to the 1995 periods was attributable to lower levels of interest
expense, since the 1995 periods included interest expense on $15 million of
bank debt incurred in connection with the Neuromed acquisition which debt was
repaid in the fourth quarter of 1995 from the proceeds of a public offering.
See Notes 3 and 5 of the Notes to Condensed Consolidated Financial Statements.
Interest income decreased $47,000 and $104,000, respectively, for the three
months and six months ended June 30, 1996 compared to the same periods in 1995
due to reduced funds available for investment.
Income Taxes. The Company recorded income tax expense of $8,000 and $27,000
for the three months and six months ended June 30, 1996, respectively. The
amortization expense of costs in excess of net assets acquired is not
deductible for tax purposes, thus explaining the relatively high rate of tax
(57.5%) for the six months compared to the U.S. statutory income tax rate
applicable to corporations of 34%. No income tax expense or benefit was
recorded during the 1995 periods.
Net Earnings (Loss). Net earnings increased to $114,000 for the three months
ended June 30, 1996, compared to a net loss of $10.25 million for the
comparable 1995 period due to the expense of $10.5 million for purchased
research and development incurred in connection with the Neuromed acquisition
during 1995. Excluding such charge, however, net earnings would have decreased
from $251,000 during 1995 to $114,000 in 1996, primarily due to the decrease in
revenue and gross profit contributed by Neuromed. Net earnings increased to
$20,000 for the six months ended June 30, 1996, compared to a net loss of
$10.61 million for the comparable 1995 period due to the 1995 charge.
Excluding such charge, net earnings increased to $20,000 during 1996 compared
to a net loss of $113,000 during the six months ended June 30, 1995, due to
reduced interest expense since the 1995 period includes interest on $15.0
million of bank debt incurred in connection with the Neuromed acquisition which
was repaid during the fourth quarter of 1995 from the proceeds of a public
offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital of $12.2 million at June 30, 1996 remained the
same as 1995 year end. The ratio of current assets to current liabilities was
3.8 to 1 at June 30, 1996. Cash, cash equivalents and marketable securities
totaled $2.7 million at June 30, 1996, a decrease of $1.2 million from 1995
year end.
In February 1996, the Company amended its working capital line of credit and
added a $15 million acquisition line of credit with NationsBank of Texas, N.A.
Under the amended agreement, the working capital line of credit is
collateralized by the Company's accounts receivable and inventory. The
acquisition line, if drawn upon, is collateralized by the Company's remaining
unencumbered assets. Both facilities will expire on December 31, 1997, and
bear interest at the prime rate plus 25 basis points or LIBOR plus 200 basis
points, at the Company's discretion. The interest rate can be reduced based
upon the Company achieving certain ratios of senior bank debt to EBITDA.
Advances under the acquisition line are immediately converted to a five-year
term loan. The Company is subject to certain covenants related to the
facilities, including a current maturities coverage ratio, fixed charge ratio
and total liabilities to tangible net worth (as defined). The
19
<PAGE> 21
Company is also restricted on the payment of cash dividends to 75% of annual
net earnings if no draws exist under the acquisition line and 25% of annual net
earnings if the acquisition line has been drawn upon. At June 30, 1996, the
Company had advances in the amount of $4.55 million outstanding under the
working capital line of credit with a weighted average interest rate of 7.13%.
The Company has not drawn upon the acquisition line of credit.
In connection with the acquisition of Neuromed, the Company agreed to pay
contingent consideration in January 1996 and January 1997 depending on
Neuromed's attainment of certain sales objectives. At year end 1995, the
Company had a note payable in connection with the 1995 earn-out consideration
in the amount of $1.5 million, payable in January 1996. The Company has
withheld payment of the $1.5 million pending arbitration of certain purchase
price adjustment disputes between the Company and Neuromed's former principal
owner, William Borkan. The 1996 contingent consideration, if earned, could
total up to $3.37 million cash and would be payable during January 1997. With
NationsBank assent, which, based on preliminary discussions with the bank,
management believes it could obtain, the Company may utilize a portion of its
acquisition line of credit to fund the payment of any necessary earn-out
considerations.
Management believes that its current cash, cash equivalents and marketable
securities, funds generated from operations, and if necessary, funds provided
by the working capital line of credit will be sufficient to satisfy normal cash
operating requirements and capital requirements during the remainder of 1996.
CASH FLOWS
Net cash used by operating activities for the first half of 1996 was $939,000.
