<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _________
COMMISSION FILE NUMBER 0-10521
QUEST MEDICAL, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 75-1646002
- ----------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
ONE ALLENTOWN PARKWAY, ALLEN, TEXAS 75002
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(972) 390-9800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING AT
TITLE OF EACH CLASS APRIL 30, 1998
- ------------------------------- ----------------------------------
COMMON STOCK, $.05 PAR VALUE 8,656,753
<PAGE> 2
QUEST MEDICAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION 2
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3-4
Condensed Consolidated Statements of Operations
For the Three Months Ended
March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended
March 31, 1998 and 1997 6
Condensed Consolidated Statements of Stockholders' Equity
For the Year Ended December 31, 1997
and the Three Months Ended March 31, 1998 7
Notes to Condensed Consolidated
Financial Statements 8-13
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-19
PART II. OTHER INFORMATION 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
2
<PAGE> 4
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
ASSETS (UNAUDITED) 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $16,530,762 $ 747,828
Marketable securities 1,050,563 1,455,864
Receivables:
Trade accounts, less allowance for doubtful
accounts of $225,061 in 1998 and $212,375
in 1997 2,626,691 2,398,327
Interest and other 199,381 209,595
----------- -----------
Total receivables 2,826,072 2,607,922
----------- -----------
Inventories:
Raw materials 959,721 1,056,718
Work-in-process 279,728 323,929
Finished goods 1,534,606 1,597,840
----------- -----------
Total inventories 2,774,055 2,978,487
----------- -----------
Net assets of discontinued operations sold in 1998 -- 12,831,318
Deferred income taxes 400,498 2,288,192
Prepaid expenses and other current assets 278,586 476,716
----------- -----------
Total current assets 23,860,536 23,386,327
----------- -----------
Property, plant and equipment:
Land 1,927,900 1,927,900
Building and improvements 5,254,945 5,254,945
Furniture and fixtures 645,687 624,753
Machinery and equipment 1,195,864 920,879
----------- -----------
9,024,396 8,728,477
Less accumulated depreciation and
amortization 1,462,525 1,317,362
----------- -----------
Net property, plant and equipment 7,561,871 7,411,115
----------- -----------
Cost in excess of net assets acquired, net of
accumulated amortization of $1,317,164 in 1998
and $1,178,014 in 1997 9,494,500 9,633,650
Patents, net of accumulated amortization of
$186,146 in 1998 and $148,958 in 1997 2,813,854 2,851,042
Purchased technology from acquisitions, net of
accumulated amortization of $800,000 in 1998
and $733,334 in 1997 3,200,000 3,266,666
Tradenames, net of accumulated amortization
of $375,000 in 1998 and $343,750 in 1997 2,125,000 2,156,250
Other assets, net of accumulated amortization of $17,248 in 1998
268,653 277,270
----------- -----------
$49,324,414 $48,982,320
=========== ===========
</TABLE>
3
<PAGE> 5
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED) 1997
----------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 317,831 $ 240,249
Short-term notes payable and current maturities
of long-term notes payable 249,113 8,257,348
Accrued salary and employee benefit costs 396,317 381,735
Income taxes payable 1,541,296 --
Other accrued expenses 1,089,506 379,444
----------- -----------
Total current liabilities 3,594,063 9,258,776
----------- -----------
Notes payable 3,588,488 3,635,027
Deferred income taxes 2,149,288 2,182,580
Commitments and contingencies
Stockholders' equity:
Common stock of $.05 par value. Authorized 25,000,000 shares;
issued 8,682,045 shares in 1998 and 8,635,509 in 1997
434,102 431,775
Additional paid-in capital 41,918,950 40,780,717
Retained earnings (deficit) (1,777,476) (7,268,061)
Cost of common shares in treasury; 73,000 shares in 1998 (508,008) --
Unrealized loss on marketable securities net of tax benefit
of $38,633 in 1998 and $19,831 in 1997 (74,993) (38,494)
----------- -----------
Total stockholders' equity 39,992,575 33,905,937
$49,324,414 $48,982,320
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 6
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net revenue $ 4,423,455 $ 3,135,581
Cost of revenue 1,257,632 917,578
----------- -----------
Gross profit 3,165,823 2,218,003
----------- -----------
Operating expenses:
Research and development 463,948 265,018
Marketing 1,119,660 897,095
Amortization of intangibles 291,502 263,107
General and administrative 519,310 430,810
----------- -----------
2,394,420 1,856,030
----------- -----------
Earnings from operations 771,403 361,973
----------- -----------
Other income (expenses):
Interest expense (96,392) (136,625)
Interest and other income 172,362 12,704
Loss on sale of assets and marketable securities -- (36,011)
----------- -----------
75,970 (159,932)
----------- -----------
Earnings from continuing operations before income
taxes 847,373 202,041
Income taxes 345,729 64,150
----------- -----------
Net earnings from continuing operations 501,644 137,891
----------- -----------
Discontinued Operations:
Loss from discontinued operations, net of income tax
benefits of $129,711 in 1998 and $7,407 in 1997 (211,634) (43,525)
Gain on sale of assets of discontinued operations, net
of income tax expense of $3,216,482 5,200,575 --
----------- -----------
Net earnings (loss) from discontinued operations 4,988,941 (43,525)
----------- -----------
Net earnings $ 5,490,585 $ 94,366
=========== ===========
Basic earnings (loss) per share:
Continuing operations $ .06 $ .02
=========== ===========
Discontinued operations $ .58 $ (.01)
=========== ===========
Net earnings $ .64 $ .01
=========== ===========
Diluted earnings (loss) per share:
Continuing operations $ .06 $ .02
=========== ===========
Discontinued operations $ .56 $ (.01)
=========== ===========
Net earnings $ .62 $ .01
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 7
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations $ 501,644 $ 137,891
----------- -----------
Adjustments to reconcile net earnings from continuing
operations to net cash provided by operating activities
Depreciation and amortization 436,665 353,409
Loss (gain) on sale of assets and marketable
securities -- 36,011
Deferred income taxes (33,292) 56,743
Changes in assets and liabilities:
Receivables (218,150) 16,134
Inventories 204,432 (37,013)
Prepaid expenses and other assets 189,499 80,504
Income taxes payable 361,021 --
Accounts payable 77,582 (224,698)
Accrued expenses 128,840 44,041
----------- -----------
Total adjustments 1,146,597 325,131
----------- -----------
Net cash provided by continuing operations 1,648,241 463,022
Net cash provided by discontinued operations 59,049 19,614
----------- -----------
Net cash provided by operating activities 1,707,290 482,636
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities -- (199,410)
Proceeds from sales of marketable securities 350,000 614,929
Additions to property, plant and equipment-continuing
operations (295,919) (36,360)
Additions to property, plant and equipment-discontinued
operations
(12,060) (91,593)
Acquisition -- (4,472,197)
Net proceeds from sale of discontinued operations 22,460,499 --
----------- -----------
Net cash provided by (used in) investing
activities 22,502,520 (4,184,463)
----------- -----------
Cash flows from financing activities:
Exercise of stock options 135,906 56,926
Purchase of treasury stock (508,008) --
Proceeds from short-term obligations -- 3,743,506
Payment of short-term obligations (8,011,826) (224,494)
Payment of long-term debt (42,948) (39,602)
----------- -----------
Net cash provided by (used in) financing
activities (8,426,876) 3,536,336
----------- -----------
Net increase (decrease) in cash and cash equivalents 15,782,934 (165,491)
Cash and cash equivalents at beginning of year 747,828 696,196
----------- -----------
Cash and cash equivalents at March 31 $16,530,762 $ 530,705
=========== ===========
Supplemental cash flow information is presented below:
Income taxes paid $ 18,000 $ --
=========== ===========
Interest paid $ 135,321 $ 229,635
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 8
QUEST MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional earnings
Shares Amount paid-in capital (deficit)
------------ -------- --------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 8,338,510 $416,926 $38,699,517 $(7,992,082)
Shares issued upon exercise
of stock options 296,999 14,849 907,537 --
Adjustment to unrealized
losses on marketable
securities -- -- -- --
Tax benefit from employee
stock option exercises -- -- 1,173,663 --
Net earnings -- -- -- 724,021
--------- -------- ----------- -----------
Balance at December 31, 1997 8,635,509 431,775 40,780,717 (7,268,061)
Shares issued upon exercise
of stock options 46,536 2,327 133,579 --
Compensation expense
resulting from changes
to stock options -- -- 1,004,654 --
Purchase of 73,000 common
shares, at cost -- -- -- --
Adjustment to unrealized
losses on marketable
securities -- -- -- --
Net earnings -- -- -- 5,490,585
--------- -------- ----------- -----------
Balance at March 31, 1998 8,682,045 $434,102 $41,918,950 $(1,777,476)
========= ======== =========== ===========
<CAPTION>
Unrealized
loss on Total
marketable Treasury stock stock-holders'
securities equity
---------- -------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996 $(130,878) $ -- $ 30,993,483
Shares issued upon exercise
of stock options -- -- 922,386
Adjustment to unrealized
losses on marketable
securities 92,384 -- 92,384
Tax benefit from employee
stock option exercises -- -- 1,173,663
Net earnings -- -- 724,021
--------- --------- ------------
Balance at December 31, 1997 (38,494) -- 33,905,937
Shares issued upon exercise
of stock options -- -- 135,906
Compensation expense
resulting from changes
to stock options -- -- 1,004,654
Purchase of 73,000 common
shares, at cost -- (508,008) (508,008)
Adjustment to unrealized
losses on marketable
securities (36,499) -- (36,499)
Net earnings -- -- 5,490,585
--------- --------- ------------
Balance at March 31, 1998 $ (74,993) $(508,008) $ 39,992,575
========= ========= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
7
<PAGE> 9
QUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS
CONTINUING OPERATIONS
Quest Medical, Inc. (the "Company") designs, develops, manufactures and
markets implantable neurostimulation systems through its wholly owned
subsidiary Advanced Neuromodulation Systems, Inc. ("ANS"). ANS devices
are used primarily to manage chronic severe pain. ANS revenues are
derived primarily from sales throughout the United States, Europe and
Australia.
The neurostimulation systems business, described above, was acquired in
March 1995. All other businesses of the Company were sold in January
1998 as described below under Discontinued Operations.
The research and development, manufacture, sale and distribution of
medical devices is subject to extensive regulation by various public
agencies, principally the Food and Drug Administration and
corresponding state, local and foreign agencies. Product approvals and
clearances can be delayed or withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems
following initial marketing.
In addition, ANS products are purchased primarily by hospitals and
other users who then bill various third party payers including
Medicare, Medicaid, private insurance companies and managed care
organizations. These third party payers reimburse fixed amounts for
services based on a specific diagnosis. The impact of changes in third
party payer reimbursement policies and any amendments to existing
reimbursement rules and regulations that restrict or terminate the
eligibility of ANS products could have an adverse impact on the
Company's financial condition and results of operations.
DISCONTINUED OPERATIONS
On January 30, 1998, the Company sold its cardiovascular and
intravenous fluid product lines ("CVS Operations"), including its
MPS(R) myocardial protection system product line, to Atrion
Corporation. The CVS Operations have been accounted for as discontinued
operations in the Condensed Consolidated Financial Statements for the
three months ended March 31, 1998 and 1997. Net assets of the CVS
Operations have been presented on the Condensed Consolidated Balance
Sheet for the period ending December 31, 1997 as net assets of
discontinued operations.
(2) CONDENSED FINANCIAL STATEMENTS
The unaudited consolidated financial information contained in this
report reflects all adjustments (consisting of normal recurring
accruals) considered necessary, in the opinion of management, for a
fair presentation of results for the interim periods presented. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
8
<PAGE> 10
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's December 31, 1997 Annual
Report on Form 10-K. The results of operations for periods ended March
31, 1998 are not necessarily indicative of operations for the full
year.
The consolidated financial statements include the accounts of Quest
Medical, Inc. and subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(3) MARKETABLE SECURITIES
The following is a summary of available-for-sale securities at March
31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Investment grade preferred
securities $ 557,596 $ 175 $ 54,092 $ 503,679
Publicly traded limited
partnerships 51,875 -- 15,940 35,935
Real estate investment
trusts 241,590 -- 14,570 227,020
Other 313,128 -- 29,199 283,929
---------- -------- ---------- ----------
$1,164,189 $ 175 $ 113,801 $1,050,563
========== ======== ========== ==========
</TABLE>
At March 31, 1998, no individual security represented more than 27
percent of the total portfolio or 1 percent of total assets. The
Company did not have any investments in derivative financial
instruments at March 31, 1998.
(4) NOTES PAYABLE
Notes payable at March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
March 31, 1998 December 31,1997
-------------- ----------------
<S> <C> <C>
Notes payable to banks $ -- $ 5,000,000
Notes payable to shareholder -- 2,000,000
Acquisition notes payable -- 1,000,000
Mortgage notes 3,767,664 3,810,612
Other 69,937 81,763
----------- -----------
3,837,601 11,892,375
Less current maturities 249,113 8,257,348
----------- -----------
Long-term notes payable $ 3,588,488 $ 3,635,027
----------- -----------
</TABLE>
9
<PAGE> 11
At December 31, 1997, the Company's notes payable to banks were under a
$5,650,000 working capital line of credit and a $350,000 term loan
facility (the "Facilities"). The Facilities were collateralized by all
of the Company's assets with the exception of the real property,
building and equipment that collateralize the mortgage notes described
below. On January 30, 1998, the Company repaid all notes payable under
the Facilities with proceeds from the sale of the assets of its CVS
Operations (see Note 8 - "Sale of CVS Operations/Discontinued
Operations") and the Facilities expired.
In February 1997, the Company borrowed $2,000,000 from a nonaffiliate
shareholder pursuant to a promissory note. Under the terms of the
promissory note, the Company was required to make quarterly interest
payments with a principal payment of $2,000,000 due and payable at the
maturity of the note in February 1998. The Company issued the
shareholder five-year warrants to purchase 100,000 shares of common
stock at an exercise price of $6.50 per share, the closing sales price
on the date the indebtedness was incurred. Under the warrant agreement,
the shareholder had the right to one demand registration in addition to
piggyback registration rights. During November 1997, upon demand of the
shareholder, the Company filed a registration statement on Form S-3. At
April 30, 1998, the warrants remain unexercised. The Company repaid the
note on January 30, 1998 with proceeds from the sale of the assets of
its CVS Operations.
In February 1997, the Company issued the former owner of Neuromed, Inc.
a promissory note in the amount of $1,000,000. Under terms of the
promissory note, the Company was required to make monthly interest
payments with a principal payment of $1,000,000 due and payable at
maturity of the note in February 1998. The Company repaid the note on
January 30, 1998 with proceeds from the sale of the assets of its CVS
Operations.
At March 31, 1998, the Company had a 8.25 percent note payable for
$69,937. This note was collateralized by certain of the Company's
marketable security investments, held by an investment company, which
had a carrying value of $712,867. Borrowings under this note are
restricted to 50 percent of the market value of the Company's
marketable securities held by the investment company. At March 31,
1998, the amount available for additional borrowing under this note was
$286,496.
