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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NO. 0-10521
QUEST MEDICAL, INC.
(Name of small business issuer in its charter)
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TEXAS 75-1646002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 ALLENTOWN PARKWAY
ALLEN, TEXAS 75002
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (214) 390-9800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
TITLE OF CLASS
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Common Stock, $.05 Par Value
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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 / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained on this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
Revenues for the Issuer for the Fiscal Year Ended December 31,
1995 -- $25,320,990.
The approximate aggregate market value of voting stock held by
non-affiliates, computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of March 21, 1996, was
$103,246,407. The number of shares of common stock outstanding as of March 21,
1996, was 8,212,243 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement relating to the
registrant's 1996 annual stockholders' meeting are incorporated by reference in
Part III of this Form 10-KSB.
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QUEST MEDICAL, INC.
ANNUAL REPORT
FORM 10-KSB
YEAR ENDED DECEMBER 31, 1995
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Quest Medical, Inc., a Texas corporation ("Quest" or the "Company") designs,
develops, manufactures and markets a variety of healthcare products used
primarily in cardiovascular surgery, interventional pain management and
intravenous fluid delivery applications. The Company operates several stable and
profitable product lines, including cardiovascular products (such as pressure
control valves, filters and surgical retracting tapes), specialized intravenous
fluid delivery tubing sets and accessories and pressure monitoring kits used
primarily in labor and delivery. The Company has levered these product lines,
its existing corporate infrastructure and its core competencies in
manufacturing, engineering and regulatory affairs to expand into new markets as
evidenced by the internally funded development of the Quest MPS myocardial
protection system, an innovative and sophisticated system designed to manage the
delivery of solutions to the heart during open-heart surgery. In addition, the
Company recently entered the interventional pain management market by acquiring
Neuromed, Inc. ("Neuromed"), which designs, develops, manufactures and markets a
line of electronic spinal cord stimulation ("SCS") devices used to manage
chronic severe pain.
The Company was formed in 1979, and shortly thereafter became the successor to
the business of Med-Pro, Ltd., a four-year-old research and development medical
device company. Until September 1987, when it sold such business, Quest
developed, manufactured and marketed electronic volumetric intravenous infusion
devices and related disposables in addition to its other products.
In 1991, Quest acquired two companies that manufactured and marketed various
cardiovascular products, significantly enhancing the Company's presence in the
cardiovascular products marketplace. In 1992, Quest identified a real and
immediate need in this marketplace for an automated and integrated myocardial
protection system that would be versatile, easy to use, efficient to monitor and
cost-effective. Myocardial protection is the process of arresting and caring for
the heart during open-heart surgery. The Quest MPS system is designed to
integrate key functions relating to the delivery of solutions to the heart such
as varying the rate and ratio of oxygenated blood, crystalloid, potassium and
other additives, and controlling temperature, pressure and other variables to
allow simpler, more flexible and cost-effective management of this process. The
MPS system employs advanced pump, temperature control and microprocessor
technologies and includes a line of captive and non-captive disposable products.
The Company received 510(k) market
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clearance for its MPS system from the FDA in March 1996. Upon the completion of
clinical validation expected in the second quarter of 1996, management expects
to commence commercial shipment of MPS.
In its continuing effort to expand into potentially high growth niche markets in
the medical device industry, the Company acquired Neuromed in March 1995. SCS is
gaining increased acceptance as a viable, efficacious and cost-effective
treatment alternative to repeat back surgeries for relieving chronic severe back
pain. The Company believes that its recently introduced CompuStim products,
which are powered by radio frequency transmitters external to the body, are the
technological leaders in the field. The Company is currently test marketing
PainDoc, a pen-based computer system that works in tandem with the Company's
CompuStim devices to assist physicians and their patients in optimizing the
performance of the Company's SCS devices both pre- and post-operatively.
Since its founding in 1979, the Company has developed, manufactured and marketed
specialized intravenous fluid delivery tubing sets and accessories sold
primarily to major hospitals in the United States. Over the last several years,
the revenues generated by this product line, a substantial component of the
Company's historical base business, have significantly aided the funding of the
Company's research and development efforts. The Company manufactures and markets
over 70 distinct models of specialized intravenous fluid delivery tubing sets.
PRODUCTS
The following table summarizes certain information with respect to the Company's
principal products in commercial distribution and under development.
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Products Description/Use Status
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Cardiovascular
Pressure Control Valves Pressure control valves used during Marketed
open-heart surgery
Arterial Line Filters and Bubble Filters and traps used to remove Marketed
Traps potentially dangerous air and other
matter from the blood during open-
heart surgery
Retract-O-Tape Surgical tubes used to retract and Marketed
occlude blood vessels during open-
heart surgery
MPS System and Related Cardioplegia delivery system and 510(k) clearance
Disposables related fluid delivery catheters and 3/96; certain related
delivery sets disposables
previously cleared for
marketing
Interventional Pain Management
SCS CompuStim Devices Neurostimulation devices used to Marketed
relieve chronic pain
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Products Description/Use Status
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PainDoc Pen-based computer system used to Test marketed as a
optimize the performance of the computer-based data
Company's implanted SCS devices recording and
both pre- and post-operatively programming device;
510(k) clearance
10/95 for use as an
interactive medical
treatment device
Intravenous Fluid Delivery
Multiport(R) Sets Intravenous administration sets that Marketed
allow multiple drug infusions
Anesthesia Sets Intravenous administration sets that Marketed
allow needleless "port" administration
Other
Intrauterine Pressure Catheters and transducers used to Marketed
Catheters/Transducers assess the frequency, duration and
intensity of contractions during high
risk labor
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CARDIOVASCULAR
Valves, Filters and Traps. The Company manufactures and markets a line of
proprietary specialized pressure control valves, pre-bypass and arterial line
filters and bubble traps, which are used by the perfusionist during
cardiopulmonary bypass surgery. Pressure control valves are placed in the
suction line to "vent," or decompress, the heart. These valves serve a number of
functions, including the maintenance of vacuum at a safe and consistent level to
minimize heart muscle tissue damage, as well as the prevention of inadvertent
and potentially catastrophic retrograde air flow into the heart. In 1993 and
1994, respectively, the Company introduced to the market two extensions of its
pressure control valve technology, the RetroGuard valve and the PlegiaGuard
valve. The RetroGuard valve is used with centrifugal pumps to prevent potential
retrograde blood flow and possible air embolism. The PlegiaGuard valve is used
to relieve overpressure in the cardioplegia line in the event that the line
becomes inadvertently clamped or occluded. The Company's arterial line filters
and bubble traps are used in the bypass circuit to remove air and other
potentially dangerous matter from the blood prior to the blood's return to the
patient. The Company's pre-bypass filters are used to flush the circuit external
to the patient's body prior to the initiation of the bypass procedure to
eliminate man-made debris within the lines. During the years ended December 31,
1995, 1994, and 1993, the Company's valves, filters and traps accounted for $5.2
million, $4.2 million, and $3.7 million, respectively, of total net revenue.
Surgical Tapes and Other Products. The Company also manufactures and markets
surgical retracting tapes under the trademark Retract-O-Tape, a product line of
silicone elastomer surgical tubing used to apply traction to and occlude blood
vessels during surgical procedures. The Company's surgical tapes are hollow
tubes, sealed at both ends to trap air, which resist collapsing when they come
into contact with a body structure. The Company's ACTester product line consists
of instrumentation and associated disposables used to
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measure the activated clotting time of blood. During the years ended December
31, 1995, 1994, and 1993, the Company's surgical tapes and other products
accounted for $1.8 million, $1.6 million, and $1.6 million, respectively, of
total net revenue.
MPS System. In 1992, based on discussions with perfusionists and cardiovascular
surgeons regarding the logistical limitations of existing cardioplegia delivery
systems, the Company identified a real and immediate need for an automated and
integrated myocardial protection system that would be versatile, easy to use,
efficient and cost-effective. Over the past several years, cardiovascular
surgeons have developed advanced myocardial protection protocols for open-heart
surgery that significantly complicate the safe and efficient administration of
cardioplegia delivery using existing systems. Protocols now call for warm or
cold cardioplegia, various levels of potassium, retrograde or antegrade
cardioplegia flow, and a number of other variables. Existing cardioplegia
delivery systems are limited in their ability to accommodate these evolving
protocols, and are also difficult to control and monitor due to the number of
different components and protocol variables. Based on its reengineering of the
conceptual approach to cardioplegia delivery, the Company designed the MPS
system to address the limitations of existing cardioplegia delivery systems. The
Company then commissioned an independent research firm to survey over 150
surgeons and perfusionists to confirm the market demand for an automated and
integrated approach to managing cardioplegia delivery.
The Company subsequently developed, and in August 1995 filed a 510(k) with the
FDA for, the MPS system. In March 1996, the Company received clearance from the
FDA to market MPS and is engaged in clinical testing of the system. Upon
completion of such testing, expected in the second quarter of 1996, management
expects to commence commercial shipment of MPS.
The MPS system, which employs advanced pump, temperature control and
microprocessor technologies, is designed to enable the perfusionist to vary the
blood/crystalloid ratio and potassium concentration, maintain a constant blood
temperature, and maintain a constant delivery pressure through an automated and
integrated device. The Quest MPS instrument is designed to provide this
flexibility through the simple setting of dials on its control panel. The
Company believes that the MPS system will simplify the cardioplegia delivery
process and thus improve the safety of this process by reducing the risk of
human error.
As a part of the MPS system, the Company has designed and developed a "captive"
disposable delivery set, which fits into the instrument and is necessary to the
operation of the instrument. The Company has also designed and developed
additional "non-captive" disposable tubing and other accessories for use with
the MPS system. These non-captive disposables are not integral to the operation
of the instrument and can be purchased from other manufacturers. The Company has
received FDA clearance to market certain of its non-captive disposables through
the submission and approval of 510(k)s, and expects to begin marketing such
products when the instrument is released to market.
INTERVENTIONAL PAIN MANAGEMENT
Background. SCS devices employ neurostimulation, the process of electrically
stimulating the spinal cord to reduce chronic severe neuropathic (as opposed to
acute) pain by "masking" the pain signals sent to the brain. Neuropathic pain
usually arises from nerve
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damage. SCS device implantation manages the pain associated with failed back
syndrome (resulting from certain spinal disorders or unsuccessful spinal cord
surgery), peripheral neuropathy, phantom limb or stump pain, ischemic pain and
reflex sympathetic dystrophy.
The market for SCS devices is currently divided between RF-coupled devices,
which use an external power source, and fully implantable systems known as
internal pulse generator ("IPG") devices. The Company believes that lPG devices
currently account for a substantial majority of the number of SCS procedures
performed, with RF-coupled devices accounting for the remainder. The Company
designs, develops, manufactures and markets RF-coupled SCS devices. The primary
advantages of the RF-coupled device include the simple replacement or recharge
of the external battery pack, and relatively lower overall cost. Although an IPG
device provides the convenience of a completely internalized system, IPG devices
involve added cost, complexity and risk because repeat surgeries are required to
replace the IPG power source. The Company believes that managed care and overall
cost sensitivity may lead to increased selection of RF-coupled devices.
Moreover, the latest generation SCS devices generally include more electrodes
and dual channel receivers, both of which consume more electrical energy than an
implanted power source can practically deliver over an extended period of time.
SCS Devices. The Company's SCS systems consist of three primary components:
leads, a receiver and a transmitter. The leads are most commonly placed through
the skin into the spinal column's epidural space. This procedure is similar to
that employed by physicians to administer drugs for anesthesia and other common
medical applications. Typically, one or two leads are inserted, each of which
has multiple electrodes that can be used to stimulate the targeted nerve roots
of the spinal cord. Each lead is then connected to the receiver, which is
implanted under the skin on the side of the abdomen. The receiver contains
electronics that receive RF energy and data from a source (the transmitter)
outside the body, and delivers the prescribed electrical pulses to the leads.
The transmitter is approximately the size of a pager, and is typically worn on a
belt. Since it is external to the body, the transmitter can be easily programmed
and serviced as needed, and its battery can be simply recharged or replaced.
Neuromed introduced its first product, the Multiprogrammable Spinal Cord
Stimulator, or Multistim, in 1979. Since that time, Neuromed has played a
significant role in the development of SCS products. Multistim incorporated a
quadrapolar electrode system within a single lead, and was considered a major
innovation in the field of neurostimulation because it significantly reduced
surgical time, cost and risk. Since the launch of Multistim, Neuromed has
developed and introduced a wide range of RF-coupled SCS systems with a variety
of options to accommodate different applications and degrees of pain.
The Company's recently introduced CompuStim systems include four, eight and
sixteen electrode leads; specialty leads for peripheral applications; single and
dual channel receivers; and rechargeable transmitters and antennae. The Company
believes that the CompuStim product line's multi-electrode leads and
multiprogrammable electronics technology have changed the manner in which
neurostimulation is performed worldwide. For example, Neuromed's "Dual Octrode"
device, a recently introduced system of dual leads with eight electrodes each,
creates a targeted current density that appears to be especially effective in
relieving chronic axial (or body trunk) pain. Previously, quadrapolar SCS
systems only relieved the leg pain associated with failed back syndrome.
Industry
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sources support the view that the Dual Octrode device provides improved pain
relief to both the legs and the back. Consequently, although the Dual Octrode
device has only been on the United States market since February 1995, it now
accounts for approximately 60% of Neuromed's current product revenue and, in the
Company's judgment, is the technological leader in the SCS field. The Company
believes that the long term results of SCS in the treatment of pain have
improved as a result of the flexibility of Neuromed's designs, epitomized by the
Dual Octrode product. Moreover, the ease of use of the system has expanded the
potential market for these products.
Use of the Company's current SCS products in certain operating modes consumes
relatively greater amounts of electrical current, reducing the operating time of
the rechargeable, externally worn battery packs. In addition, certain of the
Company's current SCS products have experienced switch failures attributable in
significant part to a specific brand of switches. These switches are no longer
being purchased and are being replaced by a new switch that appears not to
exhibit the same problems. Patient misuse has also contributed to the switch
failures. Finally, the Company's SCS products have exhibited some intermittent
stimulation, which the Company believes is attributable to several factors
including improper antenna placement, physicians or patients adjusting
stimulation below perceptible levels, improper receiver implant placement
techniques and lead movement. The Company is developing and implementing
improved patient and physician communications and training programs and is
pursuing product design enhancements and improvements to address these matters.
PainDoc. In addition to its current array of SCS devices, the Company is
developing and testing PainDoc, a pen-based computer system that is designed to
assist physicians and their patients in optimizing the performance of the
Company's SCS devices both pre- and post-operatively. PainDoc interfaces with
the Company's CompuStim transmitters to optimize SCS therapy and document
treatment outcomes. PainDoc allows the physician to input information regarding
the patient's description of the location and intensity of the patient's pain.
The resulting "pain map" is then analyzed by the computer to assess and select
the most effective stimulation sets, or combination of multi-electrode
stimulation arrays, to treat the pain. The selected arrays are uploaded into the
patient's CompuStim transmitter. After a trial period, the patient reports to
the physician the location and level of pain relief. These trial results are
uploaded back into PainDoc for the physician's objective review and analysis.
The physician can visually compare the patient's pain map against a stimulation
map and assess whether desired levels of pain relief have been obtained and
whether excess stimulation has been delivered. This process can be effective in
targeting the location of desired pain relief, reducing the patchiness of pain
relief delivered by many SCS devices and reducing or eliminating
overstimulation.
PainDoc enables the physician to program up to 24 different stimulation sets
delivering electrical stimulation every 50 milliseconds to expand pain area
coverage and relief. The Company believes that PainDoc should also allow
physicians to create a broad based database tool that, by using a standardized
methodology, will enable physicians to share and compare outcomes data, which
can then be used to deliver more efficacious pain relief to individual patients.
The Company believes that PainDoc and CompuStim devices used in tandem should
significantly enhance the effectiveness, flexibility and precision of managing
chronic neuropathic pain. The Company expects PainDoc to promote the selection
of the Company's CompuStim devices for SCS procedures, especially as SCS devices
become
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more complex and the pain management process becomes more refined. In October
1995, the Company received 510(k) approval from the FDA to market PainDoc as an
interactive medical treatment device. See Item 1: "Business -- Other Business
Matters -- Government Regulation."
During the year ended December 31, 1995, the Company's SCS products accounted
for $10.4 million of total net revenue.
INTRAVENOUS FLUID DELIVERY
Since its founding in 1979, the Company has developed, manufactured and marketed
specialized intravenous fluid delivery tubing sets and accessories sold
primarily to major hospitals in the United States. Over the last several years
the revenues generated by this product line, a substantial component of the
Company's historical base business, have significantly aided the funding of the
Company's research and development efforts. The Company's core competencies in
medical device manufacturing, engineering and regulatory affairs have largely
been developed as a consequence of its experience with intravenous fluid
delivery products, including the electronic intravenous pump and associated
disposables business that was sold in 1987.
The Company manufactures and markets over 70 distinct models of specialized
intravenous fluid delivery tubing sets, which can be broken down into two major
product categories --Multiport(R) sets and anesthesia sets. Hospitals frequently
require specialized disposable intravenous tubing sets for more complex therapy
procedures employed in anesthesia administration, intravenous feeding, intensive
care and cancer therapy. The Company's intravenous tubing sets generally consist
of specialized tubing and connector variations that distinguish them from
standard intravenous sets. The Company also manufactures and markets injection
sites used in heparin and other medication administrations.
The Company has one patented specialized tubing set, purchased primarily by the
University of Texas System Cancer Center (M.D. Anderson Hospital), which is used
to deliver multiple drugs for complex chemotherapy applications. See Item 1:
"Business -- Other Business Matters -- Marketing and Major Customer." During the
years ended December 31, 1995, 1994, and 1993 the Company's intravenous fluid
delivery products accounted for $6.0 million, $6.3 million, and $6.8 million,
respectively, of total net revenue.
OTHER PRODUCTS
The Company also designs, manufactures and markets other products for the
healthcare industry, including pressure monitoring kits used in labor and
delivery procedures and various critical care applications. The Company's
intrauterine pressure monitoring devices are used to determine pressure within
the mother's uterus primarily during high risk labor and delivery. Approximately
25% of the nearly four million births occurring annually in the United States
are categorized as "high risk" due to factors such as obesity, drug use,
disease, age or low fetus weight. During these procedures, a catheter is
inserted into the mother's uterus to measure uterine fluid pressure. This
information allows the clinician to monitor the progression of labor and to
determine whether intervention is necessary or advisable. The Company's
intrauterine pressure monitoring devices are marketed as kits containing all of
the components required to measure uterine fluid pressure. During the
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years ended December 31, 1995, 1994, and 1993 the Company's other products
(primarily pressure monitoring kits) accounted for $1.8 million, $1.9 million,
and $1.6 million, respectively, of total net revenue.
OTHER BUSINESS MATTERS
MARKETING AND MAJOR CUSTOMER
The Company markets most of its cardiovascular products and intravenous fluid
delivery tubing sets through direct contact with hospitals, independent sales
representatives, marketing arrangements with certain distributors and, to a
lesser extent, through telemarketing and direct mail. The Company plans to
market its MPS system and family of related products domestically through a
direct sales force operating on a sales team approach. In anticipation of 510(k)
clearance, the Company at year-end 1995 employed five sales managers, four of
which were hired during the fourth quarter of 1995. The Company has received
510(k) clearance for the MPS system, as previously noted, and
plans to introduce MPS commercially during the second quarter of 1996. The
Company plans to add seven additional salespersons throughout 1996 to market the
MPS system and related products. The Company plans to market the MPS system and
related products internationally through specialty distributors. The Company
also employs one sales manager who oversees the distributors who sell the
Company's pressure monitoring kits. The Company derives approximately 80% of net
revenues attributable to its cardiovascular products from domestic sales and
approximately 20% from European, Australian and Japanese sales.
Neuromed has historically relied on specialty distributors to market its SCS
devices, and the Company expects to continue this sales and marketing strategy.
The Company employs two sales managers who oversee these specialty distributors.
The primary medical specialists the Company targets in its marketing efforts are
anesthesiologists, neurosurgeons and orthopedic surgeons. Although neurosurgeons
were the first practitioners to use SCS applications, anesthesiologists now
account for a greater percentage of sales as the relative number of these
practitioners has grown and as the understanding and acceptance of SCS treatment
has increased. The Company derives 84% of net revenues attributable to its SCS
devices from domestic sales and approximately 16% from European and Australian
sales.
The University of Texas Cancer Center (M.D. Anderson Hospital) accounted for
$2.6 million, $2.7 million, and $3.1 million, or 10%, 19% and 23%, of the
Company's net revenues for the years ended December 31, 1995, 1994 and 1993
respectively. The Company supplies a patented specialized tubing set used by
M.D. Anderson Hospital for oncology applications. While the Company believes its
relations with this customer are good, and while net revenues in percentage
terms have declined and are expected to decline further as a result of the
Neuromed acquisition and introduction of MPS, the loss of this customer could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RESEARCH AND DEVELOPMENT
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Since 1992, the Company has focused its research and development efforts on
designing and developing the MPS system and related products. The Company has
spent $10.3 million on the research and development of its MPS system and
related products, representing over 90% of the Company's research and
development expense since 1992. Although the Company plans to continue engaging
in ongoing research and development to introduce new products, enhance the
effectiveness, ease of use, safety and reliability of existing products and
expand the applications for which its products are appropriate, particularly in
the cardiovascular and interventional pain management fields, the Company
expects research and development expense to decline from peak levels during
1995, as a result of completing development of the MPS system and certain
related products during 1995. Research and development expense was $4.6 million,
$3.5 million and $1.9 million for the years ended December 31, 1995, 1994 and
1993, respectively. The Company has budgeted $3.3 million for research and
development during 1996. Management expects 60% of such expenditures to be
directed to refining and redesigning of Neuromed SCS products with the remainder
directed primarily to MPS. As of March 21, 1996, the Company had an in-house
research and development staff of 24 engineers, technicians and designers, down
from a peak number of 49 during April 1995.
MANUFACTURING
The Company manufactures and packages certain cardiovascular products (such as
pressure control valves, filters, traps, MPS and surgical retracting tapes) and
intravenous fluid delivery products at its primary manufacturing facility in
Allen, Texas. This facility received ISO 9001 certification (for design and
manufacturing processes) in July 1995. See Item 1. "Business -- Other Business
Matters -- Government Regulations." Until the first quarter of 1996, when such
operations were moved to the Allen, Texas facility, the Company manufactured its
line of SCS devices and related products at an ISO 9002 certified (manufacturing
only) facility in Fort Lauderdale, FL. Finally, the Company manufactures certain
cardiovascular products at a facility in Orange County, California, and will
continue to do so for the foreseeable future.
The Company's manufacturing processes consist of the assembly of standard and
custom component parts and the testing of completed products. The Company
subcontracts with various suppliers to provide it with the quantity of component
parts necessary to assemble its products. Almost all of these components are
available from a number of different suppliers, although certain components are
purchased from single sources, who manufacture these components from the
Company's toolings. For example, the Company relies on single suppliers for two
separate components of the specialized oncology intravenous tubing set that the
Company supplies to the University of Texas System Cancer Center (M.D. Anderson
Hospital), the Company's largest customer. The Company believes that there are
alternative and satisfactory sources for single-sourced components, although a
sudden disruption in supply from one of these suppliers could adversely affect
the Company's ability to deliver the finished product on time. The Company owns
its own molds for production of a majority of the components used in specialized
tubing sets and cardiovascular products. Consequently, in the event of supply
disruption, the Company would be able to fabricate its own components or
subcontract with another supplier, albeit after a delay in the production
process.
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The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where components are assembled
in a "clean room" environment designed and maintained to reduce product exposure
to particulate matter. Products are tested throughout the manufacturing process
for adherence to specifications. Finished components are shipped to outside
processors for sterilization through radiation or treatment with ethylene oxide
gas. After sterilization, the products are quarantined and tested before they
are shipped to customers.
Skills of assembly workers required for the manufacture of medical products are
similar to those required in typical assembly operations. The Company believes
that workers with these skills are readily available in the Dallas and Orange
County areas.
COMPETITION
In marketing its products, the Company competes with numerous companies that
have substantially greater financial resources and engage in substantially
greater research and development efforts than the Company. Numerous competitors
exist for the Company's cardiovascular products, specialized tubing sets, and
pressure monitoring kits. These markets are dominated by established
manufacturers that have broader product lines, greater distribution
capabilities, substantially greater capital resources and larger marketing,
research and development staffs and facilities than the Company. Many of these
competitors offer broader product lines within the specific product market
and/or in the general field of medical devices and supplies. Broad product lines
give many of the Company's competitors the ability to negotiate exclusive,
long-term medical device supply contracts and, consequently, the ability to
offer comprehensive pricing of their competing products. By offering a broader
product line in the general field of medical devices and supplies, competitors
may also have a significant advantage in marketing competing products to group
purchasing organizations, HMOs and other managed care organizations that are
increasingly seeking to reduce costs through centralization of purchasing
functions. In addition, the Company's competitors may use price reductions to
preserve market share in their product markets.
The Company is aware of at least two cardioplegia delivery systems currently in
development or in clinical testing that would compete with the MPS system. Both
products have received FDA 510(k) market clearance. While these products
represent improvements over cardioplegia delivery systems currently in use, the
Company believes that the MPS system will offer a greater range of
functionality, flexibility and ease-of-use. In addition, innovations in surgical
techniques or medical practices could have the effect of reducing or eliminating
market demand for one or more of the Company's products. For example, some
cardiovascular surgeons and medical device companies are developing techniques,
procedures and devices for performing coronary artery bypass surgery without
stopping the heart, both through open-heart surgery and minimally invasive
procedures, thereby eliminating the need for myocardial protection in these
cases and potentially reducing the market for Quest's MPS system. While these
techniques, procedures and devices have not to date attained widespread use,
there can be no assurance that they will not gain broader market acceptance.
While these and other surgical techniques, procedures and devices may reduce the
number of coronary artery bypass procedures that require myocardial protection,
the Company believes that most, if not all, surgical suites will need to be
equipped with a myocardial protection system.
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Neuromed competes in the market for SCS devices with one other significant
supplier, Medtronic, Inc. Medtronic holds a substantial majority share of the
market and sells both RF-coupled systems and IPG devices.
The Company believes that the principal competitive factors in the
cardiovascular, interventional pain management and intravenous fluid delivery
markets are cost-effectiveness, impact on patient outcomes, product performance,
quality and ease of use, technical innovation and customer service. The Company
intends to continue to compete on the basis of its high performance products,
innovative technologies, manufacturing capability, close customer relations and
support and its strategy to increase its offerings of products within these
markets.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company owns eighteen United States patents relating to products that the
Company currently sells or develops. Although one of the Company's patents
expired in February 1996 and another is scheduled to expire in January 1997, the
Company does not believe that either expiration will have a material adverse
effect on the Company or its ability to sell the applicable products. Eleven of
the eighteen patents cover the Company's cardiovascular products. From 1993
through 1995, the Company filed four applications for patents relating to the
MPS system and related products, one of which was issued in January 1995. The
issued patent contains 69 claims, many of which, in the Company's opinion,
contain broad coverage of key elements of the MPS system, including the MPS
system's innovative methods of pumping, mixing and heating fluids. Management
believes that the issued patent should provide significant protection for its
MPS system. The three other patent applications are pending.
Neuromed currently owns four of the United States patents referred to above, and
also owns five foreign patents. In management's view, these patents offer
reasonable coverage of its SCS devices' electrode, receiver and transmitter
technology. These patents cover both RF-coupled devices and IPG systems,
although the Company currently manufactures only RF-coupled devices. The Company
is assessing whether it will file for patent protection concerning its PainDoc
product. The Company also owns three patents relating to its intravenous fluid
delivery tubing sets and accessories and other products.
The validity of any patents issued to the Company may be challenged by others
and the Company could encounter legal and financial difficulties in enforcing
its patent rights against infringers. In addition, there can be no assurance
that other technologies cannot or will not be developed or that patents will not
be obtained by others which would render the Company's patents obsolete. With
the possible exception of the patent relating to the specialized tubing sets
manufactured for the University of Texas System Cancer Center (M.D. Anderson
Hospital), the loss of any one patent would not have a material adverse effect
on the Company's current revenue base. Although the Company does not believe
that patents are the sole determinant in the commercial success of its products,
the loss of a significant percentage of its patents or its patents relating to a
specific product line, particularly the MPS system or Neuromed's SCS product
line, could have a material adverse effect on the Company's business, financial
condition and results of operations.
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The Company has developed significant technical knowledge which, although
non-patentable, is considered by the Company to be significant in enabling it to
compete. However, the proprietary nature of such knowledge may be difficult to
protect. The Company has entered into an agreement with each key employee
prohibiting such employee from disclosing any confidential information or trade
secrets of the Company and prohibiting that employee from engaging in any
competitive business while the employee is working for the Company and for a
period of one year thereafter. In addition, these agreements also provide that
any inventions or discoveries relating to the business of the Company by these
individuals will be assigned to the Company and become the Company's sole
property.
Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. The medical device industry is characterized by frequent
and substantial intellectual property litigation. The cardiovascular device
market and the interventional pain management markets are maturing and, as such,
are characterized by extensive patent and other intellectual property claims,
which can create greater potential than in less developed markets for possible
allegations of infringement, particularly with respect to newly developed
technology. Intellectual property litigation is complex and expensive, and the
outcome of this litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse determination in any such proceeding could subject the
Company to significant liabilities to third parties, or require the Company to
seek licenses from third parties or pay royalties that may be substantial.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing or
selling certain of its products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
QUEST, MULTIPORT, RETROGUARD, RETRACT-O-TAPE, ACTest and DUO-TUBE are among the
Company's registered trademarks, and MPS, COMPUSTIM, PAINDOC and ACTester are
among its non-registered trademarks. Registration applications are pending with
respect to MPS, COMPUSTIM and PAINDOC.
GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to regulation by
numerous governmental authorities, principally the FDA and corresponding foreign
agencies. The research and development, manufacturing, promotion, marketing and
distribution of the Company's products in the United States are governed by the
Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder
(the "FDC Act and Regulations"). The Company is subject to inspection by the FDA
for compliance with such regulations and procedures.
The FDA has traditionally pursued a rigorous enforcement program to ensure that
regulated entities such as the Company comply with the FDC Act and Regulations.
A company not in compliance may face a variety of regulatory actions, including
warning letters, product detentions, device alerts, mandatory recalls or field
corrections, product seizures, injunctive
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actions or civil penalties and criminal prosecutions of the company or
responsible employees, officers and directors.