Primary uses of cash included an increase of $818,000 in the Company's
investment in inventories primarily in preparation for the commercial
introduction of MPS, a reduction of $747,000 in accrued expenses primarily
related to expenditures incurred in the relocation of Neuromed from Ft.
Lauderdale, Florida to the corporate facility in Allen, Texas, and an increase
of $322,000 in trade and other receivables.
Investing activities for the first half of 1996 resulted in a net use of cash
of $605,000. The Company used cash of $1.04 million for capital expenditures
for additional manufacturing tooling and equipment and an upgraded computer
system. The Company anticipates capital expenditures of $672,000 for the
remainder of 1996. The Company was a net seller of marketable securities
during the first half of 1996 which provided net cash of $433,000.
Financing activities during the first half of 1996 provided $556,000 of cash.
Primary sources of cash from financing activities was $396,000 from the
exercise of stock options and net short-term borrowings of $234,000. The
Company utilized $74,000 for repayment against long-term debt during the first
half of 1996.
FORWARD LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Other than historical information, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward-looking statements that are based on
management assumptions and involve risks and uncertainties, including but not
limited to the Company's ability to develop, clinically validate and gain
market acceptance
20
<PAGE> 22
for new products, including the MPS system, new generation Neuromed products
and other products; successfully developing the infrastructure at Neuromed that
will enable the Company to grow the business into a solid player in the SCS
market; government regulation; competition and technological changes that may
render the Company's products obsolete or noncompetitive; general domestic and
international economic conditions; and other risks detailed from time to time
in the Company's SEC public filings. Consequently, if such management
assumptions prove to be incorrect or such risks or uncertainties materialize,
the Company's actual results could differ materially from the results
forecasted in the forward-looking statements.
IMPACT OF INFLATION AND CHANGING PRICES
The Company attempts to minimize the impact of inflation on manufacturing and
operating costs through on-going quality and productivity programs. The Company
considers the impact of inflation on its operations to be insignificant as the
rate of inflation has remained low in recent years. When material price
increases have been experienced by the Company, it has generally attempted to
pass such cost increases on to customers through its prices, to the extent
permitted by competition and other factors.
CURRENCY FLUCTUATIONS
Substantially all of the Company's international sales are denominated in U.S.
dollars. Fluctuations in currency exchange rates in other countries could
reduce the demand for the Company's products by increasing the price of the
Company's products in the currency of the countries in which the products are
sold, although management does not believe currency fluctuations have had a
material effect on the Company's results of operations.
21
<PAGE> 23
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1996 Annual Meeting of Shareholders ("Annual Meeting") on
June 27, 1996 at the Company's corporate office in Allen, Texas. 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 6,365,846 346,643 --
Robert C. Eberhart,Ph.D. 6,365,949 345,540 --
Richard A. Gilleland 6,364,813 347,676 --
Hugh M. Morrison 6,365,846 346,643 --
Richard D. Nikolaev 6,365,028 347,461 --
Thomas C. Thompson 6,365,846 346,643 --
Michael J. Torma, M.D. 6,365,543 346,946 --
2) Approval of an amendment
to the Amended Articles of
Incorporation of the Company
to increase the number of
shares of common stock
authorized for issuance
thereunder from 10,000,000
to 25,000,000. 5,694,348 903,319 114,822
</TABLE>
There were present at the Annual Meeting in person or by proxy, shareholders
holding 6,712,489 shares, or approximately 81.5% of the eligible voting shares.
22
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
(a) Exhibits
<S> <C>
3.1 -- Articles of Amendment to the Articles of Incorporation
3.2 -- Amended and Restated Bylaws
27 -- Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K have been filed during the quarter
ended June 30, 1996.
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 13, 1996 BY:/S/ F. ROBERT MERRILL III
--------------------------------
F. ROBERT MERRILL III
SENIOR VICE PRESIDENT FINANCE
CHIEF FINANCIAL OFFICER AND
TREASURER
24
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Articles of Amendment to the Articles of Incorporation
3.2 Amended and Restated Bylaws
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF QUEST MEDICAL, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, as amended, the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is Quest Medical, Inc.
ARTICLE TWO
The following amendment to the Articles of Incorporation was adopted
by the shareholders of the corporation on June 27, 1996. The amendment alters
Article Four of the original Articles of Incorporation, and the full text of
Article Four as amended is as follows:
"ARTICLE FOUR
The Corporation shall have authority to issue 25,000,000 shares of
Common Stock, $.05 par value. Each share of Common Stock shall have identical
rights and privileges in every respect."