In 1993, the Company entered into two mortgage notes relating to its
principal office and manufacturing facility. The first note, in the
amount of $2,864,033 at March 31, 1998, bears interest at 8.59 percent
and has a twenty-five year amortization. The Company has the option of
prepaying this note during years six through ten subject to certain
provisions. The loan is collateralized by the Allen facility and land.
The second note, in the amount of $903,631 at March 31, 1998, is
related to equipment and furnishings and bears interest at 7.94
percent. The note has a ten-year amortization and is collateralized by
the equipment and furnishings.
The carrying value of the Company's debt approximates its fair value.
(5) COMMITMENTS AND CONTINGENCIES
The Company has no material commitments under noncancelable operating
leases at March 31, 1998.
10
<PAGE> 12
The Company is a party to product liability claims related to ANS
neurostimulation devices. Product liability insurers have assumed
responsibility for defending the Company against these claims. While
historically product liability claims for ANS neurostimulation devices
have not resulted in significant monetary liability for the Company
beyond its insurance coverage, there can be no assurances that the
Company will not incur significant monetary liability to the claimants
if such insurance is inadequate or that the Company's neurostimulation
business and future ANS 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.
(6) INCOME TAXES
The Company recorded income tax expense from continuing operations
during the three months ended March 31, 1998, of $345,729 and income
tax expense from discontinued operations of $3,086,771, an overall
effective tax rate of 38.5 percent. The tax expense from discontinued
operations during the three months ended March 31, 1998 resulted from
the gain on the sale of the CVS Operations (see Note 8 - "Sale of CVS
Operations/Discontinued Operations"). The Company's expense for
amortization costs in excess of net assets acquired (goodwill) is not
deductible for tax purposes, thus explaining the higher effective tax
rate compared to the U.S. statutory rate for corporations of 34
percent. During the three months ended March 31, 1997, the Company
recorded income tax expense of $64,150 from continuing operations and
an income tax benefit of $7,407 from discontinued operations, an
overall effective tax rate of 37.6 percent. The Company's expense for
amortization costs of goodwill is not deductible for tax purposes, thus
explaining the higher effective tax rate compared to the U.S. statutory
rate for corporations of 34 percent.
(7) NEW ACCOUNTING PRONOUNCEMENT/EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which was adopted by the Company
on December 31, 1997. At that time, the Company changed the method used
to compute earnings per share and as required, has restated all prior
periods. Under Statement No. 128, basic earnings per share is computed
based only on the weighted average number of common shares outstanding
during the period, and the dilutive effect of stock options and
warrants is excluded. Diluted earnings per share is computed using the
additional dilutive effect, if any, of stock options and warrants using
the treasury stock method based on the average market price of the
stock during the period. Basic earnings (loss) per share for the three
months ended March 31, 1998 and 1997 are based upon 8,621,071 and
8,343,889 shares, respectively. Diluted earnings (loss) per share for
the three months ended March 31, 1998 and 1997 are based upon 8,851,714
and 8,753,639 shares, respectively.
11
<PAGE> 13
(8) SALE OF CVS OPERATIONS/DISCONTINUED OPERATIONS
On January 30, 1998, the Company sold its cardiovascular and
intravenous fluid product lines, including its MPS(R) myocardial
protection system product line, to Atrion Corporation. The Company
received approximately $24 million from the sale and utilized $8.0
million of the proceeds to retire debt and $1.2 million to pay expenses
related to the transaction. The remaining proceeds will be used for
working capital for the expanding ANS business and stock repurchases as
deemed appropriate by the Board of Directors. The Company reported a
pretax gain from the sale of $8.4 million during the three months ended
March 31, 1998. This gain is net of $1 million of compensation expense
recorded as a result of changes made to the stock options held by
employees of the CVS Operations. These changes included accelerated
vesting of the unvested portion of these terminated employee options as
a result of the sale and extension of the normal 90-day exercise period
subsequent to termination to one year for these options.
Operating results of the CVS Operations have been reclassified and
reported as discontinued operations. Summary operating results for the
three months ended March 31, 1998 and 1997 for the CVS Operations were
as follows (the 1998 period included results until the sale on January
30, 1998):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Revenue $ 1,111,992 $ 3,533,552
Gross profit 206,481 1,644,327
Earnings (loss) from operations (307,120) 50,421
Interest expense (34,225) (101,353)
----------- -----------
Loss before income tax benefit (341,345) (50,932)
Income tax benefit (129,711) (7,407)
----------- -----------
Net loss $ (211,634) $ (43,525)
----------- -----------
</TABLE>
The above operating results of the CVS Operations reflect the revenues
and expenses of the CVS Operations including direct and indirect
expenses of the CVS Operations that are paid by the Company and charged
directly to the CVS Operations. Allocation of general overhead from the
Company includes charges for regulatory, general corporate management,
accounting and payroll services, human resources, management
information systems and facilities expenses based on revenues of the
CVS Operations to total revenues of the Company. Management believes
that the expenses charged to the CVS Operations on this basis are not
materially different from the costs that would have been incurred had
the CVS Operations borne such expenses on a direct basis.
Interest expense on the Company's corporate facility has been allocated
to the CVS Operations based on space utilization. Interest expense on
the Company's general credit facilities was allocated to the CVS
Operations based on the ratio of the net assets of the CVS Operations
to the total net assets of the Company.
12
<PAGE> 14
Assets and liabilities of discontinued CVS Operations at December 31,
1997 were as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Current assets:
Accounts receivable $ 2,481,278
Inventories 5,208,676
Prepaid expenses 131,735
-----------
7,821,689
-----------
Noncurrent assets:
Net property, plant and equipment 3,633,855
Net intangible assets consisting of patents,
purchased technology and costs in excess
of net assets acquired
2,043,107
Other assets 8,631
-----------
5,685,593
-----------
Total assets 13,507,282
-----------
Current liabilities:
Accounts payable 410,483
Accrued liabilities 265,481
-----------
675,964
-----------
Net assets of CVS Operations $12,831,318
===========
</TABLE>
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and the related Notes thereto.
OVERVIEW
On January 30, 1998, the Company sold the assets of its CVS Operations,
including its MPS(R) myocardial protection system product line, to Atrion
Corporation (see Note 8 - "Sale of CVS Operations/Discontinued Operations"). The
Company received approximately $24 million in cash from the sale, subject to
post-closing adjustments as defined in the purchase agreement. The Company also
granted Atrion a nine-month option to acquire the Company's principal office and
manufacturing facility in Allen, Texas for $6.5 million. During the option
period, the Company is leasing space to Atrion for the CVS Operations for
$24,606 per month. In turn, the Company is leasing certain office and computer
equipment from Atrion for $13,175 per month.
Assets of the CVS Operations sold to Atrion primarily consisted of accounts
receivable, inventories, furniture and fixtures, manufacturing tooling and
equipment, and intangible assets including patents, trademarks and purchased
technology. The intangible assets also included the rights to the name Quest
Medical, Inc. The Company reported a pretax gain on the transaction of $8.4
million ($5.2 million after-tax) which is included in the Company's results for
the three months ended March 31, 1998. The pretax gain is net of $1 million
compensation expense recorded as a result of certain changes made to stock
options held by employees of the CVS Operations (see Note 8 - "Sale of CVS
Operations/Discontinued Operations"). The Company utilized $9.2 million of the
proceeds from the sale to retire debt and pay expenses related to the
transaction.
The CVS Operations have been accounted for as discontinued operations in the
Condensed Consolidated Statements of Operations for the three months ended March
31, 1998 and 1997.
At its Annual Meeting of Shareholders on May 28, 1998, the Company has submitted
a proposal to change the name of the Company from Quest Medical, Inc. to
Advanced Neuromodulation Systems, Inc. ("ANS"). Management believes the name
change reflects the new focus and direction of the Company on the
neuromodulation market. If the proposal is approved by the shareholders, it will
become effective upon filing and recording a Certificate of Amendment to the
Articles of Incorporation as required by law. Upon the effectiveness of the name
change, if approved by the shareholders, the Company intends to change its
trading symbol on the Nasdaq Stock Market to "ANSI".
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues. Net revenue from continuing ANS operations of $4.42 million for the
three months ended March 31, 1998 was $1.28 million, or 41 percent above the
level for the comparable 1997 period of $3.14 million. This increase was
primarily the result of higher unit sales volume
14
<PAGE> 16
of ANS' Radio Frequency ("RF") spinal cord stimulation ("SCS") systems used to
manage chronic intractable pain, principally in the United States. Management
expects to improve the Company's market position through new technologies,
additional product offerings, and enhanced distribution channels.
Gross Profit. Gross profit increased during the three months ended March 31,
1998 to $3.17 million compared to $2.22 million in 1997, an increase of
42.7 percent. As a percentage of net revenue, gross profit increased during the
three months ended March 31, 1998 to 71.6 percent compared to 70.7 percent
during the comparable 1997 period. This increase in gross profit was
attributable to the increased revenue generated by ANS, while the increase in
gross profit margin resulted from higher unit sales of the Company's dual
octrode systems for the treatment of complex pain patterns which contribute
somewhat higher margins than other ANS systems marketed by the Company.
Operating Expenses. Total operating expenses of $2.39 million for the three
months ended March 31, 1998 increased from $1.86 million during the same period
in 1997, although as a percentage of net revenue, total operating expenses
decreased from 59.2 percent in 1997 to 54.1 percent in 1998.
Research and development expense increased to $464,000 during the three months
ended March 31, 1998, compared to $265,000 for the same period a year ago, and
increased as a percentage of net revenue from 8.5 percent in 1997 to
10.5 percent in 1998. This increase in expense during 1998 compared to 1997 was
the result of additional salary and benefit expense from staffing increases,
increased consulting and contract labor expense and higher expense for test
materials. Management expects research and development expenditures to
approximate $2.2 million for the remainder of 1998. These expenditures during
the first quarter of 1998 and for the remainder of 1998 are being directed
toward development of next generation RF SCS systems, an implantable constant
rate drug pump, and development of an implantable pulse generator ("IPG")
system. The Company has entered into a development and manufacturing contract
with Hi-tronics Design, Inc., a premier contract engineering and manufacturing
firm, to develop an IPG. IPG systems currently account for 80 percent of the SCS
units sold worldwide. Management expects the IPG system to be ready for clinical
trials in the United States and market introduction internationally in early
1999. The IPG system will not only allow ANS to compete in the largest segment
of the SCS market but potentially expand the markets for ANS products for use in
proposed new applications such as deep brain stimulation to treat essential
tremor and tremor associated with Parkinson's disease, epilepsy, urinary
incontinence, angina and peripheral vascular disease. The Company is pursuing
strategic alliances that may partially fund research and development
expenditures during the remainder of 1998.
Marketing expense, as a percentage of net revenue, decreased to 25.3 percent for
the three months ended March 31, 1998, compared to 28.6 percent for the
comparable period during 1997, while the dollar amount increased from $897,000
during 1997 to $1.12 million in 1998. This dollar increase of $223,000 during
1998 was attributable to higher commissions due to the increased revenue and
training expense for new users of ANS products.
Amortization expense for intangibles increased from $263,000 during the three
months ended March 31, 1997 to $292,000 during the comparable 1998 period due,
for the most part, to
15
<PAGE> 17
expense associated with a non-compete agreement with the former president and
chief executive officer.
General and administrative expense as a percentage of net revenue decreased to
11.7 percent during the three months ended March 31, 1998 compared to
13.7 percent for the same period during 1997, while the dollar amount increased
by $89,000. This dollar increase in expense during 1998 compared to 1997 was
primarily the result of an executive placement fee paid in connection with the
hiring of a new president and chief executive officer.
Earnings From Operations. Earnings from operations increased to $771,000 during
the three months ended March 31, 1998 compared to $362,000 for the comparable
1997 period due to increased gross profit from higher sales of ANS products.
Other Income/Expense. Other income increased to $76,000 during the three months
ended March 31, 1998 compared to an expense of $160,000 for the comparable 1997
period as a result of three factors. First, interest expense decreased by
$40,000 during 1998 compared to 1997 as a result of the repayment of short-term
notes payable during January 1998 utilizing the proceeds from the sale of the
CVS Operations (see Notes 4 and 8 of the Notes to Condensed Consolidated
Financial Statements). Second, interest income increased $160,000 during 1998
compared to 1997, due to higher funds available for investment as a result of
the net proceeds from the January 1998 sale of the CVS Operations. Finally, the
Company incurred a net loss of $36,000 during the three months ended March 31,
1997 from the sale of certain marketable security investments.
Income Taxes. The Company's income tax expense for continuing operations
increased to $346,000 for the three months ended March 31, 1998 from $64,000
during the same period in 1997 due to higher earnings from continuing
operations. The effective tax rate during 1998 was 40.8 percent as the Company's
expense for amortization of costs in excess of net assets acquired (goodwill) is
not deductible for tax purposes, thus explaining the higher effective tax rate
compared to the U.S. statutory rate for corporations of 34 percent.
Net Earnings From Continuing Operations. Net earnings from continuing operations
increased to $502,000 during the three months ended March 31, 1998 compared to
$138,000 during the same period a year earlier. This increase during 1998
compared to 1997 was primarily the result of the higher earnings from operations
due to increased gross profit from higher sales of ANS products and, to a lesser
extent, the increase in other income due to lower interest expense and higher
interest income.
Discontinued Operations. Net earnings from discontinued operations increased to
$4.99 million during the three months ended March 31, 1998 compared to a net
loss from discontinued operations of $44,000 during the comparable 1997 period.
Net earnings from discontinued operations during 1998 included an after-tax gain
of $5.2 million on the sale of the assets of the discontinued CVS Operations to
Atrion on January 30, 1998. This gain was partially offset by a loss from
discontinued operations of $212,000 from January 1, 1998 until the sale on
January 30, 1998.
Net Earnings. Net earnings increased to $5.49 million during the three months
ended March 31, 1998 compared to $94,000 during the comparable 1997 period due
to the gain on the sale of
16
<PAGE> 18
the assets of the discontinued CVS Operations and the increase in net earnings
from continuing operations discussed above.
LIQUIDITY AND FINANCIAL POSITION
In the sale of assets of the CVS Operations to Atrion, the Company received cash
proceeds of approximately $24 million, subject to post-closing adjustments as
defined in the purchase agreement, which significantly enhanced the Company's
financial position. The Company utilized approximately $9.2 million of the
proceeds to retire short-term notes payable and related expenses of the
transaction. After such repayment, the Company has no debt other than its Allen
facility mortgage of $3.8 million. The Company also granted Atrion a nine-month
option to purchase the Allen facility for $6.5 million and is leasing space in
the Allen facility to Atrion under a lease agreement which expires on
January 30, 1999. If Atrion exercises the purchase option on the Allen facility,
the Company would receive another $2.7 million in net proceeds after paying off
the mortgage.
The Company's working capital increased from $14.1 million at year-end 1997 to
$20.3 million at March 31, 1998. The ratio of current assets to current
liabilities was 6.6:1 at March 31, 1998, compared to 2.5:1 at December 31, 1997.