Under the FDA's requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a legally marketed device, the
manufacturer may seek marketing clearance from the FDA to market the device by
filing a 510(k) premarket notification with the FDA. The 510(k) premarket
notification must be supported by data establishing the claim of substantial
equivalence to the satisfaction of the FDA. The process of obtaining a 510(k)
clearance typically can take several months to a year or longer. If substantial
equivalence cannot be established, or if the FDA determines that the device
requires a more rigorous review, the FDA will require that the manufacturer
submit a PMA that must be carefully reviewed and approved by the FDA prior to
sale and marketing of the device in the United States. The process of obtaining
a PMA can be expensive, uncertain and lengthy, frequently requiring anywhere
from one to several or more years from the date of FDA submission. Both a 510(k)
and a PMA, if granted, may include significant limitations on the indicated uses
for which a product may be marketed. FDA enforcement policy strictly prohibits
the promotion of approved medical devices for unapproved uses. In addition,
product approvals can be withdrawn for failure to comply with regulatory
requirements or the occurrence of unforeseen problems following initial
marketing. Although all of the Company's currently marketed products have been
the subject of successful 510(k) submissions, and the Company believes that its
products currently in development will also be eligible for the 510(k)
submission process, there can be no assurance that the FDA will agree with this
view.
The Company is also subject to regulation in each of the foreign countries in
which it sells its products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain countries require the Company's
products to be qualified before they can be marketed in those countries. To
date, the Company has not experienced significant difficulty in complying with
these regulations.
To position itself for access to European and other international markets, Quest
sought and obtained certification under the ISO 9000 Series of Standards. ISO
9000 is a set of integrated requirements, which when implemented, form the
foundation and framework for an effective quality management system. These
standards were developed and published by the ISO, a worldwide federation of
national standard bodies, founded in Geneva, Switzerland in 1946. ISO has over
92 member countries. ISO certification is widely regarded as essential to enter
Western European markets.
The Company obtained certification and was registered as an ISO 9001 compliant
company on July 1, 1995. The ISO 9001 registration is the most stringent
standard in the ISO series and lasts for three years. The German notified body,
Landesgewerbeanstalt Bayern ("LGA") issued the certificate. The ISO 9001
standards cover design, production, installation and servicing of products. The
Company will be subject to an annual audit by LGA to maintain the registration.
This registration will simplify the process of obtaining the "CE" mark for its
products. This CE mark enables a company's products to be marketed, sold and
used throughout the European Union.
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In 1991, prior to its acquisition by the Company, Neuromed commenced clinical
trials of a fully implantable SCS device in the United States and Europe. In
late 1993, the FDA canceled the IDE relating to this product and rescinded
Neuromed's export authority for this product due to alleged violations by
Neuromed, under its prior management, of applicable rules and regulations,
including good manufacturing practices. The clinical trials were discontinued
and the product was withdrawn from the market. During this period, Neuromed also
encountered regulatory difficulties in the United Kingdom due to alleged
noncompliance with applicable rules and regulations. Quest is engaged in a
process intended to restore good relations with regulatory authorities in the
United Kingdom. There can be no assurances that the Company will not encounter
similar difficulties in the future.
The financial arrangements through which the Company markets, sells and
distributes its products may be subject to certain federal and state laws and
regulations in the United States with respect to the provision of services or
products to patients who are Medicare or Medicaid beneficiaries. The "fraud and
abuse" laws and regulations prohibit the knowing and willful offer, payment or
receipt of anything of value to induce the referral of Medicare or Medicaid
patients for services or goods. In addition, the physician anti-referral laws
prohibit the referral of Medicare or Medicaid patients for certain "Designated
Health Services" to entities in which the referring physician has an ownership
or compensation interest. Violations of these laws and regulations may result in
civil and criminal penalties, including substantial fines and imprisonment. In a
number of states, the scope of fraud and abuse or physician anti-referral laws
and regulations, or both, have been extended to include the provision of
services or products to all patients, regardless of the source of payment,
although there is variation from state to state as to the exact provisions of
such laws or regulations. In other states, and, on a national level, several
health care reform initiatives have been proposed which would have a similar
impact. The Company believes that its operations and its marketing, sales and
distribution practices currently comply in all respects with all current fraud
and abuse and physician anti-referral laws and regulations, to the extent they
are applicable. Although the Company does not believe that it will need to
undertake any significant expense or modification to its operations or its
marketing, sales and distribution practices to comply with federal and state
fraud and abuse and physician anti-referral regulations currently in effect or
proposed, financial arrangements between manufacturers of medical devices and
other health care providers may be subject to increasing regulation in the
future. Compliance with such regulation could adversely affect the Company's
marketing, sales and distribution practices, and may affect the Company in other
respects not presently foreseeable, but which could have an adverse impact on
the Company's business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
The Company's products are purchased primarily by hospitals and other users,
which then bill various third party payors for the services provided to the
patients. These payors, which include Medicare, Medicaid, private insurance
companies and managed care organizations, reimburse part or all of the costs and
fees associated with the procedures performed with these devices.
Medicare and Medicaid reimbursement for hospitals is based on a fixed amount for
admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method,
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hospitals have incentives to use less costly methods in treating Medicare and
Medicaid patients, and will frequently make capital expenditures to take
advantage of less costly treatment technologies. Frequently, reimbursement is
reduced to reflect the availability of a new procedure or technique, and as a
result hospitals are generally willing to implement new cost saving technologies
before these downward adjustments take effect. Likewise, because the rate of
reimbursement for certain physicians who perform certain procedures has been and
may in the future be reduced in the event of further changes in the
resource-based relative value scale method of payment calculation, physicians
may seek greater cost efficiency in treatment to minimize any negative impact of
reduced reimbursement. Any amendments to existing reimbursement rules and
regulations which restrict or terminate the reimbursement eligibility (or the
extent or amount of coverage) of medical procedures using the Company's products
or the eligibility (or the extent or amount of coverage) of the Company's
products could have an adverse impact on the Company's business, financial
condition and results of operations. Third party payors are increasingly
challenging the prices charged for medical products and services and may deny
reimbursement if they determine that a device was not used in accordance with
cost-effective treatment methods as determined by the payor, was experimental or
was used for an unapproved application.
The Company's SCS devices, for example, while cost-effective compared to repeat
back surgeries, have encountered some resistance to third party reimbursement.
Although Medicare, Medicaid and many private insurers reimburse for the SCS
device and procedure, especially after repeat back surgeries have failed to
relieve the chronic pain, certain payors refuse to reimburse for SCS devices and
others, including the Veterans Administration, restrict reimbursement. There can
be no assurance that in the future, third party payors will continue to
reimburse for the Company's products, or that their reimbursement levels will
not adversely affect the profitability of the Company's products. In addition,
the cost of health care has risen significantly over the past decade, and there
have been and may continue to be proposals by legislators and regulators to curb
these costs. Legislative action limiting reimbursement for certain procedures
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In response to the focus of national attention on rising health care costs, a
number of changes to reduce costs have been proposed or have begun to emerge.
There have been, and may continue to be, proposals by legislators and regulators
and third party payors to curb these costs. There has also been a significant
increase in the number of Americans enrolling in some form of managed care plan.
It has become a typical practice for hospitals to affiliate themselves with as
many managed care plans as possible. Higher managed care penetration typically
drives down the prices of health care procedures, which in turn places pressure
on medical supply prices. This causes hospitals to implement tighter vendor
selection and certification processes, by reducing the number of vendors used,
purchasing more products from fewer vendors and trading discounts on price for
guaranteed higher volumes to vendors. Hospitals have also sought to control and
reduce costs over the last decade by joining group purchasing organizations or
purchasing alliances. The Company cannot predict what continuing or future
impact existing or proposed legislation, regulation or such third party payor
measures may have on its future business, financial condition or results of
operations.
Changes in reimbursement policies and practices of third party payors could have
a substantial and material impact on sales of certain of the Company's products.
The
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development or increased use of more cost-effective treatments could cause such
payors to decrease or deny reimbursement to favor these other treatments.
EMPLOYEES
As of March 21, 1996, the Company employed 250 full-time employees, 24 in
research and development, 44 in sales and marketing, 156 in manufacturing and
related operations, and the remainder in executive and administrative positions.
This is an increase of 67 employees from the number at March 17, 1995. Of such
increase, 56 personnel were added to the employee base from the Neuromed
acquisition. The remainder of the increase is primarily due to additional sales
and marketing personnel in preparation for the commercial introduction of MPS.
None of the Company's employees is represented by a labor union and the Company
considers its employee relations to be good.
ADVISORY BOARD
The Company has established a Board of Clinical Advisors (the "Advisory Board")
comprised of individuals with substantial expertise in the field of myocardial
protection who have played instrumental roles in the identification of the
market need for the MPS system and its subsequent design and development.
Members of the Company's management and scientific and technical staff consult
closely with the Advisory Board to better understand the technical and clinical
requirements of the cardiovascular surgical team and product functionality
needed to meet those requirements. The Company anticipates that these Advisory
Board members will continue to play similar roles with respect to other
products, and may assist the Company in educating other physicians in the use of
the MPS system and related products.
Certain members of the Advisory Board are employed by academic institutions and
may have commitments to or consulting or advisory agreements with other entities
that may limit their availability to the Company. The members of the Advisory
Board may also serve as consultants to other medical device companies. No
members are expected to devote more than a small portion of their time to the
Company.
ITEM 2. DESCRIPTION OF PROPERTY
In December 1993, the Company moved into its new manufacturing facility and
executive offices in Allen, Texas (located north of Dallas). The facility covers
approximately 107,000 square feet and was constructed during 1993 on a 19.2 acre
tract that the Company acquired in 1985. The Company borrowed $4.4 million from
MetLife Capital Corporation to construct and outfit this facility. This
financing is collateralized by the Allen land, the Allen facility and certain
equipment of the Company. See Note 5 of the Notes to Consolidated Financial
Statements. Management expects the current facility to serve its manufacturing,
storage and executive office needs in the Dallas area for the foreseeable
future.
The Company also currently leases approximately 4,600 square feet of office and
manufacturing space in Orange County, California on a month-to-month basis. The
Company plans to continue manufacturing certain cardiovascular surgery products
at this facility for the foreseeable future.
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Neuromed leased, until February 1996 when such lease expired, approximately
18,000 square feet of office and manufacturing space in Fort Lauderdale,
Florida, where it manufactured and marketed its SCS devices. During late 1995
and early 1996, the Company relocated the Neuromed operations to the Company's
facility in Allen, Texas.
ITEM 3. LEGAL PROCEEDINGS
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. While the Company
seeks to maintain appropriate levels of product liability insurance with
coverage that the Company believes is comparable to that maintained by companies
similar in size and serving similar markets, there can be no assurance that the
Company will avoid significant future product liability claims relating to its
SCS, cardiovascular, intravenous fluid delivery or other products.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "QMED." On March 21, 1996, there were approximately 827 holders of record
of the Company's common stock. The following table sets forth the quarterly high
and low closing sales prices for the Company's common stock. These prices do not
include adjustments for retail mark-ups, mark-downs or commissions.
1994: High Low
- ---- ---- ---
First Quarter $ 4.72 $ 4.13
Second Quarter $ 7.38 $ 4.63
Third Quarter $ 6.38 $ 5.38
Fourth Quarter $ 5.75 $ 4.63
1995: High Low
- ---- ---- ---
First Quarter $ 8.75 $ 4.88
Second Quarter $12.50 $ 7.13
Third Quarter $14.50 $11.75
Fourth Quarter $12.00 $ 9.75
1996: High Low
- ---- ---- ---
First Quarter $14.50 $10.25
(through March 21, 1996)
To date, the Company has not declared or paid any cash dividends on its common
stock, and the present policy of the Board of Directors is to retain any
earnings to provide for the Company's growth. Any future determination to pay
dividends will be at the discretion of the Board of Directors, and dependent
upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant. In
addition, the Company's current credit arrangement with NationsBank of Texas,
N.A. ("NationsBank") currently limits the payment of cash dividends to 75% of
annual net earnings (as defined in the credit agreement) if no draws exist under
the acquisition line of credit and 25% of annual net earnings if the acquisition
line of credit has been drawn upon.
The Company has paid one stock dividend on its common stock. During April 1994,
the Board of Directors approved a 3% stock dividend distributed on May 23, 1994
to shareholders of record as of May 6, 1994. In connection with the dividend,
the Company issued 152,829 shares of common stock from its treasury.
The Board of Directors on various occasions, beginning in October 1987 and as
recently as August 1993, approved stock repurchases of up to an aggregate of
3,150,000 shares, of which approximately 2,900,000 have been repurchased to
date. During the year ended December 31, 1995, the Company repurchased no shares
of common stock. During 1995, the Company issued 1,033,333 shares of common
stock from its treasury as partial consideration in the acquisition of Neuromed,
Inc. In addition, during the fourth quarter of 1995, the Company completed a
public offering in which it issued 1,676,667 shares, almost
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all of which were issued from its treasury. The Company received net proceeds of
$15.2 million which were used to repay $13.9 million of senior bank
indebtedness. At December 31, 1995, the Company had no shares in its treasury
and does not anticipate further repurchases during the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statement of the Company and the related Notes thereto.
OVERVIEW
On March 31, 1995, the Company acquired all of the issued and outstanding
capital stock of Neuromed, Inc., which was held by Mr. William Borkan and his
brother, Mr. Burt Borkan. The Neuromed acquisition was accounted for as a
purchase. The Company paid the Borkans $15.4 million in cash ($200,000 of which
was paid in June 1995 as a purchase price adjustment) and issued them 833,333
shares of Common Stock valued then at $6.5 million. The Company also incurred
$1.1 million in acquisition and financing costs. Depending on Neuromed's
attainment of certain sales objectives, the Company also agreed to pay the
Borkans contingent "earn-out" consideration in January 1996 and January 1997,
payable in a combination of cash and Common Stock. In June 1995, Mr. William
Borkan was elected to the Company's Board of Directors.
In September 1995, the Company and Mr. William Borkan amended certain terms of
the Neuromed acquisition agreement. Under the amendment, (i) the Company agreed
to issue Mr. Borkan 200,000 additional shares of Common Stock concurrently with
the closing of the public offering completed in November 1995 and pay Mr. Borkan
$1.5 million in cash in January 1996 to satisfy the 1996 contingent payment
obligation, which had been earned in July 1995, (ii) the Company agreed to
include all of the Borkans' Common Stock (1,033,333 shares) in the public
offering, (iii) Mr. Borkan resigned from the Company's Board of Directors and
relinquished his board representation and attendance rights, (iv) Mr. Borkan
relinquished his registration rights, and (v) in the event the 1997 contingent
earn-out payment is fully earned, the Company agreed to pay Mr. Borkan an amount
in cash equal to $1.5 million plus the value of 200,000 shares of Common Stock
at the net public offering price ($9.35 per share after underwriting discounts
and commissions).
In connection with the Neuromed acquisition, the Company entered into the First
Amended and Restated Credit Agreement dated March 31, 1995, with NationsBank
(the "Loan Agreement"), which provided for $15.0 million in senior term
financing and a $5.0 million working capital line of credit. The senior term
debt was utilized to pay most of the Neuromed purchase price. The Company has
also drawn down $4.5 million on the working capital line of credit. This bank
debt was collateralized by certain of the Company's assets, including without
limitation, accounts receivable, inventory, equipment, furniture and other fixed
assets, patents, trademarks and other intangible property, and the Neuromed
Common Stock, but excluding marketable securities in excess of $2.0 million.
NationsBank also excluded the Company's real property, building, and certain
equipment in Allen, Texas, which collateralize financing provided in 1993 by
MetLife Capital Corporation.
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On November 15, 1995, the public offering of 2,400,000 shares of Common Stock
was completed. Of these shares, 1,316,667 were sold by the Company and 1,083,333
were sold by selling shareholders (1,033,333 shares by the Borkans). The Company
received $11.8 million, after deducting underwriters' discounts and commissions
and offering expenses payable by the Company. In addition, on December 6, 1995,
the Company sold an additional 360,000 shares (the "green shoe") and received
net proceeds of $3.4 million. The Company utilized $13.9 million of the proceeds
from the offering to repay in its entirety the senior term bank debt with
NationsBank. At year end 1995, the Company had a commitment from NationsBank to
provide, in addition to the $5.0 million working capital line, a $15 million
acquisition line of credit. The Company entered into a Second Amended and
Restated Credit Agreement on February 9, 1996, which provided for the $15.0
million acquisition line of credit and $5.0 million working capital line of
credit.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1995 and 1994
Revenues. Net revenue of $25.3 million for the year ended December 31, 1995, was
$11.3 million, or 80.7% above the level for the comparable 1994 period of $14.0
million. This increase during 1995 compared to 1994 was primarily attributable
to revenue generated by Neuromed, which was acquired on March 31, 1995. See Item
1: "Business" and Note 3 of the Notes to Consolidated Financial Statements.
Neuromed develops, manufactures and markets a line of electronic spinal cord
stimulation ("SCS") devices used to manage chronic severe pain. Net revenue from
sales of the Company's other products increased 6.3% during 1995 compared to
1994 primarily due to higher unit sales volume from the Company's cardiovascular
products.
During August 1995, the Company filed for FDA market clearance under a
pre-market notification ("510(k)") on its MPS(TM) brand of myocardial protection
system. On March 8, 1996, the Company received clearance from the FDA to
commercially market the MPS system and related products and expects to introduce
the MPS system during the second quarter of 1996. Management expects that
Neuromed and MPS should enhance the long-range growth objectives of the Company.
Gross Profit. Gross profit during 1995 increased to $14.7 million compared to
$6.4 million in 1994, an increase of 130%. As a percentage of net revenue, gross
profit increased to 58.0% in 1995 compared to 45.6% during 1994. This increase
in gross profit and gross profit margin during 1995 compared to 1994 was
primarily attributable to the revenue generated by Neuromed, since Neuromed's
products contribute higher gross profit margins than the Company's other product
lines.
Operating Expenses. Research and development expense increased to approximately
$4.6 million during 1995 compared to the 1994 level of $3.5 million, although
such expense decreased as a percentage of net revenue from 25.3% during 1994 to
18.1% during 1995. These expenditures during 1995 were $2.1 million more than
originally budgeted at the beginning of fiscal 1995. Of such overage, $650,000
were expenditures directed toward newly acquired Neuromed while the remainder
represented additional expenditures directed at continued development of the
Company's MPS(TM) brand of myocardial protection system. See Item 1: "Business
- -- Other Business Matters -- Research and Development".
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Myocardial protection is the process of arresting and caring for the heart
during open-heart surgery. The MPS system is designed to integrate key functions
relating to the delivery of solutions to the heart such as varying the rate and
ratio of oxygenated blood, crystalloid, potassium and other additives, and
controlling temperature, pressure and other variables to allow simpler, more
flexible and cost-effective management of this process. The Company's MPS system
features an electronic console and includes a line of captive and non-captive
disposable products. As previously noted, the Company filed for FDA market
clearance under a 510(k) during August 1995 and on March 8, 1996 received
clearance to commercially market the MPS system, which management believes will
occur during the second quarter of 1996. Increased expenditures during 1995
compared to 1994 were primarily the result of additional salary and contract
labor expense from staff additions and increased consulting expense.
The Company has budgeted $3.3 million for research and development activities
during 1996. Management expects that about 60% of such expenditures to be
directed to refining and redesigning of Neuromed products, with the remainder
directed primarily to continued development of MPS and related products.
Management expects that most of its research and development activities in
fiscal 1996 will be Company-sponsored and funded through its operations.
Marketing, general and administrative expenses as a percent of net revenue
decreased to 33.2% during 1995 compared to 35.6% during 1994, while the dollar
amount increased $3.4 million. Marketing expense as a percentage of net revenue
increased to 16.6% in 1995 from 13.7% during 1994, and the dollar amount
increased by $2.3 million. Of such increase, $1.7 million was Neuromed marketing
expense. The remainder of the increase in marketing expense was primarily the
result of additional salary and benefit expense from personnel additions, and
increased travel, commission, convention and recruiting expense. During the
fourth quarter of 1995, the Company hired four additional direct salespersons in
anticipation of the 510(k) clearance of its MPS system. Management expects to
introduce the MPS system during the second quarter of 1996 and anticipates
adding seven salespersons throughout 1996 to market the MPS system and related
products. General and administrative expense increased $1.1 million during 1995
compared to 1994, but as a percentage of net revenue, decreased from 21.9%
during 1994 to 16.6% during 1995. This increase in expense during 1995 compared
to 1994 was attributable to general and administrative expense of Neuromed,
including amortization expense of Neuromed intangibles.
Loss from Operations. On March 31, 1995, the Company acquired all of the capital
stock of Neuromed, Inc. See Note 3 of the Notes to Consolidated Financial
Statements. Of the aggregate purchase price for Neuromed, $10.5 million was
identified as purchased in-process research and development and in accordance
with generally accepted accounting principles was charged to expense, with no
related tax benefit, during 1995. As a result, the loss from operations
increased from $2.1 million in 1994 to $8.8 million during 1995. Excluding the
charge for purchased research and development, the Company generated earnings
from operations of $1.7 million compared to the $2.1 million loss for the 1994
period, reflecting the positive impact of the Neuromed acquisition.
-21-
<PAGE> 23
Other Income (Expense). Other income (expense) decreased to an expense of $1.2
million during 1995 compared to income of $419,000 during 1994. This decrease
was primarily the result of higher interest expense which increased $1.1 million
during 1995 from 1994. The Company incurred $15.0 million of long-term bank debt
on March 31, 1995, which was used to fund most of the cash payment of the
Neuromed acquisition. See "-- Overview" and Notes 3 and 5 of the Notes to
Consolidated Financial Statements. Higher overall interest rates on borrowed
money also contributed to the increase in interest expense during 1995 compared
to 1994. In addition, gains recognized on the sale of the Company's investments
was $29,000 for 1995 compared to $464,000 for 1994, also contributing to the
decrease in other income.
Income Taxes. The Company recorded income tax expense of $155,000 during 1995 as
a consequence of the nondeductibility of the $10.5 million expense for purchased
research and development and amortization expense of costs in excess of net
assets acquired. No income tax benefit was recognized for the Company's 1994 net
operating loss.
Net Loss. The net loss increased from $1.7 million in 1994 to $10.4 million
during 1995 primarily as a result of the aforementioned $10.5 million expense
for purchased in-process research and development incurred in connection with
the Neuromed acquisition. In addition, the net loss for 1995 reflects an
extraordinary charge of $269,000 for the write-off of capitalized debt issuance
costs due to early repayment of the long-term bank debt.
Years Ended December 31, 1994 and 1993
Revenues. Net revenue of $14.0 million for the year ended December 31, 1994,
increased 2.6% from $13.6 million for the comparable 1993 period. Three of the
Company's product lines, however, contributed better results than the overall
2.6% year over year increase. Net revenue of the Company's cardiovascular
products increased $604,000, or 11.5%, due to higher unit sales volume from the
Company's family of pressure control valves. Net revenue generated by the
Company's pressure monitoring kits increased $160,000, or 11.7%, due to higher
unit sales volume. Net revenue generated by the Company's nasogastric feeding
tubes increased $108,000, or 48.2%. Of this increase, $74,000 was due to higher
unit sales volume with the remainder due to a price increase. Net revenue
generated by the Company's specialized tubing sets, however, decreased by
$518,500, or 7.7%, reflecting lower unit sales volume largely attributable to a
reduction in sales of specialized tubing sets used in oncology to the Companys'
largest customer, The University of Texas System Cancer Center (M.D. Anderson
Hospital), due to lower hospital census.
Gross Profit. Gross profit during 1994 decreased to $6.4 million compared to
$6.6 million in 1993, a reduction of $210,000. As a percentage of net revenue,
gross profit decreased to 45.6% in 1994 compared to 48.3% during 1993. The
decrease in gross profit during 1994 compared to 1993 resulted primarily from
the lower net revenue generated by the Company's specialized tubing sets. Lower
sales volume of this product line led not only to a reduction in actual gross
profit dollars from this product line, but also to a reduction in gross profit
margins for this product line, since manufacturing volumes were reduced, thus
resulting in higher overhead costs per unit.
-22-
<PAGE> 24
Operating Expenses. Research and development expense increased to $3.5 million
during 1994 compared to the 1993 level of $1.9 million, and as a percentage of
net revenue increased from 14.0% to 25.3%. During 1994, the Company continued
development efforts on its MPS system and related products. See Item 1.
"Business -- Other Business Matters -- Research and Development". During June
1994, the Company completed assembly of five MPS prototypes. In September 1994,
the Company determined that more time was needed to redesign the MPS prototypes
into pre-production units and delayed the anticipated December 1994 510(k)
filing with the FDA. The redesign was completed during December 1994. Increases
in research and development expense during 1994 compared to 1993 were primarily
the result of additional salary and contract labor expense from personnel
additions, increased prototype tooling, test material, consulting, and
toxicology test expenses. The Company increased its development staff headcount
by fourteen personnel during 1994 bringing its total R&D staff to 39 at
year-end.
Marketing, general and administrative expense as a percent of net revenue
increased to 35.6% for 1994 compared to 32.2% for 1993, and the dollar amount
increased $577,000. Marketing expense remained relatively unchanged during 1994
as compared to 1993 and as a percentage of revenue, decreased from 14.1% during
1993 to 13.7% during 1994. General and administrative expense increased
$582,000, or 23.4%, during 1994 as compared to 1993, and as a percentage of net
revenue, increased from 18.2% during 1993 to 21.9% for 1994. This increase
during 1994 compared to 1993 was primarily the result of higher recruiting and
relocation expense, depreciation and amortization expense, health
insurance expense, employee relations expense and expenses related to a proposed
acquisition that was not consummated.
Earnings (Loss) from Operations. Earnings from operations decreased from
earnings of $281,000 during 1993 to a loss of $2.1 million in 1994 as a result
of the aforementioned increases in research and development and general and
administrative expenses and the decrease in gross profit.
Other Income (Expense). Other income decreased to $419,000 during 1994 compared
to other income of $667,000 for the prior year. This decrease resulted from an
increase in interest expense. Interest expense increased during 1994 as compared
to 1993 by $488,000 primarily due to two pieces of debt which were in place for
all of 1994 but only in place during the fourth quarter of 1993. During December
1993, the Company consummated a financing with MetLife Capital Corporation which
provided $4.4 million of long-term financing for the Company's new corporate
headquarters constructed during 1993. In addition, the Company increased
borrowings against its working capital line of credit with NationsBank during
1994.
No income tax benefit was recognized for the Company's 1994 net operating loss.
Income tax expense during 1993 was $301,000.
Net Earnings (Loss). Net earnings decreased from net earnings of $816,000 during
1993 to a net loss of $1.7 million in 1994 primarily as a result of the decrease
in earnings from operations (caused by lower gross profit and higher general and
administrative and research and development expenses) and the decrease in other
income discussed above. During May 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity
-23-
<PAGE> 25
Securities". The Company, as permitted under the Statement, elected to adopt the
provisions of the new standard at the end of fiscal 1993. The cumulative effect
as of December 31, 1993 of adopting Statement No. 115 was to increase net income
by $169,000, resulting from the reversal of unrealized losses recorded during
1993. The ending balance of stockholder's equity was decreased by $169,000 to
reflect the net unrealized holding loss on securities classified as
available-for-sale previously carried at the lower of cost or market.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital of $12.2 million at the end of 1995 increased from
$7.4 million at the end of 1994. The ratio of current assets to current
liabilities was 3.7 to 1 at the end of 1995 and 2.8 to 1 at the end of 1994. The
Company's ratio of long-term debt to total capital was 28% at year-end 1995, up
slightly from 26% at year-end 1994.
As previously noted, the Company completed a public offering during the fourth
quarter of 1995. The total number of shares sold pursuant to the offering were
2,760,000, of which, 1,676,667 shares were sold on the Company's behalf. The
Company's net proceeds from the offering totaled $15.2 million. The Company used
$13.9 million of such proceeds to retire the senior term bank debt which was
incurred during March 1995 to consummate the Neuromed acquisition.
In February 1996, the Company amended its working capital line of credit and
added a $15 million acquisition line of credit with NationsBank. 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 on 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 such as, amongst others, 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.
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 1996.
CASH FLOWS
Net cash used by operating activities in 1995 increased slightly to $1.5 million
compared to $1.4 million in 1994. This increase was due to an increase in net
working capital, principally in the areas of accounts receivable, inventory and
prepaid expenses.
Investing activities in 1995 resulted in a net use of cash of $14.1 million
compared to cash being provided by investing activities during 1994 of $320,000.
This change during 1995
-24-
<PAGE> 26
compared to 1994 was primarily the result of $16.0 million utilized to
consummate the Neuromed acquisition in March 1995. Additionally, capital
expenditures increased to $1.5 million in 1995, an increase of $400,000 from
1994. The sale of certain of the Company's investments in marketable securities
provided $3.3 million of cash, up from $1.3 million in 1994.
Financing activities in 1995 provided $16.9 million of cash compared to $620,000
in 1994. As discussed earlier, during 1995 the Company borrowed $15.0 million of
senior term bank debt to fund most of the cash portion of the Neuromed
acquisition purchase price and increased its borrowings under its working
capital line of credit by $1.9 million. Furthermore, as also discussed earlier,
the Company completed a public offering during 1995 which provided net proceeds
of $15.2 million. These proceeds were utilized to repay the senior term bank
indebtedness.
OUTLOOK AND UNCERTAINTIES
Quest does not provide forecasts of potential future financial performance.
While Quest management is optimistic about Quest's long-term prospects, the
following issues and uncertainties, among others, should be considered in
evaluating its growth outlook.
Product Development and Market Acceptance. The Company's growth depends in part
on the development and market acceptance of new products, including the MPS
system and related products. There is no assurance that the Company will
continue to develop successful products, that delays in product introduction
will not be experienced, or that once such products are introduced, the market
will accept them.
New Business Integration. To the extent the Company's business strategy involves
acquisitions, the integration of acquired businesses can be difficult and
costly. The Neuromed acquisition, for example, will require management time and
attention and will only be fully successful if operations are combined in an
orderly and timely manner.
Government Regulation. The Company's business is subject to extensive
government regulation, principally by the FDA. The regulatory process,
especially as it relates to product approvals, can be lengthy, expensive and
uncertain.
Competition and Technological Change. The medical device market is highly
competitive. The Company competes with many larger companies that have access to
greater capital, research and development, marketing, distribution and other
resources than the Company. In addition, this market is characterized by
extensive research efforts and rapid product development and technological
change, which could render the Company's products obsolete or noncompetitive.
Intellectual Property Rights. The Company relies in part on patents, trade
secrets and proprietary technology to remain competitive. It may be necessary to
defend these rights or to defend against claims that the Company is infringing
the rights of others. Intellectual property litigation and controversies are
disruptive and expensive.
-25-
<PAGE> 27
Cost Pressures on Medical Technology. The overall escalating cost of medical
products and healthcare results in significant cost pressure. Third party payors
are under intense pressure to challenge the prices charged for medical products
and services.
Potential Product Liability. The testing, manufacturing, marketing and sale of
medical devices entail substantial risks of liability claims or product recalls.
Other Uncertainties. Other operating, financial or legal risks or uncertainties
are discussed in the Form 10-K in specific contexts. The Company is, of course,
also subject to general economic risks, the risk of interruption in the source
of supply, the risk of loss of a major customer, dependence on key personnel and
other risks and uncertainties.
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 declined 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.