ARTICLE THREE
The number of shares of the corporation outstanding at the time of the
adoption of the above amendment was 8,235,568 and the number of shares entitled
to vote on the amendment was 8,235,568.
ARTICLE FOUR
The number of shares voted for such amendment was 5,694,348 and the
number of shares voted against such amendment was 903,319.
Dated: July 23, 1996
QUEST MEDICAL, INC.
By:/s/ F. Robert Merrill III
-------------------------------------
F. Robert Merrill III
Senior Vice President-Finance,
Secretary and Treasurer
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
QUEST MEDICAL, INC.
A Texas Corporation
PREAMBLE
These bylaws are subject to, and governed by, the Texas Business
Corporation Act and the articles of incorporation of Quest Medical, Inc. (the
"Corporation"). In the event of a direct conflict between the provisions of
these bylaws and the mandatory provisions of the Texas Business Corporation Act
or the provisions of the articles of incorporation of the Corporation, such
provisions of the Texas Business Corporation Act or the articles of
incorporation of the Corporation, as the case may be, will be controlling.
ARTICLE ONE: OFFICES
1.01 Registered Office and Agent. The registered office and
registered agent of the Corporation shall be as designated from time to time by
the appropriate filing by the Corporation in the office of the Secretary of
State of Texas.
1.02 Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Texas, as the board of
directors may from time to time determine or the business of the Corporation
may require.
<PAGE> 2
ARTICLE TWO: SHAREHOLDERS
2.01 Annual Meetings. An annual meeting of shareholders of the
Corporation shall be held during each calendar year on such date and at such
time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting. At such meeting, the shareholders shall
elect directors and transact such other business as may properly be brought
before the meeting.
2.02 Special Meetings. A special meeting of the shareholders may
be called at any time by the chairman of the board, the president, the board of
directors, or the holders of not less than ten percent of all shares entitled
to vote at such meeting. Only such business shall be transacted at a special
meeting as may be stated or indicated in the notice of such meeting.
2.03 Place of Meetings. The annual meeting of shareholders may be
held at any place within or without the State of Texas as may be designated by
the board of directors. Special meetings of shareholders may be held at any
place within or without the State of Texas as may be designated by the person
or persons calling such special meeting as provided in Section 2.02. If no
place for a meeting is designated, it shall be held at the registered office of
the Corporation.
2.04 Notice. Written or printed notice stating the place, day, and
hour of each meeting of shareholders, and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not
less than ten nor more than 50 days before the date of the meeting, either
personally or by mail, by or at the direction of the chairman of the board, the
president, the secretary, or the person calling the meeting, to each
shareholder of record entitled to vote at such meeting.
2.05 Voting List. At least ten days before each meeting of
shareholders, the secretary shall prepare a complete list of shareholders
entitled to vote at such meeting, arranged in alphabetical order, including the
address of each shareholder and the number of voting shares held by each
shareholder. For a period of ten days prior to such meeting, such list shall be
kept on file at the registered office of the Corporation and shall be subject
to inspection by any shareholder during usual business hours. Such list shall
be produced at such meeting, and at all times during such meeting shall be
subject to inspection by
<PAGE> 3
any shareholder. The original stock transfer books shall be prima facie
evidence as to who are the shareholders entitled to examine such list or stock
transfer books.
2.06 Voting of Shares. Treasury shares, shares of the
Corporation's own stock owned by another corporation the majority of the voting
stock of which is owned or controlled by the Corporation, and shares of the
Corporation's own stock held by another corporation in a fiduciary capacity,
shall not be shares entitled to vote or to be counted in determining the total
number of outstanding shares. Shares held by an administrator, executor,
guardian, or conservator may be voted by him, either in person or by proxy,
without transfer of such shares into his name so long as such shares form a
part of the estate and are in the possession of the estate being served by him.
Shares standing in the name of a trustee may be voted by him, either in person
or by proxy, only after the shares have been transferred into his name as
trustee. Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without transfer of such shares into his name if authority to do
so is contained in the court order by which such receiver was appointed. Shares
standing in the name of another domestic or foreign corporation of any type or
kind may be voted by such officer, agent, or proxy as the bylaws of such
corporation may provide or, in the absence of such provision, as the board of
directors of such corporation may determine. A shareholder whose shares are
pledged shall be entitled to vote such shares until they have been transferred
into the name of the pledgee, and thereafter, the pledgee shall be entitled to
vote such shares.
