<PAGE> 1
SCHEDULE 14A
(RULE 14a-1O1)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant[X]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use
of the Commission Only
(as permitted by
Rule.14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-l 1(c) or Rule 14a-12
QUEST MEDICAL, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
BOARD OF DIRECTORS OF QUEST MEDICAL, INC.
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a) (2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[QUEST MEDICAL, INC. LETTERHEAD]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 28, 1998
To the Shareholders of Quest Medical, Inc.:
The Annual Meeting of Shareholders (the "Annual Meeting") of Quest Medical, Inc.
(the "Company") will be held at the Company's offices located at One Allentown
Parkway, Allen, Texas 75002 on Thursday, May 28, 1998, at 10:00 a.m., Dallas,
Texas time, for the purpose of considering and acting upon the following
matters:
1. Election of six directors for a one-year term.
2. Approval of an amendment to the Articles of Incorporation, as amended, to
change the Company's name to "Advanced Neuromodulation Systems, Inc." On
January 30, 1998, the Company sold the assets of its cardiovascular and
intravenous fluid product lines to Atrion Corporation including the rights
to the name Quest Medical, Inc. Following the sale, the operating
activities of the Company are conducted through its wholly-owned subsidiary
Advanced Neuromodulation Systems, Inc. ("ANS"). As a result, the corporate
name change more accurately reflects the current and future business focus
of the Company.
3. Approval of the Quest Medical, Inc. 1998 Stock Option Plan.
4. Such other business as may properly come before the meeting or any
adjournment(s) thereof.
The Board of Directors has fixed the close of business on April 10, 1998 as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the meeting and any adjournment(s) thereof.
You are cordially invited to attend the meeting. Whether or not you plan to
attend the meeting, you are urged promptly to complete, date and sign the
enclosed proxy and to mail it in the enclosed envelope, which requires no
postage if mailed in the United States. Return of your proxy does not deprive
you of your right to attend the meeting or to vote your shares in person.
By Order of the Board of Directors
F. Robert Merrill III
Secretary
Allen, Texas
April 27, 1998
<PAGE> 3
QUEST MEDICAL, INC.
ONE ALLENTOWN PARKWAY, ALLEN, TEXAS 75002
----------------------
PROXY STATEMENT
----------------------
The accompanying proxy is solicited on behalf of the Board of Directors of Quest
Medical, Inc. (the "Company") for use at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held on Thursday, May 28, 1998, at 10:00 a.m., or at any
adjournment or adjournments thereof, at the place and for the purposes set forth
in the accompanying Notice of Annual Meeting. Proxies in the accompanying form,
properly signed and received in time for the meeting, will be voted as
instructed. The persons named in the accompanying proxy will vote the proxy FOR
the Board of Directors' slate of directors, FOR the amendment to the Articles of
Incorporation and FOR the approval of the 1998 Stock Option Plan unless contrary
instructions are given. At any time before it is voted, each proxy granted may
be revoked by the shareholder by a later dated proxy, by written revocation
addressed to the Secretary of the Company at the address below or by voting by
ballot at the Annual Meeting.
The cost of preparing and mailing the enclosed material will be borne by the
Company. The Company may use the services of officers and employees of the
Company (who will receive no additional compensation) to solicit proxies. The
Company intends to request banks and brokers holding shares of the Company's
stock to forward copies of the proxy material to those persons for whom they
hold shares and to request authority for the execution of proxies. The Company
will reimburse banks and brokers for their out-of-pocket expenses.
The principal executive office of the Company is located at One Allentown
Parkway, Allen, Texas 75002. This Proxy Statement and the accompanying proxy
card are being sent to shareholders on or about April 27, 1998.
SHAREHOLDER VOTE
Only shareholders of record at the close of business on April 10, 1998, are
entitled to vote at the Annual Meeting or any adjournment or adjournments
thereof. At April 10, 1998, there were 8,644,215 shares of Common Stock, par
value $.05 per share (the "Common Stock") outstanding, which excludes 73,000
treasury shares. Every holder of outstanding shares of Common Stock entitled to
be voted at the Annual Meeting is entitled to one vote for each share held.
1
<PAGE> 4
The presence at the Annual Meeting in person, or by proxy, of the holders of a
majority of outstanding Common Stock constitutes a quorum for the Annual Meeting
and for acting on the matters specified in the Notice of Annual Meeting. If a
quorum is not present, in person or by proxy, the Annual Meeting may be
adjourned from time to time until a quorum is obtained. Votes withheld from any
director nominee will be counted in determining whether a quorum has been
reached. In the election of directors, shareholders are not entitled to cumulate
their votes and are not entitled to vote for a greater number of persons than
the number of nominees named in this Proxy Statement.