Cash, cash equivalents and marketable securities totaled $17.6 million at March
31, 1998 compared to $2.2 million at December 31, 1997.
During January 1998, the Board of Directors approved a stock repurchase program
of up to 500,000 shares of the Company's common stock. During the quarter ended
March 31, 1998, the Company repurchased 73,000 shares of its common stock at an
aggregate cost of $508,000, or $6.96 per share.
During the three months ended March 31, 1998, capital expenditures totaled
$296,000, primarily for additional manufacturing tooling and equipment.
Management expects capital expenditures for the remainder of fiscal 1998 of
$1.9 million primarily related to manufacturing tooling and equipment for the
new products the Company is developing, including next generation RF SCS
systems, an IPG system and a constant rate implantable drug pump.
Management believes that its current cash, cash equivalents and marketable
securities and funds generated from operations will be sufficient to satisfy
normal cash operating requirements, capital expenditures and stock repurchases
for the foreseeable future.
CASH FLOWS
Net cash provided by continuing operations increased to $1.65 million during the
three months ended March 31, 1998, from $463,000 for the same period a year ago
reflecting the improved operating results of ANS. The primary use of cash in
continuing operations during the three months ended March 31, 1998 was an
increase in the level of accounts receivable of $218,000. Net cash provided by
discontinued operations increased slightly to $59,000 during the three months
ended March 31, 1998 compared to $19,600 for the comparable 1997 period.
Net cash provided by investing activities increased to $22.5 million during the
three months ended March 31, 1998, compared to a net use of cash during 1997 of
$4.2 million. This increase resulted from two factors. First, the Company
received $22.5 million of net proceeds during the 1998 period from the sale of
its CVS Operations on January 30, 1998. Second,
17
<PAGE> 19
during the 1997 period the Company used $4.5 million of cash for payments to the
former owner of Neuromed, Inc. for the purchase of certain patents and the
settlement of certain purchase price issues.
Net cash used in financing activities for the three months ended March 31, 1998,
was $8.4 million while financing activities during the same period in 1997
provided net cash of $3.5 million. This decrease was primarily due to the use of
$8.0 million in 1998 to reduce debt under short-term notes payable while the
1997 period included $3.7 million of proceeds from additional borrowings under
short-term notes.
YEAR 2000
The Year 2000 issue results from computer programs being written using two
digits rather than four to identify an applicable year. Computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000.
Based on recent assessments of its computer systems and programs, the Company
believes that its core manufacturing system software is fully Year 2000
compliant. Lesser internal applications may require minor modifications or
replacement to attain full Year 2000 compliance and the Company intends to make
certain investments in its software systems and applications to ensure the
Company is Year 2000 compliant. Management believes, however, that the Year 2000
issue does not pose significant operational problems for the Company's computer
systems and that the financial impact of the issue has not been and should not
be material to the Company's financial position or results of operations in any
given year.
FORWARD-LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Statements contained in this document that are
not based on historical facts are "forward-looking statements". Terms such as
"plan", "should", "anticipate", "believe", "intend", "estimate", "expect",
"predict", "new market", "potential new market applications" and similar
expressions are intended to identify forward-looking statements. Such statements
are by nature subject to uncertainties and risks, including but not limited to:
continued growth in ANS revenues and market acceptance of ANS products
consistent with management expectations; completion of research and development
projects in an efficient and timely manner; obtaining regulatory approvals on a
timely and cost efficient basis to permit the introduction of new products; the
satisfactory completion of clinical trials and/or market tests prior to the
introduction of new products; the adequacy, acceptability and timeliness of
component supply; continued reimbursement for medical procedures using the
Company's existing products by medical reimbursement agencies like insurance
companies, HMOs, Medicare and Medicaid without material adverse changes in
reimbursement amounts, qualifications or requirements; the approval of new
products by reimbursement agencies; retention of major customers; the efficacy
of the Company's products for proposed or potential new applications;
competition and technological changes that may render the Company's products
obsolete or noncompetitive; general domestic and international economic
conditions; and other risks detailed from time to time in the Company's SEC
public filings. Consequently, if such management assumptions prove to be
incorrect or such risks or uncertainties materialize, anticipated results could
differ materially from those forecast in forward-looking statements.
18
<PAGE> 20
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.
19
<PAGE> 21
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.29 -- Employment Agreement dated April 9, 1998 between
Christopher G. Chavez and Quest Medical, Inc.
Exhibit 10.30 -- Employment Agreement dated April 9, 1998 between
Scott F. Drees and Quest Medical, Inc.
Exhibit 10.31 -- Employment Agreement dated April 9, 1998 between
F. Robert Merrill III and Quest Medical, Inc.
Exhibit 27.1 -- Financial Data Schedule
Exhibit 27.2 -- Restated Financial Data Schedule
(b) The Company filed a Form 8-K on December 31, 1997 to report
the press release announcing the Company's entering into a
definitive agreement on December 29, 1997 to sell the CVS
Operations to Atrion. On February 13, 1998 the Company filed a
Form 8-K to report the consummation of the sale of the CVS
Operations to Atrion on January 30, 1998. On April 9, 1998 the
Company filed Amendment No. 1 on a Form 8-K/A to its Form 8-K
filed on February 13, 1998 amending Item 7(b) to report pro
forma financial information.
20
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QUEST MEDICAL, INC.
Date: May 11, 1998 By: /s/ F. Robert Merrill III
---------------------------------
F. Robert Merrill III
Executive Vice President, Finance
Chief Financial Officer and Treasurer
21
<PAGE> 23
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
Exhibit 10.29 -- Employment Agreement dated April 9, 1998 between
Christopher G. Chavez and Quest Medical, Inc.
Exhibit 10.30 -- Employment Agreement dated April 9, 1998 between
Scott F. Drees and Quest Medical, Inc.
Exhibit 10.31 -- Employment Agreement dated April 9, 1998 between
F. Robert Merrill III and Quest Medical, Inc.
Exhibit 27.1 -- Financial Data Schedule
Exhibit 27.2 -- Restated Financial Data Schedule
<PAGE> 1
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into as of the ninth day of April, 1998, by and between Advanced Neuromodulation
Systems, Inc. ("ANS"), Quest Medical, Inc. (the "Parent"), (the Parent, ANS,
and, in the event of a merger of the two companies, any surviving entity,
hereinafter referred to as "the Companies," "either Company," or "each Company"
according to the context) and Christopher G. Chavez ("Employee").
R E C I T A L S
The Companies have special expertise in their businesses that has
enabled them to provide unique career opportunities for their employees.
The Companies' growth depends, to a significant degree, on their
possession of more and better information than that available to their
competitors concerning a number of matters, including but not limited to,
research, systems, development, marketing, management and other information not
generally known to others in each Company's industry. To obtain such information
and use it successfully, the Companies have made significant investments in
research, business development, customer satisfaction methods and techniques,
business process improvements and other developments in marketing methods and
providing services to their customers. This unique and special expertise in
pooling this information has enabled the Companies to conduct their businesses
successfully and thus provide potential employment opportunities for their
employees.
The parties acknowledge that Employee has his own valuable knowledge
and training in certain of the areas in which the Companies conduct their
businesses but that his knowledge will be enhanced by this employment.
Employee recognizes that unless the Companies impart to him their
special expertise, he would be less effective and of less benefit to the
Companies. Employee further acknowledges that without the additional knowledge
to be imparted to him by the Companies, he will be less valuable than would
otherwise be the case in their businesses.
Employee understands and acknowledges that a covenant not to compete
and a restriction on disclosure of confidential information is essential to the
continued growth and stability of each Company's businesses and to the
continuing viability of such businesses in the event the Employee's employment
is terminated as expressly permitted under the terms and limitations of this
Agreement.
The Employee desires employment as an Employee of the Companies
under the terms and conditions of this Agreement and further desires to be given
access to each Company's proprietary information.
The Companies desire to employ Employee under the terms and
conditions of this Agreement.
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, the parties agree as follows:
1. Employment. Subject to the terms and conditions set forth in this
Agreement, the Companies employ Employee, and Employee hereby accepts such
employment by the Companies.
2. Duties of Employee.
(a) Employee shall serve in the capacities of President and Chief
Executive Officer of Quest/ANS, and shall be subject to supervision by the Board
of Directors of Quest/ANS. In the event of a merger of Quest and ANS, Employee
shall serve as President and Chief Executive Officer of the surviving entity. In
such capacities, Employee shall have all necessary powers to discharge his
responsibilities, including general supervision of the affairs of the Companies
and active control of their businesses. Employee shall have all powers granted
by the Bylaws of the Companies to the President and/or Chief Executive Officer,
as applicable, and Employee shall report to the Board of Directors of such
corporation. For so long as Employee serves in the foregoing capacities, the
Companies shall nominate and support the election of Employee as a member of the
Board of Directors of each corporation.
(b) During the term of this Agreement, and thereafter so long as
Employee is employed by either Company, Employee shall devote his full business
time and effort to the performance of his duties and responsibilities as an
officer of ANS and the Parent. Notwithstanding the foregoing, Employee may spend
reasonable amounts of time on personal civic and charitable activities that do
not interfere with the performance of his duties and responsibilities to ANS and
the Parent. In addition, Employee may, subject to prior approval by the Board of
Directors of Quest/ANS, spend reasonable amounts of time serving on boards of
directors for other companies, provided that such service does not, in the sound
discretion of the Board of Directors of Quest/ANS, constitute or create a
conflict of interest.
(c) Employee shall observe and comply with the written rules and
regulations of each Company respecting their businesses and shall carry out and
perform the directives and policies of the Companies as they may from time to
time be stated to Employee in writing by the Chairman of the Board or the Board
of Directors.
(d) Employee shall maintain accurate business records as may from
time to time be required by the Companies. Such records may be examined by the
Companies, at all reasonable times after written request is delivered to
Employee. Any such document shall be delivered to each Company promptly upon
request.
(e) Employee agrees not to solicit or receive any income or other
compensation from any third party in connection with his employment with the
Companies. Employee agrees, upon written request by either Company, to render an
accounting of all transactions relating to his business endeavors during the
term of this employment hereunder.
<PAGE> 3
3. Term. The term of this Agreement (the "Term") shall commence
effective as of April ninth, 1998 (the "Effective Date") and continue until the
second anniversary of the Effective Date, unless Employee's employment is
earlier terminated in accordance with Section 10 of this Agreement. Upon
expiration of the term of this Agreement, Employee shall remain an "at will"
employee of the Companies but shall still be subject to and bound by the terms
of this Agreement. In the event of a merger of Quest and ANS, this Agreement
shall remain in full force and effect, with all rights and obligations of the
Companies hereunder passing to the surviving entity.
4. Salary. Commencing on the Effective Date, the Companies will pay
Employee a minimum base annual salary during the term of this Agreement for his
services as an officer of $200,000.00, which shall be payable in accordance with
the Companies' standard payroll practice, but not less than monthly. Such base
salary shall not include any benefits made available to Employee or any
contributions or payments made on his behalf pursuant to any employee benefit
plan or program of the Companies, including any health, disability or life
insurance plan or program, 401-K plan, cash bonus plan, stock incentive plan,
retirement plan or similar plan or program of any nature. The Companies shall
review Employee's salary on a semi-annual basis, and shall increase the annual
salary of Employee from time to time as may be warranted in accordance with the
Companies' compensation policies. ANS shall have no separate salary obligation
to Employee.
5. Bonus Compensation. The Companies may pay Employee an annual
performance-based cash bonus in accordance with Company policy established by
the board from time to time, as described in Exhibit "A" to this Agreement. ANS
shall have no separate bonus obligation to Employee.
6. Stock Options: The Companies shall, upon execution of this
Agreement, grant Employee a total of 200,000 non-transferable stock options to
purchase shares of Quest Common Stock. A total of 50,000 options (25%) shall
vest immediately upon execution of this Agreement. An additional 50,000 options
(25%) shall vest on each of the first, second, and third anniversaries of the
grant, respectively. All options conferred through this grant shall expire in
ten years, and shall be granted at the market price for the Companies' Common
Stock as of the date of the grant.
7. Relocation Expenses: The Companies shall reimburse Employee for all
expenses reasonably incurred by Employee in connection with relocating his
family to a residence in reasonable proximity to the Companies' location. Such
expenses shall include direct costs associated with sale of the Employee's
current residence (e.g., commissions, title, other direct costs); direct costs
associated with purchase of a new residence (e.g., inspections, closing costs
and up to one point on a purchase money mortgage); direct costs of packing and
moving Employee's household goods. During the interim period between the
Effective Date of this Agreement and the completion of Employee's relocation,
the Companies agree to reimburse Employee for costs associated with commuting
from Employee's current residence in Arlington, Texas, to Company offices in
Allen, Texas.
In the event that the Companies' reimbursement of costs associated
with Employee's relocation are deemed taxable income, the Companies agree to
make an additional
<PAGE> 4
"gross up" payment to Employee at the conclusion of the relocation process for
the purposes of making Employee whole for any tax liability incurred as a result
of reimbursements contemplated in this section, provided that the Companies'
total obligation to Employee for reimbursement of costs pursuant to this Section
shall not exceed $50,000.00.
8. Employee Benefits. During the term of this Agreement, the Companies
shall provide Employee with all benefits made available from time to time by the
Companies to their employees and/or officers generally and to employees who hold
positions similar to that of Employee (including benefits granted to other
officers of the Companies), such benefits to be in accordance with the
Companies' policies except that if Employee's employment with the Companies is
terminated, Employee's cash severance payments shall be in accordance with
Section 10 of this Agreement, in lieu of cash severance payments provided by the
policies of the Companies. Specifically, Employee's benefits shall include
participation in medical, dental and vision plans or programs (providing
coverage for Employee's immediate family); disability insurance; 401-K plans;
life insurance payable to Employee's designated beneficiary and paid vacation
(up to four weeks). ANS shall have no separate obligations to Employee with
respect to employee benefits. In the event that Employee's employment with the
Companies is terminated, the Companies agree to pay in full all premiums
associated with Employee's election to continue health benefits provided
hereunder.
9. Reimbursement of Expenses. ANS and/or Parent shall reimburse Employee
for all expenses actually and reasonably incurred by him in the business
interests of ANS and/or Parent. Such reimbursement shall be made to Employee
upon appropriate documentation of such expenditures in accordance with the
Companies' written policies.
10. Early Termination. It is the desire and expectation of each party that
the employer-employee relationship shall continue for the full term specified
herein and be a pleasant and rewarding experience for the parties hereto. The
Companies shall, however, be entitled to terminate Employee's employment at any
time before or after the Effective Date with or without Cause (as defined in
this Section 10). Termination shall require approval by majority vote of the
board of directors of the Parent.
If Employee's employment is terminated without Cause, the Companies
shall pay Employee severance compensation pursuant to the following formulas:
(a) In the event of a termination without Cause occurring prior to
the one-year anniversary of this Agreement, Employee shall
receive severance payments equivalent to twenty-four (24)
months' salary.
(b) In the event of a termination without Cause occurring at any
time after the one-year anniversary of this Agreement,
Employee will receive twelve (12) months' salary as severance.