2.07 Quorum. The holders of a majority of the outstanding shares
entitled to vote, present in person or represented by proxy, shall constitute a
quorum at any meeting of shareholders, except as otherwise provided by law, the
articles of incorporation, or these bylaws. If a quorum shall not be present
or represented at any meeting of shareholders, a majority of the shareholders
entitled to vote at the meeting, who are present in person or represented by
proxy, may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
any reconvening of an adjourned meeting at which a quorum shall be present or
represented any business may be transacted which could have been transacted at
the original meeting, if a quorum had been present or represented.
<PAGE> 4
2.08 Majority Vote; Withdrawal of Quorum. If a quorum is present in
person or represented by proxy at any meeting, the vote of the holders of a
majority of the outstanding shares entitled to vote, present in person or
represented by proxy, shall decide any question brought before such meeting,
unless the question is one on which, by express provision of law, the articles
of incorporation, or these bylaws, a different vote is required, in which event
such express provision shall govern and control the decision of such question.
The shareholders present at a duly convened meeting may continue to transact
business until adjournment, notwithstanding any withdrawal of shareholders
which may leave less than a quorum remaining.
2.09 Method of Voting; Proxies. Every shareholder of record shall
be entitled at every meeting of shareholders to one vote on each matter
submitted to a vote, for every share standing in his name on the original stock
transfer books of the Corporation except to the extent that the voting rights
of the shares of any class or classes are limited or denied by the articles of
incorporation. Such books shall be prima facie evidence as to the identity of
shareholders entitled to vote. At any meeting of shareholders, every
shareholder having the right to vote may vote either in person or by a proxy
executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Each such proxy shall be filed with the secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
11 months from the date of its execution, unless otherwise provided in the
proxy. If no date is stated on a proxy, such proxy shall be presumed to have
been executed on the date of the meeting at which it is to be voted. Each
proxy shall be revocable, unless expressly provided therein to be irrevocable,
or unless otherwise made irrevocable by law.
2.10 Closing of Transfer Books; Record Date. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any reconvening thereof or entitled to receive payment of any
dividend or in order to make a determination of shareholders for any other
proper purpose, the board of directors may provide that the stock transfer
books of the Corporation shall be closed for a stated period but not to exceed
in any event 50 days. If the stock transfer books are closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, such books shall be closed for at least ten days immediately
preceding such meeting. In lieu of closing the stock transfer books, the board
of directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than 50
days and, in case of a meeting of shareholders, not less than ten days prior to
the date on which the particular action requiring
<PAGE> 5
such determination of shareholders is to be taken. If the stock transfer books
are not closed and if no record date is fixed for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders or
entitled to receive payment of a dividend, the date on which the notice of the
meeting is mailed or the date on which the resolution of the board of directors
declaring such dividend is adopted, as the case may be, shall be the record
date for such determination of shareholders.
2.11 Presiding Officials at Meetings. Unless some other person or
persons are elected by a vote of a majority of the shares then entitled to vote
at a meeting of shareholders, the chairman of the board shall preside at and
the secretary shall prepare minutes of each meeting of shareholders.
ARTICLE THREE: DIRECTORS
3.01 Management. The business and affairs of the Corporation shall
be managed by the board of directors, subject to the restrictions imposed by
law, the articles of incorporation, or these bylaws.
3.02 Number; Election; Term; Qualification. The first board of
directors shall consist of the number of directors named in the articles of
incorporation. Thereafter, the number of directors which shall constitute the
entire board of directors shall be determined by resolution of the board of
directors at any meeting thereof or by the shareholders at any meeting thereof,
but shall never be less than one. At each annual meeting of shareholders,
directors shall be elected to hold office until the next annual meeting of
shareholders and until their successors are elected and qualified. No director
need be a shareholder, a resident of the State of Texas, or a citizen of the
United States.
3.03 Decreases in Number. No decrease in the number of directors
constituting the entire board of directors shall have the effect of shortening
the term of any incumbent director.
3.04 Removal. At any meeting of shareholders called expressly for
that purpose, any director or the entire board of directors may be removed,
with or without cause, by a vote of the holders of a majority of the shares
then entitled to vote on the election of directors.
<PAGE> 6
3.05 Vacancies; Increases in Number. Any vacancy occurring in the
board of directors (by death, resignation, removal, or otherwise) may be filled
by the affirmative vote of a majority of the remaining directors though less
than a quorum of the board of directors. A director elected to fill a vacancy
shall be elected to serve for the unexpired term of his predecessor in office.