Assuming the presence of a quorum, the affirmative vote of a plurality of the
shares of Common Stock voted at the Annual Meeting and entitled to vote thereon
is required for the election of directors. Votes may be cast in favor of or
withheld from a director nominee. Votes that are withheld from a particular
nominee will be excluded entirely from the vote and will not affect the outcome
of the vote. Under applicable rules, brokers who hold shares in street name have
the authority to vote on the election of directors when they have not received
instructions from beneficial owners. Brokers who do not receive instructions are
generally entitled to vote on the election of directors.
Assuming the presence of a quorum, the affirmative vote of a majority of the
outstanding shares of Common Stock entitled to vote thereon is required to
approve the amendment to the Articles of Incorporation, as amended, and the
affirmative vote of a majority of the shares of Common Stock voted at the Annual
Meeting and entitled to vote thereon is required to approve the 1998 Stock
Option Plan. Brokers who hold shares in street name may not have the authority
to vote on these proposals when they have not received instructions from
beneficial owners. In all other matters, assuming the presence of a quorum, the
affirmative vote of a majority of the shares of Common Stock present in person
or represented by proxy and entitled to vote thereon is required to take
shareholder action.
Where a shareholder has appropriately specified how a proxy is to be voted, it
will be voted accordingly, and where no specific direction is given, it will be
voted FOR approval of each of the proposals set forth in the Notice of Annual
Meeting and at the discretion of the proxy holders on all other business that
may properly come before the meeting. Abstentions and broker nonvotes shall be
counted for purposes of determining whether a quorum exists, but an abstention
shall not be counted as an affirmative vote in the election of the directors.
With respect to the approval of the amendment to the Articles of Incorporation,
as amended, the 1998 Stock Option Plan and all other matters, an abstention
would have the same effect as a vote against the proposal.
2
<PAGE> 5
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth as of April 10, 1998, the beneficial ownership of
each current director, each nominee for director, each named executive officer,
all executive officers and directors as a group, and each shareholder known to
management of the Company to own beneficially more than 5% of the outstanding
Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(2)
- ---------------- ----------------------- -----------
<S> <C> <C>
The Equitable Companies Incorporated 649,187(3) 7.5%
1290 Avenue of the Americas
New York, New York 10104
First Pacific Advisors, Inc. 566,100(4) 6.5%
11400 West Olympic Blvd., Suite 1200
Los Angeles, California 90064
Robert L. Swisher, Jr 500,000(5) 5.7%
5005 LBJ Freeway, Suite 1130
Dallas, Texas 75244
Hugh M. Morrison 27,000(6) *
2517 Bluebonnet Boulevard
Houston, Texas 77030
Christopher G. Chavez 50,000(7) *
2903 Forestwood Drive
Arlington, Texas 76006
Linton E. Barbee 2,250(8) *
4446 Mill Creek Road
Dallas, Texas 75244
Robert C. Eberhart, Ph.D 23,175(9) *
10519 Royal Springs
Dallas, Texas 75229
Richard D. Nikolaev 7,750(10) *
11835 N. 83rd Place
Scottsdale, Arizona 85260
Michael J. Torma, M.D 3,750(7) *
1029 Delaware
Shreveport, Louisiana 71106
Joseph E. Laptewicz, Jr -- --
3151 Lafayette Ridge Rd
Wayzata, Minnesota 55391
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(2)
- ---------------- ----------------------- -----------
<S> <C> <C>
F. Robert Merrill III 60,385(11) *
3329 Leigh Drive
Plano, Texas 75025
Scott F. Drees 39,250(7) *
834 Parkwood Court
McKinney, Texas 75070
James P. Calhoun 60,998(12) *
6609 Lake Shore Dr.
Garland, Texas 75044
Stuart B. Johnson 4,250(7) *
3112 Pinehurst
Plano, Texas 75075
All directors and executive officers as a group, 302,558(13) 3.4%
including those named above (14 persons)
</TABLE>
- -------------------------
* Less than 1.0%
(1) Unless otherwise noted and subject to community property laws, where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated
as outstanding only when determining the amount and percent owned by such
person or group.