In each case, severance payments shall be made in equal installments on
the Companies' semi-monthly payroll dates.
<PAGE> 5
If Employee dies, is unable to perform his duties and responsibilities
as a result of disability that continues for 90 consecutive days or more
("Disability"), voluntarily resigns from the Companies, or is terminated for
"Cause," ANS shall pay Employee (or his estate, executor or legal
representative, as appropriate) any salary and bonus that has accrued to the
date employment ceases, and ANS' obligations to pay additional salary or cash
compensation or benefits shall terminate as of such date.
"Cause," for the purpose of this Agreement, shall mean the occurrence
of any of the following events:
(a) Performance by Employee of illegal or fraudulent acts, criminal
conduct or willful misconduct relating to the activities of the Companies;
(b) A conviction of or nolo contendere plea by Employee for any
criminal acts involving moral turpitude having or reasonably likely to have a
material adverse effect upon each Company, including, without limitation, upon
their profitability, reputation or goodwill;
(c) Willful or grossly negligent failure by Employee to perform his
duties in a manner consistent with the Companies' best interests;
(d) Willful refusal by Employee to carry out reasonable written
instructions of the Companies' Boards of Directors not inconsistent with the
provisions of this Agreement;
(e) Violation by Employee of any of Employee's covenants and agreements
contained in Sections 11, 12 or 13 of this Agreement;
(f) Any other material breach of Employee's obligations hereunder,
which he fails to cure within thirty (30) days after receiving written notice
thereof.
11. Non-Competition Agreement.
(a) Employee understands and each Company promises that during the
course of his employment by the Companies, Employee will have access to and the
benefit of the information referred to in the Recitals above, specifically Trade
Secrets and Confidential Information, and will represent each Company and
develop contacts and relationships with other persons and entities, including
but not limited to customers, potential customers and other employees of such
entities. To protect the Companies' interest in preserving their Trade Secrets,
Confidential and other protected information and in the Business Good Will
generated by new contacts and relationships, and as a direct inducement and
consideration for the Companies' promises to provide new Trade Secrets, new
Confidential Information and new contacts, the Employee agrees and covenants to
the duties and obligations created by this covenant not to compete.
(b) The Employee agrees that all duties assumed by this covenant not to
compete include any actions taken by the Employee directly or indirectly, either
as an individual or as an employee, partner, officer, director, shareholder,
advisor, or consultant or in any other
<PAGE> 6
capacity whatsoever, of any person (other than ownership of less than 1% of the
issued and outstanding voting securities of a publicly held corporation).
(c) The employee covenants he:
(1) will not recruit, hire, assist others in recruiting or hiring,
discuss employment with, or refer to others for employment any person who is, or
within the 12 month period immediately preceding the date of any such activity
was, an employee of either Company or any of their affiliates;
(2) Employee agrees that during the term of his employment with the
Companies and for a period of one (1) year thereafter, without regard to the
party terminating such employment or the reason for termination, if any,
Employee will not, without prior written approval by the Board of Directors for
Quest/ANS, in the United States or in any foreign country in which either
Company is then marketing its products or services, directly or indirectly
engage in or own or control an interest in (except as to those investments held
at the effective date of this agreement or as a passive investor in publicly
held companies, i.e., Employee and Employee's relatives do not own of record, or
beneficially, an aggregate of more than one percent [1%] of any class of
outstanding securities) or act as an officer, director, or employee of, or
consultant or adviser to, any firm, corporation, institution or entity, directly
or indirectly in competition with or engaged in a business substantially similar
to that of Employer, including the research, development, manufacture, sale or
marketing of products, devices, instruments, methods or techniques (or any
related services or activities) similar to any products, devices, instruments,
methods or techniques which either Company is engaged in the research of,
development of, manufacture, selling, or marketing, or has under consideration
to do the same (whether or not such products, devices, instruments, methods or
techniques or the technology related thereto were obtained from Employee),
during the term of the Employee's employment. This provision 11(c)(2) is not
intended to, and shall not be construed in such a manner as to, prevent Employee
from securing gainful employment within the health care industry except with
those entities whose products, devices, instruments, methods or techniques (or
any related services or activities) substantially compete with those of the
Companies.
(d) It is understood and agreed that the scope of the foregoing
covenant is reasonable as to time, scope and geography and is necessary to
protect the legitimate business interests of the Companies, in the Confidential
Information and Trade Secrets the Companies have promised to share with
Employee. It is further agreed that such covenant will be regarded as divisible
and will be operative as to time, area and persons to the extent that it may be
so operative, and if any part of such covenant is declared invalid,
unenforceable, or void as to time, area or persons, the validity and
enforceability of the remainder will not be affected.
(e) If Employee violates the restrictive covenants of this Section 11
and the Companies bring legal action for injunctive or other relief, neither
Company shall be deprived of the benefit of the full period of the restrictive
covenant, as a result of the time involved in obtaining the relief. Accordingly,
to the extent allowed by law, the Employee agrees that the restricted period
following the term of employment shall have a duration of two years, and the
regularly
<PAGE> 7
scheduled expiration date of such covenant shall be extended by the same amount
of time that Employee is determined to have violated such covenant.
12. Confidentiality. Employee acknowledges that he has learned and will
learn Confidential Information (as defined herein) relating to the business
conducted and to be conducted by the Companies. The Companies promise to provide
all needed Confidential Information to the Employee. Employee agrees that he
will not during the term of employment with the Companies or at any time after
the termination of such employment, without regard to the party terminating such
employment, except in the normal and proper course of his duties hereunder,
disclose or use or authorize any third party to disclose or use any such
Confidential Information, without prior written approval of the Companies. As
used in this Section 12, "Confidential Information" shall mean information
disclosed to or known to Employee as a direct or indirect consequence of or
through his employment with the Companies, about the Companies' business,
methods, business plans, operations, products, processes, and services,
including, but not limited to, information relating to research, development,
inventions, recommendations, programs, systems, and systems analyses, flow
charts, finances, and financial statements, marketing plans and strategies,
merchandising, pricing strategies, merchandise sources, client sources, system
designs, procedure manuals, automated data programs, financing methods,
financial projections, terms and conditions of arrangements of any business,
computer software, terms and conditions of business arrangements with customers
or suppliers, reports, personnel procedures, supply and services resources,
names and addresses of clients, the Companies' contacts, names of professional
advisors, and all other information pertaining to customers and suppliers,
including, but not limited to assets, business interests, personal data and all
other information pertaining to the Companies, clients or suppliers whatsoever,
including all accompanying documentation therefor. All information disclosed to
Employee, or to which Employee has access during the period of his employment,
for which there is any reasonable basis to be believed is, or which appears to
be treated by the Companies as Confidential Information, shall be presumed to be
Confidential Information hereunder. Confidential Information shall not, however,
include information that (i) is publicly known or becomes publicly known through
no fault of Employee, or (ii) is generally or readily obtainable by the public,
or (iii) constitutes general skills, knowledge and experience acquired by
Employee before and/or during his employment with ANS and the Parent.
Employee agrees that all documents of any nature pertaining to
activities of the Companies or their affiliates, or that include any
Confidential Information, in his possession now or at any time during the term
of his employment, including without limitation, memoranda, notebooks, notes,
data sheets, records and computer programs, are and shall be the property of
such entity and that all copies thereof shall be surrendered to the appropriate
entity upon termination of his employment.
13. Inventions; Developments. Employee agrees to notify the Companies
of any discovery, invention, innovation, or improvement which is related to the
Business or to the business of any customer or supplier (collectively called
"Developments") conceived or developed by Employee during the term of the
Employee's employment. Developments shall include, without limitation,
developments in computer software, logical systems, algorithms, and any or all
other intellectual properties related to the Business. All Developments,
including but not limited to
<PAGE> 8
all written documents pertaining thereto, shall be the exclusive property of ANS
or the Parent, as the case may be, and shall be considered Confidential
Information subject to the terms of this Agreement. Employee agrees that when
appropriate, and upon written request of ANS or the Parent, the Employee will
acknowledge that Developments are "works for hire" and will file for patents or
copyrights with regard to any or all Developments and will sign documentation
necessary to evidence ownership of Developments in ANS or the Parent.
14. Exit Interview. To insure a clear understanding of this Agreement,
including but not limited to the protection of the Companies' business
interests, Employee agrees, at no additional expense to the Companies, to engage
in an exit interview with the Companies prior to Employee's departure from the
Companies at a time and place designated by the Companies. In the event that the
exit interview takes place in a location outside of the Dallas/Fort Worth
metropolitan area, the Companies agree to reimburse Employee for reasonable
expenses associated with his travel to and from said exit interview.
15. Right of Setoff. The Companies shall be entitled, at their option
and not in lieu of any other remedies to which they may be entitled, to set off
any amounts due Employee or any affiliate of Employee against any amount due and
payable by Employee or any affiliate of Employee to the Companies ("Set-Offs")
pursuant to this Agreement or otherwise, provided that the Set-Offs are set
forth in detail in writing with supporting evidence to substantiate each
Set-Off.
16. Notice Provision. Any notice, demand or request required or
permitted to be given or made under this Agreement shall be in writing and shall
be deemed given or made when delivered in person, when sent by United States
registered or certified mail, or postage prepaid, or when telecopied to a party
at its address or telecopy number specified below:
If to ANS:
Advanced Neuromodulation Systems, Inc.
201 Allentown Parkway
Allen, Texas 75002
Telecopy number: (972) 390-9687
If to the Parent:
Quest Medical, Inc.
201 Allentown Parkway
Allen, Texas 75002
Telecopy number: (972) 390-9687
<PAGE> 9
If to Employee:
Christopher G. Chavez
2903 Forestwood Drive
Arlington, TX 76006
Telecopy number:
------------------
The parties to this Agreement may change their addresses for notice
in the manner provided above.
17. Headings Non-binding. All section titles and captions in this
Agreement are for convenience only, shall not be deemed part of this Agreement,
and in no way shall define, limit, extend or describe the scope or intent of any
provisions hereof.
18. Words to have Contextual Meaning. Whenever the context may require,
any pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa. Additionally, the words "and" and "or"
shall be given their contextual meaning and not be interpreted blindly as being
solely conjunctive or disjunctive, as the case may be.
19. Execution of Agreement. The parties shall execute all documents,
provide all information and take or refrain from taking all actions as may be
reasonably necessary or appropriate to achieve the purposes of this Agreement.
20. Partial Assignment Clause. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their representatives and permitted
successors and assigns. Employee's duties hereunder are personal services and
are not assignable. Except for the provisions of Sections 11, 12 and 13 of this
Agreement, which are intended to benefit ANS' and the Parent's affiliates as
third party beneficiaries, or as otherwise expressly provided in this Agreement,
nothing in this Agreement, express or implied, is intended to confer upon any
person other than the parties to this Agreement, their respective
representatives and permitted successors and assigns, any rights, remedies or
obligations under or by reason of this Agreement. In the event of a merger of
Quest and ANS, the rights conferred upon Employee hereunder shall survive, and
all attendant obligations of Quest and/or ANS hereunder shall be assumed by the
surviving entity.
21. Limitation of Benefits Clause. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any creditors of the
parties, except as otherwise expressly provided herein.
22. Non-waiver Provision. No failure by any party to insist upon the
strict performance of any covenant, duty, agreement or condition of this
Agreement or to exercise any right or remedy consequent upon a breach thereof
shall constitute waiver of any such breach or any other covenant, duty,
agreement or condition.
<PAGE> 10
23. Multiple Originals. This Agreement may be executed in counterparts,
all of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart.
24. CHOICE OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW.
25. Subject Claims; Initiation of Binding Arbitration. The matters,
claims, rights, and obligations subject to these arbitration provisions include
all rights, claims and obligations arising out of or relating to this Agreement
or to the employee's employment and/or its termination, including, without
limitation, any and all claims, rights or causes of action which may ever arise
or be asserted under any federal, state, local or foreign statutory, regulatory
or common law, and including, without limitation, claims of discrimination,
wrongful discharge or termination, breach of contract, tort (such as intentional
infliction of emotional distress, libel, slander, wrongful invasion of privacy
or personal injury), workers compensation or unemployment compensation. All of
the foregoing types of matters, claims, rights and obligations subject to these
arbitration provisions are herein called "Subject Claims". In the event of a
dispute relating to any Subject Claim, then, upon notice by any party to the
other parties (an "Arbitration Notice") and to American Arbitration Association
("AAA"), Dallas, the controversy or dispute shall be submitted to a sole
arbitrator who is independent and impartial, for binding arbitration in Dallas,
Texas, in accordance with AAA's National Rules for the Resolution of Employment
Disputes (the "Rules") as modified or supplemented hereby. The parties agree
that they will faithfully observe this agreement and the Rules and that they
will abide by and perform any award rendered by the arbitrator. The arbitration
shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 116 (or by
the same principles enunciated by such Act in the event it may not be
technically applicable). The award or judgment of the arbitrator shall be final
and binding on all parties and judgment upon the award or judgment of the
arbitrator may be entered and enforced by any court having jurisdiction. If any
party becomes the subject of a bankruptcy, receivership or other similar
proceeding under the laws of the United States of America, any state or
commonwealth or any other nation or political subdivision thereof, then, to the
extent permitted or not prohibited by applicable law, any factual or substantive
legal issues arising in or during the pendency of any such proceeding shall be
subject to all of the foregoing mandatory mediation and arbitration provisions
and shall be resolved in accordance therewith. The agreements contained herein
have been given for valuable consideration, are coupled with an interest and are
not intended to be executory contracts. The fees and expenses of the arbitrator
will be shared equitably (as determined by the arbitrator) by all parties
engaged in the dispute or controversy.
<PAGE> 11
Selection of Arbitrator. Promptly after the Arbitration Notice is
given, AAA will select five possible arbitrators, to whom AAA will give the
identities of the parties and the general nature of the controversy. If any of
those arbitrators disqualifies himself or declines to serve, AAA shall continue
to designate potential arbitrators until the parties have five to select from.
After the panel of five potential arbitrators has been completed, a two page
summary of the background of each of the potential arbitrators will be given to
each of the parties, and the parties will have a period of 10 days after
receiving the summaries in which to attempt to agree upon the arbitrator to
conduct the arbitration. If the parties are unable to agree upon an arbitrator,
then one of the parties shall notify AAA and the other party, and AAA will
notify each party that it has five days from the AAA notice to strike two names
from the list and advise AAA of the two names stricken. After expiration of the
strike period, if all but one candidate has been stricken, the remaining one
will be the arbitrator, but, if two or more have not been stricken, AAA shall
select the arbitrator from one of those not stricken. The decision of AAA with
respect to the selection of the arbitrator will be final and binding in such
case.