In case of any increase in the number of directors constituting the entire
board of directors, the additional directors shall be elected at a meeting of
shareholders.
3.06 First Meeting. Each newly elected board of directors may hold
its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as
the annual meeting of shareholders, and notice of such meeting shall not be
necessary.
3.07 Regular Meetings. Regular meetings of the board of directors
may be held without notice at such times and places as may be designated from
time to time by the chairman of the board, or by resolution of the board of
directors and communicated to all directors.
3.08 Special Meetings. A special meeting of the board of directors
shall be held whenever called by any director at such time and place as such
director shall designate in the notice of such special meeting. The director
calling any special meeting shall cause notice of such special meeting to be
given to each director at least 24 hours before such special meeting. Neither
the business to be transacted at, nor the purpose of, any special meeting of
the board of directors need be specified in the notice or waiver of notice of
any special meeting.
3.09 Quorum; Majority Vote. At all meetings of the board of
directors, a majority of the directors, fixed in the manner provided in these
bylaws, shall constitute a quorum for the transaction of business. If a quorum
is not present at a meeting, a majority of the directors present may adjourn
the meeting from time to time, without notice other than an announcement at the
meeting, until a quorum is present. The vote of a majority of the directors
present at a meeting at which a quorum is in attendance shall be the act of the
board of directors, unless the vote of a different number is required by the
articles of incorporation or these bylaws.
<PAGE> 7
3.10 Procedure; Minutes. At meetings of the board of directors,
business shall be transacted in such order as the chairman of the board or the
board of directors may determine from time to time. If present, the chairman of
the board shall preside at the meeting. If not so present, the board of
directors shall appoint at the meeting another director to preside at the
meeting and a person to act as secretary of the meeting. The secretary of the
meeting shall prepare minutes of the meeting which shall be delivered to the
secretary of the Corporation for placement in the minute books of the
Corporation.
3.11 Presumption of Assent. A director of the Corporation who is
present at any meeting of the board of directors at which action on any matter
is taken shall be presumed to have assented to the action unless his dissent
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or shall forward any dissent by
certified or registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to
a director who voted in favor of such action.
3.12 Compensation. Directors, in their capacity as directors, may
receive, by resolution of the board of directors, a fixed sum and expenses of
attendance, if any, for attending meetings of the board of directors or a
stated salary. No director shall be precluded from serving the Corporation in
any other capacity or receiving compensation therefor.
ARTICLE FOUR: COMMITTEES
4.01 Designation. The board of directors may, by resolution adopted
by a majority of the entire board of directors, designate executive and other
committees.
4.02 Number; Qualification; Term. Each committee shall consist of
one or more directors appointed by resolution adopted by a majority of the
entire board of directors. The number of committee members may be increased or
decreased from time to time by resolution adopted by a majority of the entire
board of directors. Each committee member shall serve as such until the
expiration of his term as a director or his earlier resignation, unless sooner
removed as a committee member or as a director.
<PAGE> 8
4.03 Authority. The executive committee, unless expressly
restricted in the resolution adopted by a majority of the entire board of
directors establishing the executive committee, shall have and may exercise all
of the authority of the board of directors in the management of the business
and affairs of the Corporation. Each other committee, to the extent expressly
provided for in the resolution adopted by a majority of the entire board of
directors establishing such committee, shall have and may exercise all of the
authority of the board of directors in the management of the business and
affairs of the Corporation. However, no committee shall have the authority of
the board of directors in reference to:
(a) amending the articles of incorporation;
(b) approving a plan of merger or consolidation;
(c) recommending to the shareholders the sale, lease, or exchange
of all or substantially all of the property and assets of the
Corporation otherwise than in the usual and regular course of
its business;
(d) recommending to the shareholders a voluntary dissolution of
the Corporation or a revocation thereof;
(e) amending, altering, or repealing these bylaws or adopting new
bylaws;
(f) filling vacancies in or removing members of the board of
directors or of any committee;
(g) electing or removing officers or committee members;
(h) fixing the compensation of any committee member; and
(i) altering or repealing any resolution of the board of directors
which by its terms provides that it shall not be amendable or
repealable.
In the resolution adopted by a majority of the entire board of directors
establishing an executive or other committee, the board of directors may
expressly authorize such committee to declare dividends or to authorize the
issuance of shares of the Corporation.