(3) Based on information obtained by the Company from Schedule 13G filed by The
Equitable Companies Incorporated ("The Equitable"), pursuant to a Joint
Filing Agreement among The Equitable, Alpha Assurances Vie Mutuelle, AXA
Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, and AXA Courtage
Assurance Mutuelle, and AXA-UAP, dated February 10, 1998. Alliance Capital
Management L.P., a subsidiary of The Equitable, is deemed to have
beneficial ownership of 649,187 shares of the Company's Common Stock, as of
December 31, 1997.
(4) Based on information obtained by the Company from Schedule 13G filed by
First Pacific Advisors, Inc., an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940, dated February 4, 1998.
First Pacific Advisors, Inc. is deemed to have beneficial ownership of
566,100 shares of the Company's Common Stock as of December 31, 1997.
(5) Based on information obtained by the Company from Schedule 13D filed by
Robert L. Swisher, Jr. dated February 21, 1997. Mr. Swisher owned 400,000
shares of the Company's Common Stock as of February 21, 1997, and a warrant
to purchase 100,000 shares of the Company's Common Stock which became
exercisable as of February 21, 1997 at an exercise price of $6.50 per
share.
(6) Includes 1,250 shares subject to options.
(7) Consists entirely of shares subject to options.
(8) Includes 1,250 shares subject to options.
(9) Includes 15,450 shares subject to options.
(10) Includes 3,750 shares subject to options.
(11) Includes 35,450 shares subject to options.
(12) Includes 18,750 shares subject to options.
(13) Includes 192,900 shares subject to options.
4
<PAGE> 7
PROPOSAL I
ELECTION OF DIRECTORS
Six directors are proposed to be elected at the Annual Meeting. Each director
will serve until the next annual meeting of shareholders or until his successor
shall be elected and shall qualify. Proxies in the accompanying form shall be
voted for the six nominees listed in the table that follows, except where
authority is specifically withheld by the shareholder.
Thomas C. Thompson, a director and officer since 1979, resigned as President,
Chief Executive Officer and Director of the Company on December 31, 1997. On
April 9, 1998, Christopher G. Chavez was appointed to the office of President
and Chief Executive Officer of the Company and was elected to serve as a
director of the Company filling the vacancy created by Mr. Thompson. In
addition, Linton E. Barbee, a director of the Company since 1983, has informed
management of his intent not to stand for reelection at the Annual Meeting. The
Board of Directors has nominated Joseph E. Laptewicz, Jr. to stand for election
at the Annual Meeting to fill such vacancy. All other nominees are incumbent
directors. If any of the nominees should become unable to accept the election,
or for good cause will not accept the election, the person named in the proxy
may vote for such other person or persons as may be designated by the Board of
Directors. Each of the nominees named below has indicated his willingness to
accept election, and management has no reason to believe that any of the
nominees named below will be unable or unwilling to serve.
The nominees for directors of the Company are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT DURING THE DIRECTOR OF
NAME PAST FIVE YEARS AGE COMPANY SINCE
- ------------------------------- ------------------------------------------------- ----- -------------
<S> <C> <C> <C>
Hugh M. Morrison(2) President and Chief Executive Officer of Clean 51 1983
Acquisition, Inc. and Pilgrim Cleaners, Inc.
since March 1996; independent business consultant
and investor from January 1993 to February 1996;
Chairman of the Board of the Company since
January 1998; Director of Owen Healthcare, Inc.
from April 1995 to March 1997; Director of Equal
Net Holding Corp. From March 1995 to March 1996.
Robert C. Eberhart, Ph.D.(2,3) Chairman, Joint Program in Biomedical 61 1994
Engineering, University of Texas Southwestern
Medical Center, Dallas, Texas, and University of
Texas at Arlington, Arlington, Texas since
September 1984.
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT DURING THE DIRECTOR OF
NAME PAST FIVE YEARS AGE COMPANY SINCE
- ------------------------------- ------------------------------------------------- ----- -------------
<S> <C> <C> <C>
Michael J. Torma, M.D.(2, 3) Vice President-Technology Development of 55 1994
Biomedical Research Foundation of Northwest
Louisiana and Director of the Center for
Biomedical Technology Innovation (CBTI) since
September 1996; Chair, Surgical Services of
Presbyterian Hospital of Dallas and Chairman of
Institute for Surgical Sciences of Presbyterian
Healthcare System from October 1992 to September
1996; Command Surgeon, Strategic Air Command,
USAF from August 1989 to September 1992; Chief of
Professional Affairs & Quality Assurance for USAF
Medical Services from September 1987 to August
1990.