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.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is set forth in Appendices A and B.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
-26-
<PAGE> 28
PART II
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is contained under the captions "Election
of Directors" and "Executive Officers" in the definitive proxy material of the
Company to be filed in connection with its 1996 annual meeting of stockholders,
which information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Compensation and Committees of the Board of Directors" and "Compensation of
Executive Officers" in the definitive proxy material of the Company to be filed
in connection with its 1996 annual meeting of stockholders, which information is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is contained under the caption "Security
Ownership of Management and Principal Shareholders" in the definitive proxy
material of the Company to be filed in connection with its 1996 annual meeting
of stockholders, which information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Certain
Relationships and Related Transactions" in the definitive proxy material of the
Company to be filed in connection with its 1996 annual meeting of stockholders,
which information is incorporated herein by reference.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Agreement for the Purchase and Sale of All of the Issued Capital
Stock of Neuromed, Inc. dated February 10, 1995, between Quest
Medical, Inc. and William N. Borkan(9)
2.2 Amendment Agreement dated March 17, 1995, between Quest Medical,
Inc. and William N. Borkan(9)
2.3 Letter Agreement dated as of September 23, 1995, by and between
Quest Medical, Inc. and William N. Borkan(10)
3.1 Articles of Incorporation, as amended(10)
3.2 Bylaws(1)
4.1 Rights Agreement between Quest Medical, Inc. and MTrust Corp.,
N.A. as Rights Agent dated as of October 12,1989 and Letter to
Shareholders of Quest Medical, Inc. dated October 13,1989,
including attached Summary of Rights to Purchase Shares(10)
-27-
<PAGE> 29
4.2 Amendment of Rights Agreement dated as of February 9, 1995,
between Quest Medical, Inc. and KeyCorp Shareholder Services,
Inc. as Rights Agent(9)
10.1 Quest Medical, Inc. 1979 Amended and Restated Employees Stock
Option Plan(2)
10.2 Form of 1979 Employees Stock Option Agreement(3)
10.3 Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)
10.4 Form of Directors Stock Option Agreement(1)
10.5 Quest Medical, Inc. 1987 Stock Option Plan(10)
10.6 Form of 1987 Employee Stock Option Agreement(10)
10.7 Quest Medical, Inc. 1995 Stock Option Plan(10)
10.8 Form of 1995 Employee Stock Option Agreement(10)
10.9 Form of Employment Agreement and Covenant Not to Compete,
between the Company and key employees(1)
10.10 Sublease Agreement dated July 2,1992, effective September 1,
1992, between the Company and Unistor Corporation(5)
10.11 Promissory Note dated December 28,1993, between Quest Medical,
Inc. and MetLife Capital Financial Corporation(8)
10.12 Commercial Deed of Trust, Security Agreement and Assignment of
Leases and Rents and Fixture Filing dated December 28,1993,
between Quest Medical, Inc. and MetLife Capital Financial
Corporation(8)
10.13 Term Promissory Note dated December 28,1993, between Quest
Medical, Inc. and MetLife Capital Corporation(8)
10.14 Loan and Security Agreement dated December 28,1993, between Quest
Medical, Inc. and MetLife Capital Corporation(8)
10.15 Supplemental Security Agreement Number One dated December 28,
1993, between Quest Medical, Inc. and MetLife Capital
Corporation(8)
10.16 Security Agreement dated as of March 31, 1995 between Quest
Medical, Inc. and NationsBank of Texas, N.A.(11)
10.17 Security Agreement dated as of March 31, 1995 between Neuromed,
Inc. and NationsBank of Texas, N.A.(11)
10.18 Intellectual Property Security Agreement and Assignment dated
as of March 31, 1995 between Quest Medical, Inc. and
NationsBank of Texas, N.A.(11)
10.19 Intellectual Property Security Agreement and Assignment dated
as of March 31, 1995 between Neuromed, Inc. and NationsBank of
Texas, N.A.(11)
10.20 License Agreement dated as of March 31, 1995 between Quest
Medical, Inc. and NationsBank of Texas, N.A.(11)
10.21 License Agreement dated as of March 31, 1995 between Neuromed,
Inc. and NationsBank of Texas, N.A.(11)
10.22 Guaranty of Neuromed, Inc. in favor of NationsBank of Texas,
N.A. under the First Amended and Restated Credit Agreement
dated as of March 31, 1995(11)
10.23 Second Amended and Restated Credit Agreement dated as of
February 9, 1996, between Quest Medical, Inc. and NationsBank
of Texas, N.A.(12)
10.24 Promissory Note (Facility A. Note) in the original principal
amount of $5 million dated February 9, 1996(12)
10.25 Promissory Note (Facility B Note) in the original principal
amount of $15 million dated February 9, 1996(12)
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<PAGE> 30
10.26 First Amendment to Security Agreement, Intellectual Property
Security Agreement and Assignment, License Agreement, and
Pledge Agreement dated February 9, 1996 between Quest Medical,
Inc. and NationsBank of Texas, N.A.(12)
10.27 First Amendment to Security Agreement, Intellectual Property
Security Agreement and Assignment, License Agreement, and
Guaranty dated February 9, 1996, between Neuromed, Inc. and
NationsBank of Texas, N.A.(12)
11.1 Computation of Earnings Per Share(12)
21.1 Subsidiaries(12)
23.1 Consent of Independent Auditors(12)
(b) Reports on Form 8-K
None
- --------------------------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-18, Registration No. 2-71198-FW, and incorporated herein by
reference.
(2) Filed as an Exhibit to the report of the Company on Form 10-K for the
year ended December 31, 1987, and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form
S-1, Registration No. 2-78186, and incorporated herein by reference.
(4) Filed as an Exhibit to the report of the Company on Form 8-K dated
October 13, 1989, and incorporated herein by reference.
(5) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1992, and incorporated herein by
reference.
(6) Filed as an Exhibit to the report of the Company on Form 10-QSB for
the period ended June 30, 1993, and incorporated herein by reference.
(7) Filed as an Exhibit to the report of the Company on Form 10-QSB for
the period ended September 30, 1993, and incorporated herein by
reference.
(8) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1993, and incorporated herein by
reference.
(9) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1994, and incorporated herein by
reference.
(10) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2, Registration No. 33-62991, and incorporated herein by
reference.
(11) Filed as an Exhibit to the report of the Company on Form 8-K dated
April 13, 1995, and incorporated herein by reference.
(12) Filed herewith.
-29-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: March 29, 1996
QUEST MEDICAL, INC.
By: /s/THOMAS C. THOMPSON
------------------------------
Thomas C. Thompson, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Thomas C. Thompson President and Director of Quest March 29, 1996
- ---------------------------------- Medical, Inc. (Principal Executive
Thomas C. Thompson Officer)
/s/F. Robert Merrill III Senior Vice President - Finance, Secretary March 29, 1996
- ---------------------------------- and Treasurer of Quest Medical, Inc.
F. Robert Merrill III (Principal Financial and Accounting Officer)
/s/Linton E. Barbee Director of Quest Medical, Inc. March 29, 1996
- ----------------------------------
Linton E. Barbee
/s/Robert C. Eberhart Director of Quest Medical, Inc. March 29, 1996
- ----------------------------------
Robert C. Eberhart
Director of Quest Medical, Inc. March 29, 1996
- ----------------------------------
John A. Gula
Director of Quest Medical, Inc. March 29, 1996
- ----------------------------------
Hugh M. Morrison
</TABLE>
-30-
<PAGE> 32
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Michael J. Torma Director of Quest Medical, Inc. March 29, 1996
- ----------------------------------
Michael J. Torma
</TABLE>
-31-
<PAGE> 33
APPENDIX A
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
THREE YEARS ENDED DECEMBER 31, 1995
FORMING A PART OF THE ANNUAL REPORT
FORM 10-KSB
ITEM 7
OF
QUEST MEDICAL, INC. AND SUBSIDIARIES
(NAME OF ISSUER)
FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
UNDER
THE SECURITIES AND EXCHANGE ACT OF 1934
<PAGE> 34
QUEST MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
TO
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-KSB - ITEM 7
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Operations - Three years ended December 31, 1995
Consolidated Statements of Stockholders' Equity - Three years ended
December 31, 1995
Consolidated Statements of Cash Flows - Three years ended December 31, 1995
Notes to Consolidated Financial Statements
<PAGE> 35
Report of Independent Auditors
The Board of Directors
Quest Medical, Inc.
We have audited the accompanying consolidated balance sheets of Quest Medical,
Inc. and subsidiaries (the Company) as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quest Medical,
Inc. and subsidiaries at December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 4 to the financial statements, in 1993 the Company changed
its method of accounting for certain investments in debt and equity securities.
ERNST & YOUNG LLP
Dallas, Texas
March 6, 1996
<PAGE> 36
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,325,630 $ 87,963
Marketable securities 2,588,547 5,174,470
Receivables:
Trade accounts, less allowance for doubtful
accounts of $114,337 in 1995 and $14,337 in 1994 4,955,235 1,671,684
Interest and other 128,492 172,969
----------- -----------
Total receivables 5,083,727 1,844,653
----------- -----------
Inventories:
Raw materials 2,743,702 1,322,498
Work-in-process 1,077,529 580,432
Finished goods 2,285,961 2,084,522
----------- -----------
Total inventories 6,107,192 3,987,452
----------- -----------
Deferred income taxes 356,703 --
Prepaid expenses and other current assets 1,226,268 484,406
----------- -----------
Total current assets 16,688,067 11,578,944
----------- -----------
Property, plant and equipment:
Land 1,930,289 1,930,289
Building and improvements 5,271,718 5,258,976
Furniture and fixtures 2,964,471 2,587,738
Machinery and equipment 3,879,802 2,722,868
----------- -----------
14,046,280 12,499,871
Less accumulated depreciation and
amortization 3,784,510 2,867,453
----------- -----------
Net property, plant and equipment 10,261,770 9,632,418
----------- -----------
Cost in excess of net assets acquired, net of
accumulated amortization of $340,300 in 1995
and $99,550 in 1994 9,546,298 913,656
Patents, net of accumulated amortization of $1,086,433
in 1995 and $857,965 in 1994 1,288,966 1,517,434
Purchased technology from acquisitions, net of
accumulated amortization of $413,558 in 1995 and
$163,007 in 1994 4,284,442 534,993
Tradenames, net of accumulated amortization of
$93,750 in 1995 2,406,250 --
Other assets, net of accumulated amortization of
$178,667 in 1995 and $141,167 in 1994 19,964 57,464
----------- -----------
$44,495,757 $24,234,909
=========== ===========
(Continued)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 37
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------ ----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,210,265 $ 951,208
Short-term notes payable and current maturities of
long-term notes payable 1,616,311 2,759,241
Accrued salary and employee benefit costs 630,908 392,397
Accrued relocation costs 291,370 --
Other accrued expenses 755,976 65,393
----------- -----------
Total current liabilities 4,504,830 4,168,239
----------- -----------
Notes payable 8,558,297 4,123,853
Deferred income taxes 562,580 11,837
Commitments and contingencies
Stockholders' equity:
Common stock, $.05 par value.
Authorized 10,000,000 shares;
issued 8,147,349 shares in 1995
and 7,982,498 shares in 1994 407,367 399,125
Additional capital 38,253,670 19,514,171
Retained earnings (deficit) (7,579,925) 2,794,118
Unrealized loss on marketable securities net of
tax benefit of $108,729 in 1995 (211,062) (917,634)
Cost of common shares in treasury; 2,705,816 shares
in 1994. -- (5,858,800)
----------- -----------
Total stockholders' equity 30,870,050 15,930,980
----------- -----------
$44,495,757 $24,234,909
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 38
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net revenue $ 25,320,990 $13,999,165 $13,642,764
Cost of revenue 10,624,215 7,617,932 7,052,157
------------- ------------- -------------
Gross profit 14,696,775 6,381,233 6,590,607
------------- ------------- -------------
Operating expenses:
General and administrative 4,199,398 3,063,296 2,481,476
Research and development 4,582,868 3,542,193 1,909,589
Purchased research and development 10,500,000 -- --
Marketing 4,195,972 1,913,793 1,918,285
------------- ------------- -------------
23,478,238 8,519,282 6,309,350
------------- ------------- -------------
Earnings (loss) from operations (8,781,463) (2,138,049) 281,257
Other income (expense):
Gain on sale of marketable securities 29,115 464,113 462,178
Interest expense (1,657,818) (569,428) (81,800)
Investment and other income, net 460,282 524,171 286,171
------------- ------------- -------------
(1,168,421) 418,856 666,549
------------- ------------- -------------
Earnings (loss) before income taxes, cumulative
effect of change in accounting principle
and extraordinary item (9,949,884) (1,719,193) 947,806
Income taxes 155,114 -- 300,769
------------- ------------- -------------
Earnings (loss) before cumulative effect of change
in accounting principle and extraordinary item (10,104,998) (1,719,193) 647,037
Extraordinary item - loss on early extinguishment of debt,
net of income tax benefit of $138,599 (269,045) -- --
Cumulative effect of change in accounting principle -- -- 169,308
------------- ------------- -------------
Net earnings (loss) $ (10,374,043) $ (1,719,193) $ 816,345
============= ============= =============
Per common and common equivalent share:
Earnings (loss) before cumulative effect of change in
accounting principle and extraordinary item $ (1.52) $ (.33) $ .12
============= ============= =============
Extraordinary item $ (.04) $ -- $ --
============= ============= =============
Cumulative effect of change in accounting principle $ -- $ -- $ .03
============= ============= =============
Net earnings (loss) $ (1.56) $ (.33) $ .15
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 39
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (10,374,043) $ (1,719,193) $ 816,345
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Depreciation 952,935 761,174 464,307
Amortization 922,454 362,771 353,258
Extraordinary item: write off of debt issuance costs 407,644 -- --
Deferred income taxes 200,002 -- 49,998
Non-operating gains included in net earnings (loss) (137,898) (464,113) (634,516)
Purchased research and development 10,500,000 -- --
Changes in assets and liabilities, net of effects of acquisition:
Receivables (2,020,213) 387,347 (277,313)
Inventories (557,095) 22,471 (12,032)
Federal income tax recoverable -- -- 616,823
Prepaid expenses (750,284) (128,770) (71,400)
Accounts payable (346,134) (325,167) 444,610
Accrued expenses (340,966) (304,894) (173,059)
Other 9,720 (39,701) (6,537)
----------- ----------- ----------
Net cash provided by (used in) operating activities (1,533,878) (1,448,075) 1,570,484
----------- ----------- ----------
Cash flows from investing activities:
Net proceeds from marketable securities transactions 3,317,881 1,346,903 182,085
Additions to property, plant and equipment (1,468,732) (1,076,871) (6,500,560)
Acquisition, net of cash acquired (15,996,910) -- --
Other 6,550 19,510 47,338
----------- ----------- ----------
Net cash provided by (used in) investing activities (14,141,211) 319,542 (6,271,137)
----------- ----------- ----------
Cash flows from financing activities:
Net increase in short-term obligations -- 500,000 1,836,100
Proceeds of long-term debt, net of debt issuance costs 16,431,233 106,978 4,248,093
Payment of long-term debt (15,108,486) (121,977) (726,999)
Exercise of stock options 369,449 137,047 119,756
Net proceeds from public offering of common stock 15,218,815 -- --
Issuance (purchase) of treasury stock, net 1,745 -- (349,004)
----------- ----------- ----------
Net cash provided by financing activities 16,912,756 622,048 5,127,946
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 1,237,667 (506,485) 427,293
Cash and cash equivalents at beginning of year 87,963 594,448 167,155
----------- ----------- ----------
Cash and cash equivalents at end of year $ 1,325,630 $ 87,963 $ 594,448
============ ============ ===========
Supplemental cash flow information is presented below:
Income taxes paid $ -- $ -- $ 46,000
============ ============ ===========
Interest paid (net of amounts capitalized) $ 1,571,553 $ 558,337 $ 70,757
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 40
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK RETAINED LOSS ON TOTAL
------------------ ADDITIONAL EARNINGS MARKETABLE TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) SECURITIES STOCK EQUITY
--------- -------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <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 of stock
options 67,898 3,395 116,361 -- -- -- 119,756
Purchase of 100,000 common shares -- -- -- -- -- (349,004) (349,004)
Issuance of 1,490 common shares from -- -- -- -- -- 7,402 7,402
treasury
Tax effect of stock option
exercise -- -- 187,236 -- -- -- 187,236
Adjustment to unrealized losses on
marketable securities -- -- -- -- (169,308) -- (169,308)
Net earnings -- -- -- 816,345 -- -- 816,345
--------- -------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1993 7,939,441 396,972 18,787,628 5,430, 286 (169,308) (6,193,796) 18,251,782
Shares issued upon exercise of
stock options 43,057 2,153 134,894 -- -- -- 137,047
Issuance of 1,882 common shares from
treasury -- -- 5,595 -- -- 4,075 9,670
Stock dividend -- -- 586,054 (916,975) -- 330,921 --
Adjustment to unrealized losses on
marketable securities -- -- -- -- (748,326) -- (748,326)
Net loss -- -- -- (1,719,193) -- -- (1,719,193)
--------- -------- ----------- ----------- --------- ----------- -----------
Balance at December 31, 1994 7,982,498 399,125 19,514,171 2,794,118 (917,634) (5,858,800) 15,930,980
Shares issued upon exercise of
stock options 160,422 8,021 361,429 -- -- -- 369,450
Issuance of 245 common shares from treasury -- -- 1,216 -- -- 529 1,745
Adjustment to unrealized losses on
marketable securities -- -- -- -- 706,572 -- 706,572
Issuance of 1,033,333 common shares from
treasury for acquisition -- -- 6,779,285 -- -- 2,237,246 9,016,531
Sale of treasury and new common shares in
public offering, net of offering costs 4,429 221 11,597,569 -- -- 3,621,025 15,218,815
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
========= ======== =========== =========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 41
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(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 requirement or
the occurrence of unforeseen problems following initial marketing. While
the Company has received clearance for the MPS system, 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) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Quest
Medical, Inc. and subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. 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.
Revenue from product sales is recognized at the time the product is
shipped.
Cash equivalents include certificates of deposit and short-term, highly
liquid debt instruments with original maturities of three months or less.
Effective December 31, 1993, 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. Prior to December 31, 1993,
marketable securities were accounted for at the lower of cost or market.
<PAGE> 42
- 2 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1995, 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 earnings per share for 1995, 1994, and 1993 are
based upon 6,642,082, 5,256,683 and 5,559,422 common and common equivalent
shares outstanding, respectively. Common stock equivalents are outstanding
stock options and are included in average common and common equivalent
shares outstanding using the treasury stock method except during periods
where their effect would be antidilutive. During 1994, the Board of
Directors approved a 3% stock dividend. The weighted average number of
common and common equivalent shares outstanding used in computing
earnings per share were increased to retroactively reflect the stock
dividend.
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.
Certain prior period amounts have been reclassified to conform to current
year presentation.
(Continued)
<PAGE> 43
- 3 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 (payable in cash in January 1996). In addition,
in September 1995, the Company amended certain terms of the acquisition
agreement whereby the Company agreed to accelerate issuance of the 200,000
shares for the 1995 earn-out and the seller relinquished certain rights
from the previous agreement. The amended agreement sets the 1996
contingent consideration, payable in January 1997, at a cash payment equal
to $3,370,000, if earned.
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 year ended December 31, 1995.
The purchase price allocation for the acquisition of Neuromed, as of
December 31, 1995 is summarized below:
Tradenames $ 2,500,000
Purchased technology 4,000,000
Cost in excess of net assets acquired 8,873,391
Purchased research and development 10,500,000
Net tangible assets acquired 640,050
Deferred financing costs 468,767
-----------
$26,982,208
===========
In connection with the purchase, the Company determined that the
operations of Neuromed will be relocated to the Company's facility in
Allen, Texas by the end of the first
(Continued)
<PAGE> 44
- 4 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
quarter of 1996. The estimated costs of the relocation of $850,000 were
recorded during the year ended December 31, 1995 as an adjustment to cost
in excess of net assets acquired.
The following unaudited pro forma summary presents the results of
operations as if the acquisition had occurred on January 1, 1994. 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>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Pro forma revenue $27,728,289 $22,043,518
Pro forma earnings (loss) from operations 2,634,499 (86,467)
----------- -----------
Pro forma net earnings (loss) before extraordinary
item in 1995 584,986 (1,220,055)
----------- -----------
Pro forma net earnings (loss) per common and
equivalent share before extraordinary item
in 1995 $ .08 $ (0.20)
=========== ===========
</TABLE>
The pro forma operations information excludes the non-recurring charge of
$10,500,000 ($1.72 per share) related to purchased in-process research and
development which was expensed at the date of acquisition.
(4) MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at December
31, 1995:
<TABLE>
<CAPTION> GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $ 993,241 $ 252 $ 135,928 $ 857,565
Publicly traded limited
partnerships 506,447 -- 39,697 466,750
Real estate investment
trusts 1,031,417 11,899 96,816 946,500
Other 377,233 3,884 63,385 317,732
---------- --------- --------- ----------
$2,908,338 $ 16,035 $ 335,826 $2,588,547
========== ========= ========= ==========
</TABLE>
At December 31, 1995, 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 December 31, 1995.
(Continued)
<PAGE> 45
- 5 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of available-for-sale securities at December
31, 1994:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $2,788,587 $ -- $522,437 $2,266,150
Utility stocks 328,579 -- 48,704 279,875
Publicly traded limited
partnerships 511,201 -- 80,263 430,938
Real estate investment trusts 1,846,566 22,751 150,694 1,718,623
Other 617,171 165 138,452 478,884
---------- --------- -------- ----------
$6,092,104 $ 22,916 $940,550 $5,174,470
========== ========= ======== ==========
</TABLE>
At December 31, 1994, no individual security represented more than 10% of
the total portfolio or 2% of total assets. The Company did not have any
investments in derivative financial instruments at December 31, 1994.
In 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As permitted under the
Statement, the Company elected to adopt the provisions of the new standard
as of the end of 1993. The cumulative effect as of December 31, 1993, of
adopting Statement 115, including the reversal of unrealized losses,
increased net income by $169,308. The balance of stockholders' equity was
decreased by $169,308 at December 31, 1993, to reflect the net unrealized
holding loss on securities classified as available-for-sale.
(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 bear interest at prime plus 125
basis points, or at the Company's option, LIBOR plus 300 basis points. The
interest rate can be reduced based on the Company achieving certain ratios
of senior bank debt to EBITDA (earnings before interest, taxes,
depreciation and amortization). The facilities are 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 is 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 11). Borrowings under the working
(Continued)
<PAGE> 46
- 6 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capital line are due and payable on May 31, 1997. At December 31, 1995,
the Company had advances in the amount of $4,550,000 outstanding under the
working capital line with a weighted average interest rate of 7.69%.
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 acquisition line are
immediately converted to a five-year term loan. The Company will be
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 will also be 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 December 31, 1995, the Company had a note payable in the amount of
$1,500,000 related to "earn-out" consideration for Neuromed, Inc. (See
Note 3). The note is due in January 1996 and is non-interest bearing.
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 $2,966,285 at December 31, 1995. 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 $1,158,323 at December 31, 1995.
At December 31, 1995, the Company has 8% and 8.25% note facilities
available that are collateralized by the Company's marketable securities
held by investment companies. Borrowings under these notes are restricted
to 50% of the market value of these securities and at December 31, 1995,
the amounts available for total borrowings were $249,336 and $196,875,
respectively. At December 31, 1995, the Company had no advances
outstanding with respect to these notes.
Total interest incurred during 1993 was $164,777. Capitalized interest, in
conjunction with the construction of the principal office and
manufacturing facility in 1993 was recorded as
(Continued)
<PAGE> 47
- 7 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
part of the building, and is amortized over the assets' useful life. In
1993, $82,977 of interest costs were capitalized. No interest was
capitalized in 1995 and 1994.
The carrying value of the Company's debt approximates its fair value.
(6) FEDERAL INCOME TAXES
The significant components of the net deferred tax liability at December
31, were as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Deferred tax assets:
Tax credit and net operating loss carry forwards $ 2,119,781 $ 1,664,528
Accrued expenses and reserves 377,302 106,902
Unrealized loss on marketable
securities 108,729 311,996
Valuation allowance (271,767) (1,745,090)
----------- ----------
Total deferred tax asset 2,334,045 338,336
Deferred tax liabilities:
Purchased intangible assets (2,110,125) --
Excess of tax over book depreciation (259,361) (208,644)
Other (170,436) (141,529)
----------- ----------
Total deferred tax liability (2,539,922) (350,173)
----------- ----------
Net deferred tax liability $ (205,877) $ (11,837)
=========== ===========
</TABLE>
At December 31, 1995 and 1994, $271,767 and $137,927, respectively, of the
total valuation allowance is attributable to stock option deductions
which, when realized, will be credited to additional capital. During 1995,
the valuation allowance decreased by $1,473,323 which was recorded as a
reduction of costs in excess of net assets acquired because the decrease
resulted from deferred tax liabilities recorded in connection with the
acquisition of Neuromed. During 1994, the valuation allowance increased by
$1,071,356.
The provision for federal income taxes (benefit) for the years ended
December 31 consists of the following amounts:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current $ (44,888) $ -- $250,769
Deferred 200,002 -- 50,000
-------- -------- --------
$ 155,114 $ -- $300,769
======== ======== ========
</TABLE>
A reconciliation of the provision (benefit) for taxes on earnings (loss)
before cumulative effect of change in accounting principle and
extraordinary item, to the taxes calculated at the U.S. statutory rate
follows:
(Continued)
<PAGE> 48
- 8 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Federal income tax (benefit) at statutory
rate $ (3,382,961) $ (584,526) $ 322,254
Tax effect of:
Tax exempt interest (19,949) (52,862) (93,720)
Nondeductible amortization of
goodwill 81,855 13,856 10,490
Recognition of research and
development tax benefit (109,135) -- --
Nondeductible writeoff of purchased
in-process research and development 3,570,000 -- --
Benefit of net operating loss not
recognized -- 637,308 --
Other 15,304 (13,776) 61,745
------------ ------------ -----------
Income tax expense $ 155,114 $ -- $ 300,769
============ ============ ===========
</TABLE>
During 1993, the Company realized $187,236 of tax benefits from stock
option deductions which were credited to additional capital.
At December 31, 1995, general business credits of $861,047 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.
(7) STOCKHOLDERS' EQUITY
At December 31, 1995 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.
Pursuant to the 1995 Stock Option Plan ("the 1995 Plan"), officers or
other employees of the Company or any of its subsidiaries are eligible to
receive stock option grants. The 1995 Plan provides for the grant of both
incentive stock options intended to qualify for
(Continued)
<PAGE> 49
- 9 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
preferential tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended, and nonqualified stock options that do not qualify
for this treatment. The exercise price of all options granted under the
1995 Plan must equal or exceed the fair market value of the Common Stock
at the time of the grant. A total of 250,000 shares of Common Stock has
been reserved for issuance under the 1995 Plan; provided, however, that on
January 1 of each year (commencing in 1996), the aggregate number of
shares of Common Stock reserved for issuance under the 1995 Plan shall be
increased by the same percentage that the total number of issued and
outstanding shares of Common Stock increased from the preceding January 1
to the following December 31 (if such percentage is positive).
At December 31, 1995, under all of the Company's stock option plans,
options have been or may be granted to purchase 2,249,892 shares of its
common stock of which 1,692,257 options have been or may be granted to key
employees (Employees' Plan and the 1995 Plan) and 557,635 options have
been or may be granted to directors and advisory directors (Directors'
Plan). These options are exercisable one-fourth each year over a four-year
period of continuous service. Certain options under both the Employees'
Plan and Directors' Plan have a special two (2) year vesting schedule.
These options are exercisable one-half each year over a two-year period.
The stock options granted under the Employees' Plan and the 1995 Plan
expire ten years from the date of grant. The stock options granted under
the Directors' Plan expire six years from date of grant. The changes in
the number of common shares issuable under outstanding options, the number
of shares reserved for issuance and the price range of options for 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Outstanding at beginning of year 1,088,003 894,455
Granted 239,520 252,444
Effect of 3% stock dividend -- 31,709
Rescinded (40,540) (47,548)
Exercised (160,422) (43,057)
-------- --------
Outstanding at end of year 1,126,561 1,088,003
========= =========
Exercisable at end of year 622,226 488,590
========== =========
Shares reserved for issuance 127,214 139,804
========== =========
Price range of options outstanding
at end of year $1.45 to $12.13 $1.45 to $6.38
Price range of options exercised
during the year $1.45 to $6.38 $1.45 to $4.25
</TABLE>
(Continued)
<PAGE> 50
- 10 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) COMMITMENTS AND CONTINGENCIES
The Company has no material commitments under noncancellable operating
leases. Total rent expense under operating leases for the years ended
December 31, 1995, 1994, and 1993 was $127,113, $24,930 and $293,221,
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.
(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.
Net sales to a major customer for each of the years ended December 31, as
a percentage of total net revenues were as follows: 1995 - 10%, 1994 -
19%, and 1993 - 23%. Foreign sales, primarily in Europe and Australia,
were approximately 12% of total net revenues for the year ended December
31, 1995.
(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
$142,485 in 1995, $102,961 in 1994, and $86,903 in 1993.
(Continued)
<PAGE> 51
- 11 -
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) SALE OF COMMON STOCK
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. Net earnings (loss) per share
would have been ($1.28) if this transaction had occurred on March 31,
1995, the date at which the debt incurred in connection with the
Neuromed acquisition was first outstanding.
(Continued)
<PAGE> 52
APPENDIX B
QUARTERLY FINANCIAL DATA
(UNAUDITED)
FORMING A PART OF THE ANNUAL REPORT
FORM 10-KSB
ITEM 7
OF
QUEST MEDICAL, INC. AND SUBSIDIARIES
(NAME OF ISSUER)
FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
UNDER
THE SECURITIES AND EXCHANGE ACT OF 1934
<PAGE> 53
<TABLE>
<CAPTION>
1995 1ST 2ND(1),(2) 3RD 4TH(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $4,071,640 $ 7,231,494 $6,818,923 $7,198,933
Gross profit 2,044,288 4,348,356 3,968,885 4,335,246
Earnings (loss) from operations (336,944) (9,775,378) 543,507 787,352
Earnings (loss) before income taxes (364,598) (10,248,708) 90,541 572,881
Earnings (loss) before extraordinary item (364,598) (10,248,708) 90,541 417,767
Extraordinary item - loss on early
extinguishment of debt -- -- -- (269,045)
Net earnings (loss) $ (364,598) $(10,248,708) $ 90,541 $ 148,722
- ------------------------------------------------------------------------------------------------------------------------------------
Per common and common
equivalent share:
Net earnings (loss) before extraordinary
item $ (.07) $ (1.66) $ .01 $ .05
Extraordinary item -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (.07) $ (1.66) $ .01 $ .02
====================================================================================================================================
1994 1ST 2ND 3RD 4TH
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue $3,481,122 $ 3,742,194 $3,457,971 $3,317,878
Gross profit 1,469,803 1,725,701 1,628,565 ,557,164
Loss from operations (303,885) (414,921) (511,352) (907,891)
Loss before income taxes (183,361) (357,083) (488,756) (689,993)
Net loss $ (183,361) $ (357,083) $ (488,756) $ (689,993)
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per common and common
Equivalent share $ (.04) $ (.07) $ (.09) $ (.13)
====================================================================================================================================
</TABLE>
__________________________________
(1) Includes results of Neuromed, Inc. from April 1, 1995 (See Note 3)
(2) Includes a non-recurring charge of $10,500,000 for purchased in-process
research and development incurred in connection with the acquisition of
Neuromed, Inc. (See Note 3)
(3) Extraordinary item of $269,045 (net of income tax benefit of $138,599) from
write-off of capitalized debt issuance costs due to repayment of bank debt.