<PAGE> 9
4.04 Committee Changes. The board of directors shall have the
power at any time to fill vacancies in, to change the membership of, and to
discharge any committee. However, a committee member may be removed by the
board of directors, only if, in the judgment of the board of directors, the
best interests of the Corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
4.05 Regular Meetings. Regular meetings of any committee may be
held without notice at such times and places as may be designated from time to
time by resolution of the committee and communicated to all committee members.
4.06 Special Meetings. A special meeting of any committee may be
held whenever called by any committee member at such time and place as such
committee member shall designate in the notice of such special meeting. The
committee member calling any special meeting shall cause notice of such special
meeting to be given to each committee member at least 12 hours before such
special meeting. Neither the business to be transacted at, nor the purpose of,
any special meeting of any committee need be specified in the notice or waiver
of notice or any special meeting.
4.07 Quorum; Majority Vote. At all meetings of any committee, a
majority of the number of committee members designated by the board of
directors shall constitute a quorum for the transaction of business. If a
quorum is not present at a meeting of any committee, a majority of the
committee members present may adjourn the meeting from time to time, without
notice other than an announcement at the meeting, until a quorum is present.
The vote of a majority of the committee members present at any meeting at which
a quorum is in attendance shall be the act of a committee, unless the vote of a
different number is required by the articles of incorporation or these bylaws.
4.08 Minutes. Each committee shall cause minutes of its
proceedings to be prepared and shall report the same to the board of directors
upon the request of the board of directors. The minutes of the proceedings of
each committee shall be delivered to the secretary of the Corporation for
placement in the minute books of the Corporation.
<PAGE> 10
4.09 Compensation. Committee members may, by resolution of the
board of directors, be allowed a fixed sum and expenses of attendance, if any,
for attending any committee meetings or a stated salary.
4.10 Responsibility. The designation of any committee and the
delegation of authority to it shall not operate to relieve the board of
directors or any director of any responsibility imposed upon it or such
director by law.
ARTICLE FIVE: GENERAL PROVISIONS RELATING TO MEETINGS
5.01 Notice. Whenever by law, the articles of incorporation, or
these bylaws, notice is required to be given to any shareholder, director, or
committee member and no provision is made as to how such notice shall be given,
it shall be construed to mean that notice may be given either (a) in person,
(b) in writing, by mail, (c) except in the case of a shareholder, by telegram,
telex, cable, telecopies, or similar means, or (d) by any other method
permitted by law. Any notice required or permitted to be given hereunder (other
than personal notice) shall be addressed to such shareholder, director, or
committee member at his address as it appears on the books of the Corporation
or, in the case of a shareholder, on the stock transfer records of the
Corporation or at such other place as such shareholder, director, or committee
member is known to be at the time notice is mailed or transmitted. Any notice
required or permitted to be given by mail shall be deemed to be delivered and
given at the time when the same is deposited in the United States mail, postage
prepaid. Any notice required or permitted to be given by telegram, telex,
cable, telecopier, or similar means shall be deemed to be delivered and given
at the time transmitted.
5.02 Waiver of Notice. Whenever by law, the articles of
incorporation, or these bylaws, any notice is required to be given to any
shareholder, director, or committee member of the Corporation a waiver thereof
in writing signed by the person or persons entitled to such notice, whether
before or after the time notice should have been given, shall be equivalent to
the giving of such notice. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends
a
<PAGE> 11
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
5.03 Telephone and Similar Meetings. Shareholders, directors, or
committee members may participate in and hold a meeting by means of a
conference telephone or similar communications equipment by means of which
persons participating in the meeting can hear each other. Participation in such
a meeting shall constitute presence in person at such meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
5.04 Action Without Meeting. Any action which may be taken, or is
required by law, the articles of incorporation, or these bylaws to be taken, at
a meeting of shareholders, directors, or committee members may be taken without
a meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the shareholders, directors, or committee members, as the case
may be, entitled to vote with respect to the subject matter thereof, and such
consent shall have the same force and effect, as of the date stated therein, as
a unanimous vote of such shareholders, directors, or committee members, as the
case may be, and may be stated as such in any document filed with the Secretary
of State of Texas or in any certificate or other document delivered to any
person. The consent may be in one or more counterparts so long as each
shareholder, director, or committee member signs one of the counterparts. The
signed consent shall be placed in the minute books of the Corporation.
ARTICLE SIX: OFFICERS AND OTHER AGENTS
6.01 Number; Titles; Election; Term. The Corporation shall have a
president and a secretary, and such other officers and agents as the board of
directors may deem desirable. The board of directors shall elect a president
and secretary at its first meeting at which a quorum shall be present after the
annual meeting of shareholders or whenever a vacancy exists. The board of
directors then, or from time to time, may also elect or appoint one or more
other officers or agents as it shall deem advisable. Each officer and agent
shall hold office until his successor has been elected or appointed and
qualified, or, if earlier, at his death, resignation, or removal. Any two or
more offices may be held by the same person.