No Litigation; Damages Limitation. Unless and only to the extent
mandatory arbitration is validly prohibited or limited by applicable statute or
regulation, no litigation or other proceeding may ever be instituted at any time
in any court or before any administrative agency or body for the purpose of
adjudicating, interpreting or enforcing any of the rights, duties, liabilities
or obligations of the parties hereto or any rights, duties, liabilities or
obligations relating to any Subject Claim, whether or not covered by the express
terms of this Agreement, or for the purpose of adjudicating a breach or
determination of the validity of this Agreement, or for the purpose of appealing
any decision of an arbitrator, except a proceeding instituted (i) for the
purpose of having the award or judgment of an arbitrator entered and enforced or
(ii) to seek an injunction or restraining order (but not damages in connection
therewith) in circumstances where such relief is available. Unless and only to
the extent a limitation of damages is validly prohibited or limited by
applicable statute or regulation, no punitive, exemplary or consequential
damages may ever be awarded by the arbitrator or anyone else, and each of the
parties hereby waives any and all rights to make, claim or recover any such
damages.
Arbitration Hearing. Within 20 days after the selection of the
arbitrator, the parties and their counsel will appear before the arbitrator at a
place and time designated by the arbitrator for the purpose of each party making
a one hour or less presentation and summary of the case. Thereafter, the
arbitrator will set dates and times for additional hearings in accordance with
the Rules until the proceeding is concluded. The desire and goal of the parties
is, and the arbitrator will be advised that his goal should be, to conduct and
conclude the arbitration proceeding as expeditiously as possible. If any party
or his counsel fails to appear at any hearing, the arbitrator shall be entitled
to reach a decision based on the evidence which has been presented to him by the
parties who did appear.
26. Severability and Reformation. If any provision of this Agreement is
declared or found to be illegal, unenforceable, or void, in whole or in part,
then the parties shall be relieved of all obligations arising under such
provision, but only to the extent that it is illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement shall be
deemed amended by modifying such provision to the extent necessary to make it
legal and enforceable
<PAGE> 12
while preserving its intent or, if that is not possible, by substituting
therefor another provision that is legal and enforceable and achieves the same
objectives.
27. Written Amendments Provision. No supplement, modification or
amendment of this agreement or waiver of any provision of this Agreement shall
be binding unless executed in writing by all parties to this Agreement. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision of this Agreement (regardless of
whether similar), nor shall any such waiver constitute a continuing wavier
unless otherwise expressly provided.
28. Actions to Enforce Non-Compete, Confidentiality or Inventions.
Employee acknowledges and agrees that ANS and the Parent would be irreparably
harmed by any violation of Employee's obligations under Sections 11, 12 and 13
hereof and that, in addition to all other rights or remedies available at law or
in equity, ANS and the Parent will be entitled to injunctive and other equitable
relief to prevent or enjoin any such violation. Additionally, both parties agree
that irrespective of their agreement to arbitrate, either party may seek to have
its rights under Sections 11, 12 or 13 of this agreement enforced by legal or
equitable action in a Court of Competent jurisdiction. The provisions of
Sections 11, 12 and 13 hereof will survive any termination of this Agreement, in
accordance with their terms.
29. Written Consent for Assignment. No party may assign this Agreement
or any rights or benefits thereunder without the written consent of the other
parties to this Agreement.
30. Choice of Forum. Any action initiated pursuant to paragraph 28 must
proceed in a Texas District Court in Collin County, Texas. If such an action can
not proceed in District Court due to jurisdictional limitations, then it shall
proceed in any State or County court of competent jurisdiction in Collin County,
Texas.
EXECUTED as of the date first above written.
QUEST MEDICAL, INC. AND ITS SUBSIDIARY,
ADVANCED NEUROMODULATION SYSTEMS, INC.
By: /s/ Hugh Morrison
------------------------------------
Hugh Morrison
Chairman of the Board
/s/ Christopher G. Chavez
------------------------------------
Christopher G. Chavez
<PAGE> 13
EXHIBIT A
Annual Bonus
In addition to the base salary described in Section 4 of this Agreement,
Employee shall be eligible for an annual performance-based cash bonus.
Employee's standard bonus percentage would be 50% of his annual base salary, to
be earned by meeting certain strategic milestones and objective measurements of
profitability and shareholder value, such milestones and objectives to be
determined by mutual agreement of Employee and the Board of Directors, such that
Employee will receive the full 50% bonus amount if all such objectives are fully
met. In the event that Employee's performance exceeds the objectives established
by Employee and the Board of Directors, Employee shall be eligible for a bonus
in an amount larger than the standard bonus percentage stated above. In the
event that Employee's performance falls short of the objectives established by
Employee and the Board of Directors, Employee may receive less than the full
bonus percentage.
<PAGE> 1
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the ninth day of April, 1998, by and between Advanced Neuromodulation
Systems, Inc. ("ANS"), Quest Medical, Inc. (the "Parent"), (the Parent, ANS,
and, in the event of a merger of the two companies, any surviving entity,
hereinafter referred to as "the Companies," "either Company," or "each Company"
according to the context) and Scott F. Drees ("Employee").
R E C I T A L S
The Companies have special expertise in their businesses that has
enabled them to provide unique career opportunities for their employees.
The Companies' growth depends, to a significant degree, on their
possession of more and better information than that available to their
competitors concerning a number of matters, including but not limited to,
research, systems, development, marketing, management and other information not
generally known to others in each Company's industry. To obtain such information
and use it successfully, the Companies have made significant investments in
research, business development, customer satisfaction methods and techniques,
business process improvements and other developments in marketing methods and
providing services to their customers. This unique and special expertise in
pooling this information has enabled the Companies to conduct their businesses
successfully and thus provide potential employment opportunities for their
employees.
The parties acknowledge that Employee has his own valuable knowledge
and training in certain of the areas in which the Companies conduct their
businesses but that his knowledge will be enhanced by this employment.
Employee recognizes that unless the Companies impart to him their
special expertise, he would be less effective and of less benefit to the
Companies. Employee further acknowledges that without the additional knowledge
to be imparted to him by the Companies, he will be less valuable than would
otherwise be the case in their businesses.
Employee understands and acknowledges that a covenant not to compete
and a restriction on disclosure of confidential information is essential to the
continued growth and stability of each Company's businesses and to the
continuing viability of such businesses in the event the Employee's employment
is terminated as expressly permitted under the terms and limitations of this
Agreement.
The Employee desires employment as an Employee of the Companies under
the terms and conditions of this Agreement and further desires to be given
access to each Company's proprietary information.
The Companies desire to employ Employee under the terms and conditions
of this Agreement.
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the parties agree as follows:
1. Employment. Subject to the terms and conditions set forth in this
Agreement, the Companies employ Employee, and Employee hereby accepts such
employment by the Companies.
2. Duties of Employee.
(a) Employee shall serve in the capacities of Executive Vice
President-Sales and Marketing of Quest/ANS, and shall be subject to supervision
by the President/Chief Executive Officer of Quest/ANS. In the event of a merger
of Quest and ANS, Employee shall serve as Executive Vice President- Sales and
Marketing of the surviving entity. In such capacities, Employee shall have all
necessary powers to discharge his responsibilities. Employee shall have all
powers granted by the Bylaws of the Companies to the Executive Vice President,
as applicable, and Employee shall report to the President/Chief Executive
Officer of such corporation.
(b) During the term of this Agreement, and thereafter so long as
Employee is employed by either Company, Employee shall devote his full business
time and effort to the performance of his duties and responsibilities as an
officer of ANS and the Parent. Notwithstanding the foregoing, Employee may spend
reasonable amounts of time on personal civic and charitable activities that do
not interfere with the performance of his duties and responsibilities to ANS and
the Parent. In addition, Employee may, subject to prior approval by the Board of
Directors of Quest/ANS, spend reasonable amounts of time serving on boards of
directors for other companies, provided that such service does not, in the sound
discretion of the Board of Directors of Quest/ANS, constitute or create a
conflict of interest.
(c) Employee shall observe and comply with the written rules and
regulations of each Company respecting their businesses and shall carry out and
perform the directives and policies of the Companies as they may from time to
time be stated to Employee in writing by the President/Chief Executive Officer.
(d) Employee shall maintain accurate business records as may from
time to time be required by the Companies. Such records may be examined by the
Companies, at all reasonable times after written request is delivered to
Employee. Any such document shall be delivered to each Company promptly upon
request.
(e) Employee agrees not to solicit or receive any income or other
compensation from any third party in connection with his employment with the
Companies. Employee agrees, upon written request by either Company, to render an
accounting of all transactions relating to his business endeavors during the
term of this employment hereunder.
3. Term. The term of this Agreement (the "Term") shall commence
effective as of April ninth, 1998 (the "Effective Date") and continue until the
second anniversary of the Effective Date, unless Employee's employment is
earlier terminated in accordance with Section 9 of this
<PAGE> 3
Agreement. Upon expiration of the term of this Agreement, Employee shall remain
an "at will" employee of the Companies but shall still be subject to and bound
by the terms of this Agreement. In the event of a merger of Quest and ANS, this
Agreement shall remain in full force and effect, with all rights and obligations
of the Companies hereunder passing to the surviving entity.
4. Salary. Commencing on the Effective Date, the Companies will pay
Employee a minimum base annual salary during the term of this Agreement for his
services as an officer of $145,000.00, which shall be payable in accordance with
the Companies' standard payroll practice, but not less than monthly. Such base
salary shall not include any benefits made available to Employee or any
contributions or payments made on his behalf pursuant to any employee benefit
plan or program of the Companies, including any health, disability or life
insurance plan or program, 401-K plan, cash bonus plan, stock incentive plan,
retirement plan or similar plan or program of any nature. The Companies shall
review Employee's salary on a semi-annual basis, and shall increase the annual
salary of Employee from time to time as may be warranted in accordance with the
Companies' compensation policies. ANS shall have no separate salary obligation
to Employee.
5. Bonus Compensation. The Companies may pay Employee an annual
performance-based cash bonus in accordance with Company policy established by
the board from time to time. ANS shall have no separate bonus obligation to
Employee.
6. Stock Options: The Companies shall, upon execution of this
Agreement, grant Employee a total of 50,000 non-transferable stock options to
purchase shares of Quest Common Stock. A total of 12,500 options (25%) shall
vest immediately upon execution of this Agreement. An additional 37,500 options
(25%) shall vest on each of the first, second, and third anniversaries of the
grant, respectively. All options conferred through this grant shall expire in
ten years, and shall be granted at the market price for the Companies' Common
Stock as of the date preceding the grant.
7. Employee Benefits. During the term of this Agreement, the Companies
shall provide Employee with all benefits made available from time to time by the
Companies to their employees and/or officers generally and to employees who hold
positions similar to that of Employee (including benefits granted to other
officers of the Companies), such benefits to be in accordance with the
Companies' policies except that if Employee's employment with the Companies is
terminated, Employee's cash severance payments shall be in accordance with
Section 9 of this Agreement, in lieu of cash severance payments provided by the
policies of the Companies. Specifically, Employee's benefits shall include
participation in medical, dental and vision plans or programs (providing
coverage for Employee's immediate family); disability insurance; 401-K plans;
life insurance payable to Employee's designated beneficiary and paid vacation.
ANS shall have no separate obligations to Employee with respect to employee
benefits. In the event that Employee's employment with the Companies is
terminated, the Companies agree to pay premiums associated with Employee's
election to continue health benefits provided hereunder consistent with past
practices.
8. Reimbursement of Expenses. The Company shall reimburse Employee for
all expenses actually and reasonably incurred by him in the business interests
of ANS and/or Parent.
<PAGE> 4
Such reimbursement shall be made to Employee upon appropriate documentation of
such expenditures in accordance with the Companies' written policies.
9. Early Termination. It is the desire and expectation of each party
that the employer-employee relationship shall continue for the full term
specified herein and be a pleasant and rewarding experience for the parties
hereto. The Companies shall, however, be entitled to terminate Employee's
employment at any time before or after the Effective Date with or without Cause
(as defined in this Section 9). Termination shall be at the initiation of the
President/Chief Executive Officer, but requires approval by majority vote of the
board of directors of the Parent.
If Employee's employment is terminated without Cause, the Companies
shall pay Employee severance compensation pursuant to the following formulas:
(a) In the event of a termination without Cause occurring prior to
the one-year anniversary of this Agreement, Employee shall
receive severance payments equivalent to his salary payable
under this Agreement, including a prorated bonus (as defined
in Section 5) for the current year, from the date of
termination through April 9, 2000. In addition, in the event
of a termination without Cause occurring prior to December 31,
1998, Employee shall receive the full value of the Stock
Appreciation Rights described in Exhibit A, payable on or
before January 31, 1999.
(b) In the event of a termination without Cause occurring at any
time after the one-year anniversary of this Agreement,
Employee will receive twelve (12) months' salary as severance
and a prorated bonus (as defined in Section 5) for the current
year.
In each case, severance payments shall be made in equal installments
on the Companies' semi-monthly payroll dates, provided however, the prorated
bonus will be paid when the bonus is paid to other officers of the Company.
If Employee dies, is unable to perform his duties and
responsibilities as a result of disability that continues for 90 consecutive
days or more ("Disability"), voluntarily resigns from the Companies, or is
terminated for "Cause," the Company shall pay Employee (or his estate, executor
or legal representative, as appropriate) any salary and bonus that has accrued
to the date employment ceases, and the Company's obligations to pay additional
salary or cash compensation or benefits shall terminate as of such date.
"Cause," for the purpose of this Agreement, shall mean the
occurrence of any of the following events:
(a) Performance by Employee of illegal or fraudulent acts, criminal
conduct or willful misconduct relating to the activities of the Companies;
<PAGE> 5
(b) A conviction of or nolo contendere plea by Employee for any
criminal acts involving moral turpitude having or reasonably likely to have a
material adverse effect upon each Company, including, without limitation, upon
their profitability, reputation or goodwill;
(c) Willful or grossly negligent failure by Employee to perform his
duties in a manner consistent with the Companies' best interests;
(d) Willful refusal by Employee to carry out reasonable written
instructions of the Companies' President/Chief Executive Officer or the Boards
of Directors not inconsistent with the provisions of this Agreement;
(e) Violation by Employee of any of Employee's covenants and
agreements contained in Sections 10, 11 or 12 of this Agreement;
(f) Any other material breach of Employee's obligations hereunder,
which he fails to cure within thirty (30) days after receiving written notice
thereof.
10. Non-Competition Agreement.
(a) Employee understands and each Company promises that during the
course of his employment by the Companies, Employee will have access to and the
benefit of the information referred to in the Recitals above, specifically Trade
Secrets and Confidential Information, and will represent each Company and
develop contacts and relationships with other persons and entities, including
but not limited to customers, potential customers and other employees of such
entities. To protect the Companies' interest in preserving their Trade Secrets,
Confidential and other protected information and in the Business Good Will
generated by new contacts and relationships, and as a direct inducement and
consideration for the Companies' promises to provide new Trade Secrets, new
Confidential Information and new contacts, the Employee agrees and covenants to
the duties and obligations created by this covenant not to compete.
(b) The Employee agrees that all duties assumed by this covenant
not to compete include any actions taken by the Employee directly or indirectly,
either as an individual or as an employee, partner, officer, director,
shareholder, advisor, or consultant or in any other capacity whatsoever, of any
person (other than ownership of less than 1% of the issued and outstanding
voting securities of a publicly held corporation).