Richard D. Nikolaev (1) President and Chief Executive Officer, NIKOR 59 1996
Enterprises, Inc. (Healthcare Industry
Consulting/ Investing) since November 1997;
President and Chief Executive Officer of Wright
Medical Technology, Inc. from November 1995 to
November 1997; Chief Executive Officer of
OsteoBiologics, Inc. from August 1995 to November
1995; independent business consultant from
January 1995 to July 1995; Chairman, President
and Chief Executive Officer of Orthomet, Inc.
from January 1992 to December 1994; Director of
Wright Medical Technology, Inc. since September
1995; Director of Everest Medical from December
1992 to April 1997.
Christopher G. Chavez President, Chief Executive Officer and Director 42 1998
of the Company since April 1998; Vice President,
Worldwide Marketing & Strategic Planning, Eastman
Kodak Company, from April 1997 to November 1997;
Vice President and General Manager, Infection
Prevention Business Unit of Johnson & Johnson
Medical, Inc. (JJMI) from August 1995 to April
1997; Director, International Marketing of JJMI
from June 1994 to August 1995; Director, New
Business Development of JJMI from January 1990 to
May 1994.
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT DURING THE DIRECTOR OF
NAME PAST FIVE YEARS AGE COMPANY SINCE
- ----------------------------- ------------------------------------------------- ----- -------------
<S> <C> <C> <C>
Joseph E. Laptewicz, Jr. (4) President and Chief Executive Officer, Empi, Inc. 49
(Physical Therapy and Orthopedic Medical ----
Products) since October 1994; President and Chief
Executive Officer, Schneider USA (Subsidiary of
Pfizer, Inc.) from April 1992 to September 1994;
Director of Angiodynamics, Inc., (Peripheral
Interventional Medicine) a subsidiary of E-Z-EM,
Inc. since April 1997.
</TABLE>
- -------------------------
(1) Member of the Audit Committee of the Board of Directors (2) Member of the
Compensation Committee of the Board of Directors (3) Member of the Stock Option
Committee of the Board of Directors (4) Director Nominee
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE ELECTION OF ALL NOMINEES NAMED ABOVE
COMPENSATION AND COMMITTEES OF THE BOARD OF DIRECTORS
During the year ended December 31, 1997, there were six meetings of the Board of
Directors. Each director attended at least 75% of the aggregate of (a) the total
number of meetings of the Board of Directors held during the period for which he
served as a director and (b) the total number of meetings held by all committees
of the Board of Directors on which he served. The Board has three committees:
Audit, Compensation, and Stock Option.
Prior to the Annual Meeting, the Audit Committee consisted of Mr. Barbee and Mr.
Nikolaev, both of whom are nonmanagement directors. This committee acts as a
liaison between the Board of Directors and the independent auditors. The
committee reviews with the independent auditors the planning and scope of
financial statement audits, the results of those audits and the adequacy of
internal accounting controls. It also monitors other corporate and financial
policies. The Audit Committee held two meetings during the year ended December
31, 1997.
Prior to the Annual Meeting, the Compensation Committee consisted of Dr.
Eberhart, Mr. Morrison, and Dr. Torma, all of whom are nonmanagement directors.
This committee establishes executive compensation policies and makes
recommendations to the Board of Directors. The Compensation Committee held two
meetings during the year ended December 31, 1997.
7
<PAGE> 10
Prior to the Annual Meeting, the Stock Option Committee consisted of Dr.
Eberhart and Dr. Torma, both of whom are nonmanagement directors. This committee
is vested with full authority to select participants, grant options, determine
the number of shares subject to each option, the exercise price of each option,
and in general, to make, administer and interpret such rules and regulations as
it deems necessary to administer the Company's Stock Option Plans. The Stock
Option Committee held two meetings during the year ended December 31, 1997.
Nonmanagement directors received an annual retainer of $10,000 based on 75%
board meeting attendance, a $1,000 director's fee for each Board of Directors'
meeting attended, $500 for each committee meeting attended and reimbursement of
all expenses incurred in attending such meetings.
In April 1980, the Company adopted the Quest Medical, Inc. Directors' Stock
Option Plan, (the "Directors' Plan"), which has been amended on several
different occasions, most recently in July 1992 to increase the number of shares
to be held by an advisory director at any time from 12,000 to 15,000. Under the
Directors' Plan, nontransferable stock options may be granted to directors and
advisory directors of the Company. Under the Directors' Plan, the option price
per share cannot be less than the fair market value per share on the date the
option is granted. The Directors' Plan further provides that the exercise period
for options cannot exceed six years. Under the Directors' Plan, each option
vests ratably over a four-year period. During the year ended December 31, 1997,
no directors were granted options under the Directors' Plan. Only one director,
Michael J. Torma, M.D., exercised options under the Directors' Plan during the
year ended December 31, 1997. During June 1997, Dr. Torma exercised options to
purchase 3,750 shares of Common Stock at an exercise price of $6.375 per share.