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- -----------
<S> <C>
2.1 Agreement for the Purchase and Sale of All of the Issued Capital Stock of Neuromed, Inc. dated February
10, 1995, between Quest Medical, Inc. and William N. Borkan(9)
2.2 Amendment Agreement dated March 17, 1995, between Quest Medical, Inc. and William N. Borkan(9)
2.3 Letter Agreement dated as of September 23, 1995, by and between Quest Medical, Inc. and William N.
Borkan(10)
3.1 Articles of Incorporation, as amended(10)
3.2 Bylaws(1)
4.1 Rights Agreement between Quest Medical, Inc. and MTrust Corp., N.A. as Rights Agent dated as of October
12,1989 and Letter to Shareholders of Quest Medical, Inc. dated October 13,1989, including attached
Summary of Rights to Purchase Shares(10)
4.2 Amendment of Rights Agreement dated as of February 9, 1995, between Quest Medical, Inc. and KeyCorp
Shareholder Services, Inc. as Rights Agent(9)
10.1 Quest Medical, Inc. 1979 Amended and Restated Employees Stock Option Plan(2)
10.2 Form of 1979 Employees Stock Option Agreement(3)
10.3 Quest Medical, Inc. Directors Stock Option Plan (as amended)(2)
10.4 Form of Directors Stock Option Agreement(1)
10.5 Quest Medical, Inc. 1987 Stock Option Plan(10)
10.6 Form of 1987 Employee Stock Option Agreement(10)
10.7 Quest Medical, Inc. 1995 Stock Option Plan(10)
10.8 Form of 1995 Employee Stock Option Agreement(10)
10.9 Form of Employment Agreement and Covenant Not to Compete, between the Company and key employees(1)
10.10 Sublease Agreement dated July 2,1992, effective September 1,1992, between the Company and Unistor
Corporation(5)
10.11 Promissory Note dated December 28,1993, between Quest Medical, Inc. and MetLife Capital Financial
Corporation(8)
10.12 Commercial Deed of Trust, Security Agreement and Assignment of Leases and Rents and Fixture Filing dated
December 28,1993, between Quest Medical, Inc. and MetLife Capital Financial Corporation(8)
10.13 Term Promissory Note dated December 28,1993, between Quest Medical, Inc. and MetLife Capital
Corporation(8)
10.14 Loan and Security Agreement dated December 28,1993, between Quest Medical, Inc. and MetLife Capital
Corporation(8)
10.15 Supplemental Security Agreement Number One dated December 28,1993, between Quest Medical, Inc. and MetLife
Capital Corporation(8)
10.16 Security Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank of Texas,
N.A.(11)
10.17 Security Agreement dated as of March 31, 1995 between Neuromed, Inc. and NationsBank of Texas, N.A.(11)
10.18 Intellectual Property Security Agreement and Assignment dated as of March 31, 1995 between Quest Medical,
Inc. and NationsBank of Texas, N.A.(11)
10.19 Intellectual Property Security Agreement and Assignment dated as of March 31, 1995 between Neuromed, Inc.
and NationsBank of Texas, N.A. (11)
</TABLE>
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.20 License Agreement dated as of March 31, 1995 between Quest Medical, Inc. and NationsBank of Texas, N.A.
(11)
10.21 License Agreement dated as of March 31, 1995 between Neuromed, Inc. and NationsBank of Texas, N.A.(11)
10.22 Guaranty of Neuromed, Inc. in favor of NationsBank of Texas, N.A. under the First Amended and Restated
Credit Agreement dated as of March 31, 1995(11)
10.23 Second Amended and Restated Credit Agreement dated as of February 9, 1996, between Quest Medical, Inc. and
NationsBank of Texas, N.A.(12)
10.24 Promissory Note (Facility A. Note) in the original principal amount of $5 million dated February 9, 1996
(12)
10.25 Promissory Note (Facility B Note) in the original principal amount of $15 million dated February 9, 1996
(12)
10.26 First Amendment to Security Agreement, Intellectual Property Security Agreement and Assignment, License
Agreement, and Pledge Agreement dated February 9, 1996 between Quest Medical, Inc. and NationsBank of
Texas, N.A.(12)
10.27 First Amendment to Security Agreement, Intellectual Property Security Agreement and Assignment, License
Agreement, and Guaranty dated February 9, 1996, between Neuromed, Inc. and NationsBank of Texas, N.A.(12)
11.1 Computation of Earnings Per Share(12)
21.1 Subsidiaries(12)
23.1 Consent of Independent Auditors(12)
</TABLE>
(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-18, Registration No. 2-71198-FW, and incorporated herein by
reference.
(2) Filed as an Exhibit to the report of the Company on Form 10-K for the
year ended December 31, 1987, and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form
S-1, Registration No. 2-78186, and incorporated herein by reference.
(4) Filed as an Exhibit to the report of the Company on Form 8-K dated
October 13, 1989, and incorporated herein by reference.
(5) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1992, and incorporated herein by
reference.
(6) Filed as an Exhibit to the report of the Company on Form 10-QSB for
the period ended June 30, 1993, and incorporated herein by reference.
(7) Filed as an Exhibit to the report of the Company on Form 10-QSB for
the period ended September 30, 1993, and incorporated herein by
reference.
(8) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1993, and incorporated herein by
reference.
(9) Filed as an Exhibit to the report of the Company on Form 10-KSB for
the year ended December 31, 1994, and incorporated herein by
reference.
(10) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2, Registration No. 33-62991, and incorporated herein by reference.
(11) Filed as an Exhibit to the report of the Company on Form 8-K dated
April 13, 1995, and incorporated herein by reference.
(12) Filed herewith.
<PAGE> 1
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") dated
as of February 9, 1996, between QUEST MEDICAL, INC., a Texas corporation, having
its principal office at One Allentown Parkway, Allen, Texas 75002 ("Borrower"),
and NATIONSBANK OF TEXAS, N.A., a national banking association, having its
principal office at 901 Main Street, Dallas, Texas 75202 ("Lender").
BACKGROUND
Borrower and Lender have entered into (1) the Credit Agreement dated as
of October 22, 1993, and (2) the First Amended and Restated Credit Agreement
dated as of March 31, 1995 (as amended, the "First Restated Credit Agreement")
providing for a line of credit in the maximum principal amount of $5,000,000
("Existing Facility A"), the proceeds of which are to be used for working
capital purposes, and a $15,000,000 term facility ("Existing Facility B"), the
proceeds of which were used to acquire all capital stock of Neuromed, Inc., a
Florida corporation. Borrower has requested that Lender renew Existing Facility
A and restate Existing Facility B to provide a $15,000,000 term facility
("Facility B"), the proceeds of which will be used to make acquisitions subject
to the terms of this Agreement.
In consideration of the mutual covenants and agreements contained
herein, and other good and valuable consideration, receipt of which is
acknowledged by all parties hereto, the parties agree as follows:
AGREEMENT
ARTICLE I. DEFINITIONS
1.1 Definitions. The terms defined in this Article I (except as
otherwise expressly provided in this Agreement) for all purposes shall have the
following meanings:
"Account" has the meaning assigned to such term in the UCC.
"Acquisition Documents" means all agreements and documents related to
each Permitted Acquisition.
"Additional Costs" has the meaning set forth in Section 2.15.
"Advance" means an advance by Lender to Borrower pursuant to Article
II, and refers to a Facility A Advance or Facility B Advance.
<PAGE> 2
"Affiliate" means any Person that directly or indirectly through one or
more Persons Controls, or is Controlled By or Under Common Control with,
Borrower or a Person who Controls or is Controlled by, Borrower.
"Allen Property" means the real property described on Schedule 2,
together with all improvements and equipment located thereon.
"Applicable Law" means the Laws of the United States of America
applicable to contracts made or performed in the State of Texas, including,
without limitation, 12 USC Sections 85 and 86 as amended to the date
hereof and as the same may be amended at any time and from time to time
hereafter and any other statute of the United States of America now or at any
time hereafter prescribing maximum rates of interest on loans and extensions of
credit, and the Laws of the State of Texas, including, without limitation,
Articles 5069-l.04 and 5069-l.07 (a), Title 79, Revised Civil Statutes of Texas,
1925, as amended at any time and from time to time hereafter and any other
statute of the State of Texas now or at any time hereafter prescribing maximum
rates of interest on loans and extensions of credit ("Art. l.04").
"Applicable Margin" means (a) with respect to Prime Advances, 0.25% per
annum and (b) with respect to LIBOR Advances, 2.00% per annum. Notwithstanding
the foregoing, after completion of the first full fiscal quarter after the
Effective Date, effective on the date of receipt (if such date is a Business Day
or, if the date of receipt is not a Business Day, effective on the next Business
Day) by Lender from Borrower of a Compliance Certificate delivered to Lender for
any reason and demonstrating a change in the Margin Ratio to an amount so that
another Applicable Margin should be applied pursuant to the table set forth
below, the Applicable Margin for each Type of Advance shall mean the respective
amount set forth below opposite such relevant Margin Ratio in Columns A and B
below, until the first succeeding Quarterly Date which is at least one Business
Day after receipt by Lender from Borrower of a Compliance Certificate,
demonstrating a change in the Margin Ratio to an amount so that another
Applicable Margin shall be applied; provided that the Applicable Margin shall
never be a negative number.
<TABLE>
<CAPTION>
Column A Column B
Margin Ratio Prime Base Rate LIBOR Rate
- ------------ --------------- ----------
<S> <C> <C> <C> <C>
Equal to or greater than 2.00 to 1.00 0.25% 2.00%
Greater than or equal to 1.50 to 1.00 but less than 2.00 0% 1.75%
to 1.00
Less than 1.50 to 1.00 0% 1.50%
</TABLE>
"Art. 1.04" has the meaning given to such term in the definition of
Applicable Law in Article I.
"Borrowing" means a borrowing under Facility A or Facility B of the
same Type made on the same day.
-2-
<PAGE> 3
"Borrowing Base" means, at the time in question, an amount equal to the
sum of (a) 80% of Eligible Accounts and (b) 50% of Eligible Inventory.
"Borrowing Base Certificate" means a certificate, signed by a duly
authorized officer of Borrower, in the form of Exhibit K, appropriately
completed.
"Borrowing Notice" has the meaning set forth in Section 2.3(a).
"Business Days" means days other than (a) Saturdays, Sundays and other
legal holidays or (b) days on which banking institutions are authorized or
obligated to close in Dallas, Texas or, with respect to any notice, payment or
calculation related to a LIBOR Advance, London, England.
"Capital Leases" means capital leases and subleases, as defined in the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 13, dated November 1976, as amended.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means that property of Borrower or any other Person in
which Lender shall have Liens to secure payment and performance of the
Obligation.
"Collateral Documents" means all security agreements, pledge agreements
and any other agreements or documents executed or delivered to secure repayment
of the Obligation or part thereof.
"Compliance Certificate" means a certificate, signed by a duly
authorized officer of Borrower, in the form of Exhibit G, appropriately
completed.
"Consequential Loss" means with respect to (a) Borrower's payment of
all or any portion of the then-outstanding principal amount of a LIBOR Advance
on a day other than the last day of the related Interest Period, including,
without limitation, payments made as a result of the acceleration of the
maturity of a Note pursuant to Section 7.2, and (b) any of the circumstances
specified in Sections 2.3(c), 2.6, 2.8 and 2.15 on which a Consequential Loss
may be incurred, any loss, cost or expense incurred by Lender as a result of the
timing of the payment of the Advance or in liquidating, redepositing,
redeploying or reinvesting the principal amount so paid or affected by the
timing of the Advance or the circumstances described in Sections 2.3(c), 2.6,
2.8 and 2.15, which amount shall be the sum of (i) the interest that, but for
the payment or timing of Advance, Lender would have earned in respect of that
principal amount, reduced, if Lender is able to redeposit, redeploy, or reinvest
the principal amount, by the interest earned by Lender as a result of
redepositing, redeploying or reinvesting the principal amount plus (ii) any
expense or penalty incurred by such Lender by reason of liquidating,
redepositing, redeploying or reinvesting the principal amount. Each
determination by Lender of any Consequential Loss is, in the absence of manifest
error, conclusive and binding.
-3-
<PAGE> 4
"Continue," "Continuation" and "Continued" each refer to the
continuation pursuant to Section 2.11 of a LIBOR Advance from one Interest
Period to the next Interest Period.
"Control" or "Controlled By" or "Under Common Control" mean possession,
direct or indirect, of power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or
otherwise); provided that, in any event (a) any Person which beneficially owns
20% or more (in number of votes) of the securities having ordinary voting power
for the election of directors of a corporation shall be presumed to control such
corporation, and (b) no Person shall be deemed to be an Affiliate of a
corporation solely by reason of his being an officer or director of such
corporation.
"Conversion or Continuance Notice" has the meaning set forth in Section
2.11.
"Current Maturities" means, for Borrower and its Subsidiaries,
determined in accordance with GAAP on a consolidated basis, scheduled principal
payments in respect of Term Debt, due within the twelve consecutive months
preceding the date of determination.
"Current Maturities Coverage Ratio" means the ratio of (a) Net Earnings
Available for Current Maturities to (b) Current Maturities.
"Debt" means, with respect to any Person, all debt, obligations and
liabilities of such Person, including without limitation, (a) all "liabilities"
which would be reflected on a balance sheet of such Person, prepared in
accordance with GAAP, (b) all obligations of such Person in respect of any
Guaranty, (c) all obligations of such Person in respect of any Capital Lease,
(d) all obligations, debt and liabilities secured by any Lien on any property or
assets of such Person and (e) all obligations of such Person in respect of
letters of credit, acceptances or similar obligations issued or created for the
account of such Person.
"Debt for Borrowed Money" means, as to any Person, at any date, without
duplication, (a) all obligations of such Person for borrowed money, (b) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) all obligations of such Person to pay the deferred
purchase price of property or services, except trade accounts payable arising in
the ordinary course of business, (d) all obligations of such Person in respect
of any Guaranty, (e) all obligations of such Person in respect of any Capital
Lease, and (f) all obligations, debt and liabilities secured by any Lien on any
property or assets of such Person.
"Debtor Relief Laws" means any applicable liquidation, conservatorship,
bankruptcy, moratorium, rearrangement, fraudulent conveyance, insolvency,
reorganization or similar debtor relief Laws relating to the enforcement of
creditors' rights generally from time to time in effect.
-4-
<PAGE> 5
"Default" means any of the events specified in Section 7.1, whether or
not there has been satisfied any requirement in connection with such event for
the giving of notice, or the lapse of time, or the happening of any further
condition, event or act.
"Device" has the meaning set forth in the FDA Act.
"Distribution" means, as to any Person, (a) any declaration or payment
of any distribution or dividend (other than a stock dividend) on, or the making
of any pro rata distribution, loan, advance, or investment to or in any holder
(in its capacity as a partner, shareholder or other equity holder) of, any
partnership interest or shares of capital stock or other equity interest of such
Person, or (b) any purchase, redemption, or other acquisition or retirement for
value of any shares of partnership interest or capital stock or other equity
interest of such Person.
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"Drug" has the meaning set forth in the FDA Act.
"EBITDA" means, as of any date of determination, the sum of Borrower's
and its Subsidiaries' (a) pre-tax income or deficit, as the case may be
(excluding extraordinary items (including but not limited to capitalized finance
costs incurred in 1995 in the amount of $407,442 and purchased research and
development expense incurred in 1995 in the amount of $10,500,000) and income
from the sale of assets other than in the ordinary course of business), plus (b)
cash interest expense paid; amortization of Debt discounts; any payments or fees
with respect to letters of credit, bankers' acceptances or similar facilities;
fees and expenses with respect to interest rate swap or similar agreements or
foreign currency hedge, exchange or similar agreements, plus (c) consolidated
depreciation and amortization expense, all calculated on a consolidated basis in
accordance with GAAP, plus (d) with respect to any calculation including the
period from March 31, 1995 through December 31, 1995, research and development
expense related to the myocardial protection system developed by Borrower and
for which Borrower has applied for the trademark "MPS", and related Devices,
determined for the four fiscal quarters preceding the date of calculation.
"Effective Date" means February 9, 1996.
"Eligible Accounts" means at the time of any determination thereof,
each Account as to which the following requirements have been fulfilled to the
satisfaction of Lender:
(a) Borrower or a Subsidiary of Borrower has lawful and
absolute title to such Account;
(b) Such Account is a valid, legally enforceable obligation of
the Person who is obligated under such Account (the "account debtor")
for goods or services delivered or rendered to such Person;
-5-
<PAGE> 6
(c) There has been excluded from such Account any portion that
is subject to any dispute, offset, counterclaim or other claim or
defense on the part of the account debtor or to any claim on the part
of the account debtor denying liability under such Account;
(d) Borrower or a Subsidiary of Borrower has full and
unqualified right to assign and grant a security interest in such
Account to Lender as security for the Obligation;
(e) Such Account is payable in Dollars and is evidenced by an
invoice rendered to the account debtor and such Account is not
evidenced by any chattel paper, promissory note or other instrument;
(f) Such Account is subject to a fully perfected first
priority security interest in favor of Lender pursuant to the Loan
Papers, prior to the rights of, and enforceable as such against, any
other Person (including holders of a purchase money security interest);
(g) If the account debtor in respect of such Account is either
located outside the United States of America or primarily conducts
business in a jurisdiction outside the United States of America, or if
the goods or services sold giving rise to such Account are to be
delivered or performed outside of the United States of America, (i) the
account debtor is located in a province of the Dominion of Canada in
which all actions necessary to perfect a first priority security
interest in all Collateral in favor of Lender have occurred, (ii) the
entire amount of the payment obligation represented by such Account is
secured by either (A) an irrevocable Dollar-denominated commercial
letter of credit issued or confirmed by a financial institution (1) the
short-term debt obligations of which have the same or higher rating, as
established by either Standard & Poor's Corporation or Moody's
Investors Service, Inc., as comparable obligations of Lender, (2) the
short-term obligations of the holding company of such financial
institution have the same or higher rating, as established by Standard
& Poor's Corporation or Moody's Investors Service, Inc., as comparable
obligations of NationsBank Corporation (if either or both of such
financial institution and Lender do not have outstanding comparable
short-term obligations or such obligations are not rated), or (3)
acceptable to Lender (if (A) either or both of such financial
institution and Lender and (B) either or both of the holding company of
such financial institution and NationsBank Corporation do not have
outstanding comparable short-term obligations or such obligations are
not rated), the proceeds of which letter of credit have been assigned
to Lender or which letter of credit shall specifically provide that
payment thereunder shall be made solely to an account maintained by
Borrower at Lender (which account and all property on deposit therein
has been assigned to Lender), or (B) a receivables insurance policy
issued by ExImBank or a private insurance company acceptable to Lender
and ExImBank, in either case, the proceeds of which policy have been
assigned to Lender;
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(h) Such Account is not subject to any Lien in favor of any
Person other than the Lien of Lender pursuant to the Loan Papers;
(i) Such Account has not been due and payable for more than 90
days from the invoice date; and
(j) No account debtor in respect of such Account is (i) any
Tribunal, domestic or foreign; provided, for purposes of determining
"Eligible Account", "Tribunal" shall not include any government or
university, medical department of any government or university or
hospital associated with any government or university located in the
United States of America, (ii) the subject of a proceeding under any
Debtor Relief Laws, or (iii) the United States of America or any state;
provided, that, unless Lender agrees otherwise, no Accounts payable by an
account debtor shall constitute Eligible Accounts if 10% or more of the
aggregate dollar amount of all Accounts owed to Borrower by such account debtor
have been due and payable for 91 days or more from their respective invoice
dates.
"Eligible Inventory" means, at the time of any determination thereof,
each item of Inventory (excluding work-in-progress) valued at the lower of cost
or market value, as to which the following requirements have been fulfilled to
the satisfaction of Lender:
(a) Borrower or a Subsidiary of Borrower has lawful and
absolute title to such Inventory;
(b) Such Inventory is subject to a fully perfected first
priority security interest in favor of Lender pursuant to the Loan
Papers, prior to the rights of, and enforceable as such against, any
other Person (including holders of a purchase money security interest);
(c) Such Inventory is (i) neither adulterated nor misbranded,
(ii) not the subject of any pending or threatened proceeding or action
by FDA or other Tribunal seeking the recall, seizure or condemnation or
the prohibition of the sale, use or distribution of such Inventory,
(iii) properly registered with FDA (if such registration is required),
(iv) produced at an Establishment registered with FDA (if such
registration is required), (v) not subject to any restriction on the
distribution, sale or use by Lender or any purchaser at any foreclosure
sale or other realization on the Collateral and (vi) not a Drug;
(d) Such Inventory was produced in compliance with the FDA Act
and the Fair Labor Standards Act and related rules and regulations;
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<PAGE> 8
(e) Such Inventory is located at 5000-A Oakes Road, Fort
Lauderdale, Florida, 2930-G and 2930-H Grace Lane, Costa Mesa,
California or One Allentown Parkway, Allen, Texas.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Establishment" has the meaning set forth in 21 CFR Section 807.3.
"Event of Default" means the occurrence of any of the events specified
in Section 7.1, provided there has been satisfied any requirement in connection
with such event for the giving of notice, or the lapse of time, or the happening
of any further condition, event or act.
"ExImBank" means Export-Import Bank of the United States, an agency of
the United States of America, and any successor entity.
"Existing Facility A" has the meaning set forth in the Background
section.
"Existing Facility B" has the meaning set forth in the Background
section.
"Facility A Advance" means an Advance described in Section 2.1 to be
made from time to time by Lender to Borrower.
"Facility A Commitment" means $5,000,000, as the same may be reduced or
terminated pursuant to Sections 2.7(b) and 2.8.
"Facility A Commitment Fee" has the meaning set forth in Section
2.5(a).
"Facility A Note" means the promissory note of Borrower payable to the
order of Lender, in substantially the form of Exhibit A, and any and all
renewals, extensions, modifications and amendments thereof and substitutions
therefor.
"Facility A Termination Date" means December 31, 1997, or such earlier
date that the Facility A Commitment is terminated.
"Facility B Advance" means an Advance described in Section 2.2 to be
made from time to time by Lender to Borrower.
"Facility B Advance Note" means the promissory note of Borrower payable
to the order of Lender, in substantially the form of Exhibit B, and any and all
renewals, extensions, modifications and amendments thereof and substitutions
therefor.
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<PAGE> 9
"Facility B Commitment" means $15,000,000, as the same may be reduced
or terminated pursuant to Sections 2.7(b) and 2.8.
"Facility B Commitment Fee" has the meaning set forth in Section
2.5(b).
"Facility B Note" means the Facility B Advance Note and each Facility B
Term Note.
"Facility B Term Note" means each promissory note of Borrower payable
to the order of Lender, in substantially the form of Exhibit C, and any and all
renewals, extensions, modifications and amendments thereof and substitutions
therefor.
"Facility B Termination Date" means December 31, 1997, or such earlier
date that the Facility B Commitment is terminated.
"FDA" means the Food and Drug Administration and any successor.
"FDA Act" means the Federal Food, Drug and Cosmetic Act, 21
USCSection301, et seq, and all amendments and successors thereto.
"Financial Statements" means with respect to Borrower and its
Subsidiaries, consolidated and consolidating balance sheets, consolidated and
consolidating profit and loss statements, reconciliation of capital and surplus
(prepared as to fiscal quarters and fiscal years, only), and statements of cash
flow.
"First Restated Credit Agreement" has the meaning specified in the
Background section.
"Fixed Charges" means the sum of, for Borrower and its Subsidiaries,
determined in accordance with GAAP on a consolidated basis, (a) interest expense
(including interest expense pursuant to Capital Leases), plus (b) lease expense
payable for Operating Leases, determined for the four fiscal quarters preceding
the date of calculation.
"Fixed Charges Coverage Ratio" means the ratio of Net Earnings
Available for Fixed Charges to Fixed Charges.
"GAAP" means generally accepted accounting principles applied on a
consistent basis, set forth in the Opinions of the Accounting Principles Board
of the American Institute of Certified Public Accountants and/or in statements
of the Financial Accounting Standards Board, which are applicable in the
circumstances as of the date in question, and the requirement that such
principles be applied on a consistent basis shall mean that the accounting
principles observed in a current period are comparable in all material respects
to those applied in a preceding period. Unless otherwise indicated herein, all
accounting terms will be defined according to GAAP.
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<PAGE> 10
"Government Securities" means direct obligations of the United States
of America or any agency thereof, or obligations fully guaranteed by the United
States of America or any agency thereof.
"Guaranty" of any Person means any contract, agreement or understanding
of such Person pursuant to which such Person guarantees, or in effect
guarantees, any Debt of any other Person in any manner, whether directly or
indirectly; except that "Guaranty" shall not include the endorsement by such
Person in the ordinary course of business of negotiable instruments or documents
for deposit or collection.
"Guaranty Agreement" means a Guaranty Agreement in the form of Exhibit
H, or, if executed in connection with the First Restated Credit Agreement, a
Guaranty Agreement (as that term is defined in the First Restated Credit
Agreement).
"hereof", "hereto", "hereunder" and similar terms refer to this
Agreement and not to any particular section or provision of this Agreement.
"Highest Lawful Rate" means at the particular time in question the
maximum rate of interest which, under Applicable Law, Lender is then permitted
to charge on the Obligation. If the maximum rate of interest which, under
Applicable Law, Lender is permitted to charge on the Obligation shall change
after the date hereof, the Highest Lawful Rate shall be automatically increased
or decreased, as the case may be, from time to time as of the effective time of
each change in the Highest Lawful Rate without notice to Borrower. For purposes
of determining the Highest Lawful Rate under the Applicable Law of the State of
Texas, the applicable rate ceiling shall be (a) the indicated rate ceiling
described in and computed in accordance with the provisions of Section (a)(l) of
Art. l.04; or (b) provided notice is given as required in Section (h)(1) of said
Art. l.04, the quarterly ceiling computed pursuant to Section (d) of said Art.
l.04; provided, however, that at any time the indicated rate ceiling, the
annualized ceiling or the quarterly ceiling, as applicable, shall be less than
18% per annum or more than 24% per annum, the provisions of Sections (b)(1) and
(2) of said Art. l.04 shall control for purposes of such determination, as
applicable.
"Indemnitee" has the meaning set forth in Section 4.13.
"Interest Period" means, with respect to any LIBOR Advance, the period
beginning on the date the Advance is made or continued as a LIBOR Advance and
ending one, two, three or six months thereafter (as Borrower shall select);
provided, however, that:
(a) Borrower may not select any Interest Period that ends
after any principal repayment date (including the Facility A
Termination Date, the Facility B Termination Date (with respect to
Advances evidenced by the Facility B Advance Note), and the Maturity
Date of the respective Facility B Term Note) unless, after giving
effect to such selection, the aggregate principal amount of LIBOR
Advances having Interest Periods that
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<PAGE> 11
end on or prior to such principal repayment date, shall be at least
equal to the principal amount of Advances due and payable on and prior
to such date;
(b) whenever the last day of any Interest Period would
otherwise occur on a day other than a Business Day, the last day of
such Interest Period shall be extended to occur on the next succeeding
Business Day; provided, however, that if such extension would cause the
last day of such Interest Period to occur in the next following
calendar month, the last day of such Interest Period shall occur on the
next preceding Business Day; and
(c) no Interest Period for a Facility A Advance may extend
beyond the Facility A Termination Date, no Interest Period for a
Facility B Advance may extend beyond the Facility B Termination Date
(with respect to Advances evidenced by the Facility B Advance Note),
and the Maturity Date of the respective Facility B Term Note.
"Inventory" has the meaning assigned to such term in the UCC.
"Investment" in any Person means any investment, whether by means of
share purchase, loan, advance, extension of credit, capital contribution or
otherwise, in or to such Person, the Guaranty of Debt of such Person or the
subordination of any claim against such Person to other Debt of such Person.
"Laws" means all statutes, laws, ordinances, regulations, orders,
writs, injunctions, or decrees of the United States, any state or commonwealth,
any municipality, any foreign country, any territory or possession, or any
Tribunal.
"Lending Office" means, with respect to Lender, its branch or
affiliate, (i) initially, the office of Lender, branch or affiliate identified
as such in Section 8.4(b), and (ii) subsequently, such other office of Lender,
branch or affiliate as Lender may designate to Borrower as the office from which
the Advances of Lender will be made and maintained and for the account of which
all payments of principal and interest on the Advances and the Commitment Fee
will thereafter be made. Lender may have more than one Lending Office for the
purpose of making Prime Advances and LIBOR Advances.
"LIBOR Advance" means an Advance bearing interest at the LIBOR Rate.
"LIBOR Rate" means a simple per annum interest rate equal to the lesser
of (a) the Highest Lawful Rate, and (b) the sum of the LIBOR Rate Basis plus the
Applicable Margin. The LIBOR Rate shall, with respect to LIBOR Advances subject
to reserve or deposit requirements, be subject to premiums assessed therefor by
Lender, which are payable directly to Lender. Once determined, the LIBOR Rate
shall remain unchanged during the applicable Interest Period.
"LIBOR Rate Basis" means, for any Interest Period, the interest rate
per annum (rounded upward to the nearest 1/16th of one percent) determined by
Lender at approximately 9:00 a.m.,
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<PAGE> 12
on the date which is two Business Days before the first day of such Interest
Period to be the offered quotations that appear on the Reuter's Screen LIBO page
for dollar deposits in the London interbank market for a length of time
approximately equal to the Interest Period for the LIBOR Advance sought by
Borrower. If at least two such offered quotations appear on the Reuter's Screen
LIBO page, the LIBOR Rate shall be the arithmetic mean (rounded upward to the
nearest 1/16th of one percent) of such offered quotations, as determined by
Lender. If the Reuter's Screen LIBO page is not available or has been
discontinued, the LIBOR Rate Basis shall be the rate per annum that Lender
determines to be the arithmetic mean (rounded as aforesaid) of the per annum
rates of interest at which deposits in dollars in an amount approximately equal
to the principal amount of, and for a length of time approximately equal to the
Interest Period for, the LIBOR Advance sought by Borrower are offered to Lender
in immediately available funds in the London interbank market at 11:00 a.m.,
London time, on the date which is two Business Days prior to the first day of an
Interest Period.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any agreement to give or not to give any of the
foregoing), any conditional sale or other title retention agreement, any lease
in the nature thereof, and the filing of or agreement to give any financing
statement.