(c) The employee covenants he:
(1) will not recruit, hire, assist others in recruiting or
hiring, discuss employment with, or refer to others for employment any person
who is, or within the 12 month period immediately preceding the date of any such
activity was, an employee of either Company or any of their affiliates;
(2) Employee agrees that during the term of his employment
with the Companies and for a period of one (1) year thereafter, without regard
to the party terminating
<PAGE> 6
such employment or the reason for termination, if any, Employee will not,
without prior written approval by the Board of Directors for Quest/ANS, in the
United States or in any foreign country in which either Company is then
marketing its products or services, directly or indirectly engage in or own or
control an interest in (except as to those investments held at the effective
date of this agreement or as a passive investor in publicly held companies,
i.e., Employee and Employee's relatives do not own of record, or beneficially,
an aggregate of more than one percent [1%] of any class of outstanding
securities) or act as an officer, director, or employee of, or consultant or
adviser to, any firm, corporation, institution or entity, directly or indirectly
in competition with or engaged in a business substantially similar to that of
Employer, including the research, development, manufacture, sale or marketing of
products, devices, instruments, methods or techniques (or any related services
or activities) similar to any products, devices, instruments, methods or
techniques which either Company is engaged in the research of, development of,
manufacture, selling, or marketing, or has under consideration to do the same
(whether or not such products, devices, instruments, methods or techniques or
the technology related thereto were obtained from Employee), during the term of
the Employee's employment. This provision 10(c)(2) is not intended to, and shall
not be construed in such a manner as to, prevent Employee from securing gainful
employment within the health care industry except with those entities whose
products, devices, instruments, methods or techniques (or any related services
or activities) substantially compete with those of the Companies.
(d) It is understood and agreed that the scope of the foregoing
covenant is reasonable as to time, scope and geography and is necessary to
protect the legitimate business interests of the Companies, in the Confidential
Information and Trade Secrets the Companies have promised to share with
Employee. It is further agreed that such covenant will be regarded as divisible
and will be operative as to time, area and persons to the extent that it may be
so operative, and if any part of such covenant is declared invalid,
unenforceable, or void as to time, area or persons, the validity and
enforceability of the remainder will not be affected.
(e) If Employee violates the restrictive covenants of this Section
10 and the Companies bring legal action for injunctive or other relief, neither
Company shall be deprived of the benefit of the full period of the restrictive
covenant, as a result of the time involved in obtaining the relief. Accordingly,
to the extent allowed by law, the Employee agrees that the restricted period
following the term of employment shall have a duration of two years, and the
regularly scheduled expiration date of such covenant shall be extended by the
same amount of time that Employee is determined to have violated such covenant.
11. Confidentiality. Employee acknowledges that he has learned and will
learn Confidential Information (as defined herein) relating to the business
conducted and to be conducted by the Companies. The Companies promise to provide
all needed Confidential Information to the Employee. Employee agrees that he
will not during the term of employment with the Companies or at any time after
the termination of such employment, without regard to the party terminating such
employment, except in the normal and proper course of his duties hereunder,
disclose or use or authorize any third party to disclose or use any such
Confidential Information, without prior written approval of the Companies. As
used in this Section 11, "Confidential Information" shall mean information
disclosed to or known to Employee as a direct or indirect consequence of or
through his employment with the Companies, about the Companies'
<PAGE> 7
business, methods, business plans, operations, products, processes, and
services, including, but not limited to, information relating to research,
development, inventions, recommendations, programs, systems, and systems
analyses, flow charts, finances, and financial statements, marketing plans and
strategies, merchandising, pricing strategies, merchandise sources, client
sources, system designs, procedure manuals, automated data programs, financing
methods, financial projections, terms and conditions of arrangements of any
business, computer software, terms and conditions of business arrangements with
customers or suppliers, reports, personnel procedures, supply and services
resources, names and addresses of clients, the Companies' contacts, names of
professional advisors, and all other information pertaining to customers and
suppliers, including, but not limited to assets, business interests, personal
data and all other information pertaining to the Companies, clients or suppliers
whatsoever, including all accompanying documentation therefor. All information
disclosed to Employee, or to which Employee has access during the period of his
employment, for which there is any reasonable basis to be believed is, or which
appears to be treated by the Companies as Confidential Information, shall be
presumed to be Confidential Information hereunder. Confidential Information
shall not, however, include information that (i) is publicly known or becomes
publicly known through no fault of Employee, or (ii) is generally or readily
obtainable by the public, or (iii) constitutes general skills, knowledge and
experience acquired by Employee before and/or during his employment with ANS and
the Parent.
Employee agrees that all documents of any nature pertaining to
activities of the Companies or their affiliates, or that include any
Confidential Information, in his possession now or at any time during the term
of his employment, including without limitation, memoranda, notebooks, notes,
data sheets, records and computer programs, are and shall be the property of
such entity and that all copies thereof shall be surrendered to the appropriate
entity upon termination of his employment.
12. Inventions; Developments. Employee agrees to notify the Companies
of any discovery, invention, innovation, or improvement which is related to the
Business or to the business of any customer or supplier (collectively called
"Developments") conceived or developed by Employee during the term of the
Employee's employment. Developments shall include, without limitation,
developments in computer software, logical systems, algorithms, and any or all
other intellectual properties related to the Business. All Developments,
including but not limited to all written documents pertaining thereto, shall be
the exclusive property of ANS or the Parent, as the case may be, and shall be
considered Confidential Information subject to the terms of this Agreement.
Employee agrees that when appropriate, and upon written request of ANS or the
Parent, the Employee will acknowledge that Developments are "works for hire" and
will file for patents or copyrights with regard to any or all Developments and
will sign documentation necessary to evidence ownership of Developments in ANS
or the Parent.
13. Exit Interview. To insure a clear understanding of this Agreement,
including but not limited to the protection of the Companies' business
interests, Employee agrees, at no additional expense to the Companies, to engage
in an exit interview with the Companies prior to Employee's departure from the
Companies at a time and place designated by the Companies. In the event that the
exit interview takes place in a location outside of the Dallas/Fort Worth
<PAGE> 8
metropolitan area, the Companies agree to reimburse Employee for reasonable
expenses associated with his travel to and from said exit interview.
14. Right of Setoff. The Companies shall be entitled, at their option
and not in lieu of any other remedies to which they may be entitled, to set off
any amounts due Employee or any affiliate of Employee against any amount due and
payable by Employee or any affiliate of Employee to the Companies ("Set-Offs")
pursuant to this Agreement or otherwise, provided that the Set-Offs are set
forth in detail in writing with supporting evidence to substantiate each
Set-Off.
15. Notice Provision. Any notice, demand or request required or
permitted to be given or made under this Agreement shall be in writing and shall
be deemed given or made when delivered in person, when sent by United States
registered or certified mail, or postage prepaid, or when telecopied to a party
at its address or telecopy number specified below:
If to ANS:
Advanced Neuromodulation Systems, Inc.
201 Allentown Parkway
Allen, Texas 75002
Telecopy number: (972) 390-9687
If to the Parent:
Quest Medical, Inc.
201 Allentown Parkway
Allen, Texas 75002
Telecopy number: (972) 390-9687
If to Employee:
Scott F. Drees
834 Parkwood Court
McKinney, TX 75070
Telecopy number:
------------------
The parties to this Agreement may change their addresses for notice
in the manner provided above.
16. Headings Non-binding. All section titles and captions in this
Agreement are for convenience only, shall not be deemed part of this Agreement,
and in no way shall define, limit, extend or describe the scope or intent of any
provisions hereof.
<PAGE> 9
17. Words to have Contextual Meaning. Whenever the context may require,
any pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa. Additionally, the words "and" and "or"
shall be given their contextual meaning and not be interpreted blindly as being
solely conjunctive or disjunctive, as the case may be.
18. Execution of Agreement. The parties shall execute all documents,
provide all information and take or refrain from taking all actions as may be
reasonably necessary or appropriate to achieve the purposes of this Agreement.
19. Partial Assignment Clause. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their representatives and permitted
successors and assigns. Employee's duties hereunder are personal services and
are not assignable. Except for the provisions of Sections 10, 11 and 12 of this
Agreement, which are intended to benefit ANS' and the Parent's affiliates as
third party beneficiaries, or as otherwise expressly provided in this Agreement,
nothing in this Agreement, express or implied, is intended to confer upon any
person other than the parties to this Agreement, their respective
representatives and permitted successors and assigns, any rights, remedies or
obligations under or by reason of this Agreement. In the event of a merger of
Quest and ANS, the rights conferred upon Employee hereunder shall survive, and
all attendant obligations of Quest and/or ANS hereunder shall be assumed by the
surviving entity.
20. Limitation of Benefits Clause. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any creditors of the
parties, except as otherwise expressly provided herein.
21. Non-waiver Provision. No failure by any party to insist upon the
strict performance of any covenant, duty, agreement or condition of this
Agreement or to exercise any right or remedy consequent upon a breach thereof
shall constitute waiver of any such breach or any other covenant, duty,
agreement or condition.
22. Multiple Originals. This Agreement may be executed in counterparts,
all of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart.
23. CHOICE OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW.
24. Subject Claims; Initiation of Binding Arbitration. The matters,
claims, rights, and obligations subject to these arbitration provisions include
all rights, claims and obligations arising out of or relating to this Agreement
or to the employee's employment and/or its termination, including, without
limitation, any and all claims, rights or causes of action which may ever arise
or be asserted under any federal, state, local or foreign statutory, regulatory
or common law, and including, without limitation, claims of discrimination,
wrongful discharge or termination, breach of contract, tort (such as intentional
infliction of emotional distress, libel,
<PAGE> 10
slander, wrongful invasion of privacy or personal injury), workers compensation
or unemployment compensation. All of the foregoing types of matters, claims,
rights and obligations subject to these arbitration provisions are herein called
"Subject Claims". In the event of a dispute relating to any Subject Claim, then,
upon notice by any party to the other parties (an "Arbitration Notice") and to
American Arbitration Association ("AAA"), Dallas, the controversy or dispute
shall be submitted to a sole arbitrator who is independent and impartial, for
binding arbitration in Dallas, Texas, in accordance with AAA's National Rules
for the Resolution of Employment Disputes (the "Rules") as modified or
supplemented hereby. The parties agree that they will faithfully observe this
agreement and the Rules and that they will abide by and perform any award
rendered by the arbitrator. The arbitration shall be governed by the Federal
Arbitration Act, 9 U.S.C. Section 116 (or by the same principles enunciated by
such Act in the event it may not be technically applicable). The award or
judgment of the arbitrator shall be final and binding on all parties and
judgment upon the award or judgment of the arbitrator may be entered and
enforced by any court having jurisdiction. If any party becomes the subject of a
bankruptcy, receivership or other similar proceeding under the laws of the
United States of America, any state or commonwealth or any other nation or
political subdivision thereof, then, to the extent permitted or not prohibited
by applicable law, any factual or substantive legal issues arising in or during
the pendency of any such proceeding shall be subject to all of the foregoing
mandatory mediation and arbitration provisions and shall be resolved in
accordance therewith. The agreements contained herein have been given for
valuable consideration, are coupled with an interest and are not intended to be
executory contracts. The fees and expenses of the arbitrator will be shared
equitably (as determined by the arbitrator) by all parties engaged in the
dispute or controversy.
Selection of Arbitrator. Promptly after the Arbitration Notice is
given, AAA will select five possible arbitrators, to whom AAA will give the
identities of the parties and the general nature of the controversy. If any of
those arbitrators disqualifies himself or declines to serve, AAA shall continue
to designate potential arbitrators until the parties have five to select from.
After the panel of five potential arbitrators has been completed, a two page
summary of the background of each of the potential arbitrators will be given to
each of the parties, and the parties will have a period of 10 days after
receiving the summaries in which to attempt to agree upon the arbitrator to
conduct the arbitration. If the parties are unable to agree upon an arbitrator,
then one of the parties shall notify AAA and the other party, and AAA will
notify each party that it has five days from the AAA notice to strike two names
from the list and advise AAA of the two names stricken. After expiration of the
strike period, if all but one candidate has been stricken, the remaining one
will be the arbitrator, but, if two or more have not been stricken, AAA shall
select the arbitrator from one of those not stricken. The decision of AAA with
respect to the selection of the arbitrator will be final and binding in such
case.
No Litigation; Damages Limitation. Unless and only to the extent
mandatory arbitration is validly prohibited or limited by applicable statute or
regulation, no litigation or other proceeding may ever be instituted at any time
in any court or before any administrative agency or body for the purpose of
adjudicating, interpreting or enforcing any of the rights, duties, liabilities
or obligations of the parties hereto or any rights, duties, liabilities or
obligations relating to any Subject Claim, whether or not covered by the express
terms of this Agreement, or for the purpose of adjudicating a breach or
determination of the validity of this Agreement, or for the
<PAGE> 11
purpose of appealing any decision of an arbitrator, except a proceeding
instituted (i) for the purpose of having the award or judgment of an arbitrator
entered and enforced or (ii) to seek an injunction or restraining order (but not
damages in connection therewith) in circumstances where such relief is
available. Unless and only to the extent a limitation of damages is validly
prohibited or limited by applicable statute or regulation, no punitive,
exemplary or consequential damages may ever be awarded by the arbitrator or
anyone else, and each of the parties hereby waives any and all rights to make,
claim or recover any such damages.
Arbitration Hearing. Within 20 days after the selection of the
arbitrator, the parties and their counsel will appear before the arbitrator at a
place and time designated by the arbitrator for the purpose of each party making
a one hour or less presentation and summary of the case. Thereafter, the
arbitrator will set dates and times for additional hearings in accordance with
the Rules until the proceeding is concluded. The desire and goal of the parties
is, and the arbitrator will be advised that his goal should be, to conduct and
conclude the arbitration proceeding as expeditiously as possible. If any party
or his counsel fails to appear at any hearing, the arbitrator shall be entitled
to reach a decision based on the evidence which has been presented to him by the
parties who did appear.
25. Severability and Reformation. If any provision of this Agreement is
declared or found to be illegal, unenforceable, or void, in whole or in part,
then the parties shall be relieved of all obligations arising under such
provision, but only to the extent that it is illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement shall be
deemed amended by modifying such provision to the extent necessary to make it
legal and enforceable while preserving its intent or, if that is not possible,
by substituting therefor another provision that is legal and enforceable and
achieves the same objectives.
26. Written Amendments Provision. No supplement, modification or
amendment of this agreement or waiver of any provision of this Agreement shall
be binding unless executed in writing by all parties to this Agreement. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision of this Agreement (regardless of
whether similar), nor shall any such waiver constitute a continuing wavier
unless otherwise expressly provided.
27. Actions to Enforce Non-Compete, Confidentiality or Inventions.
Employee acknowledges and agrees that ANS and the Parent would be irreparably
harmed by any violation of Employee's obligations under Sections 10, 11 and 12
hereof and that, in addition to all other rights or remedies available at law or
in equity, ANS and the Parent will be entitled to injunctive and other equitable
relief to prevent or enjoin any such violation. Additionally, both parties agree
that irrespective of their agreement to arbitrate, either party may seek to have
its rights under Sections 10, 11 or 12 of this agreement enforced by legal or
equitable action in a Court of Competent jurisdiction. The provisions of
Sections 10, 11 and 12 hereof will survive any termination of this Agreement, in
accordance with their terms.