<PAGE> 12
No officer or agent need be a shareholder, a director, a resident of the State
of Texas, or a citizen of the United States.
6.02 Removal. Any officer or agent elected or appointed by the
board of directors may be removed by the board of directors, whenever, in the
judgment of the board of directors, the best interests of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an
officer or agent shall not of itself create contract rights.
6.03 Vacancies. Any vacancy occurring in any office of the
Corporation (by death, resignation, removal, or otherwise) may be filled by the
board of directors.
6.04 Authority. Officers shall have such authority and perform such
duties in the management of the Corporation as are provided in these bylaws or
as may be determined by resolution of the board of directors not inconsistent
with these bylaws.
6.05 Compensation. The compensation, if any, of the officers
shall be fixed, increased, or decreased from time to time by the board of
directors.
6.06 Chairman of the Board. The chairman of the board, if a person
is elected to such office by the board of directors, shall perform the
following duties and have the following responsibilities: schedule regular
meetings of the board of directors; work with the officers and other directors
of the Corporation to set the agenda for regular and special meetings of the
board of directors; preside at all meetings of the board of directors that the
chairman is able to attend; ensure that the directors are given adequate
information to render informed decisions at board meetings; work with the
president and the other officers of the Corporation to formulate public
announcements, press releases and shareholder and analyst communications and
oversee and coordinate their release; ensure the smooth operation of the
committees of the board of directors; see that all orders and resolutions of
the board are carried into
<PAGE> 13
effect; and perform such other duties and have such other authority and powers
as the board of directors may from time to time prescribe.
6.07 President and Chief Executive Officer. The president and
chief executive officer shall be the chief executive officer of the Corporation
subject to the supervision of the board of directors. The president and chief
executive officer shall perform the following duties and have the following
responsibilities: generally manage the business and property of the
Corporation in the ordinary course of business with all such powers of
oversight, supervision and management with respect to such business and
property as may be reasonably incident to such responsibilities, including, but
not limited to, the power to employ, discharge, or suspend employees or agents
of the Corporation, to fix the compensation of employees and agents, and to
suspend, with or without cause, any officer of the Corporation pending final
action by the board of directors with respect to continued suspension, removal,
or reinstatement of such officer; perform such other duties and have such other
authority and powers as are typically possessed and exercised by corporate
presidents and chief executive officers, all subject to the board's further
instructions on discharging the duties of managing the business and property of
the Corporation. If the board of directors has not elected a person to the
office of chairman of the board, the president shall exercise all of the powers
and discharge all of the duties of the chairman of the board. As between the
Corporation and third parties, any action taken by the president in the
performance of the duties of the chairman of the board shall be conclusive
evidence that there is no chairman of the board.
6.08 Secretary. The secretary shall maintain minutes of all
meetings of the board of directors, of any committee, and of the shareholders
or consents in lieu of such minutes in the Corporation's minute books, and
shall cause notice of such meetings to be given when requested by any person
authorized to call such meetings. With respect to any contract, deed, deed of
trust, mortgage, or other instrument executed by the Corporation through its
duly authorized officer or officers, the attestation to such execution by the
secretary shall not be necessary to constitute such contract, deed, deed of
trust, mortgage, or other instrument a valid and binding obligation against the
Corporation unless the resolution, if any, of the board of directors
authorizing such execution expressly states that such attestation is necessary.
The secretary shall have charge of the certificate books, stock transfer books,
and stock papers as the board of directors may direct, all of which shall at
all reasonable times be open to inspection by any director. The secretary shall
perform such other duties as may be prescribed from time to time by the board
of directors or as may be delegated from time to time by the president.
<PAGE> 14
ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS
7.01 Certificates for Shares. The certificates for shares of
stock of the Corporation shall be in such form as shall be approved by the
board of directors in conformity with law. The certificates shall be
consecutively numbered, shall be entered as they are issued in the books of the
Corporation or in the records of the Corporation's designated transfer agent,
if any, and shall state the shareholder's name, the number of shares, and such
other matters as may be required by law. The certificates shall be signed by
the president or any vice president and also by the secretary, an assistant
secretary, or any other officer, and may be sealed with the seal of the
Corporation or a facsimile thereof. If any certificate is countersigned by a
transfer agent or registered by a registrar, either of which is other than the
Corporation itself or an employee of the Corporation, the signatures of the
foregoing officers may be a facsimile.