"Listed Debt" means any debt security (the issuer of which is a
corporation organized under the laws of any of the United States of America)
rated, at any date of determination, any one of the three highest ratings by
Standard & Poor's Corporation or Moody's Investors Service, Inc., each regularly
traded on the New York Stock Exchange or the American Stock Exchange.
"Listed Securities" means any equity security regularly traded on the
New York Stock Exchange or the American Stock Exchange.
"Litigation" means any proceeding, claim, lawsuit and/or investigation
conducted or, to the knowledge of Borrower, threatened by or before any
Tribunal, including, but not limited to, proceedings, claims, lawsuits, and/or
investigations under or pursuant to any environmental, occupational, safety and
health, antitrust, unfair competition, securities, Tax, or other Law, or under
or pursuant to any contract, agreement or other instrument.
"Loan Papers" means this Agreement, the Notes, any agreement securing
or assuring performance of the Obligation and all other agreements, certificates
and documents delivered by Borrower hereunder or any other Person pursuant
hereto.
"Margin Ratio" means the ratio, as at any date of determination, of (a)
the sum of the aggregate unpaid principal of all outstanding Advances, plus all
accrued, unpaid interest on all Advances, plus the amount of all other
Obligations, to (b) EBITDA.
"Material Adverse Change or Effect" means any act or circumstance which
(a) would be material and adverse to the combined financial condition, business
operations or prospects of
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<PAGE> 13
Borrower and its Subsidiaries or any other Obligor, (b) in any material manner
whatsoever would adversely affect the validity or enforceability of any of the
Loan Papers or (c) in any material manner impairs the value of any material
portion of the Collateral.
"Maturity Date" means, with respect to each Facility B Term Note, the
date five years after the date of such Facility B Term Note.
"Maximum Amount" means the maximum amount of interest which, under
Applicable Law, Lender is permitted to charge on the Obligation.
"NationsBank" means NationsBank of Texas, N.A., a national banking
association.
"Net Earnings Available for Current Maturities" means, for Borrower and
its Subsidiaries, determined in accordance with GAAP on a consolidated basis,
(a) Net Income, plus depreciation and amortization and other non-cash charges,
plus (b) extraordinary non-cash charges (including but not limited to
capitalized finance costs incurred in 1995 in the amount of $407,442 and
purchased research and development expense incurred in 1995 in the amount of
$10,500,000), plus (c) with respect to any calculation including the period from
March 31, 1995 through December 31, 1995, research and development expense
related to the myocardial protection system developed by Borrower and for which
Borrower has applied for the trademark "MPS", and related Devices, determined
for the four fiscal quarters preceding the date of calculation.
"Net Earnings Available for Fixed Charges" means, for Borrower and its
Subsidiaries, determined in accordance with GAAP on a consolidated basis, (a)
Net Income before Taxes, plus (b) extraordinary non-cash charges (including but
not limited to capitalized finance costs incurred in 1995 in the amount of
$407,442 and purchased research and development expense incurred in 1995 in the
amount of $10,500,000), plus (c) interest expense (including interest expense
pursuant to Capital Leases), plus (d) with respect to any calculation including
the period from March 31, 1995 through December 31, 1995, research and
development expense related to the myocardial protection system developed by
Borrower and for which Borrower has applied for the trademark "MPS", and related
Devices, plus (e) lease expense pursuant to Operating Leases, determined for the
four fiscal quarters preceding the date of calculation.
"Net Income" means, for Borrower and its Subsidiaries, determined in
accordance with GAAP on a consolidated basis, net profit or loss.
"Neuromed" means Neuromed, Inc., a Florida corporation.
"Neuromed Agreement" means the Agreement for the Purchase and Sale of
All of the Issued Capital Stock of Neuromed, Inc. dated February 10, 1995,
between Borrower and William Borkan.
"Notes" means the Facility A Note and the Facility B Notes.
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<PAGE> 14
"Obligations" means all present and future obligations, indebtedness
and liabilities, and all renewals and extensions of all or any part thereof, of
Borrower and each Obligor to Lender arising from, by virtue of, or pursuant to
this Agreement, any of the other Loan Papers and any and all renewals and
extensions thereof or any part thereof, or future amendments thereto, all
interest accruing on all or any part thereof and reasonable attorneys' fees
incurred by Lender for the administration, execution of waivers, amendments and
consents, and in connection with any restructuring, workouts or in the
enforcement or the collection of all or any part thereof, whether such
obligations, indebtedness and liabilities are direct, indirect, fixed,
contingent, joint, several or joint and several. Without limiting the generality
of the foregoing, "Obligations" includes all amounts would be owed by Borrower,
each other Obligor and any other Person (other than Lender) to Lender under any
Loan Paper, but for the fact that they are unenforceable or not allowable due to
the existence of a bankruptcy, reorganization or similar proceeding involving
Borrower, any other Obligor or any other Person (including all such amounts
which would become due or would be secured but for the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding of Borrower, any other Obligor or any other Person under any Debtor
Relief Law).
"Obligor" means (a) Borrower, (b) each other Person (other than Lender)
liable for performance of any of the obligations under the Loan Papers and (c)
each other Person the property of which secures the performance of any of the
obligations under the Loan Papers.
"Operating Leases" means operating leases, as defined in the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 13,
dated November 1976, as amended.
"PBGC" means the Pension Benefit Guaranty Corporation, and any
successor to all or any of the Pension Benefit Guaranty Corporation's functions
under ERISA.
"Permitted Acquisition" means the acquisition by Borrower or a
Subsidiary of Borrower of (a) all of the outstanding equity interest of any
Person or (b) all or a portion of the assets of any Person; provided, (i) the
board of directors of such Person has approved such acquisition and such
approval has not been revoked, and (ii) such Person or the assets of such Person
the subject of the proposed acquisition are used in the research, development,
design, production or marketing of Devices.
"Permitted Investments" means Government Securities, Listed Debt,
Listed Securities and State Securities; provided Investments in Listed
Securities of a single issuer shall not exceed 25% of the outstanding equity
having voting rights of such issuer.
"Permitted Liens" means: (a) Liens granted to Lender to secure the
Obligation, (b) Liens in assets of Borrower or a Subsidiary of Borrower which
assets are not required by the Loan Papers to be subject to a Lien in favor of
Lender or which are not required by the Loan Papers to not be
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<PAGE> 15
subject to a Lien in favor of any Person, (c) Liens in the Allen Property to the
extent such Liens do not cover or purport to cover any asset of Borrower which
is subject to a Lien in favor of Lender, (d) pledges or deposits made to secure
payment of worker's compensation or occupational injury insurance (or to
participate in any fund in connection with worker's compensation or occupational
injury insurance), unemployment insurance, pensions or social security programs
or to secure performance of bids, tenders, contracts or leases, or to secure
statutory obligations, surety or appeal bonds, or indemnity, performance or
similar bonds in the ordinary course of business, (e) Liens imposed by mandatory
provisions of law such as for materialmen's, mechanics', warehousemen's and
other like Liens arising in the ordinary course of business, securing
indebtedness whose payment is not yet due or which are being contested in good
faith and as to which adequate cash reserves established in accordance with GAAP
have been provided, (f) Liens for taxes, assessments and governmental charges or
levies imposed upon a Person or upon such Person's income or profits or
property, if the same are not yet due and payable or if the same are being
contested in good faith and as to which adequate cash reserves have been
provided, (g) Liens in favor of MetLife Capital Corporation or its affiliates
upon the Allen Property in existence and of record on March 31, 1995, provided
such Liens do not secure Debt in excess of the amount of such Debt on March 31,
1995, as reduced by payments on and after March 31, 1995, or (h) Liens to secure
Borrower's or any Subsidiary's of Borrower obligations under lease agreements
related to the real property and improvements located at 5000-A Oakes Drive,
Fort Lauderdale, Florida and 2930-G and 2930-H Grace Lane, Costa Mesa,
California, or any reasonably comparable lease agreements entered into as
replacements for or expansion of such lease agreements.
"Permitted Venture" means any Investment in any Person; provided, (a)
such Person has not conducted any operations (other than corporate, partnership
or joint venture organizational operations) prior to Borrower's Investment in
such Person, and (b) such Person's sole business shall be the design,
development, manufacture and/or marketing of Devices.
"Person" means and includes an individual, a partnership, a joint
venture, a corporation, a limited liability company, a trust, an unincorporated
organization, and a government or any department, Tribunal, agency or political
subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained by
Borrower for employees of Borrower covered by Title IV of ERISA, or subject to
the minimum funding standards under Section 412 of the Internal Revenue Code of
1986, as amended ("Code").
"Prime Advance" means an Advance bearing interest at the Prime Rate.
"Prime Base Rate" means the prime interest rate charged by NationsBank
as announced or published by NationsBank from time to time as its prime rate,
and which may not be the lowest interest rate charged by NationsBank.
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"Prime Rate" means, with respect to each Prime Advance, a rate per
annum equal to the lesser of (a) the sum of (i) the Prime Base Rate, plus (ii)
the Applicable Margin and (b) the Highest Lawful Rate.
"Principal Office" means the principal office of Lender located at 901
Main Street, Dallas, Texas 75202.
"Quarterly Date" means March 31, June 30, September 30 and December 31.
"Refinancing Advance" means an Advance which is used to pay the
principal of an existing Advance at the end of its Interest Period and which,
after giving effect to such application, does not result in an increase in the
aggregate outstanding amount of Advances.
"Regulatory Modification" has the meaning set forth in Section 2.15.
"Reportable Event" has the meaning specified in Title IV of ERISA.
"Rights" means rights, remedies, powers and privileges.
"Solvent" means, with respect to a particular date, that on such date
(a) the fair value of the property of a Person is greater than the total amount
of liabilities, including, without limitation, contingent liabilities, of such
Person, (b) the present fair salable value of the assets of such Person is not
less than the amount that will be required to pay the probable liability of such
Person on its debts as they become absolute and matured, (c) such Person is able
to realize upon its assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, or believe that it will, incur
debts or liabilities beyond such Person's ability to pay as such debts and
liabilities mature, and (e) such Person is not engaged in business or a
transaction, and is not about to engage in business or a transaction, for which
such Person's property would constitute unreasonably small capital after giving
due consideration to the prevailing practice in the industry in which such
Person is engaged. In computing the amount of contingent liabilities at any
time, it is intended that such liabilities will be computed at the amount which,
in light of all the facts and circumstances existing at such time, represents
the amount that can reasonably be expected to become an actual or material
liability.
"Special Counsel" means the law firm of Donohoe, Jameson & Carroll,
P.C., Dallas, Texas, Special Counsel to Lender, and each other attorney or law
firm representing Lender.
"State Securities" means direct obligations of any state or political
subdivision thereof, rated, at any date of determination, A-1 or P-1 by Standard
& Poor's Corporation or Moody's Investors Service, Inc.
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"Subsidiary" of any Person means any corporation, limited liability
company, partnership, joint venture, trust or estate of which (or in which) more
than 50% of: (a) the outstanding capital stock having voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
at the time capital stock of any other class or classes of such corporation
shall or might have voting power upon the occurrence of any contingency), (b)
the interest in the capital or profits of such partnership or joint venture, or
(c) the beneficial interest of such trust or estate, is at the time directly or
indirectly owned by such Person, by such Person and one or more of its
Subsidiaries or by one or more of such Person's Subsidiaries.
"Tangible Net Worth" means, with respect to Borrower, shareholders'
equity, as shown on a balance sheet prepared in accordance with GAAP on a
consolidated basis, less the aggregate book value of intangible assets shown on
such balance sheet (provided, goodwill shall not be used in any determination of
"Tangible Net Worth" if goodwill is shown on the balance sheet as a negative
number, provided further that goodwill shown on the balance sheet as a positive
number shall be deducted in determining "Tangible Net Worth").
"Taxes" means all taxes, assessments, fees or other charges from time
to time or at any time imposed by any Laws or by any Tribunal.
"Term Debt" means debt for borrowed money the original scheduled
maturity of the last installment of which was more than twelve months after the
date borrowed.
"Total Liabilities" means all liabilities of Borrower which would be
classified as total liabilities on a balance sheet prepared in accordance with
GAAP on a consolidated basis.
"Tribunal" means any state, commonwealth, federal, foreign,
territorial, or other court or governmental department, commission, board,
bureau, agency or instrumentality.
"Type" refers to the distinction between Advances bearing interest at
the Prime Rate and LIBOR Rate.
"UCC" means the Uniform Commercial Code of Texas, as amended.
"Unrestricted Cash" means all cash, Government Securities, Listed Debt,
Listed Securities and State Securities owned by Borrower which are not subject
to any Lien.
1.2 Accounting and Other Terms. All accounting terms used in this
Agreement which are not otherwise defined herein shall be construed in
accordance with GAAP consistently applied on a consolidated basis for Borrower
and its Subsidiaries, unless otherwise expressly stated herein. If after the
Effective Date any change in GAAP applicable to Borrower or its Subsidiaries
results in a change in the manner of any calculation under the Loan Papers,
Borrower and Lender shall negotiate amendments to the Loan Papers to accommodate
such changes in GAAP. References herein to one gender shall be deemed to include
all other genders. Except where the
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context otherwise requires, (a) definitions imparting the singular shall include
the plural and vice versa and (b) all references to time are deemed to refer to
Dallas time.
ARTICLE II. ADVANCES
2.1 Facility A Advances. Lender agrees, upon the terms and subject to
the conditions of this Agreement, to make Facility A Advances to Borrower from
time to time from the Effective Date to the Facility A Termination Date;
provided, however, that immediately after giving effect to each Facility A
Advance pursuant to this Section 2.1, the aggregate principal amount of the
Facility A Advances shall at no time exceed the lesser of (a) the Facility A
Commitment and (b) the Borrowing Base.
2.2 Facility B Advances. Lender agrees, upon the terms and subject to
the conditions of this Agreement, to make Facility B Advances to Borrower from
time to time from the Effective Date to the Facility B Termination Date;
provided, however, that (a) immediately after giving effect to each Facility B
Advance pursuant to this Section 2.2, the aggregate principal amount of the
Facility B Advances shall at no time exceed the Facility B Commitment, and (b)
each reborrowing of a Facility B Advance may be made only as a Refinancing
Advance.
2.3 Manner of Borrowing.
(a) Each Borrowing of Advances shall be made upon the written notice of
Borrower, received by Lender (i) not later than 12:00 noon three Business Days
prior to the date of the proposed Borrowing, in the case of LIBOR Advances; and
(ii) not later than 11:00 a.m. on the date of such Borrowing, in the case of
Prime Advances. Each such notice of a Borrowing (a "Borrowing Notice") shall be
by telecopy or telex, promptly confirmed by letter, in substantially the form of
Exhibit I specifying therein:
(i) the date of such proposed Borrowing, which shall be a
Business Day;
(ii) whether such Borrowing is requested to be made under
Facility A or Facility B;
(iii) the amount of such proposed Borrowing which, (A) shall
not exceed the unused portion of the Facility A Commitment or Facility
B Commitment, as appropriate, (B) shall not, in the case of Facility A
Advances, when added to the aggregate principal of outstanding Facility
A Advances, exceed the Borrowing Base, (C) shall, in the case of a
Borrowing of LIBOR Advances, be in an amount of not less than $100,000
or an integral multiple of $100,000 in excess thereof and (D) in the
case of a Borrowing of Prime Advances, be in an amount of not less than
$50,000 or an integral multiple of $10,000 in excess thereof;
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(iv) the Type of Advances of which the Borrowing is to be
comprised; and
(v) if the Borrowing is to be comprised of LIBOR Advances, the
duration of the initial Interest Period applicable to such Advances.
If the Borrowing Notice fails to specify the duration of the initial
Interest Period for any Borrowing comprised of LIBOR Advances, such Interest
Period shall be one month.
(b) Provided that all conditions precedent to the making of such
Advance have been satisfied, Lender shall on the date of such Advance (other
than a Refinancing Advance) deposit the funds so requested in the deposit
account no. 1291792407 of Borrower with Lender.
(c) After giving effect to any Borrowing, there shall not be more than
five different Interest Periods in effect.
(d) No Interest Period for a Borrowing under Facility A shall extend
beyond the Facility A Termination Date and no Interest Period for a Borrowing
under Facility B shall extend beyond the Facility B Termination Date (with
respect to Advances evidenced by the Facility B Advance Note), and the Maturity
Date of the respective Facility B Term Note.
(e) Borrower shall indemnify Lender against any Consequential Loss
incurred by Lender as a result of (i) any failure to fulfill, on or before the
date specified for the Advance, the conditions to the Advance set forth herein
or (ii) Borrower's requesting that an Advance not be made on the date specified
in the Borrowing Notice.
2.4 Evidence of Indebtedness.
(a) Facility A Advances shall be evidenced by the Facility A Note in
the amount of the Facility A Commitment in effect on the Effective Date. The
Facility B Advances shall be evidenced by the Facility B Advance Note in the
amount of the Facility B Commitment in effect on the Effective Date and each
Facility B Term Note issued pursuant to Section 2.4(b).
(b) If the principal amount of any single proposed Facility B Advance
equals or exceeds $3,000,000, such Facility B Advance shall be evidenced by
either the Facility B Advance Note or, at the option of Borrower, a Facility B
Term Note. If Borrower elects for such Facility B Advance to be evidenced by a
Facility B Term Note, Borrower shall execute and deliver to Lender a Facility B
Term Note in the principal amount of such proposed Advance and dated as of the
date of such proposed Advance. If after giving effect to a proposed Facility B
Advance the principal amount of which is less than $3,000,000, the aggregate
outstanding principal of all Facility B Advances evidenced by the Facility B
Advance Note would equal or exceed $3,000,000, Borrower may, at its option,
execute and deliver to Lender a Facility B Term Note in the principal amount of
such proposed Advance plus the aggregate principal of all Facility B
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Advances outstanding under the Facility B Advance Note. Each Facility B Term
Note shall be issued with a number corresponding to its order of issue,
commencing with the number one, and dated as of the date of issue.
(c) Absent manifest error, Lender's records shall be prima facie
evidence as to amounts owed Lender under the Notes and this Agreement.
2.5 Fees.
(a) Facility A Commitment Fee. Subject to the provisions of Section
8.12, Borrower shall pay to Lender a commitment fee ("Facility A Commitment
Fee") at the rate of 3/8% per annum on the average daily unused portion of the
Facility A Commitment. The Facility A Commitment Fee shall be payable in arrears
(i) on each Quarterly Date, commencing December 31, 1995 and (ii) on the
Facility A Termination Date.
(b) Facility B Commitment Fee. Subject to the provisions of Section
8.12, Borrower shall pay to Lender a commitment fee ("Facility B Commitment
Fee") at the rate of 1/4% per annum on the average daily unused portion of the
Facility B Commitment. The Facility B Commitment Fee shall be payable in arrears
(i) on each Quarterly Date, commencing December 31, 1995 and (ii) on the
Facility B Termination Date.
(c) Origination Fee. Subject to the provisions of Section 8.12,
Borrower shall pay to Lender an origination fee of $50,000 with respect to the
Facility B Commitment.
2.6 Prepayments.
(a) Borrower may, upon at least three Business Days prior written
notice to Lender stating the proposed date and aggregate principal amount of the
prepayment, prepay the outstanding principal amount of any Advances in whole or
in part, together with accrued interest to the date of such prepayment on the
principal amount prepaid without premium or penalty other than any Consequential
Loss; provided, however, that in the case of a prepayment of a Prime Advance,
the notice of prepayment may be given by telephone by 11:00 a.m. on the date of
prepayment. Each partial prepayment shall, in the case of LIBOR Advances, be in
an aggregate principal amount of not less than $100,000 or an integral multiple
of $100,000 in excess thereof and, in the case of Prime Advances, be in an
aggregate principal amount of not less than $50,000 or an integral multiple of
$10,000 in excess thereof. If any notice of prepayment is given, the principal
amount stated therein, together with accrued interest on the amount prepaid and
the amount, if any, due under Section 2.15, shall be due and payable on the date
specified in such notice.
(b) If at any time the aggregate principal of outstanding Facility A
Advances exceeds the lesser of (a) the Facility A Commitment and (b) the
Borrowing Base, Borrower shall immediately prepay Facility A Advances then
outstanding in the aggregate amount equal to such
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excess, together with accrued interest to the date of such prepayment on the
principal amount prepaid without premium or penalty other than any Consequential
Loss.
(c) Unless otherwise specified by Borrower, any prepayment of Advances
pursuant to this Section 2.6 shall be applied first to Prime Advances, if any,
then outstanding, and second to LIBOR Advances with the shortest remaining
Interest Periods outstanding.
(d) No prepayments of Facility A Advances made solely pursuant to this
Section 2.6 shall cause the Facility A Commitment to be reduced. Each prepayment
of Facility B Advances made pursuant to this Section 2.6 shall (i) permanently
reduce the Facility B Commitment by the amount of such prepayment as of the date
of such prepayment and (ii) be applied to outstanding principal of Facility B
Advances in the inverse order of maturity.
2.7 Repayment.
(a) Facility A. Borrower shall repay to Lender the outstanding
principal amount of the Facility A Advances on the Facility A Termination Date.
(b) Facility B. Borrower shall repay to Lender the outstanding
principal amount of (i) the Facility B Advances outstanding under the Facility B
Advance Note on the Facility B Termination Date and (ii) the Facility B Advances
outstanding under each Term Note on each Quarterly Date, commencing with the
first Quarterly Date occurring after the date of the respective Note, in an
amount equal to 1/20th of the original principal amount of the Note, with all
unpaid principal due on the fifth anniversary date of such Note. The Facility B
Commitment shall permanently reduce by the amount of each payment required by
this Section 2.7(b) on the date due.
(c) General. The principal amount of each LIBOR Advance is due and
payable on the last day of the applicable Interest Period, which principal
payment may be made by means of a Refinancing Advance (subject to the other
provisions of this Agreement). On the date of a reduction of the Facility B
Commitment pursuant to Section 2.7(b) and of either Commitment pursuant to
Section 2.8, the aggregate amount of the applicable Advances outstanding on the
date of reduction in excess of such Commitment as reduced shall be due and
payable, which principal payment may not be made by means of a Refinancing
Advance.
2.8 Reduction of Commitments.
(a) Mandatory. The Facility B Commitment shall be reduced by the
aggregate original face amount of all Facility B Term Notes, effective as of the
date of issue of each Facility B Term Note.
(b) Optional. Borrower shall have the right at any time and from time
to time upon not less than three Business Days' notice to Lender not later than
12:00 noon (if telephonic,
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to be confirmed by telex or in writing on or before the date of reduction or
termination), to terminate or reduce the Facility A Commitment or Facility B
Commitment, in whole or in part, provided that each partial termination shall be
in an aggregate amount which is an integral multiple of $50,000. Once reduced or
terminated, the Facility A Commitment or Facility B Commitment (as appropriate)
may not be increased or reinstated. On the date of any such reduction, Borrower
shall repay such principal amount (together with accrued interest thereon and
any Consequential Loss) of outstanding Advances as may be necessary so that
after such repayment, the aggregate unpaid principal amount of Advances does not
exceed the amount of the Facility A Commitment or Facility B Commitment (as
appropriate) as then reduced.
2.9 Interest. Subject to Sections 2.10 and 8.12, Borrower shall pay
interest on the unpaid principal amount of each Advance from the date of such
Advance until such principal shall be paid in full, at the following rates per
annum:
(a) Prime Advances. Prime Advances shall bear interest at a rate per
annum equal to the Prime Rate as in effect from time to time.
(b) LIBOR Advances. LIBOR Advances shall bear interest at the rate per
annum equal to the LIBOR Rate applicable to such Advance, which at no time shall
exceed the Highest Lawful Rate.
(c) Payment Dates. Accrued and unpaid interest on Prime Advances shall
be paid in arrears on each Quarterly Date, on the Facility A Termination Date
and the Facility B Termination Date, as appropriate, and on the maturity date of
each Facility B Term Note. Accrued and unpaid interest in respect of each LIBOR
Advance shall be paid on the last day of the appropriate Interest Period and on
the date of any prepayment or repayment of such Advance; provided, however, that
if any Interest Period for a LIBOR Advance exceeds three months, interest shall
also be paid on the date which falls three months after the beginning of such
Interest Period.
(d) Index. Reference to any particular index or reference rate for
determining any applicable interest rate under this Agreement is for purposes of
calculating the interest due and is not intended as and shall not be construed
as requiring Lender to actually obtain its funds used to make any Advance at any
particular index or reference rate.
2.10 Default Interest. During the continuation of any Event of Default,
Borrower shall pay, on demand, interest (after as well as before judgment to the
extent permitted by Law) on the principal amount of all Advances outstanding and
on all other Obligations due and unpaid hereunder for each Advance equal to the
Highest Lawful Rate.
2.11 Continuation and Conversion Elections.
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(a) Borrower may upon irrevocable written notice to Lender and subject
to the terms of this Agreement:
(i) elect to convert, on any Business Day, all or any portion
of outstanding Prime Advances (in an aggregate amount not less than
$100,000 or an integral multiple of $100,000 in excess thereof) into
LIBOR Advances; or
(ii) elect to convert, at the end of any Interest Period
therefor, all or any portion of outstanding LIBOR Advances comprised in
the same Borrowing (in an aggregate amount not less than $50,000 or an
integral multiple of $10,000 in excess thereof), into Prime Advances;
or
(iii) elect to continue, at the end of any Interest Period
therefor, any LIBOR Advances;
provided, however, that if the aggregate amount of outstanding LIBOR
Advances comprised in the same Borrowing shall have been reduced as a result of
any payment, prepayment or conversion of part thereof to an amount less than
$100,000, the LIBOR Advances comprised in such Borrowing shall automatically
convert into Prime Advances at the end of each respective Interest Period.
(b) Borrower shall deliver a notice of conversion or continuation (a
"Conversion or Continuation Notice"), in substantially the form of Exhibit J, to
Lender not later than (i) 12:00 noon three Business Days prior to the proposed
date of conversion or continuation, if the Advances or any portion thereof are
to be converted into or continued as LIBOR Advances; and (ii) 10:00 a.m. on the
Business Day of the proposed conversion, if the Advances or any portion thereof
are to be converted into Prime Advances.
Each such Conversion or Continuation Notice shall be by telecopy or
telex, promptly confirmed by letter, specifying therein:
(i) the Note to which the proposed conversion or continuation
relates;
(ii) the proposed date of conversion or continuation;
(iii) the aggregate amount of Advances to be converted or
continued;
(iv) the nature of the proposed conversion or continuation;
and
(v) the duration of the applicable Interest Period.
(c) If, upon the expiration of any Interest Period applicable to LIBOR
Advances, Borrower shall have failed to select a new Interest Period to be
applicable to such
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<PAGE> 24
LIBOR Advances or if an Event of Default shall then have occurred and be
continuing, Borrower shall be deemed to have elected to convert such LIBOR
Advances into Prime Advances effective as of the expiration date of such current
Interest Period.
(d) Notwithstanding any other provision contained in this Agreement,
after giving effect to any conversion or continuation of any Advances, there
shall not be outstanding Advances with more than five different Interest
Periods.
2.12 Maximum Amount of Interest. In no event shall any interest rate
charged hereunder exceed the Highest Lawful Rate. If the amount of interest
payable for the account of Lender on any Quarterly Date in respect of the
immediately preceding interest computation period would exceed the Maximum
Amount, the amount of interest payable on such Quarterly Date shall be
automatically reduced to the Maximum Amount. If the amount of interest payable
for the account of Lender in respect of any interest computation period is
reduced pursuant to the immediately preceding sentence and the amount of
interest payable for its account in respect of any subsequent interest
computation period would be less than the Maximum Amount, then the amount of
interest payable for its account in respect of such subsequent interest
computation period shall be automatically increased to such Maximum Amount;
provided that at no time shall the aggregate amount by which interest paid for
the account of Lender has been increased pursuant to this sentence exceed the
aggregate amount by which interest paid for its account has theretofore been
reduced pursuant to the immediately preceding sentence.
2.13 Computations. Subject to the provisions of Section 8.12 of this
Agreement, interest on all Advances as well as computation of the Facility A
Commitment Fee and the Facility B Commitment Fee, shall be calculated on the
basis of actual days elapsed, but computed as if each year consisted of 360
days. All LIBOR Advances shall bear interest from and including the first day of
the applicable Interest Period to (but not including) the last day of such
Interest Period. All Prime Advances shall bear interest from and including each
Quarterly Date to (but not including) the next Quarterly Date.
2.14 Taxes. All payments made by Borrower under this Agreement shall be
made free and clear of and without deduction for or on account of any present or
future income, stamp or other Taxes (excluding, however, Taxes imposed on the
overall net income of Lender or any franchise Taxes).
2.15 Capital Adequacy; Increased Costs.
(a) If Lender shall have determined that any change after the Effective
Date in any applicable Law or guideline regarding capital adequacy, capital
maintenance or similar requirements against loan commitments made by Lender
(including any such applicable Law or guideline which may be adopted before the
date of this Agreement but which requirements are phased in over a period of
time), or any change therein, or any change in the interpretation or
administration thereof by any Tribunal, central bank or comparable agency
charged with the
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interpretation or administration thereof, or compliance by Lender (or any
Lending Office of Lender) or any corporation controlling Lender with any request
or directive regarding capital adequacy, capital maintenance or similar
requirements against loan commitments, whether or not having the force of law
(each such adoptions or modification and each interpretation or administration
being herein called a "Regulatory Modification"), has or would have the effect
of increasing the cost of Lender with respect to this Agreement as a result of
reducing the rate of return on Lender's or such corporation's capital as a
consequence of its obligations hereunder ("Additional Costs") to a level below
that which Lender or such corporation could have achieved but for such adoption,
change or compliance (taking into consideration Lender's or such corporation's
policies with respect to such capital impositions) by an amount deemed by Lender
to be material, then from time to time, Borrower shall pay to Lender such
Additional Costs as will compensate Lender for such reduction. No failure by
Lender to immediately demand payment of Additional Costs payable hereunder shall
constitute a waiver of Lender's right to demand payment of such Additional Costs
at any subsequent time. Determinations by Lender for purposes of this Section
2.15 shall be presumed correct, provided that such determinations are made
reasonably and in good faith. Nothing contained herein shall be construed or so
operate as to require Borrower to pay any interest, fees, costs or charges
greater than as permitted by Applicable Law.
(b) If, after the date hereof, any Tribunal, central bank or other
comparable authority, shall at any time impose, modify or deem applicable any
reserve (including, without limitation, any imposed by the Board of Governors of
the Federal Reserve System), special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, Lender,
or shall impose on Lender other conditions affecting a LIBOR Advance, the Notes,
or its obligation to make a LIBOR Advance; and the result of any of the
foregoing is to increase the cost to Lender of making or maintaining LIBOR
Advances, or to reduce the amount of any sum received or receivable by Lender
under this Agreement or under the Notes by an amount deemed by Lender to be
material, then, within five days after demand by Lender, Borrower shall pay to
Lender the additional amount or amounts as will compensate Lender for the
increased cost or reduction. A certificate of Lender claiming compensation under
this Section 2.15 and setting forth in reasonable detail the calculation of the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. If Lender demands compensation under this Section
2.15, Borrower may at any time, upon at least five Business Days' prior notice
to Lender either (i) repay in full the then outstanding principal amount of
LIBOR Advances, together with accrued interest thereon, or (ii) convert such
LIBOR Advances to Prime Advances in accordance with the provisions of this
Agreement; provided, however, that Borrower shall be liable for any
Consequential Loss arising pursuant to such actions.