28. Written Consent for Assignment. No party may assign this Agreement
or any rights or benefits thereunder without the written consent of the other
parties to this Agreement.
<PAGE> 12
29. Choice of Forum. Any action initiated pursuant to paragraph 27 must
proceed in a Texas District Court in Collin County, Texas. If such an action can
not proceed in District Court due to jurisdictional limitations, then it shall
proceed in any State or County court of competent jurisdiction in Collin County,
Texas.
EXECUTED as of the date first above written.
QUEST MEDICAL, INC. AND ITS SUBSIDIARY,
ADVANCED NEUROMODULATION SYSTEMS, INC.
By: /s/ Hugh Morrison
-------------------------------------
Hugh Morrison
Chairman of the Board
/s/ Scott F. Drees
-------------------------------------
Scott F. Drees
<PAGE> 13
EXHIBIT A
Stock Appreciation Right
The Company shall pay Employee, in cash prior to January 31, 1999, an amount
equal to the difference between the average closing sales price for the
Company's common stock, determined by reference to the closing sales price
reported by the NASDAQ National Market for the five trading days preceding
December 31, 1998, and $6.00, multiplied by 50,000, with a cap of $212,500.
<PAGE> 1
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the ninth day of April, 1998, by and between Advanced Neuromodulation
Systems, Inc. ("ANS"), Quest Medical, Inc. (the "Parent"), (the Parent, ANS,
and, in the event of a merger of the two companies, any surviving entity,
hereinafter referred to as "the Companies," "either Company," or "each Company"
according to the context) and F. Robert Merrill III ("Employee").
R E C I T A L S
The Companies have special expertise in their businesses that has
enabled them to provide unique career opportunities for their employees.
The Companies' growth depends, to a significant degree, on their
possession of more and better information than that available to their
competitors concerning a number of matters, including but not limited to,
research, systems, development, marketing, management and other information not
generally known to others in each Company's industry. To obtain such information
and use it successfully, the Companies have made significant investments in
research, business development, customer satisfaction methods and techniques,
business process improvements and other developments in marketing methods and
providing services to their customers. This unique and special expertise in
pooling this information has enabled the Companies to conduct their businesses
successfully and thus provide potential employment opportunities for their
employees.
The parties acknowledge that Employee has his own valuable knowledge
and training in certain of the areas in which the Companies conduct their
businesses but that his knowledge will be enhanced by this employment.
Employee recognizes that unless the Companies impart to him their
special expertise, he would be less effective and of less benefit to the
Companies. Employee further acknowledges that without the additional knowledge
to be imparted to him by the Companies, he will be less valuable than would
otherwise be the case in their businesses.
Employee understands and acknowledges that a covenant not to compete
and a restriction on disclosure of confidential information is essential to the
continued growth and stability of each Company's businesses and to the
continuing viability of such businesses in the event the Employee's employment
is terminated as expressly permitted under the terms and limitations of this
Agreement.
The Employee desires employment as an Employee of the Companies under
the terms and conditions of this Agreement and further desires to be given
access to each Company's proprietary information.
The Companies desire to employ Employee under the terms and conditions
of this Agreement.
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the parties agree as follows:
1. Employment. Subject to the terms and conditions set forth in this
Agreement, the Companies employ Employee, and Employee hereby accepts such
employment by the Companies.
2. Duties of Employee.
(a) Employee shall serve in the capacities of Executive Vice
President- Finance, Chief Financial Officer, Secretary and Treasurer of
Quest/ANS, and shall be subject to supervision by the President/Chief Executive
Officer of Quest/ANS. In the event of a merger of Quest and ANS, Employee shall
serve as Executive Vice President- Finance, Chief Financial Officer, Secretary
and Treasurer of the surviving entity. In such capacities, Employee shall have
all necessary powers to discharge his responsibilities. Employee shall have all
powers granted by the Bylaws of the Companies to the Executive Vice President,
Chief Financial Officer, Secretary and Treasurer, as applicable, and Employee
shall report to the President/Chief Executive Officer of such corporation.
(b) During the term of this Agreement, and thereafter so long as
Employee is employed by either Company, Employee shall devote his full business
time and effort to the performance of his duties and responsibilities as an
officer of ANS and the Parent. Notwithstanding the foregoing, Employee may spend
reasonable amounts of time on personal civic and charitable activities that do
not interfere with the performance of his duties and responsibilities to ANS and
the Parent. In addition, Employee may, subject to prior approval by the Board of
Directors of Quest/ANS, spend reasonable amounts of time serving on boards of
directors for other companies, provided that such service does not, in the sound
discretion of the Board of Directors of Quest/ANS, constitute or create a
conflict of interest.
(c) Employee shall observe and comply with the written rules and
regulations of each Company respecting their businesses and shall carry out and
perform the directives and policies of the Companies as they may from time to
time be stated to Employee in writing by the President/Chief Executive Officer.
(d) Employee shall maintain accurate business records as may from
time to time be required by the Companies. Such records may be examined by the
Companies, at all reasonable times after written request is delivered to
Employee. Any such document shall be delivered to each Company promptly upon
request.
(e) Employee agrees not to solicit or receive any income or other
compensation from any third party in connection with his employment with the
Companies. Employee agrees, upon written request by either Company, to render an
accounting of all transactions relating to his business endeavors during the
term of this employment hereunder.
3. Term. The term of this Agreement (the "Term") shall commence
effective as of April ninth, 1998 (the "Effective Date") and continue until the
second anniversary of the Effective
<PAGE> 3
Date, unless Employee's employment is earlier terminated in accordance with
Section 9 of this Agreement. Upon expiration of the term of this Agreement,
Employee shall remain an "at will" employee of the Companies but shall still be
subject to and bound by the terms of this Agreement. In the event of a merger of
Quest and ANS, this Agreement shall remain in full force and effect, with all
rights and obligations of the Companies hereunder passing to the surviving
entity.
4. Salary. Commencing on the Effective Date, the Companies will pay
Employee a minimum base annual salary during the term of this Agreement for his
services as an officer of $121,000.00, which shall be payable in accordance with
the Companies' standard payroll practice, but not less than monthly. Such base
salary shall not include any benefits made available to Employee or any
contributions or payments made on his behalf pursuant to any employee benefit
plan or program of the Companies, including any health, disability or life
insurance plan or program, 401-K plan, cash bonus plan, stock incentive plan,
retirement plan or similar plan or program of any nature. The Companies shall
review Employee's salary on a semi-annual basis, and shall increase the annual
salary of Employee from time to time as may be warranted in accordance with the
Companies' compensation policies. ANS shall have no separate salary obligation
to Employee.
5. Bonus Compensation. The Companies may pay Employee an annual
performance-based cash bonus in accordance with Company policy established by
the board from time to time. ANS shall have no separate bonus obligation to
Employee.
6. Stock Options: The Companies shall, upon execution of this
Agreement, grant Employee a total of 50,000 non-transferable stock options to
purchase shares of Quest Common Stock. A total of 12,500 options (25%) shall
vest immediately upon execution of this Agreement. An additional 37,500 options
(25%) shall vest on each of the first, second, and third anniversaries of the
grant, respectively. All options conferred through this grant shall expire in
ten years, and shall be granted at the market price for the Companies' Common
Stock as of the date preceding the grant.
7. Employee Benefits. During the term of this Agreement, the Companies
shall provide Employee with all benefits made available from time to time by the
Companies to their employees and/or officers generally and to employees who hold
positions similar to that of Employee (including benefits granted to other
officers of the Companies), such benefits to be in accordance with the
Companies' policies except that if Employee's employment with the Companies is
terminated, Employee's cash severance payments shall be in accordance with
Section 9 of this Agreement, in lieu of cash severance payments provided by the
policies of the Companies. Specifically, Employee's benefits shall include
participation in medical, dental and vision plans or programs (providing
coverage for Employee's immediate family); disability insurance; 401-K plans;
life insurance payable to Employee's designated beneficiary and paid vacation.
ANS shall have no separate obligations to Employee with respect to employee
benefits. In the event that Employee's employment with the Companies is
terminated, the Companies agree to pay premiums associated with Employee's
election to continue health benefits provided hereunder consistent with past
practices.
<PAGE> 4
8. Reimbursement of Expenses. The Company shall reimburse Employee for
all expenses actually and reasonably incurred by him in the business interests
of ANS and/or Parent. Such reimbursement shall be made to Employee upon
appropriate documentation of such expenditures in accordance with the Companies'
written policies.
9. Early Termination. It is the desire and expectation of each party
that the employer-employee relationship shall continue for the full term
specified herein and be a pleasant and rewarding experience for the parties
hereto. The Companies shall, however, be entitled to terminate Employee's
employment at any time before or after the Effective Date with or without Cause
(as defined in this Section 9). Termination shall be at the initiation of the
President/Chief Executive Officer, but requires approval by majority vote of the
board of directors of the Parent.
If Employee's employment is terminated without Cause, the Companies
shall pay Employee severance compensation pursuant to the following formulas:
(a) In the event of a termination without Cause occurring prior to
the one-year anniversary of this Agreement, Employee shall
receive severance payments equivalent to his salary payable
under this Agreement, including a prorated bonus (as defined
in Section 5) for the current year, from the date of
termination through April 9, 2000.
(b) In the event of a termination without Cause occurring at any
time after the one-year anniversary of this Agreement,
Employee will receive twelve (12) months' salary as severance
and a prorated bonus (as defined in Section 5) for the current
year.
In each case, severance payments shall be made in equal installments on
the Companies' semi-monthly payroll dates, provided however, the prorated bonus
will be paid when the bonus is paid to other officers of the Company.
If Employee dies, is unable to perform his duties and responsibilities
as a result of disability that continues for 90 consecutive days or more
("Disability"), voluntarily resigns from the Companies, or is terminated for
"Cause," the Company shall pay Employee (or his estate, executor or legal
representative, as appropriate) any salary and bonus that has accrued to the
date employment ceases, and the Company's obligations to pay additional salary
or cash compensation or benefits shall terminate as of such date.
"Cause," for the purpose of this Agreement, shall mean the occurrence
of any of the following events:
(a) Performance by Employee of illegal or fraudulent acts, criminal
conduct or willful misconduct relating to the activities of the Companies;
(b) A conviction of or nolo contendere plea by Employee for any
criminal acts involving moral turpitude having or reasonably likely to have a
material adverse effect upon each Company, including, without limitation, upon
their profitability, reputation or goodwill;
<PAGE> 5
(c) Willful or grossly negligent failure by Employee to perform his
duties in a manner consistent with the Companies' best interests;
(d) Willful refusal by Employee to carry out reasonable written
instructions of the Companies' President/Chief Executive Officer or the Boards
of Directors not inconsistent with the provisions of this Agreement;
(e) Violation by Employee of any of Employee's covenants and agreements
contained in Sections 10, 11 or 12 of this Agreement;
(f) Any other material breach of Employee's obligations hereunder,
which he fails to cure within thirty (30) days after receiving written notice
thereof.
10. Non-Competition Agreement.
(a) Employee understands and each Company promises that during the
course of his employment by the Companies, Employee will have access to and the
benefit of the information referred to in the Recitals above, specifically Trade
Secrets and Confidential Information, and will represent each Company and
develop contacts and relationships with other persons and entities, including
but not limited to customers, potential customers and other employees of such
entities. To protect the Companies' interest in preserving their Trade Secrets,
Confidential and other protected information and in the Business Good Will
generated by new contacts and relationships, and as a direct inducement and
consideration for the Companies' promises to provide new Trade Secrets, new
Confidential Information and new contacts, the Employee agrees and covenants to
the duties and obligations created by this covenant not to compete.
(b) The Employee agrees that all duties assumed by this not to compete
include any actions taken by the Employee directly or indirectly, either as an
individual or as an employee, partner, officer, director, shareholder, advisor,
or consultant or in any other capacity whatsoever, of any person (other than
ownership of less than 1% of the issued and outstanding voting securities of a
publicly held corporation).
(c) The employee covenants he:
(1) will not recruit, hire, assist others in recruiting or hiring,
discuss employment with, or refer to others for employment any person who is, or
within the 12 month period immediately preceding the date of any such activity
was, an employee of either Company or any of their affiliates;
(2) Employee agrees that during the term of his employment with the
Companies and for a period of one (1) year thereafter, without regard to the
party terminating such employment or the reason for termination, if any,
Employee will not, without prior written approval by the Board of Directors for
Quest/ANS, in the United States or in any foreign country in which either
Company is then marketing its products or services, directly or indirectly
engage in or
<PAGE> 6
own or control an interest in (except as to those investments held at the
effective date of this agreement or as a passive investor in publicly held
companies, i.e., Employee and Employee's relatives do not own of record, or
beneficially, an aggregate of more than one percent [1%] of any class of
outstanding securities) or act as an officer, director, or employee of, or
consultant or adviser to, any firm, corporation, institution or entity, directly
or indirectly in competition with or engaged in a business substantially similar
to that of Employer, including the research, development, manufacture, sale or
marketing of products, devices, instruments, methods or techniques (or any
related services or activities) similar to any products, devices, instruments,
methods or techniques which either Company is engaged in the research of,
development of, manufacture, selling, or marketing, or has under consideration
to do the same (whether or not such products, devices, instruments, methods or
techniques or the technology related thereto were obtained from Employee),
during the term of the Employee's employment. This provision 10(c)(2) is not
intended to, and shall not be construed in such a manner as to, prevent Employee
from securing gainful employment within the health care industry except with
those entities whose products, devices, instruments, methods or techniques (or
any related services or activities) substantially compete with those of the
Companies.
(d) It is understood and agreed that the scope of the foregoing
covenant is reasonable as to time, scope and geography and is necessary to
protect the legitimate business interests of the Companies, in the Confidential
Information and Trade Secrets the Companies have promised to share with
Employee. It is further agreed that such covenant will be regarded as divisible
and will be operative as to time, area and persons to the extent that it may be
so operative, and if any part of such covenant is declared invalid,
unenforceable, or void as to time, area or persons, the validity and
enforceability of the remainder will not be affected.
(e) If Employee violates the restrictive covenants of this Section 10
and the Companies bring legal action for injunctive or other relief, neither
Company shall be deprived of the benefit of the full period of the restrictive
covenant, as a result of the time involved in obtaining the relief. Accordingly,
to the extent allowed by law, the Employee agrees that the restricted period
following the term of employment shall have a duration of two years, and the
regularly scheduled expiration date of such covenant shall be extended by the
same amount of time that Employee is determined to have violated such covenant.