7.02 Lost, Stolen, or Destroyed Certificates. The Corporation shall
issue a new certificate in place of any certificate for shares previously
issued if the registered owner of the certificate:
(a) Claim. Makes proof by affidavit, in form and substance
satisfactory to the board of directors, that a previously
issued certificate for shares has been lost, destroyed, or
stolen;
(b) Timely Request. Requests the issuance of a new certificate
before the Corporation has notice that the certificate has
been acquired by a purchaser for value in good faith and
without notice of an adverse claim;
(c) Bond. If requested by the board of directors, delivers to the
Corporation a bond, in form and substance satisfactory to the
board of directors, with such surety or sureties and with
fixed or open penalty, as the board of directors may direct,
in its discretion, to indemnify the Corporation (and its
transfer agent and registrar, if any) against any claim that
may be made on account of the alleged loss, destruction, or
theft of the certificate; and
(d) Other Requirements. Satisfies any other reasonable
requirements imposed by the board of directors.
When a certificate has been lost, destroyed, or stolen, and the shareholder of
record fails to notify the Corporation within a reasonable time after he has
notice of it, and the Corporation registers a transfer of the shares
represented by the certificate before receiving such notification, the
shareholder of record is precluded from making any claim against the
Corporation for the transfer or for a new certificate.
<PAGE> 15
7.03 Transfer of Shares. Shares of stock of the Corporation shall
be transferable only on the books of the Corporation by the shareholders
thereof in person or by their duly authorized attorneys or legal
representatives. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate representing shares duly endorsed or accompanied
by proper evidence of succession, assignment, or authority to transfer, the
Corporation or its transfer agent shall issue a new certificate to the person
entitled thereto, cancel the old certificate, and record the transaction upon
its books.
7.04 Registered Shareholders. The Corporation shall be entitled to
treat the shareholder of record as the shareholder in fact of any shares and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not it
shall have actual or other notice thereof, except as otherwise provided by law.
ARTICLE EIGHT: MISCELLANEOUS PROVISIONS
8.01 Fiscal Year. The fiscal year of the Corporation shall be fixed
by the board of directors; provided, that if such fiscal year is not fixed by
the board of directors it shall be the calendar year.
8.02 Seal. The seal, if any, of the Corporation shall be in such
form as may be approved from time to time by the board of directors. If the
board of directors approves a seal, the affixation of such seal shall not be
required to create a valid and binding obligation against the Corporation.
8.03 Resignation. A director, committee member, officer, or agent
may resign by so stating at any meeting of the board of directors or by giving
written notice to the Corporation. The effective time of such resignation
shall be any time specified in the statement made at the board of directors'
meeting or in the written notice given to the Corporation, but in no event may
the effective time of such resignation be prior to the time such statement is
made or such notice is given. If no effective time is specified in the
resignation, the resignation shall be effective immediately. Unless a
resignation specifies otherwise, it is effective without being accepted.
<PAGE> 16
8.04 Securities of Other Corporations. The president or any vice
president of the Corporation or any other person authorized by resolution of
the board of directors shall have the power and authority to transfer, endorse
for transfer, vote, consent, or take any other action with respect to any
securities of another issuer which may be held or owned by the Corporation and
to make, execute, and deliver any waiver, proxy, or consent with respect to any
such securities.
8.05 Amendment. The power to alter, amend, or repeal these bylaws
or to adopt new bylaws is vested in the board of directors, subject to repeal
or change by action of the shareholders.
8.06 Invalid Provisions. If any provision of these bylaws is held
to be illegal, invalid, or unenforceable under present or future laws, such
provision shall be fully severable; these bylaws shall be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid, or unenforceable provision there shall be added
automatically as a part of these bylaws a provision as similar in terms to such
illegal, invalid, or unenforceable provision as may be possible and be legal,
valid, and enforceable.
8.07 Headings. The headings used in these bylaws are for reference
purposes only and do not affect in any way the meaning or interpretation of
these bylaws.
CERTIFICATE
These Amended and Restated Bylaws were adopted by the Board of Directors
of the Corporation on July 3, 1996.
/s/ F. Robert Merrill III
----------------------------------------
F. Robert Merrill III
Secretary
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0
0
<OTHER-SE> 30,951,372
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<EPS-PRIMARY> .00
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</TABLE>