(c) Notwithstanding any other provision of this Agreement, if the
introduction of or any change in or in the interpretation or administration of
any Law shall make it unlawful, or any central bank or other Tribunal shall
assert that it is unlawful, for Lender to perform its obligations hereunder to
make LIBOR Advances or to continue to fund or maintain LIBOR Advances hereunder,
then, on notice thereof and demand therefor by Lender to Borrower, (i) each
LIBOR Advance will automatically, upon such demand, convert into a Prime Advance
and (ii) the
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obligation of Lender to make, or to convert into or Continue Advances as, LIBOR
Advances shall be suspended until Lender notifies Borrower that Lender has
determined that the circumstances causing such suspension no longer exist.
(d) Upon the occurrence and during the continuance of any Default or
Event of Default, (i) each LIBOR Advance will automatically, on the last day of
the then existing Interest Period therefor, convert into a Prime Advance and
(ii) the obligation of Lender to make, or to convert into or Continue Advance
as, LIBOR Advances shall be suspended.
(e) Failure on the part of Lender to demand compensation for any
increased costs, increased capital or reduction in amounts received or
receivable or reduction in return on capital pursuant to this Section 2.15 with
respect to any period shall not constitute a waiver of Lender's right to demand
compensation with respect to such period or any other period.
(f) The obligations of Borrower under this Section 2.15 shall survive
any termination of this Agreement; provided that at no time may Lender demand
any compensation under Sections 2.15(a) or (b) for any amount with respect to
any period prior to the date which is six months prior to the date of the notice
or certificate delivered by Lender pursuant to either Section 2.15(a) or (b);
provided further that Lender shall not demand any compensation under Section
2.15(a) or (b) except in accordance with Lender's normal policies for
administering loans with similar provisions.
(g) Determinations by Lender for purposes of this Section 2.15 shall be
conclusive, absent manifest error. Any certificate delivered to Borrower by
Lender pursuant to this Section 2.15 shall include in reasonable detail the
basis for Lender's demand for additional compensation.
ARTICLE III. CONDITIONS PRECEDENT TO ADVANCES.
3.1 Conditions Precedent to Advances. The obligation of Lender to make
the first Advance to be made by it hereunder is subject to the satisfaction of
the following conditions:
(a) Laws. The making of both the Facility A Commitment and the Facility
B Commitment shall not contravene any Law applicable to Lender.
(b) No Default. (i) No Material Adverse Change, as determined by
Lender, shall have occurred and be continuing since September 30, 1995, and (ii)
there shall not be a Default or Event of Default existing.
(c) Representations and Warranties. The representations and warranties
in Article VI and the other Loan Papers shall be true and correct in all
material respects.
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(d) Certificate. Borrower shall have delivered to Lender an officer's
certificate for each Obligor, executed by authorized officers of such Obligor,
dated the Effective Date, certifying (A) that attached thereto is a copy of its
certificate or articles of incorporation certified by the Secretary of State (or
other appropriate officer) of the jurisdiction of its incorporation, which is
true and complete, and in full force and effect, without amendment except as
shown, (B) that attached thereto is a copy of its bylaws, which is true and
complete, and in full force and effect, without amendment except as shown, (C)
that attached thereto is a copy of the resolutions of the board of directors of
such Obligor authorizing execution, delivery and performance of this Agreement
and all other Loan Papers, which are true and complete, are in full force and
effect, were duly adopted, have not been amended, modified, or revoked, and
constitute all resolutions of such Obligor adopted with respect to this loan
transaction, (D) that attached thereto are certificates of good standing and
certificates of existence for such Obligor issued not more than ten days prior
to the Effective Date, issued by the appropriate officer of the jurisdiction of
organization of such Obligor and of each jurisdiction in which the nature of
such Obligor's business or properties require such qualification, (E) with
respect to Borrower, that the pledged interests in Neuromed have been issued and
are outstanding and a description of the ownership of the pledged interests in
Neuromed, (F) with respect to each Obligor other than Borrower, a description of
the ownership of all authorized, issued and outstanding equity interests of such
Obligor and (G) to the incumbency, name, and signature of each officer
authorized to sign this Agreement and any other Loan Paper on its behalf. Lender
may conclusively rely on each certificate delivered pursuant to this Section
3.1(d) until it receives notice from Borrower in writing to the contrary.
(e) Proceedings. All corporate proceedings of each Obligor taken in
connection with the transactions contemplated by this Agreement and all
documents incidental thereto shall be satisfactory in form and substance to
Lender and Special Counsel; and Lender shall have received, as of the Effective
Date, copies of all documents or other evidence which Lender or Special Counsel
may reasonably request in connection with said transactions.
(f) Loan Papers. Each Obligor shall have delivered to Lender the Loan
Papers to be executed by such Obligor, dated as of the Effective Date,
appropriately completed.
(g) Existing Facility A. Borrower shall have paid to Lender and Lender
shall have received all accrued unpaid interest on and fees (including
commitment fees) in respect of advances under Existing Facility A. All
outstanding, unpaid principal of advances under Existing Facility A shall be
renewed and restated and evidenced by the Facility A Note.
(h) Existing Facility B. Borrower shall have paid to Lender and Lender
shall have received all outstanding, unpaid principal of, and accrued unpaid
interest on, and all fees (including commitment fees) in respect of advances
under Existing Facility B.
(i) Origination Fee. Borrower shall have paid to Lender and Lender
shall have received the fee described in Section 2.5(c).
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(j) Documents. Borrower shall have delivered to Lender the following
(in the number of counterpart requested by Lender), all in form and substance
satisfactory to Lender:
(i) The results of UCC and other Lien searches against the
assets of each Obligor, and evidence satisfactory to Lender that all
Liens (other than Permitted Liens) in favor of any Person against
assets of any Obligor shall have been released and any credit facility
related to any of the above shall have been terminated.
(ii) Evidence satisfactory to Lender of the perfection and
priority of the Liens in the Collateral.
(iii) If requested by Lender, reasonable evidence that any
Obligor is the rightful owner and has good title to its Collateral, as
applicable.
(iv) A certificate computed after giving effect to the Initial
Advance, but demonstrating compliance on the Effective Date with all
financial ratios described in Sections 5.8 and 5.10 (determined on a
pro forma basis as of the Effective Date, based on the unaudited
financial statements of Borrower as of December 31, 1995).
(v) Copies of insurance binders or certificates covering the
assets of each Obligor indicating Lender as a loss payee.
(vi) Payment of all fees (including attorneys' fees) incurred
by Lender.
(vii) Copies of all documentation relating to debt owed by
Borrower and each other Obligor to any Person, including without
limitation, all credit agreements, notes, collateral documents, bonds,
instruments and other documentation in connection with any extension of
credit.
(viii) Certificates for all of the outstanding capital stock
of each Subsidiary of Borrower and stop transfer letters in favor of
Lender.
(ix) Stock and other powers for all shares of the outstanding
capital stock of each Subsidiary of Borrower.
(k) Financial Condition Certificate. Lender shall have received a
certificate of each Obligor to the effect that: (i) the fair and saleable value
of the assets of such Obligor, after giving effect to this Agreement, the Notes
and the other Loan Papers, will exceed amounts that will be required to be paid
by such Obligor on or in respect of its existing debts (including contingent
liabilities) as they mature; (ii) such Obligor will not have unreasonably small
capital to carry out its business as now conducted or as proposed to be
conducted, and (iii) such Obligor has not incurred debts beyond its ability to
pay such debts as they mature.
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<PAGE> 29
(l) Opinion of Counsel. Lender shall have received an opinion of
Fulbright & Jaworski L.L.P. acceptable to Lender and Special Counsel.
(m) Further Documents. As of the Effective Date, Lender shall have
received, in form and substance satisfactory to Lender and Special Counsel, such
other documents and instruments as Lender may reasonably require to evidence the
status, organization or authority of Borrower, and to evidence payment of the
Obligation.
3.2 Conditions Precedent to Facility B Advances. Lender shall not be
obligated to make any Facility B Advance unless:
(a) Borrower shall have provided to Lender (all to be in form and
substance acceptable to Lender) (i) current financial statements of and
historical operating information on the Person which, or the assets of which, is
the proposed Permitted Acquisition, (ii) a pro-forma balance sheet of Borrower,
together with pro-forma operating projections of the three year period following
the acquisition, (iii) pro forma financial statements which consolidate the
financial statements of Borrower and the Person of which is the proposed
Permitted Acquisition (or if assets, only, of such Person are to be acquired,
financial statements based on the operations of such assets as a stand-alone
entity), prepared as if Borrower and such Person (or its assets to be acquired)
had operated as a single entity during the twelve-month period preceding the
effective date of proposed Permitted Acquisition, (iv) a pro-forma Compliance
Certificate showing calculations based on the financial statements described in
clause (iii), (v) a copy of the results of Borrower's due diligence with respect
to the Person which, or the assets of which, is the proposed Permitted
Acquisition, and (vi) such other documents and information as Lender may
reasonably request.
(b) If the aggregate consideration payable by Borrower in respect of
the specific Permitted Acquisition equals or exceeds $5,000,000, Lender shall
have notified Borrower within ten days of receipt of the information described
in Section 3.2.(a) that Lender has consented to make a Facility B Advance to
fund all or a portion of such Permitted Acquisition.
(c) If the principal amount of any single proposed Facility B Advance
equals or exceeds $3,000,000, or if after giving effect to a proposed Facility B
Advance the principal amount of which is less than $3,000,000, the aggregate
outstanding principal of all Facility B Advances not evidenced by a Facility B
Term Note equals or exceeds $3,000,000, and Borrower has elected to have such
principal amount evidenced by a Facility B Term Note, Borrower has executed and
delivered to Lender a Facility B Term Note in accordance with Section 2.4(b).
(d) All terms of the proposed acquisition and the related Acquisition
Documents shall be acceptable to Lender in its sole discretion, and the
Acquisition shall have been consummated in accordance with the terms, provisions
and conditions of the Acquisition Documents, without amendments, consents or
waivers with respect thereto (except with the express written consent of
Lender).
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(e) Lender shall have completed all due diligence related to the
proposed acquisition deemed necessary in its sole discretion, and all such
information revealed in connection with such due diligence shall be acceptable
to Lender in its sole discretion.
(f) Lender receives:
(i) Copies of all opinions rendered by any counsel in
connection with the proposed acquisition and the Acquisition Documents,
together with letters authorizing Lender to rely thereon.
(ii) A copy of all Acquisition Documents, all in form and
substance satisfactory to Lender, certified by an officer of Borrower
to be true and complete.
(iii) Evidence satisfactory to Lender of the completion of all
transactions related to the proposed acquisition.
(iv) Evidence reasonably satisfactory to Lender that on the
date of the proposed acquisition: (A) each Tribunal, the consent of
which is necessary, has consented to the proposed acquisition; and (B)
all representations and warranties in the Acquisition Documents related
to the proposed acquisition are true and correct.
(v) The results of UCC and other Lien searches against the
assets and equity of the Person to be acquired or assets to be
acquired, as appropriate, and evidence satisfactory to Lender that all
Liens in favor of any Person against all material assets shall have
been released and any credit facility related to any of the above shall
have been terminated.
(vi) Evidence satisfactory to Lender of the perfection and
priority of the Liens in the assets to be acquired.
(vii) If requested by Lender, reasonable evidence that the
Person to be acquired, or the Person from whom assets will be acquired,
is the rightful owner and has good title to all material assets it
purports to own, as applicable.
(viii) Copies of insurance binders or certificates covering
all material assets to be acquired in connection with the proposed
acquisition.
(ix) Payment of all fees (including attorneys' fees) incurred
by Lender.
(x) Certificates for all of the outstanding capital stock or
other equity interests of the Person to be acquired and stop transfer
letters in favor of Lender.
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(xi) Stock and other powers for all shares of the outstanding capital
stock or other equity interests of the Person to be acquired.
(g) Lender elects to fund all or any of the proposed Facility B Advance
(Lender having the right, in its sole discretion, to elect not to fund all or
any of each proposed Facility B Advance).
3.3 Conditions Precedent to All Advances. Lender shall not be obligated
to make any Advance, if (a) there is in existence at such time a Default under
Section 4.2, 5.6, 5.7, 5.8, or 5.9; (b) an Event of Default has occurred and is
continuing; (c) if any representations and warranties contained in Article VI of
this Agreement shall be false or untrue in any material respect on the date of
such Advance, as if made on such date except for representations and warranties
that are by their express terms limited to a specific date; or (d) any
Subsidiary of Borrower has not executed and delivered to Lender a Guaranty
Agreement. Each request by Borrower for an Advance shall constitute a
representation by Borrower that it is in compliance with the provisions of this
Section 3.3.
3.4 Legal Details. All documents executed or submitted pursuant hereto
by Borrower shall be satisfactory in form and substance to Lender and Special
Counsel. Lender and Special Counsel shall receive all information, and such
counterpart originals or certified or other copies of and such materials, as
Lender or Special Counsel may reasonably request. All legal matters incident to
the transactions contemplated by this Agreement (including, without limitation,
matters arising from time to time as a result of changes occurring with respect
to any Laws) shall be satisfactory to Special Counsel.
ARTICLE IV. AFFIRMATIVE COVENANTS
From the date hereof, and so long as this Agreement is in effect and
until final payment in full of the Obligation and the performance of all other
obligations of Borrower under this Agreement and the other Loan Papers, Borrower
agrees and covenants that it shall, and shall cause each Subsidiary of Borrower
to, observe, perform, comply and fulfill each and every covenant, term and
provision set forth below:
4.1 Books, Records and Properties. Borrower shall, and shall cause each
Subsidiary of Borrower to, maintain its books and records in accordance with
GAAP. Borrower during normal business hours and after reasonable notice by
Lender shall, and shall cause each Subsidiary of Borrower to, permit any of
Lender's agents or representatives to have access to and examine its books and
records, including statements and schedules with respect to the Collateral, and
to copy and make abstracts therefrom, and to inspect any of the properties of
Borrower and each Subsidiaries of Borrower to, at any time(s) hereafter during
normal business hours; provided, that any such access or inspection shall not
disrupt Borrower's operations.
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4.2 Financial Statements and Reports. Borrower shall furnish or cause
to be furnished to Lender the following Financial Statements and reports:
(a) Accounting Period Statements. As soon as practicable after the end
of each fiscal quarter of Borrower and in any event within 45 days after the end
of each fiscal quarter of Borrower, copies of Financial Statements as of the end
of such quarter, all in reasonable detail and certified as complete and correct
in all material respects, subject to changes resulting from year-end adjustment,
by a financial officer of Borrower or any other Person acceptable to Lender;
(b) Annual Statements. As soon as practicable after the end of each
fiscal year of Borrower and in any event within 90 days thereafter, copies of
annual Financial Statements, setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and accompanied
by an unqualified opinion of independent certified public accountants approved
by Borrower's board of directors, which opinion shall state that the Financial
Statements have been prepared in accordance with GAAP, that their examination
has been made in accordance with generally accepted auditing standards and that
said financial statements present fairly the consolidated financial position of
Borrower and its Subsidiaries and their results of operations;
(c) Compliance Certificate and related reports. Within 45 days after
the end of each fiscal quarter, the Compliance Certificate for the last day of
such quarter.
(d) Borrowing Base Certificate and related reports. Within 15 days
after the end of each month:
(i) The Borrowing Base Certificate for the last day of such
month;
(ii) A schedule showing for such month an aging of Accounts of
Borrower in categories of current, 30 days past due, 60 days past due
and 91 or more days past due; and
(iii) A schedule showing for such month Accounts payable by
each account debtor of which 10% or more of the aggregate dollar amount
of all Accounts owed to Borrower by such account debtor have been due
and payable for 91 days or more from their respective invoice dates;
(e) Contingent Liabilities Report. Promptly upon becoming aware,
written notice of any actual or potential contingent liabilities, including
Litigation, against Borrower or any Subsidiary of Borrower involving liability
in an amount which must be disclosed in either Borrower's financial statements
or filings with the Securities and Exchange Commission.
(f) FDA Reports. Promptly upon receipt from FDA, a copy of each
inspection report received from FDA and responses from and to FDA.
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(g) SEC Filings. As soon as filed with the Securities and Exchange
Commission, copies of each of Borrower's forms 10-Q, 10-K and 8-K.
4.3 Maintenance of Existence. Borrower shall cause to be done all
things necessary to preserve and keep in full force and effect Borrower's and
each of Borrower's Subsidiaries' existence as a corporation; provided, (a) any
Subsidiary of Borrower may merge with and into Borrower if Borrower is the
surviving entity and (b) any Subsidiary of Borrower may merge with and into
another Subsidiary of Borrower.
4.4 Insurance. Borrower shall maintain, and shall cause each Subsidiary
of Borrower to, in force with financially sound and reputable insurers, the
insurance policies required pursuant to the Loan Papers in accordance with the
provisions thereof and such other policies with respect to its respective
property and business against such casualties and contingencies (including fire,
worker's compensation or occupational injury insurance, business interruption
and public liability) and in such amounts as is customary in the lines of
business of comparable size and financial strength, with a loss payee
endorsement for casualty insurance in favor of Lender and noncancelable without
30 days prior notice to Lender. Borrower shall supply evidence of such insurance
to Lender.
4.5 Compliance with Applicable Laws. Borrower shall, and shall cause
each Subsidiary of Borrower to, comply with the requirements of all applicable
Laws and orders (including but not limited to the FDA Act, ERISA and
environmental laws) of Tribunals or other governmental authorizations necessary
to the ownership of Borrower's and each of Subsidiary's of Borrower properties
or to the conduct of its business if the result of failure to so comply would
have a Material Adverse Effect.
4.6 Other Information and Documents. Borrower shall, and shall cause
each Subsidiary of Borrower to, promptly deliver to Lender such information,
certificates and documents in addition to those herein mentioned as Lender may
from time to time reasonably request.
4.7 Default. Borrower shall report to Lender immediately any Default or
Event of Default, and any notice of any claimed default under any other Debt
agreement, specifying the default and steps taken or to be taken to cure.
4.8 Taxes. Borrower shall pay any stamp, loan, transaction or similar
taxes that may be imposed on this Agreement, the Advances hereunder, the Notes,
or any of the transactions hereunder, and shall pay, and shall cause each
Subsidiary of Borrower to, all income, ad valorem, and other taxes of Borrower
or such Subsidiary before they become delinquent except taxes being contested by
appropriate means and in good faith and the levy and execution of which have
been stayed and continued to be stayed. Any such taxes must be paid before their
nonpayment causes a Lien (other than a Permitted Lien) to be filed on any of the
Collateral.
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4.9 Further Assurances. Borrower will, and will cause each other
Obligor to, on request of Lender, promptly correct any defect, error or omission
which may be discovered in the contents of any of the Loan Papers or in the
execution or acknowledgment thereof, and will execute, acknowledge and deliver
such further instruments and do such further acts as may be necessary or as may
be requested by Lender to carry out more effectively the purposes of this
Agreement and the Loan Papers and to subject to the Liens any of Borrower's or
any other Obligor's properties, rights or interests covered or intended to be
covered thereby, and to perfect and maintain all Liens at any time securing all
or any part of the debt hereunder.
4.10 Filings. Borrower will pay all expenses incurred in connection
with the filing of any of the Loan Papers and every other instrument in addition
or supplemental to any thereof that shall be required by Law in order to perfect
and maintain the validity and effectiveness of Liens at any time securing all or
any part of the debt hereunder.
4.11 Maintenance. Borrower will, and shall cause each Subsidiary of
Borrower to, maintain all of Borrower's and such Subsidiary's material property
in good condition and repair (wear and tear excepted) and make all necessary
replacements thereof, and preserve and maintain all material leases, licenses,
privileges, franchises, certificates and the like used in the operation of
Borrower's and such Subsidiary's business (other than with respect to any such
lease, license, privilege, franchise and certificate which the Board of
Directors of Borrower or such Subsidiary of Borrower has determined that the
expiration or termination of which is in the best interest of Borrower or such
Subsidiary of Borrower, respectively).
4.12 ERISA Compliance. Borrower shall, and shall cause each Subsidiary
of Borrower to, (a) at all times, make prompt payment of all contributions
required under all Plans and required to meet the minimum funding standard set
forth in ERISA with respect to its Plans, (b) notify Lender immediately of any
fact, including, but not limited to, any Reportable Event arising in connection
with any of its Plans, which might constitute grounds for termination thereof by
the PBGC or for the appointment by the appropriate United States District Court
of a trustee to administer such Plan, together with a statement, if requested by
Lender as to the reason therefor and the action, if any, proposed to be taken
with respect thereto, and (c) furnish to Lender, upon its request, such
additional information concerning any of its Plans as may be reasonably
requested.
4.13 Indemnity by Borrower. Borrower shall indemnify, save, and hold
harmless Lender and its shareholders, directors, officers, agents, attorneys,
and employees (collectively, the "Indemnitees") from and against: (a) any and
all claims, demands, actions, or causes of action that are asserted by any
Person other than Borrower, its shareholders, directors, officers, agents,
attorneys, and employees against any Indemnitee if the claim, demand, action or
cause of action relates to the Obligations, the use of proceeds of any Advance,
or the relationship of Borrower and Lender under this Agreement or any
transaction contemplated pursuant to this Agreement or any other Loan Paper, (b)
any proceeding or any administrative, investigative or arbitration proceeding by
or before any Tribunal or arbitral directly or indirectly related to (i) a
claim,
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demand, action or cause of action described in clause (a) above or (ii) any
claim, demand, proceeding, action or cause of action involving Borrower or any
Affiliate (including any shareholder) of Borrower in which any Indemnitee incurs
costs and expenses as a result of any requirement that such Indemnitee testify
or produce records therein (other than as a result of any Litigation commenced
by an Indemnitee or Borrower in which such Indemnitee is not a prevailing
party), and (c) any and all liabilities, losses, costs, or expenses (including
attorneys' fees and disbursements) that any Indemnitee suffers or incurs as a
result of any of the foregoing (other than as a result of any Litigation
commenced by an Indemnitee or Borrower in which such Indemnitee is not the
prevailing party); provided, however, that Borrower shall not have any
obligation under this Section 4.13 to a particular Indemnitee or with respect to
any of the foregoing arising out of the negligence or willful misconduct of such
Indemnitee. If any claim, demand, action or cause of action is asserted against
any Indemnitee, such Indemnitee shall promptly notify Borrower, but the failure
to so promptly notify Borrower shall not affect Borrower's obligations under
this Section 4.13 except to the extent such failure materially impairs
Borrower's ability to defend any such claim, demand, action or cause of action.
Any obligation or liability of Borrower to any Indemnitee under this Section
4.13 shall survive the expiration or termination of this Agreement and the
repayment of the Obligation.
ARTICLE V. NEGATIVE COVENANTS
From the date hereof and so long as this Agreement is in effect and
until final payment in full of the Obligation, and the performance of all other
obligations of Borrower under this Agreement and the other Loan Papers, Borrower
agrees and covenants that it shall, and shall cause each of its Subsidiaries to,
observe, perform, comply and fulfill each and every covenant, term and provision
set forth below:
5.1 Liens. Borrower shall not, and shall not permit any Subsidiary of
Borrower to, grant, permit or suffer to exist any Lien on any of its property or
assets, except (a) Permitted Liens, and (b) Liens granted under the Loan Papers.
5.2 Transfer of Assets. Borrower shall not, and shall not permit any
Subsidiary of Borrower to, sell, lease, transfer, or otherwise dispose of assets
of Borrower or such Subsidiary, except (a) payments of business expenses of
Borrower or such Subsidiary in the ordinary course of business, (b) Inventory
and Investments in the ordinary course of business and for full and fair
consideration, (c) assets which Borrower or such Subsidiary determines in good
faith are worthless or obsolete, (d) assets not subject to a Lien or license in
favor of Lender the value of which, individually and in the aggregate, does not
exceed 5% of the gross revenue of Borrower and its Subsidiaries (determined on
or consolidated basis) during the preceding fiscal year from operations, or (e)
in connection with Investments permitted pursuant to Section 5.4.
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5.3 New Industry. Borrower shall not, and shall not permit any
Subsidiary of Borrower to, enter any industry or type of business which is not
directly related to the research, design, development, manufacture and/or
marketing of Devices.
5.4 Restricted Investments. Borrower shall not make or have outstanding
any Investments, except for Permitted Investments, Permitted Acquisitions and
Permitted Ventures.
5.5 Transactions with Affiliates. Borrower shall not, and shall not
permit any Subsidiary of Borrower to, enter into any transaction with any
Affiliate, except in the ordinary course of the business of Borrower or such
Subsidiary, and on fair and reasonable terms no less favorable to Borrower or
such Subsidiary than it would obtain in a comparable arm's length transaction
with a Person not an Affiliate.
5.6 Fixed Charges Coverage Ratio. Borrower shall not permit the Fixed
Charges Coverage Ratio to be less than 2.50 to 1.00, as at the end of each
fiscal quarter of Borrower, commencing with the first fiscal quarter ending
after the Effective Date.
5.7 Margin Ratio. Borrower shall not permit the Margin Ratio to be
greater than 2.50 to 1.00, as at the end of each fiscal quarter of Borrower,
commencing with the first fiscal quarter ending after the Effective Date.
5.8 Total Liabilities to Tangible Worth Ratio. Borrower shall not
permit the ratio of Total Liabilities to Tangible Net Worth to be greater than
as indicated below, (a) as at the end of each fiscal quarter of Borrower, ending
during the period indicated or (b) on the date indicated:
Effective Date through September 30, 1996 2.50 to 1.00
October 31, 1996 and thereafter 1.75 to 1.00
5.9 Current Maturities Coverage Ratio. Borrower shall not permit the
Current Maturities Coverage Ratio to be less than 2.00 to 1.00, as at the end of
each fiscal quarter of Borrower, commencing with the first fiscal quarter ending
after the Effective Date.
5.10 Capital Expenditures. Borrower shall not permit the aggregate
amount of Capital Expenditures incurred or paid during (a) any calendar year to
exceed $2,500,000, and (b) the period from and after the Effective Date through
February 9, 1998 to exceed $4,000,000 in the aggregate.
5.11 Merger and Consolidation. Borrower shall not, and shall not permit
any Subsidiary of Borrower to, merge or consolidate with any other Person or
allow any other Person to merge or consolidate with it; provided, (a) Borrower
may merge or consolidate with any other Person if (i) Borrower is the surviving
entity and (ii) such merger or consolidation is the result of (A) a Permitted
Acquisition or (B) any other Investment, so long as no Default or Event of
Default exists prior to or after giving effect to such Investment and (b) each
Subsidiary of Borrower may
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merge with and into either Borrower or any other Subsidiary of Borrower if
Borrower or another Subsidiary of Borrower is the surviving entity, as
appropriate, and no Default or Event of Default exists prior to or after giving
effect thereto.
5.12 Debt. Borrower shall not, and shall not permit any Subsidiary of
Borrower to, create, incur, assume, become or be liable in any manner in respect
of, or suffer to exist, any Debt for Borrowed Money, except (a) Debt under the
Loan Papers, (b) obligations in respect of trade payables (i) incurred by
Borrower or a Subsidiary of Borrower in the ordinary course of business and (ii)
acquired or assumed by Borrower or a Subsidiary of Borrower pursuant to a
Permitted Acquisition, (c) Debt the proceeds of which was used solely for the
acquisition and construction of the Allen Property not in excess of the amount
of such Debt on the Effective Date, as reduced by payments on and after the
Effective Date, (d) Debt payable to William Borkan pursuant to Section 1.2(iii)
of the Neuromed Agreement; provided, such amount shall not exceed $3,400,000 in
the aggregate, and (e) other Debt of Borrower and each of its Subsidiaries not
to exceed in the aggregate $250,000.
5.13 Distributions.
(a) Dividends. Borrower shall not declare, pay, make or become liable
for any Distribution, provided that so long as no Default or Event of Default
exists, Borrower may (i) declare and pay dividends on Borrower's capital stock
in an aggregate amount not to exceed in any calendar year (A) if no Facility B
Advance has been made, 75% of the prior fiscal year's Net Income (determined on
a non-cumulative basis), and (B) if a Facility B Advance has been made, 25% of
the prior fiscal year's Net Income (determined on a non-cumulative basis);
provided, further, if with respect to any calendar year, Borrower has made
Distributions otherwise permitted by Section 5.13(a)(i)(A), no Default or Event
of Default shall exist solely as a result of Borrower's requesting or receiving
a Facility B Advance during such calendar year but after such Distribution has
occurred; provided, further, prior to the declaration of each such dividend,
Borrower shall deliver to Lender not later than fifteen Business Days prior to
the proposed declaration date a certificate of the chief financial officer of
Borrower stating that (A) no Default or Event of Default exists or will result
from the declaration or payment or such dividend, and (B) attached to such
certificate are calculations of Sections 5.6, 5.7, 5.8, 5.9, 5.10, and 5.12,
calculated on a pro forma basis as at the date twelve months after the date of
payment of the proposed dividend, (ii) enter into transactions permitted by
Section 5.13(b) and (iii) make payments to William Borkan in accordance with the
Neuromed Agreement permitted by Section 5.12(d); provided further that no
Distribution otherwise permitted by Section 5.13(a)(i) or (ii) shall be made
prior to receipt by Lender of the audited financial statements of Borrower for
the fiscal year to which such proposed Distribution is attributable.
(b) Treasury Stock. Borrower shall not declare, pay, make or become
liable for any Distribution, provided that so long as no Default or Event of
Default exists, Borrower may (i) acquire for cash Borrower's capital stock in an
aggregate amount not to exceed $1,000,000 in any calendar year; provided,
further, not later than seven days after each such acquisition of any of
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Borrower's capital stock, Borrower shall deliver to Lender a certificate of the
chief financial officer of Borrower stating that no Default or Event of Default
exists or will result from the declaration or payment or such dividend and (ii)
enter into transactions permitted by Section 5.13(a); provided further that no
Distribution otherwise permitted by this Section 5.13(b) shall be made prior to
receipt by Lender of the audited financial statements of Borrower for the fiscal
year to which such proposed Distribution is attributable.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
6.1 Organization; Qualification; Authority. Borrower and each
Subsidiary of Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the state indicated on Schedule 1. Borrower and
each Subsidiary of Borrower has the power to own its properties and to carry on
its businesses as now being conducted. The Board of Directors of Borrower has
duly authorized the execution, delivery and performance of the Loan Papers to be
executed by Borrower. No consent of the shareholders of Borrower is required as
a prerequisite to the validity and enforceability of any Loan Papers or any
other document contemplated hereby. Borrower has full legal right and corporate
power, and authority to execute, deliver, and perform its obligations under the
Loan Papers to be executed and delivered by it.