11. Confidentiality. Employee acknowledges that he has learned and will
learn Confidential Information (as defined herein) relating to the business
conducted and to be conducted by the Companies. The Companies promise to provide
all needed Confidential Information to the Employee. Employee agrees that he
will not during the term of employment with the Companies or at any time after
the termination of such employment, without regard to the party terminating such
employment, except in the normal and proper course of his duties hereunder,
disclose or use or authorize any third party to disclose or use any such
Confidential Information, without prior written approval of the Companies. As
used in this Section 11, "Confidential Information" shall mean information
disclosed to or known to Employee as a direct or indirect consequence of or
through his employment with the Companies, about the Companies' business,
methods, business plans, operations, products, processes, and services,
including, but not limited to, information relating to research, development,
inventions, recommendations, programs, systems, and systems analyses, flow
charts, finances, and financial statements,
<PAGE> 7
marketing plans and strategies, merchandising, pricing strategies, merchandise
sources, client sources, system designs, procedure manuals, automated data
programs, financing methods, financial projections, terms and conditions of
arrangements of any business, computer software, terms and conditions of
business arrangements with customers or suppliers, reports, personnel
procedures, supply and services resources, names and addresses of clients, the
Companies' contacts, names of professional advisors, and all other information
pertaining to customers and suppliers, including, but not limited to assets,
business interests, personal data and all other information pertaining to the
Companies, clients or suppliers whatsoever, including all accompanying
documentation therefor. All information disclosed to Employee, or to which
Employee has access during the period of his employment, for which there is any
reasonable basis to be believed is, or which appears to be treated by the
Companies as Confidential Information, shall be presumed to be Confidential
Information hereunder. Confidential Information shall not, however, include
information that (i) is publicly known or becomes publicly known through no
fault of Employee, or (ii) is generally or readily obtainable by the public, or
(iii) constitutes general skills, knowledge and experience acquired by Employee
before and/or during his employment with ANS and the Parent.
Employee agrees that all documents of any nature pertaining to
activities of the Companies or their affiliates, or that include any
Confidential Information, in his possession now or at any time during the term
of his employment, including without limitation, memoranda, notebooks, notes,
data sheets, records and computer programs, are and shall be the property of
such entity and that all copies thereof shall be surrendered to the appropriate
entity upon termination of his employment.
12. Inventions; Developments. Employee agrees to notify the Companies
of any discovery, invention, innovation, or improvement which is related to the
Business or to the business of any customer or supplier (collectively called
"Developments") conceived or developed by Employee during the term of the
Employee's employment. Developments shall include, without limitation,
developments in computer software, logical systems, algorithms, and any or all
other intellectual properties related to the Business. All Developments,
including but not limited to all written documents pertaining thereto, shall be
the exclusive property of ANS or the Parent, as the case may be, and shall be
considered Confidential Information subject to the terms of this Agreement.
Employee agrees that when appropriate, and upon written request of ANS or the
Parent, the Employee will acknowledge that Developments are "works for hire" and
will file for patents or copyrights with regard to any or all Developments and
will sign documentation necessary to evidence ownership of Developments in ANS
or the Parent.
13. Exit Interview. To insure a clear understanding of this Agreement,
including but not limited to the protection of the Companies' business
interests, Employee agrees, at no additional expense to the Companies, to engage
in an exit interview with the Companies prior to Employee's departure from the
Companies at a time and place designated by the Companies. In the event that the
exit interview takes place in a location outside of the Dallas/Fort Worth
metropolitan area, the Companies agree to reimburse Employee for reasonable
expenses associated with his travel to and from said exit interview.
<PAGE> 8
14. Right of Setoff. The Companies shall be entitled, at their option
and not in lieu of any other remedies to which they may be entitled, to set off
any amounts due Employee or any affiliate of Employee against any amount due and
payable by Employee or any affiliate of Employee to the Companies ("Set-Offs")
pursuant to this Agreement or otherwise, provided that the Set-Offs are set
forth in detail in writing with supporting evidence to substantiate each
Set-Off.
15. Notice Provision. Any notice, demand or request required or
permitted to be given or made under this Agreement shall be in writing and shall
be deemed given or made when delivered in person, when sent by United States
registered or certified mail, or postage prepaid, or when telecopied to a party
at its address or telecopy number specified below:
If to ANS:
Advanced Neuromodulation Systems, Inc.
201 Allentown Parkway
Allen, Texas 75002
Telecopy number: (972) 390-9687
If to the Parent:
Quest Medical, Inc.
201 Allentown Parkway
Allen, Texas 75002
Telecopy number: (972) 390-9687
If to Employee:
F. Robert Merrill III
3329 Leigh Drive
Plano, TX 75002
Telecopy number:
The parties to this Agreement may change their addresses for notice
in the manner provided above.
16. Headings Non-binding. All section titles and captions in this
Agreement are for convenience only, shall not be deemed part of this Agreement,
and in no way shall define, limit, extend or describe the scope or intent of any
provisions hereof.
17. Words to have Contextual Meaning. Whenever the context may require,
any pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
<PAGE> 9
Additionally, the words "and" and "or" shall be given their contextual meaning
and not be interpreted blindly as being solely conjunctive or disjunctive, as
the case may be.
18. Execution of Agreement. The parties shall execute all documents,
provide all information and take or refrain from taking all actions as may be
reasonably necessary or appropriate to achieve the purposes of this Agreement.
19. Partial Assignment Clause. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their representatives and permitted
successors and assigns. Employee's duties hereunder are personal services and
are not assignable. Except for the provisions of Sections 10, 11 and 12 of this
Agreement, which are intended to benefit ANS' and the Parent's affiliates as
third party beneficiaries, or as otherwise expressly provided in this Agreement,
nothing in this Agreement, express or implied, is intended to confer upon any
person other than the parties to this Agreement, their respective
representatives and permitted successors and assigns, any rights, remedies or
obligations under or by reason of this Agreement. In the event of a merger of
Quest and ANS, the rights conferred upon Employee hereunder shall survive, and
all attendant obligations of Quest and/or ANS hereunder shall be assumed by the
surviving entity.
20. Limitation of Benefits Clause. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any creditors of the
parties, except as otherwise expressly provided herein.
21. Non-waiver Provision. No failure by any party to insist upon the
strict performance of any covenant, duty, agreement or condition of this
Agreement or to exercise any right or remedy consequent upon a breach thereof
shall constitute waiver of any such breach or any other covenant, duty,
agreement or condition.
22. Multiple Originals. This Agreement may be executed in counterparts,
all of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart.
23. CHOICE OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW.
24. Subject Claims; Initiation of Binding Arbitration. The matters,
claims, rights, and obligations subject to these arbitration provisions include
all rights, claims and obligations arising out of or relating to this Agreement
or to the employee's employment and/or its termination, including, without
limitation, any and all claims, rights or causes of action which may ever arise
or be asserted under any federal, state, local or foreign statutory, regulatory
or common law, and including, without limitation, claims of discrimination,
wrongful discharge or termination, breach of contract, tort (such as intentional
infliction of emotional distress, libel, slander, wrongful invasion of privacy
or personal injury), workers compensation or unemployment compensation. All of
the foregoing types of matters, claims, rights and obligations subject to these
arbitration provisions are herein called "Subject Claims". In the
<PAGE> 10
event of a dispute relating to any Subject Claim, then, upon notice by any party
to the other parties (an "Arbitration Notice") and to American Arbitration
Association ("AAA"), Dallas, the controversy or dispute shall be submitted to a
sole arbitrator who is independent and impartial, for binding arbitration in
Dallas, Texas, in accordance with AAA's National Rules for the Resolution of
Employment Disputes (the "Rules") as modified or supplemented hereby. The
parties agree that they will faithfully observe this agreement and the Rules and
that they will abide by and perform any award rendered by the arbitrator. The
arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Section
116 (or by the same principles enunciated by such Act in the event it may not be
technically applicable). The award or judgment of the arbitrator shall be final
and binding on all parties and judgment upon the award or judgment of the
arbitrator may be entered and enforced by any court having jurisdiction. If any
party becomes the subject of a bankruptcy, receivership or other similar
proceeding under the laws of the United States of America, any state or
commonwealth or any other nation or political subdivision thereof, then, to the
extent permitted or not prohibited by applicable law, any factual or substantive
legal issues arising in or during the pendency of any such proceeding shall be
subject to all of the foregoing mandatory mediation and arbitration provisions
and shall be resolved in accordance therewith. The agreements contained herein
have been given for valuable consideration, are coupled with an interest and are
not intended to be executory contracts. The fees and expenses of the arbitrator
will be shared equitably (as determined by the arbitrator) by all parties
engaged in the dispute or controversy.
Selection of Arbitrator. Promptly after the Arbitration Notice is
given, AAA will select five possible arbitrators, to whom AAA will give the
identities of the parties and the general nature of the controversy. If any of
those arbitrators disqualifies himself or declines to serve, AAA shall continue
to designate potential arbitrators until the parties have five to select from.
After the panel of five potential arbitrators has been completed, a two page
summary of the background of each of the potential arbitrators will be given to
each of the parties, and the parties will have a period of 10 days after
receiving the summaries in which to attempt to agree upon the arbitrator to
conduct the arbitration. If the parties are unable to agree upon an arbitrator,
then one of the parties shall notify AAA and the other party, and AAA will
notify each party that it has five days from the AAA notice to strike two names
from the list and advise AAA of the two names stricken. After expiration of the
strike period, if all but one candidate has been stricken, the remaining one
will be the arbitrator, but, if two or more have not been stricken, AAA shall
select the arbitrator from one of those not stricken. The decision of AAA with
respect to the selection of the arbitrator will be final and binding in such
case.
No Litigation; Damages Limitation. Unless and only to the extent
mandatory arbitration is validly prohibited or limited by applicable statute or
regulation, no litigation or other proceeding may ever be instituted at any time
in any court or before any administrative agency or body for the purpose of
adjudicating, interpreting or enforcing any of the rights, duties, liabilities
or obligations of the parties hereto or any rights, duties, liabilities or
obligations relating to any Subject Claim, whether or not covered by the express
terms of this Agreement, or for the purpose of adjudicating a breach or
determination of the validity of this Agreement, or for the purpose of appealing
any decision of an arbitrator, except a proceeding instituted (i) for the
purpose of having the award or judgment of an arbitrator entered and enforced or
(ii) to seek an injunction or restraining order (but not damages in connection
therewith) in circumstances
<PAGE> 11
where such relief is available. Unless and only to the extent a limitation of
damages is validly prohibited or limited by applicable statute or regulation, no
punitive, exemplary or consequential damages may ever be awarded by the
arbitrator or anyone else, and each of the parties hereby waives any and all
rights to make, claim or recover any such damages.
Arbitration Hearing. Within 20 days after the selection of the
arbitrator, the parties and their counsel will appear before the arbitrator at a
place and time designated by the arbitrator for the purpose of each party making
a one hour or less presentation and summary of the case. Thereafter, the
arbitrator will set dates and times for additional hearings in accordance with
the Rules until the proceeding is concluded. The desire and goal of the parties
is, and the arbitrator will be advised that his goal should be, to conduct and
conclude the arbitration proceeding as expeditiously as possible. If any party
or his counsel fails to appear at any hearing, the arbitrator shall be entitled
to reach a decision based on the evidence which has been presented to him by the
parties who did appear.
25. Severability and Reformation. If any provision of this Agreement is
declared or found to be illegal, unenforceable, or void, in whole or in part,
then the parties shall be relieved of all obligations arising under such
provision, but only to the extent that it is illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement shall be
deemed amended by modifying such provision to the extent necessary to make it
legal and enforceable while preserving its intent or, if that is not possible,
by substituting therefor another provision that is legal and enforceable and
achieves the same objectives.
26. Written Amendments Provision. No supplement, modification or
amendment of this agreement or waiver of any provision of this Agreement shall
be binding unless executed in writing by all parties to this Agreement. No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision of this Agreement (regardless of
whether similar), nor shall any such waiver constitute a continuing wavier
unless otherwise expressly provided.
27. Actions to Enforce Non-Compete, Confidentiality or Inventions.
Employee acknowledges and agrees that ANS and the Parent would be irreparably
harmed by any violation of Employee's obligations under Sections 10, 11 and 12
hereof and that, in addition to all other rights or remedies available at law or
in equity, ANS and the Parent will be entitled to injunctive and other equitable
relief to prevent or enjoin any such violation. Additionally, both parties agree
that irrespective of their agreement to arbitrate, either party may seek to have
its rights under Sections 10, 11 or 12 of this agreement enforced by legal or
equitable action in a Court of Competent jurisdiction. The provisions of
Sections 10, 11 and 12 hereof will survive any termination of this Agreement, in
accordance with their terms.
28. Written Consent for Assignment. No party may assign this Agreement
or any rights or benefits thereunder without the written consent of the other
parties to this Agreement.
29. Choice of Forum. Any action initiated pursuant to paragraph 27 must
proceed in a Texas District Court in Collin County, Texas. If such an action can
not proceed in District Court
<PAGE> 12
due to jurisdictional limitations, then it shall proceed in any State or County
court of competent jurisdiction in Collin County, Texas.
EXECUTED as of the date first above written.
QUEST MEDICAL, INC. AND ITS SUBSIDIARY,
ADVANCED NEUROMODULATION SYSTEMS, INC.
By: /s/ Hugh Morrison
-------------------------------------
Hugh Morrison
Chairman of the Board
/s/ F. Robert Merrill III
-------------------------------------
F. Robert Merrill III
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,530,762
<SECURITIES> 1,050,563
<RECEIVABLES> 2,851,752
<ALLOWANCES> 225,061
<INVENTORY> 2,774,055
<CURRENT-ASSETS> 23,860,536
<PP&E> 9,024,396
<DEPRECIATION> 1,462,525
<TOTAL-ASSETS> 49,324,414
<CURRENT-LIABILITIES> 3,594,063
<BONDS> 0
0
0
<COMMON> 434,102
<OTHER-SE> 39,558,473
<TOTAL-LIABILITY-AND-EQUITY> 49,324,414
<SALES> 4,423,455
<TOTAL-REVENUES> 4,423,455
<CGS> 1,257,632
<TOTAL-COSTS> 2,394,420
<OTHER-EXPENSES> (172,362)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,392
<INCOME-PRETAX> 847,373
<INCOME-TAX> 345,729
<INCOME-CONTINUING> 501,644
<DISCONTINUED> 4,988,941
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,490,585
<EPS-PRIMARY> .64
<EPS-DILUTED> .62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 530,705
<SECURITIES> 954,161
<RECEIVABLES> 2,515,249
<ALLOWANCES> 160,000
<INVENTORY> 3,042,026
<CURRENT-ASSETS> 20,169,897
<PP&E> 8,231,655
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<CURRENT-LIABILITIES> 40,631,422
<BONDS> 0
0
0
<COMMON> 417,797
<OTHER-SE> 30,754,145
<TOTAL-LIABILITY-AND-EQUITY> 46,159,825
<SALES> 3,135,581
<TOTAL-REVENUES> 3,135,581
<CGS> 917,578
<TOTAL-COSTS> 1,856,030
<OTHER-EXPENSES> 23,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,625
<INCOME-PRETAX> 202,041
<INCOME-TAX> 64,150
<INCOME-CONTINUING> 137,891
<DISCONTINUED> (43,525)
<EXTRAORDINARY> 0
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<NET-INCOME> 94,366
<EPS-PRIMARY> .01
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</TABLE>