6.2 Financial Statements. The audited financial statements for the
fiscal year ended December 31, 1994 and the unaudited financial statements for
the six months ended June 30, 1995 and for the most recent fiscal quarter
(including any related schedules and/or notes) are true and correct in all
material respects (subject, as to interim statements, to charges resulting from
audits and year-end adjustments) have been prepared in accordance with GAAP
(except, as to interim statements, for notes and year-end adjustments)
consistently followed throughout the periods specified, and fairly present in
accordance with GAAP the financial condition and results of operations of
Borrower as at the dates thereof and for the periods indicated. There has been
no material adverse change in the business, condition or operations (financial
or otherwise) of Borrower since December 31, 1994.
6.3 Conflicting Agreements and Other Matters. Neither Borrower nor any
Subsidiary of Borrower is a party to any contract or agreement or subject to any
restriction which materially and adversely affects the ability of Borrower to
perform its obligations under the Loan Papers. Neither the execution nor
delivery of this Agreement, the Notes, or the other Loan Papers, nor fulfillment
of nor compliance with the terms and provisions of this Agreement, the Notes or
the other Loan Papers will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in any
violation of, or result in the creation of any Lien (except for Liens created by
the Loan Papers) upon any of the properties or assets of Borrower or any
Subsidiary of Borrower pursuant to the articles of incorporation of Borrower or
such Subsidiary, any award of any arbitrator or any agreement, instrument,
order, judgment, decree,
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statute, law, rule or regulation to which Borrower or such Subsidiary is
subject. Neither Borrower nor any Subsidiary of Borrower is a party to, or
otherwise subject to any provision contained in, any instrument evidencing
indebtedness of Borrower or such Subsidiary, any agreement relating thereto or
any other contract or agreement which limits the amount of, or otherwise imposes
restrictions on the incurring of, Debt of Borrower of the type to be evidenced
by the Notes.
6.4 Governmental Consent. Neither the nature of Borrower or any
Subsidiary of Borrower, its businesses or properties, nor any relationship
between Borrower, any Subsidiary of Borrower and any other Person, nor any
circumstance in connection with the execution, delivery and performance of this
Agreement, the Loan Papers or the Notes is such as to require any authorization,
consent, approval, exemption of other action by or notice to or filing with any
court or Tribunal (other than routine filings and recordings to perfect Liens)
in connection with the execution and delivery of this Agreement, the Notes, the
other Loan Papers, or fulfillment of or compliance with the terms and provisions
hereof, of the Notes or of the other Loan Papers.
6.5 Enforceability. This Agreement is, the other Loan Papers are and
the Notes when delivered will be legal, valid and binding obligations of
Borrower enforceable against Borrower in accordance with their terms, except as
limited by Debtor Relief Laws.
6.6 Actions Pending. Other than as described on Schedule 3, there is no
Litigation pending or, to the knowledge of Borrower, threatened against Borrower
or any Subsidiary of Borrower, or any properties or rights of Borrower or any
Subsidiary of Borrower, by or before any court, arbitrator or Tribunal which may
reasonably be expected to result in any Material Adverse Effect. There is no
Litigation pending or, to the knowledge of Borrower, threatened against Borrower
or any Subsidiary of Borrower which purports to affect the validity or
enforceability of this Agreement, either Note or any of the other Loan Papers.
6.7 Outstanding Debt. Neither Borrower nor any Subsidiary of Borrower
has any outstanding Debt except (a) as described on the balance sheet of
Borrower for the fiscal year ended December 31, 1994, (b) as described in the
balance sheet of Neuromed for the fiscal year ended October 31, 1994, (c) trade
payables incurred in the ordinary course of business and (d) Debt for Borrowed
Money owed to Lender. There exists no default under the provisions of any
instrument evidencing such Debt or of any material agreement relating thereto.
6.8 Title to Properties. Borrower and each Subsidiary of Borrower has
good and indefeasible title to its respective real properties (other than
properties which it leases) and good title to all of its other material
properties and assets used in the operations of its business, subject to no Lien
of any kind except Liens permitted by Section 5.1. All leases necessary in any
material respect for the conduct of the respective businesses of Borrower are
valid and subsisting and are in full force and effect.
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6.9 Taxes. Borrower and each Subsidiary of Borrower has paid all taxes
and assessments owed by it to the extent that such taxes and assessments have
become due, except such taxes as are being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP.
6.10 Regulation G, etc. Neither Borrower nor any Subsidiary of Borrower
owns or has any present intention of acquiring any "margin stock" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve
System (herein called "margin stock"). None of the proceeds of any Advance will
be used, directly or indirectly, for the purpose, whether immediate, incidental
or ultimate, of purchasing or carrying any margin stock or for the purpose of
maintaining, reducing or retiring any indebtedness which was originally incurred
to purchase or carry any stock that is currently a margin stock or for any other
purpose which might constitute this transaction a "purpose credit" within the
meaning of such Regulation G. Neither Borrower nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
Notes to violate Regulation G, Regulation T, Regulation X or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the Securities Exchange Act of 1934, as amended, in each case as in effect now
or as the same may hereafter be in effect.
6.11 ERISA. No accumulated funding deficiency (as defined in section
302 of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any Plan. No liability to the PBGC has been or is expected by
Borrower or any Subsidiary of Borrower to be incurred with respect to any Plan
by Borrower or any Subsidiary of Borrower which is or would be materially
adverse to Borrower or any Subsidiary of Borrower. Neither Borrower nor any
Subsidiary of Borrower has incurred or presently expects to incur any withdrawal
liability under Title IV of ERISA with respect to any Multiemployer Plan which
is or would be materially adverse to Borrower.
6.12 Disclosure. Neither this Agreement or any other document,
certificate or statement furnished, or to be furnished, to Lender by or on
behalf of Borrower or any other Obligor in connection herewith or therewith
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein and therein not
misleading in any material respect.
6.13 Environmental Matters. Borrower, each Subsidiary of Borrower, the
plants and sites each owns, and to the best of Borrower's knowledge after due
inquiry of the owners of leased property the plants and sites which each leases
have complied with all federal, state, local and regional statutes, ordinances,
orders, judgments, rulings and regulations relating to any matters of pollution
or of environmental regulation or control except, in any such case, where such
failure to comply would not result in a Material Adverse Effect. Without
limiting the generality of the preceding sentence, neither Borrower nor any
Subsidiary of Borrower has received notice of and does not have actual knowledge
of any actual or claimed or asserted failure so to comply which alone or
together with any other such failure is material and would result in a
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Material Adverse Effect. During periods of use, ownership, occupancy or
operation by Borrower and each Subsidiary of Borrower, none of Borrower, any
Subsidiary of Borrower, or their respective plants or sites have managed,
generated, released or disposed of, any hazardous wastes, hazardous substances,
hazardous materials, toxic substances or toxic pollutants, as those terms are
used or defined in the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Hazardous Materials
Transportation Act, the Toxic Substance Control Act, the Clean Air Act and the
Clean Water Act, in material violation of or in a manner which would result in
liability under such statutes or any regulations promulgated pursuant thereto or
any other applicable law, except where such noncompliance or liability would not
result in a Material Adverse Effect.
6.14 Sufficiency of Capital. Borrower and each Subsidiary of Borrower
are, and after consummation of this Agreement and after giving effect to the
Obligation incurred and Liens created by Borrower and each Subsidiary of
Borrower in connection herewith will be, Solvent.
6.15 Affiliates. No Affiliate of Borrower exists, except as identified
on Schedule 1.
ARTICLE VII. DEFAULT
7.1 Events of Default. The term "Event of Default" as used herein,
means the occurrence and continuance of any one or more of the following events
(including the passage of time, if any, specified therefor):
(a) Borrower shall fail to pay any amount, whether principal, interest
or other amounts, payable hereunder or under the Notes when due and such failure
shall continue for three days from the date due; or
(b) (i) Any representation or warranty made by Borrower or any other
Obligor under or in connection with any Loan Paper shall prove to have been
incorrect in any material respect when made or (ii) (A) a breach of any
representation or warranty made by any party thereto (other than Borrower) under
or in connection with any Acquisition Document is discovered, (B) Lender makes a
determination that such breach has caused or will cause a Material Adverse
Change or Effect and gives notice thereof to Borrower, and (C) such breach has
not already been cured or paid for by such party, or, alternatively, Borrower or
such party does not cure such breach or the situation giving rise thereto to the
complete satisfaction of Lender within 30 days after receipt of such notice from
Lender; or
(c) Borrower shall fail to perform or observe any term, covenant or
agreement contained in Sections 5.6, 5.7, 5.8 or 5.9 and such failure shall
continue for two consecutive months or any other provision of Article V of this
Agreement; or
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(d) Borrower or any other Obligor shall fail to perform or observe any
term, covenant or agreement contained in any Loan Paper on its part to be
performed or observed, other than described in Section 7.1(a), (b), or (c), and
such default has continued for a period of 30 days; or
(e) Borrower, any Subsidiary of Borrower or any other Obligor shall
fail to pay any Debt (other than under the Loan Papers) which is, singly or in
the aggregate, in an amount equal to or greater than $100,000, or any interest
or premium thereon, when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Debt; or any other default under any agreement or
instrument relating to any such Debt, or any other event, shall occur and shall
continue after the applicable grace or cure period, if any, specified in such
agreement or instrument, if the effect of such default or event is to
accelerate, or to permit the acceleration of, the maturity of such Debt; or any
such Debt shall be declared to be due and payable, or required to be prepaid
(other than by a regularly scheduled required prepayment), prior to the stated
maturity thereof; or
(f) Borrower, any Subsidiary of Borrower or any other Obligor shall
generally not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally, or shall make a general assignment for
the benefit of creditors; or any proceeding shall be instituted by or against
Borrower, any Subsidiary of Borrower or any other Obligor seeking to adjudicate
it a bankrupt or insolvent, or seeking liquidation, winding-up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under any Debtor Relief Laws, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or for any
substantial part of its property; or Borrower, any Subsidiary of Borrower or any
other Obligor shall take any action to authorize any of the actions set forth
above in this Section 7.1(f); or
(g) Any judgment or order for the payment of money in excess of 10% of
Unrestricted Cash (calculated as at the date of entry of the judgment or order)
shall be rendered against Borrower, any Subsidiary of Borrower or any other
Obligor and either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order or (ii) there shall be any period of 30
consecutive days during which a stay of enforcement of such judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect; or
(h) Lender for any reason shall cease to have a valid and perfected
first priority security interest in any material portion (as reasonably
determined by Lender) of the Collateral purported to be covered thereby; or
(i) FDA or any Tribunal shall issue any order resulting in the banning,
recall or seizure of any Device of Borrower or any Subsidiary of Borrower the
sales of which Device constituted 5% or more of gross sales revenue of Borrower
(determined on a consolidated basis) for the twelve months preceding the date
such order is issued; or
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(j) Any Inventory of Borrower or any Subsidiary of Borrower produced in
the United States of America is not produced in compliance with the Fair Labor
Standards Act and such failure results in the banning, recall or seizure of
Inventory constituting 5% or more of the value (valued at the greater of market
or book value without giving effect to such ban, recall or seizure or any other
write down is the value of such Inventory) of all Inventory of Borrower or such
Subsidiary, respectively; or
(k) Any material provision of the Loan Papers shall at any time for any
reason cease to be valid and binding on Borrower or any other Obligor or shall
be declared to be null and void, or the validity or enforceability thereof shall
be contested by Borrower or any other Obligor, or a proceeding shall be
commenced by any Tribunal having jurisdiction over Borrower, any other Obligor
or any Collateral, seeking to establish the invalidity or unenforceability
thereof and such proceeding (if commenced by a Person other than Borrower or any
other Obligor) shall remain undismissed or unstayed for a period of 30 days, or
Borrower or any other Obligor shall deny that it has any or further liability or
obligation thereunder; or
(l) The occurrence of a default or event of default (howsoever
designated) contained in any other Loan Paper and such default or event of
default shall continue beyond any applicable grace or cure period.
7.2 Remedies Upon Default. If an Event of Default specified in Section
7.1(f) shall occur and be continuing, the aggregate unpaid principal balance of
and accrued interest on the Obligation shall thereupon become due and payable
and the Facility A Commitment and the Facility B Commitment shall immediately
terminate concurrently therewith, without any action by Lender and without
diligence, presentment, demand, protest, notice of protest or intent to
accelerate, or notice of any other kind, all of which are hereby expressly
waived. Should any other Event of Default occur and be continuing, Lender may do
any one or more of the following:
(a) Acceleration. Declare the entire unpaid balance of the Obligation,
or any part thereof, immediately due and payable, whereupon it shall be due and
payable without any action by Lender and without diligence, presentment, demand,
protest, notice of protest or intent to accelerate or notice of any other kind,
all of which are hereby expressly waived.
(b) Termination. Terminate the Facility A Commitment and the Facility B
Commitment.
(c) Judgment. Reduce any claim to judgment.
(d) Rights. Exercise any and all Rights afforded by the Laws of the
State of Texas or any other jurisdiction, including, but not limited to, the
UCC, or by any other Loan Papers, or by Law or equity, or otherwise.
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(e) Offset. Exercise the Rights of offset and/or banker's Lien against
the interest of Borrower and each other Obligor in and to every account and
other property of Borrower and each other Obligor which is in the possession of
Lender, to the extent of the full amount of the Obligation.
7.3 Performance by Lender. Should any covenant, duty or agreement of
Borrower fail to be performed in all material respects in accordance with the
terms of this Agreement or the Collateral Documents, Lender may, at its option,
perform, or attempt to perform, such covenant, duty or agreement on behalf of
Borrower. In such event, Borrower shall, at the request of Lender, promptly pay
any amount expended by Lender in such performance or attempted performance to
Lender at Lender's Principal Office, together with interest thereon at the
lesser of (a) the Prime Rate plus 3% and (b) the Highest Lawful Rate from the
date of such expenditure by Lender until paid. Notwithstanding the foregoing, it
is expressly understood that Lender shall not have any liability or
responsibility for the performance of any duties of Borrower hereunder.
7.4 Lender Not in Control. None of the covenants or other provisions
contained in this Agreement shall, or shall be deemed to, give Lender the Rights
or power to exercise control over the affairs management of Borrower, the power
of Lender being limited to the Right to exercise the remedies provided in this
Article VII; provided that, if Lender becomes the owner of any interest in
Borrower, whether through foreclosure or otherwise, Lender shall be entitled to
exercise such legal Rights as it may have by being an owner of such interest in
Borrower.
7.5 Waivers. The acceptance by Lender at any time and from time to time
of part payment on the Obligation shall not be deemed to be a waiver of any
Event of Default or Default then existing. No waiver by Lender of any particular
Event of Default or Default shall be deemed to be a waiver of any Event of
Default or Default other than said particular Event of Default or Default. No
delay or omission by Lender in exercising any Right under any Loan Papers shall
impair such Right or be construed as a waiver thereof or an acquiescence
therein, nor shall any single or partial exercise of any such Right preclude
other or further exercise thereof, or the exercise of any other Right under the
Loan Papers or otherwise.
7.6 Cumulative Rights. All Rights available to Lender under the Loan
Papers shall be cumulative of and in addition to all other Rights granted to
Lender at Law or in equity, whether or not the Obligation be due and payable and
whether or not Lender shall have instituted any suit for collection or other
action in connection with any Loan Paper.
7.7 Expenditures by Lender. Any sums, including reasonable attorneys'
fees, spent by Lender pursuant to the exercise of any Right provided in this
Article VII shall become part of the Obligation and shall bear interest at a
rate per annum equal to the lesser of (a) the Prime Rate plus 3% and (b) the
Highest Lawful Rate from the date spent until the date repaid by Borrower.
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ARTICLE VIII. MISCELLANEOUS
8.1 Money. Unless stipulated otherwise, all references herein to
"Dollars", "money", "payments", or other similar financial or monetary terms,
are references to currency of the United States of America.
8.2 Headings. The headings, captions and arrangements used in this
Agreement and the other Loan Papers are, unless specified otherwise, for
convenience only and shall not be deemed to limit, amplify or modify the terms
of any Loan Paper, nor affect the meaning thereof.
8.3 Articles, Sections, and Exhibits. All references to "Article",
"Sections", "subparagraphs" or "subsections" contained herein are, unless
specifically indicated otherwise, references to articles, sections,
subparagraphs and subsections of this Agreement. All references to "Exhibits"
and "Schedules" contained herein are references to exhibits and schedules
attached hereto, all of which are made a part hereof for all purposes, the same
as if set forth herein verbatim. If any exhibit or schedule attached hereto
which is to be executed and delivered contains blanks or is otherwise required
to be updated from time to time, it shall be completed correctly and in
accordance with the terms and provisions contained and as contemplated herein
prior to, at the time of or after the execution and delivery thereof.
8.4 Notices and Deliveries.
(a) Manner of Delivery. All notices, communications and materials
(including all Information) to be given or delivered pursuant to this Agreement
shall, except in those cases where giving notice by telephone is expressly
permitted, be given or delivered in writing. All written notices, communications
and materials shall be sent by registered or certified mail, postage prepaid,
return receipt requested, by telecopier, or delivered by hand. In the event of a
discrepancy between any telephonic notice and any written confirmation thereof,
such written confirmation shall be deemed the effective notice except to the
extent Lender or Borrower has acted in reliance on such telephonic notice.
(b) Addresses. All notices, communications and materials to be given or
delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers and to the
attention of the following individuals or departments:
(i) if to Borrower, to it at:
Quest Medical, Inc.
One Allentown Parkway
Allen, Texas 75002
Telephone No: (214) 390-9800
Telecopier No: (214) 390-9687
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Attention: F. Robert Merrill III
if to Lender, to it at:
NationsBank of Texas, N.A.
NationsBank Plaza
901 Main Street
7th Floor
Dallas, Texas 75202
Telephone No: (214) 508-0365
Telecopier No: (214) 508-3140
Attention: Commercial Banking
or at such other address, telecopier or telephone number or to the attention of
such other individual or department as the party to which such information
pertains may hereafter specify for the purpose in a notice to the other
specifically captioned "Notice of Change of Address".
(c) Effectiveness. Each notice, communication and any material to be
given or delivered to Lender or Borrower pursuant to this Agreement shall be
effective or deemed delivered or furnished (i) if sent by certified mail, return
receipt requested, on the fifth Business Day after such notice, communication or
material is deposited in the mail, addressed as above provided, (ii) if sent by
telecopier, when such notice, communication or material is transmitted to the
appropriate number determined as above provided in this Section 8.4 and the
appropriate receipt is received or acknowledged, (iii) if sent by hand delivery
or overnight courier, when left at the address of the addressee addressed as
above provided and the appropriate receipt is received or acknowledged, and (iv)
if given by telephone, when communicated to the individual or any member of the
department specified as the individual or department to whose attention notices,
communications and materials are to be given or delivered except that notices of
a change of address, telecopier or telephone number or individual or department
to whose attention notices, communications and materials are to be given or
delivered shall not be effective until received.
8.5 Place of Payment. All sums payable to Lender hereunder shall be
paid to Lender at either Lender's Principal Office or at a branch of Lender
within Dallas or Collin Counties, Texas, not later than noon, Dallas time, on
the date due, in immediately available funds. Except as provided in Article II,
if any payment falls due on other than a Business Day, then such due date shall
be extended to the next succeeding Business Day, and interest on such amount (if
applicable) shall be payable in respect to such extension.
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8.6 Survival of Agreements. All covenants, agreements, representations
and warranties made herein shall survive the execution and the delivery of the
Agreement, the Notes and the other Loan Papers.
8.7 Parties in Interest. All covenants and agreements contained in the
Loan Papers shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto, except that Borrower may not assign its rights
hereunder without the prior written consent of Lender.
8.8 Expenses. Borrower agrees (a) to pay all out-of-pocket expenses of
Lender in connection with the negotiation and preparation of this Agreement,
including exhibits and amendments, consents and waivers to any of the other Loan
Papers as may from time to time hereafter be requested or required, and the
reasonable fees and expenses of Special Counsel from time to time in connection
with the negotiation, preparation and execution of the Loan Papers, and (b) to
pay or reimburse Lender for all reasonable costs and expenses, including
reasonable fees and expenses of counsel to Lender, incurred in connection with
the enforcement or preservation of any rights under or the collection of any
amounts due pursuant to any of the Loan Papers. The obligations of Borrower
under this Section 8.8 shall survive any termination of this Agreement.
8.9 Governing Law. This Agreement and all other Loan Papers shall be
deemed contracts made under the Laws of Texas and shall be construed and
enforced in accordance with and governed by the Laws of Texas, except to the
extent federal Laws govern the validity, construction, enforcement and
interpretation of all or any part of the Loan Papers. Without excluding any
other jurisdiction, Borrower agrees that the courts of Texas will have
jurisdiction over proceedings in connection herewith. Borrower and Lender hereby
agree that the provisions of Art. 5069-15.01 et seq. of the Revised Civil
Statutes of Texas, 1925, as amended, shall not apply to this Agreement and the
Notes.
8.10 MANDATORY ARBITRATION. (A) ANY CONTROVERSY OR CLAIM BETWEEN OR
AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING
ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY
BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT
APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR
THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION
SERVICES, INC. ("JAMS"), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT
OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO
THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING,
TO COMPEL ARBITRATION OF ANY CONTROVERSY
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OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER
SUCH ACTION.
(b) Special Rules. The arbitration shall be conducted in Dallas, Texas
and administered by JAMS who will appoint an arbitrator; if JAMS is unable or
legally precluded from administering the arbitration, then the American
Arbitration Association will serve. All arbitration hearings will be commenced
within ninety days of the demand for arbitration; further, the arbitrator shall
only, upon a showing of cause, be permitted to extend the commencement of such
hearing for up to an additional sixty days.
(c) Reservations of Rights. Nothing in this Agreement or any other Loan
Paper shall be deemed to (i) limit the applicability of any otherwise applicable
statutes of limitation or repose and any waivers contained in this Agreement; or
(ii) be a waiver by Lender of the protection afforded to it by 12 U.S.C. Section
91 or any substantially equivalent state law; or (iii) limit the right of Lender
hereto (A) to exercise self help remedies such as (but not limited to) setoff,
or (B) to foreclose against any real or personal property collateral, or (C) to
obtain from a court provisional or ancillary remedies such as (but not limited
to) injunctive relief or the appointment of a receiver. Lender may exercise such
self help rights, foreclose upon such property, or obtain such provisional or
ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this Agreement. At Lender's option, foreclosure
under a deed of trust or mortgage may be accomplished by any of the following:
the exercise of a power of sale under the deed of trust or mortgage, or by
judicial sale under the deed of trust or mortgage, or by judicial foreclosure.
Neither this exercise of self help remedies nor the institution or maintenance
of an action for foreclosure or provisional or ancillary remedies shall
constitute a waiver of the right of any party, including the claimant in any
such action, to arbitrate the merits of the controversy or claim occasioning
resort to such remedies.
8.11 WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW,
BORROWER HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY
DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER
OR RELATING TO THIS AGREEMENT, THE OTHER LOAN PAPERS, OR ANY RELATED MATTERS,
AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A
JURY.
8.12 Maximum Amount Limitation. It is not the intention of any of the
parties to this Agreement to make an agreement violative of the Laws of any
applicable jurisdiction relating to usury. Regardless of any provision in this
Agreement, the Notes or any other Loan Paper, Lender shall never be entitled to
receive, collect or apply, as interest on the Obligation, any amount in excess
of the Maximum Amount. If Lender ever receives, collects or applies, as
interest, any such excess, such amount which would be excessive interest shall
be deemed a partial repayment of principal and treated hereunder as such; and if
principal is paid in full, any remaining excess shall be paid to Borrower. In
determining whether or not the interest paid or payable, under any specific
contingency, exceeds the Maximum Amount, Borrower and Lender shall, to the
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maximum extent permitted under Applicable Laws, (a) characterize any
nonprincipal payment as an expense, fee or premium rather than as interest, (b)
exclude voluntary prepayments and the effect thereof, and (c) amortize, prorate,
allocate and spread in equal parts, the total amount of interest throughout the
entire contemplated term of the Obligation so that the interest rate is uniform
throughout the entire term of the Obligation; provided that if the Obligation is
paid and performed in full prior to the end of the full contemplated term
thereof, and if the interest received for the actual period of existence thereof
exceeds the Maximum Amount, Lender shall refund to Borrower the amount of such
excess or credit the amount of such excess against the total principal amount
owing, and, in such event, Lender shall not be subject to any penalties provided
by any Laws for contracting for, charging or receiving interest in excess of the
Maximum Amount. This Section 8.12 shall control every other provision of all
agreements among the parties to this Agreement pertaining to the transactions
contemplated by or contained in the Notes and the other Loan Papers.
8.13 Severability. If any provision of this Agreement or any other Loan
Paper is held to be illegal, invalid or unenforceable under present or future
Laws during the term thereof, such provision shall be fully severable, the
appropriate agreement or instrument shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof,
and the remaining provisions thereof shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance therefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision there shall be added automatically as a part of such
agreement or instrument a provision as similar in terms to the illegal, invalid
or unenforceable provision as may be possible and legal, valid and enforceable.
8.14 Amendment. The provisions of this Agreement and each other Loan
Paper may not be amended, modified or waived except by the written agreement of
Borrower and Lender. This Agreement embodies the entire agreement among the
parties, supersedes all prior agreements and understandings, if any, relating to
the subject matter hereof, and may be amended only as provided above.
8.15 Exceptions to Covenants. Borrower shall not be deemed to be
permitted to take any action or fail to take any action which is permitted as an
exception to any of the covenants contained herein or which is within the
permissible limits of any of the covenants contained herein if such action or
omission would result in the breach of any other covenant contained herein.
8.16 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, but in making proof of this Agreement, it shall not be necessary to
produce or account for more than one such counterpart.
8.17 Restatement. This Agreement restates in its entirety the First
Restated Credit Agreement. All obligations of each Obligor pursuant to the First
Restated Credit Agreement are amended and restated by this Agreement, which is
not intended as a release or novation of any such obligation.
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8.18 ENTIRE AGREEMENT. THIS AGREEMENT AND THE LOAN PAPERS REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY (A) EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES, OR (B)
THE COMMITMENT LETTER, DATED SEPTEMBER 25, 1995 FROM LENDER TO BORROWER (ALL THE
TERMS AND CONDITIONS OF WHICH ARE SUPERSEDED BY THE LOAN PAPERS). THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
QUEST MEDICAL, INC.
By:
--------------------------------
F. Robert Merrill III, Vice President
NATIONSBANK OF TEXAS, N.A.
By:
--------------------------------
Brian K. Schneider, Vice President
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PROMISSORY NOTE
(Facility A Note)
$5,000,000.00 Dallas, Texas February 9, 1996
QUEST MEDICAL, INC., a Texas corporation, with its principal office
located at One Allentown Parkway, Allen, Texas 75002 ("Borrower"), for value
received, promises to pay to the order of NATIONSBANK OF TEXAS, N.A. ("Lender"),
at its Dallas Banking Center at 901 Main Street, Dallas, Texas 75202, in
immediately available funds and in lawful money of the United States of America,
the principal sum of Five Million and 00/100 Dollars ($5,000,000.00), or such
lesser sum as shall be due and payable from time to time hereunder, on December
31, 1997, or sooner, as provided in the Credit Agreement referred to below.
Borrower promises to pay interest on the unpaid principal amount of the Facility
A Advances (as defined in the Credit Agreement) from the date made until such
principal amount is paid in full, at such interest rates, and payable at such
times, as are specified in the Credit Agreement.
For the purposes of this Note, the following terms have the respective
meanings assigned to them below:
"Applicable Law" means the laws of the United States of
America applicable to contracts made or performed in the State of
Texas, including, without limitation, 12 USC 86, as amended to the date
hereof and as the same may be amended at any time and from time to time
hereafter and any other statute of the United States of America now or
at any time hereafter prescribing maximum rates of interest on loans
and extensions of credit, and the laws of the State of Texas,
including, without limitation, Article 1.04, Title 79, Revised Civil
Statutes of Texas, 1925, as the same may be amended at any time and
from time to time hereafter ("Article 1.04") and any other statute of
the State of Texas now or at any time hereafter prescribing maximum
rates of interest on loans and extensions of credit provided that
pursuant to Article 5069-15.10(b), Title 79, Revised Civil Statues,
1925, as amended, Borrower agrees that the provisions of Chapter 15,
Title 79, Revised Civil Statutes of Texas, 1925, as amended, shall not
apply to this Note.
"Highest Lawful Rate" means at the particular time in question
the maximum rate of interest which, under Applicable Law, Lender is
then permitted to charge on the obligation hereunder. If the maximum
rate of interest which, under Applicable Law, Lender is permitted to
charge on the obligation hereunder shall change after the date hereof,
the Highest Lawful Rate shall be automatically increased or decreased,
as the case may be, from time to time as of the effective time of each
change in the Highest Lawful Rate without notice to Borrower. For
purposes of determining the Highest Lawful Rate under the Applicable
Law of the State of Texas, the applicable rate ceiling shall be (i) the
indicated rate ceiling described in and computed in accordance with the
provisions of Section (a)(1) of Article 1.04, Title 79, Revised Civil
Statues of Texas 1925, as amended, or (ii) if the parties subsequently
contract as allowed by Applicable Law, the quarterly ceiling or the
annualized
<PAGE> 2
ceiling computed pursuant to Section (d) of said Article 1.04;
provided, however, that if at any time the indicated rate ceiling, the
quarterly ceiling or the annualized ceiling, as applicable, shall be
less than 18% per annum or more than 24% per annum, the provisions of
Sections (b)(1) and (2) of said Article 1.04 shall control for purposes
of such determination, as applicable.
Notwithstanding the foregoing and all other provisions of this Note and
any documents and instruments executed in connection with this Note, in no event
shall the interest payable hereon, whether before or after maturity, exceed the
Highest Lawful Rate of interest which, under Applicable Law, Lender is permitted
to charge to Borrower.
All agreements between Borrower and Lender, or any subsequent holder of
this Note, whether now existing or hereafter arising and whether written or
oral, are expressly limited so that in no contingency or event whatsoever,
whether by reason of acceleration of the maturity of this Note or otherwise,
shall the amount paid or agreed to be paid to the holder of this Note for the
use, forbearance, or detention of the funds advanced pursuant to this Note or
for the performance or payment of any covenant or obligation contained herein or
in any other document evidencing, securing or pertaining to this Note, exceed
the maximum amount permissible under Applicable Law. If from any circumstance
whatsoever fulfillment of any provision hereof or of any such other document, at
the time performance of such provision shall be due, shall involve transcending
the limit of validity prescribed by Applicable Law, then ipso facto, the
obligation to be fulfilled shall be reduced to the limit of such validity, and
if from any circumstance the holder hereof shall ever receive anything of value
deemed excess interest by Applicable Law, an amount equal to any such excess
interest shall be applied to the reduction of the principal amount owing under
this Note, and not to the payment of interest, or if such excess interest
exceeds the unpaid principal balance of this Note, such excess interest shall be
refunded to Borrower. All sums paid or agreed to be paid to any holder of this
Note for the use, forbearance or detention of any funds advanced pursuant to
this Note shall, to the extent permitted by Applicable Law, be amortized,
prorated, allocated and spread throughout the full term of this Note until
payment in full so that the rate of interest on account of the indebtedness
evidenced by this Note is uniform throughout the term hereof. The terms and
provisions of this paragraph shall control and supersede every other provision
of all agreements between Borrower and any holder of this Note.
This Note is issued pursuant to the Second Amended and Restated Credit
Agreement between Borrower and Lender dated as of February 9, 1996 (such
agreement, together with all amendments and restatements, the "Credit
Agreement"), to which reference is made for a statement of the rights and
obligations of Lender and the duties and obligations of Borrower in relation
thereto; but neither this reference to the Credit Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of
Borrower to pay unpaid principal of and interest on this Note when due. The
Credit Agreement among other things, contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon the
terms and conditions therein specified. If a breach of or default under the
Credit Agreement or any other Loan Paper (as defined in the Credit Agreement)
-2-
<PAGE> 3
shall occur, unpaid principal of and interest on this Note may be declared due
and payable without notice, at the option of the holder of this Note, in the
manner and with the effect provided thereunder. Failure to exercise this option
shall not constitute a waiver of the right to exercise the same in the event of
any subsequent default or event of default. This Note is a renewal and
restatement of the promissory note (Facility A Note) dated March 31, 1995 made
by Borrower and payable to the order of Lender in the principal amount of
$5,000,000.00, and is not a novation or impairment of such note.
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby is proved,
established or collected in any court or in any bankruptcy, receivership, debtor
relief, probate or other court proceedings, Borrower and all endorsers, sureties
and guarantors of this Note jointly and severally agree to pay reasonable
attorneys' fees and collection costs to the holder hereof in addition to the
principal and interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note hereby
severally waive demand, presentment for payment, protest, notice of protest,
notice of acceleration of and notice of intention to accelerate the maturity of
this Note, diligence in collecting, the bringing of any suit against any party
and any notice of or defense on account of any extensions, renewals, partial
payments or changes in any manner of or in this Note or in any of its terms,
provisions and covenants, or any releases or substitutions of any security, or
any delay, indulgence or other act of any trustee or any holder hereof, whether
before or after maturity.
THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THE SAME ARE
GOVERNED BY THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO
NATIONAL BANKS. THE BOOKS AND RECORDS OF LENDER SHALL CONSTITUTE PRIMA FACIE
EVIDENCE OF ALL SUMS DUE LENDER HEREUNDER.
QUEST MEDICAL, INC.
By:
-------------------------------------
F. Robert Merrill III, Vice President
-3-
<PAGE> 4
N O T I C E O F F I N A L A G R E E M E N T
----------------------------------------------------
THIS NOTE AND THE OTHER WRITTEN LOAN PAPERS EXECUTED CONTEMPORANEOUSLY WITH THIS
NOTE REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
BORROWER REPRESENTS THAT IT TODAY RECEIVED A COPY OF THIS NOTICE.
Borrower Lender
QUEST MEDICAL, INC. NATIONSBANK OF TEXAS, N.A.
By: By:
-------------------------- ------------------------------
F. Robert Merrill III, Brian K. Schneider,
Vice President Senior Vice President
-4-
<PAGE> 1
PROMISSORY NOTE
(Facility B Advance Note)
$15,000,000.00 Dallas, Texas February 9, 1996
QUEST MEDICAL, INC., a Texas corporation, with its principal office
located at One Allentown Parkway, Allen, Texas 75002 ("Borrower"), for value
received, promises to pay to the order of NATIONSBANK OF TEXAS, N.A. ("Lender"),
at its Dallas Banking Center at 901 Main Street, Dallas, Texas 75202, in
immediately available funds and in lawful money of the United States of America,
the principal sum of Fifteen Million and 00/100 Dollars ($15,000,000.00), or
such lesser sum as shall be due and payable from time to time hereunder, on
December 31, 1997, or sooner, as provided in the Credit Agreement referred to
below. Borrower promises to pay interest on the unpaid principal amount of the
Facility B Advances (as defined in the Credit Agreement) from the date made
until such principal amount is paid in full, at such interest rates, and payable
at such times, as are specified in the Credit Agreement.
For the purposes of this Note, the following terms have the respective
meanings assigned to them below:
"Applicable Law" means the laws of the United States of
America applicable to contracts made or performed in the State of
Texas, including, without limitation, 12 USC 86, as amended to the date
hereof and as the same may be amended at any time and from time to time
hereafter and any other statute of the United States of America now or
at any time hereafter prescribing maximum rates of interest on loans
and extensions of credit, and the laws of the State of Texas,
including, without limitation, Article 1.04, Title 79, Revised Civil
Statutes of Texas, 1925, as the same may be amended at any time and
from time to time hereafter ("Article 1.04") and any other statute of
the State of Texas now or at any time hereafter prescribing maximum
rates of interest on loans and extensions of credit provided that
pursuant to Article 5069-15.10(b), Title 79, Revised Civil Statues,
1925, as amended, Borrower agrees that the provisions of Chapter 15,
Title 79, Revised Civil Statutes of Texas, 1925, as amended, shall not
apply to this Note.
"Highest Lawful Rate" means at the particular time in question
the maximum rate of interest which, under Applicable Law, Lender is
then permitted to charge on the obligation hereunder. If the maximum
rate of interest which, under Applicable Law, Lender is permitted to
charge on the obligation hereunder shall change after the date hereof,
the Highest Lawful Rate shall be automatically increased or decreased,
as the case may be, from time to time as of the effective time of each
change in the Highest Lawful Rate without notice to Borrower. For
purposes of determining the Highest Lawful Rate under the Applicable
Law of the State of Texas, the applicable rate ceiling shall be (i) the
indicated rate ceiling described in and computed in accordance with the
provisions of Section (a)(1) of Article 1.04, Title 79, Revised Civil
Statues of Texas 1925, as amended, or (ii) if the parties subsequently
contract as allowed by Applicable Law, the quarterly
<PAGE> 2
ceiling or the annualized ceiling computed pursuant to Section (d) of
said Article 1.04; provided, however, that if at any time the indicated
rate ceiling, the quarterly ceiling or the annualized ceiling, as
applicable, shall be less than 18% per annum or more than 24% per
annum, the provisions of Sections (b)(1) and (2) of said Article 1.04
shall control for purposes of such determination, as applicable.
Notwithstanding the foregoing and all other provisions of this Note and
any documents and instruments executed in connection with this Note, in no event
shall the interest payable hereon, whether before or after maturity, exceed the
Highest Lawful Rate of interest which, under Applicable Law, Lender is permitted
to charge to Borrower.
All agreements between Borrower and Lender, or any subsequent holder of
this Note, whether now existing or hereafter arising and whether written or
oral, are expressly limited so that in no contingency or event whatsoever,
whether by reason of acceleration of the maturity of this Note or otherwise,
shall the amount paid or agreed to be paid to the holder of this Note for the
use, forbearance, or detention of the funds advanced pursuant to this Note or
for the performance or payment of any covenant or obligation contained herein or
in any other document evidencing, securing or pertaining to this Note, exceed
the maximum amount permissible under Applicable Law. If from any circumstance
whatsoever fulfillment of any provision hereof or of any such other document, at
the time performance of such provision shall be due, shall involve transcending
the limit of validity prescribed by Applicable Law, then ipso facto, the
obligation to be fulfilled shall be reduced to the limit of such validity, and
if from any circumstance the holder hereof shall ever receive anything of value
deemed excess interest by Applicable Law, an amount equal to any such excess
interest shall be applied to the reduction of the principal amount owing under
this Note, and not to the payment of interest, or if such excess interest
exceeds the unpaid principal balance of this Note, such excess interest shall be
refunded to Borrower. All sums paid or agreed to be paid to any holder of this
Note for the use, forbearance or detention of any funds advanced pursuant to
this Note shall, to the extent permitted by Applicable Law, be amortized,
prorated, allocated and spread throughout the full term of this Note until
payment in full so that the rate of interest on account of the indebtedness
evidenced by this Note is uniform throughout the term hereof. The terms and
provisions of this paragraph shall control and supersede every other provision
of all agreements between Borrower and any holder of this Note.
This Note is issued pursuant to the Second Amended and Restated Credit
Agreement between Borrower and Lender dated as of February 9, 1996 (such
agreement, together with all amendments and restatements, the "Credit
Agreement"), to which reference is made for a statement of the rights and
obligations of Lender and the duties and obligations of Borrower in relation
thereto; but neither this reference to the Credit Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of
Borrower to pay unpaid principal of and interest on this Note when due. The
Credit Agreement among other things, contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon the
terms and conditions therein specified. If a breach of or default under the
Credit Agreement
-2-
<PAGE> 3
or any other Loan Paper (as defined in the Credit Agreement) shall occur, unpaid
principal of and interest on this Note may be declared due and payable without
notice, at the option of the holder of this Note, in the manner and with the
effect provided thereunder. Failure to exercise this option shall not constitute
a waiver of the right to exercise the same in the event of any subsequent
default or event of default. This Note is a renewal and restatement of the
promissory note (Facility B Note) dated March 31, 1995 made by Borrower and
payable to the order of Lender in the principal amount of $15,000,000.00, and is
not a novation or impairment of such note.
If this Note is placed in the hands of an attorney for collection after
default, or if all or any part of the indebtedness represented hereby is proved,
established or collected in any court or in any bankruptcy, receivership, debtor
relief, probate or other court proceedings, Borrower and all endorsers, sureties
and guarantors of this Note jointly and severally agree to pay reasonable
attorneys' fees and collection costs to the holder hereof in addition to the
principal and interest payable hereunder.
Borrower and all endorsers, sureties and guarantors of this Note hereby
severally waive demand, presentment for payment, protest, notice of protest,
notice of acceleration of and notice of intention to accelerate the maturity of
this Note, diligence in collecting, the bringing of any suit against any party
and any notice of or defense on account of any extensions, renewals, partial
payments or changes in any manner of or in this Note or in any of its terms,
provisions and covenants, or any releases or substitutions of any security, or
any delay, indulgence or other act of any trustee or any holder hereof, whether
before or after maturity.
THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THE SAME ARE
GOVERNED BY THE FEDERAL LAWS OF THE UNITED STATES OF AMERICA APPLICABLE TO
NATIONAL BANKS. THE BOOKS AND RECORDS OF LENDER SHALL CONSTITUTE PRIMA FACIE
EVIDENCE OF ALL SUMS DUE LENDER HEREUNDER.
QUEST MEDICAL, INC.
By:
------------------------------------------
F. Robert Merrill III, Vice President
-3-
<PAGE> 4
N O T I C E O F F I N A L A G R E E M E N T
-------------------------------------------------
THIS NOTE AND THE OTHER WRITTEN LOAN PAPERS EXECUTED CONTEMPORANEOUSLY WITH THIS
NOTE REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
BORROWER REPRESENTS THAT IT TODAY RECEIVED A COPY OF THIS NOTICE.
Borrower Lender
QUEST MEDICAL, INC. NATIONSBANK OF TEXAS, N.A.
By: By:
-------------------------- ------------------------------
F. Robert Merrill III, Brian K. Schneider,
Vice President Senior Vice President
-4-
<PAGE> 1
FIRST AMENDMENT
TO SECURITY AGREEMENT,
INTELLECTUAL PROPERTY SECURITY AGREEMENT AND ASSIGNMENT,
LICENSE AGREEMENT, AND PLEDGE AGREEMENT
This First Amendment to Security Agreement, Intellectual Property
Security Agreement and Assignment, License Agreement, and Pledge Agreement (this
"First Amendment") dated as of February 9, 1996, is entered into between Quest
Medical, Inc., a Texas corporation ("Borrower"), and NationsBank of Texas, N.A.
("Lender").
BACKGROUND.
Borrower and Lender have entered into the First Amended and Restated
Credit Agreement, dated as of March 31, 1995 (the "Existing Credit Agreement").
Pursuant to the Existing Credit Agreement, Borrower executed the Security
Agreement dated as of March 31, 1995 (the "Existing Security Agreement"), the
Intellectual Property Security Agreement and Assignment dated as of March 31,
1995 (the "IP Agreement"), the License Agreement dated as of March 31, 1995 (the
"License Agreement") and the Pledge Agreement dated as of March 31, 1995 (the
"Pledge Agreement"). Borrower and Lender have entered into the Second Amended
and Restated Credit Agreement dated as of February 9, 1996 (the "Credit
Agreement"), which restates in its entirety the Existing Credit Agreement.
It is a condition precedent to the effectiveness of the Credit
Agreement that Borrower shall have executed and delivered this First Amendment.
AGREEMENT.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, Borrower and
Lender covenant and agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise defined herein
have the meaning given to them in the Credit Agreement.
2. Amendments to Security Agreement. The Security Agreement is amended as
follows:
(a) The Table of Contents is amended by deleting "Brokerage Agreements"
from the list of Schedules and substituting, in lieu thereof, "[Intentionally
Omitted]".
<PAGE> 2
(b) Paragraphs (1) and (2) of the Background section are deleted in
their entirety and the following is substituted in lieu thereof:
(1) Secured Party and Debtor have entered into the First
Amended and Restated Credit Agreement dated as of March 31, 1995 (as
amended, the "Existing Credit Agreement"), and the Security Agreement
dated as of March 31, 1995 ("Security Agreement") and related
agreements.
(2) Secured Party and Debtor have entered into the
Second Amended and Restated Credit Agreement dated as of February 9,
1996 (such agreement, together with all amendments and restatements
thereof, the "Credit Agreement") which restates in its entirety the
Existing Credit Agreement.
(c) The text of Section 1.1(k) is deleted in its entirety and
"[Intentionally Omitted]" is substituted in lieu thereof.
(d) Section 1.4 is amended by deleting "(if the security is subject to
Brokerage Agreement and the Brokerage Agreement permits such issuance)."
(e) The last sentence of Section 3.3 is amended by deleting "Section
4.2, 5.5, 5.6, 5.9, 5.10 or 5.12" and substituting, in lieu thereof, "Section
4.2, 5.5, 5.6, 5.7 or 5.9."
(f) Section 3.4(a) is amended by deleting the second sentence.
(g) Section 3.4(b) is amended by deleting the two references to
"Section 4.2, 5.5, 5.6, 5.9, 5.10 or 5.12" and substituting, in lieu of both,
"Section 4.2, 5.5, 5.6, 5.7 or 5.9."
(h) Section 3.5 is amended by deleting the third and fourth sentences.
(i) The subject heading and text of Section 3.6 are deleted in their
entirety and "[Intentionally Omitted]" is substituted in lieu thereof.
(j) Section 3.7 is amended by deleting from the second sentence "Except
for any property maintained in a Brokerage Account, if" and substituting "If" in
lieu thereof.
(k) Section 3.8 is amended by deleting "each party to a Brokerage
Agreement and".
(l) The text of Schedule 7 is deleted in its entirety and
"[Intentionally Omitted]" is substituted in lieu thereof.
-2-
<PAGE> 3
3. Amendments to IP Agreement. The IP Agreement is amended by deleting Paragraph
(1) of the Background section in its entirety and substituting the following in
lieu thereof:
(1) Secured Party and Debtor have entered into the First
Amended and Restated Credit Agreement dated as of March 31, 1995 (such
agreement, together with all amendments and restatements thereof, the
"Existing Credit Agreement"), and the Second Amended and Restated
Credit Agreement dated as of February 9, 1996 (such agreement, together
with all amendments and restatements thereof, the "Credit Agreement").
The Credit Agreement restates in its entirety the Existing Credit
Agreement.
4. Amendments to License Agreement. The License Agreement is amended by deleting
the second "WHEREAS" paragraph in its entirety and substituting the following in
lieu thereof:
WHEREAS, Licensee and Licensor have entered into the First
Amended and Restated Credit Agreement dated as of March 31, 1995 (such
agreement, together with all amendments and restatements thereof, the
"Existing Credit Agreement");
WHEREAS, Licensee and Licensor have entered into the Second
Amended and Restated Credit Agreement dated as of February 9, 1996
(such agreement, together with all amendments and restatements thereof,
the "Credit Agreement");
WHEREAS, the Credit Agreement restates in its entirety the
Existing Credit Agreement;
5. Amendments to Pledge Agreement. The Pledge Agreement is amended by deleting
Paragraph (1) of the Background section in its entirety and substituting the
following in lieu thereof:
(1) Pledgor and Secured Party have entered into the First
Amended and Restated Credit Agreement dated as of March 31, 1995 (such
agreement, together with all amendments and restatements thereof, the
"Existing Credit Agreement"), and the Second Amended and Restated
Credit Agreement dated as of February 9, 1996 (such agreement, together
with all amendments and restatements thereof, the "Credit Agreement"),
which restates in its entirety the Existing Credit Agreement.
6. Representations and Warranties of Borrower. Borrower represents and warrants
to Lender that, as of the date hereof and after giving effect to the amendments
in Sections 2, 3, 4, and 5:
-3-
<PAGE> 4
(a) The representations and warranties contained in each of the
Security Agreement, the IP Agreement, the License Agreement, and the Pledge
Agreement are true and correct in all material respects on and as of the date
hereof as though made on and as of the date hereof, except for such
representations and warranties which relate to a particular date.
(b) Borrower has full power and authority to execute, deliver and
perform this First Amendment, and this First Amendment constitutes the legal,
valid and binding obligation of Borrower, enforceable in accordance with its
terms.
(c) No authorization, approval, consent or other action by, notice to,
or filing with, any Tribunal or other Person, is required for the execution,
delivery or performance by Borrower of this First Amendment.
7. Conditions of Effectiveness. This First Amendment shall be effective on the
date all conditions precedent to the initial Advance under Section 3.1 of the
Credit Agreement have occurred or exist.
8. Reference to the Security Agreement, the IP Agreement, the License Agreement
and the Pledge Agreement.
(a) Upon the effectiveness of this First Amendment, each reference in
the Security Agreement, the IP Agreement, the License Agreement, and the Pledge
Agreement, respectively, to "this Agreement", "hereunder", or words of like
import shall mean and be a reference to the Security Agreement, the IP
Agreement, the License Agreement, and the Pledge Agreement, respectively, as
affected and amended hereby.
(b) The Security Agreement, the IP Agreement, the License Agreement,
and the Pledge Agreement, as affected by the amendments referred to above, shall
remain in full force and effect and are hereby ratified and confirmed.
(c) THE SECURITY AGREEMENT, THE IP AGREEMENT, THE LICENSE AGREEMENT,
AND THE PLEDGE AGREEMENT, AS AFFECTED BY THE AMENDMENTS CONTAINED IN THIS FIRST
AMENDMENT, TOGETHER WITH EACH OTHER LOAN PAPER, REPRESENT THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
9. Execution in Counterparts. This First Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which
-4-
<PAGE> 5
when so executed and delivered shall be deemed to be an original and all of
which taken together shall constitute but one and the same instrument.
10. Governing Law; Binding Effect. This First Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and be binding upon
Borrower and Lender and their respective successors and assigns.
11. Headings. Section headings in this First Amendment are included herein for
convenience of reference only and shall not constitute part of this First
Amendment for any other purpose.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date first above written.
QUEST MEDICAL, INC.
By:
------------------------------------------
F. Robert Merrill III, Vice President
NATIONSBANK OF TEXAS, N.A.
By:
------------------------------------------
Brian K. Schneider, Vice President
-5-
<PAGE> 1
FIRST AMENDMENT
TO SECURITY AGREEMENT,
INTELLECTUAL PROPERTY SECURITY AGREEMENT AND ASSIGNMENT,
LICENSE AGREEMENT, AND GUARANTY
This First Amendment to Security Agreement, Intellectual Property
Security Agreement and Assignment, License Agreement, and Guaranty (this "First
Amendment") dated as of February 9, 1996, is entered into between Neuromed,
Inc., a Florida corporation ("Neuromed"), and NationsBank of Texas, N.A.
("Lender").
BACKGROUND.
Quest Medical, Inc. ("Borrower"), and Lender have entered into the
First Amended and Restated Credit Agreement, dated as of March 31, 1995 (the
"Existing Credit Agreement"). Pursuant to the Existing Credit Agreement,
Neuromed executed the Security Agreement dated as of March 31, 1995 (the
"Existing Security Agreement"), the Intellectual Property Security Agreement and
Assignment dated as of March 31, 1995 (the "IP Agreement"), the License
Agreement dated as of March 31, 1995 (the "License Agreement") and the Guaranty
dated as of March 31, 1995 (the "Guaranty"). Borrower and Lender have entered
into the Second Amended and Restated Credit Agreement dated as of February 9,
1996 (the "Credit Agreement"), which restates in its entirety the Existing
Credit Agreement.
It is a condition precedent to the effectiveness of the Credit
Agreement that Neuromed shall have executed and delivered this First Amendment.
AGREEMENT.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, Neuromed and
Lender covenant and agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise defined herein
have the meaning given to them in the Credit Agreement.
2. Amendments to Security Agreement. The Security Agreement is amended as
follows:
(a) Paragraphs (1) and (2) of the Background section are deleted in
their entirety and the following is substituted in lieu thereof:
<PAGE> 2
(1) Secured Party and Quest Medical, Inc., a Texas corporation
("Borrower") have entered into the First Amended and Restated Credit
Agreement dated as of March 31, 1995 (as amended, the "Existing Credit
Agreement"), pursuant to which Debtor and Secured Party entered into
the Security Agreement dated as of March 31, 1995 ("Security
Agreement") and related agreements.
(2) Secured Party and Borrower have entered into the Second
Amended and Restated Credit Agreement dated as of February 9, 1996
(such agreement, together with all amendments and restatements thereof,
the "Credit Agreement") which restates in its entirety the Existing
Credit Agreement.
(b) Section 1.4 is amended by deleting "(if the security is subject to
Brokerage Agreement and the Brokerage Agreement permits such issuance)."
(c) The last sentence of Section 3.3 is amended by deleting "Section
4.2, 5.5, 5.6, 5.9, 5.10 or 5.12" and substituting, in lieu thereof, "Section
4.2, 5.5, 5.6, 5.7 or 5.9."
(d) Section 3.4(a) is amended by deleting the second sentence.
(e) Section 3.4(b) is amended by deleting the two references to
"Section 4.2, 5.5, 5.6, 5.9, 5.10 or 5.12" and substituting, in lieu of both,
"Section 4.2, 5.5, 5.6, 5.7 or 5.9."
(f) Section 3.5 is amended by deleting the third and fourth sentences.
(g) The subject heading and text of Section 3.6 are deleted in their
entirety and "[Intentionally Omitted]" is substituted in lieu thereof.
(h) Section 3.7 is amended by deleting from the second sentence "Except
for any property maintained in a Brokerage Account, if" and substituting "If" in
lieu thereof.
(i) Section 3.8 is amended by deleting "each party to a Brokerage
Agreement and."
3. Amendments to IP Agreement. The IP Agreement is amended by deleting Paragraph
(1) of the Background section in its entirety and substituting the following in
lieu thereof:
(1) Secured Party and Quest Medical, Inc., a Texas corporation
("Borrower"), have entered into the First Amended and Restated Credit
Agreement dated as of March 31, 1995 (such agreement, together with all
amendments and
-2-
<PAGE> 3
restatements thereof, the "Existing Credit Agreement"), and the Second
Amended and Restated Credit Agreement dated as of February 9, 1996
(such agreement, together with all amendments and restatements thereof,
the "Credit Agreement"). The Credit Agreement restates in its entirety
the Existing Credit Agreement.
4. Amendments to License Agreement. The License Agreement is amended by deleting
the second "WHEREAS" paragraph in its entirety and substituting the following in
lieu thereof:
WHEREAS, Licensee and Quest Medical, Inc., a Texas corporation
("Borrower"), have entered into the First Amended and Restated Credit
Agreement dated as of March 31, 1995 (such agreement, together with all
amendments and restatements thereof, the "Existing Credit Agreement");
WHEREAS, Licensee and Licensor have entered into the Second
Amended and Restated Credit Agreement dated as of February 9, 1996
(such agreement, together with all amendments and restatements thereof,
the "Credit Agreement");
WHEREAS, the Credit Agreement restates in its entirety the
Existing Credit Agreement;
5. Amendments to Guaranty. The Guaranty is amended by deleting the initial
paragraph in its entirety and substituting the following in lieu thereof:
THIS GUARANTY is entered into as of this 31st day of March,
1995 by Neuromed, Inc., a Florida corporation ("Guarantor"), in favor
of NationsBank of Texas, N.A. ("Lender") under the First Amended and
Restated Credit Agreement dated as of March 31, 1995 (such agreement,
together with all amendments and restatements thereof, the "Existing
Credit Agreement"), between Quest Medical, Inc. ("Borrower") and
Lender, as restated in its entirety by the Second Amended and Restated
Credit Agreement dated as of February 9, 1996 (such agreement, together
with all amendments and restatements thereof, the "Credit Agreement"),
between Borrower and Lender.
6. Representations and Warranties of Neuromed. Neuromed represents and warrants
to Lender that, as of the date hereof and after giving effect to the amendments
in Sections 2, 3, 4, and 5:
(a) The representations and warranties contained in each of the
Security Agreement, the IP Agreement, the License Agreement, and the Guaranty
are true and correct in all material respects on and as of the date hereof as
though made on and as of the date hereof, except for such representations and
warranties which relate to a particular date.
-3-
<PAGE> 4
(b) Neuromed has full power and authority to execute, deliver and
perform this First Amendment, and this First Amendment constitutes the legal,
valid and binding obligation of Neuromed, enforceable in accordance with its
terms.
(c) No authorization, approval, consent or other action by, notice to,
or filing with, any Tribunal or other Person, is required for the execution,
delivery or performance by Neuromed of this First Amendment.
Conditions of Effectiveness. This First Amendment shall be effective on
the date all conditions precedent to the initial Advance under Section 3.1 of
the Credit Agreement have occurred or exist.
8. Reference to the Security Agreement, the IP Agreement, the License Agreement
and the Guaranty.
(a) Upon the effectiveness of this First Amendment, each reference in
the Security Agreement, the IP Agreement, the License Agreement, and the
Guaranty, respectively, to "this Agreement", "hereunder", or words of like
import shall mean and be a reference to the Security Agreement, the IP
Agreement, the License Agreement, and the Guaranty, respectively, as affected
and amended hereby.
(b) The Security Agreement, the IP Agreement, the License Agreement,
and the Guaranty, as affected by the amendments referred to above, shall remain
in full force and effect and are hereby ratified and confirmed.
(c) THE SECURITY AGREEMENT, THE IP AGREEMENT, THE LICENSE AGREEMENT,
AND THE GUARANTY, AS AFFECTED BY THE AMENDMENTS CONTAINED IN THIS FIRST
AMENDMENT, TOGETHER WITH EACH OTHER LOAN PAPER, REPRESENT THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
9. Execution in Counterparts. This First Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original and
all of which taken together shall constitute but one and the same instrument.
-4-
<PAGE> 5
10. Governing Law; Binding Effect. This First Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and be binding upon
Neuromed and Lender and their respective successors and assigns.
11. Headings. Section headings in this First Amendment are included herein for
convenience of reference only and shall not constitute part of this First
Amendment for any other purpose.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date first above written.
NEUROMED, INC.
By:
------------------------------------------
F. Robert Merrill III, Vice President
NATIONSBANK OF TEXAS, N.A.
By:
------------------------------------------
Brian K. Schneider, Vice President
-5-
<PAGE> 1
QUEST MEDICAL, INC.
COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1995 1994 1993
------------- ----------- -----------
<S> <C> <C> <C>
Primary and fully diluted:
Weighted average common
shares outstanding 6,267,439 5,256,683 5,253,062
Stock options and warrants -
based on the treasury stock
method using average market price (which was
higher than the year end price) 374,643 306,360
------------ ----------- ----------
Primary weighted average common and
common equivalent shares outstanding 6,642,082 5,256,683 5,559,422
============ =========== ==========
Earnings (loss) before cumulative effect of
change in accounting principle and
extraordinary item $(10,104,998) $(1,719,193) $ 647,037
------------ ----------- ----------
Extraordinary item - loss on early extinguishment of debt $ (269,045) $ -- $ --
------------ ----------- ----------
Cumulative effect of change in
accounting principle $ -- $ -- $ 169,308
------------- ----------- ----------
Net earnings (loss) $(10,374,043) $(1,719,193) $ 816,345
============ =========== ==========
Earnings (loss) before cumulative effect of
change in accounting principle and
extraordinary item per share $ (1.52) $ (.33) $ .12
------------ ----------- ----------
Extraordinary item per share $ (.04) $ -- $ --
------------ ----------- ----------
Cumulative effect of change in accounting
principle per share $ -- $ -- $ .03
------------ ----------- ----------
Net earnings (loss) per share $ (1.56) $ (.33) $ .15
============= =========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
Neuromed, Inc. Florida
- 2 -
<PAGE> 1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 - Nos. 2-82414, 2-91410, 33-235312, and 33-00967) pertaining to the
Quest Medical, Inc. 1979 Amended and Restated Employees' Stock Option Plan; the
Quest Medical, Inc. Directors' Stock Option Plan; the Quest Medical, Inc. 1987
Employees' Stock Option Plan; and the Quest Medical, Inc. 1995 Stock Option
Plan, the Quest Medical, Inc. Sales and Marketing Employees Stock Option Plan,
and the Heaton Stock Option Plan and the related Prospectuses of our report
dated March 6, 1996, with respect to the consolidated financial statements of
Quest Medical, Inc. and subsidiaries, included in the Annual Report (Form
10-KSB) for the year ended December 31, 1995.
Ernst & Young LLP
Dallas, Texas
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,325,630
<SECURITIES> 2,588,547
<RECEIVABLES> 5,069,572
<ALLOWANCES> 114,337
<INVENTORY> 6,107,192
<CURRENT-ASSETS> 16,688,067
<PP&E> 14,046,280
<DEPRECIATION> 3,784,510
<TOTAL-ASSETS> 44,495,757
<CURRENT-LIABILITIES> 4,504,830
<BONDS> 0
0
0
<COMMON> 407,367
<OTHER-SE> 30,462,683
<TOTAL-LIABILITY-AND-EQUITY> 44,495,757
<SALES> 25,320,990
<TOTAL-REVENUES> 25,320,990
<CGS> 10,624,215
<TOTAL-COSTS> 22,478,238
<OTHER-EXPENSES> 1,168,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,657,818
<INCOME-PRETAX> (9,949,884)
<INCOME-TAX> 155,114
<INCOME-CONTINUING> (10,104,998)
<DISCONTINUED> 0
<EXTRAORDINARY> (269,045)
<CHANGES> 0
<NET-INCOME> (10,374,043)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