The net value of such securities to Dr. Torma (market value less exercise price)
at the time of exercise was approximately $10,000.
SALE OF ASSETS - TRANSFER OF EMPLOYMENT
On January 30, 1998, the Company completed the sale of substantially all of the
assets of its cardiovascular and intravenous fluid product lines (the "CVS
Operations") to Atrion Corporation. The CVS Operations designed, developed,
manufactured and marketed cardiovascular products, specialized intravenous fluid
delivery tubing sets and accessories and pressure monitoring kits used primarily
in labor and delivery. The cardiovascular products of the CVS Operations also
included the Quest MPS(R) myocardial protection system, a sophisticated system
designed to manage the delivery of solutions to the heart during open-heart
surgery. The assets included accounts receivable, inventories, furniture and
fixtures, manufacturing tooling and equipment and intangible assets including
patents, trademarks and
8
<PAGE> 11
purchased technology. The assets also included the name Quest Medical, Inc. As
part of the sale, approximately 130 personnel of the CVS Operations transferred
employment to Atrion including David O. Turner, the Company's Executive Vice
President and Chief Operating Officer and Kenneth A. Jones, the Vice President
of Research and Development for the CVS Operations.
EXECUTIVE OFFICERS
The executive officers of the Company and its wholly-owned subsidiary, Advanced
Neuromodulation Systems, Inc. ("ANS"), are as follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER
NAME AGE POSITION SINCE
- ------------------------- ----- ---------------------------------------- -----------------
<S> <C> <C> <C>
Christopher G. Chavez 42 President, Chief Executive Officer and 1998
Director
F. Robert Merrill III 48 Executive Vice President - Finance; Chief 1981
Financial Officer; Treasurer and Secretary
Scott F. Drees 40 Executive Vice President - Sales and 1996
Marketing
James P. Calhoun 48 Vice President - Human Resources 1995
Ramon C. Dougan 56 Vice President - International Sales 1996
John H. Erickson 49 Vice President - Research and Development 1996
Stuart B. Johnson 51 Vice President - Manufacturing 1997
W. Alan Mock 41 Vice President - Marketing 1996
</TABLE>
Mr. Chavez has been President, Chief Executive Officer and Director of the
Company since April 1998. From April 1997 to November 1997, Mr. Chavez was Vice
President, Worldwide Marketing & Strategic Planning of Eastman Kodak Company.
From January 1990 to April 1997, Mr. Chavez was employed by Johnson & Johnson
Medical, Inc. where he held various positions including Vice President and
General Manager of the Infection Prevention Business Unit from August 1995 to
April 1997; Director, International Marketing from June 1994 to August 1995 and
Director, New Business Development from January 1990 to May 1994.
Mr. Merrill has been Executive Vice President-Finance since March 1998, Chief
Financial Officer since April 1994, Secretary since February 1989, and Treasurer
since February 1981. Mr. Merrill was acting President and Chief Executive
Officer of the Company from January
9
<PAGE> 12
1998 to April 1998. From July 1995 to March 1998, Mr. Merrill was Senior Vice
President-Finance of the Company and Vice President-Finance from February 1981
to July 1995. Mr. Merrill joined the Company in October 1979 as Director of
Manufacturing Operations.
Mr. Drees has been Executive Vice President-Sales and Marketing of the Company
since March 1998. From April 1996 to March 1998, Mr. Drees was Vice President of
the Company and President of ANS from September 1996 to March 1998. From
November 1987 to April 1996, Mr. Drees was employed by St. Jude Medical, Inc., a
medical device company, where he held various positions within the sales and
marketing area, including Director, North American Sales from August 1990 to
April 1996.
Mr. Calhoun has been Vice President-Human Resources of the Company since April
1995. From May 1992 to April 1995, Mr. Calhoun was Executive Director of Hogan
Quality Institute, a management consulting firm. From February 1988 to May 1992,
Mr. Calhoun was the Vice President of Human Resources and Corporate Quality
Programs of Harris Adacom Corporation, a data communications company.
Mr. Dougan has been Vice President-International Sales of ANS since September
1996 and was Director of International Sales of ANS from April 1995 to August
1996. From May 1993 to March 1995, Mr. Dougan was employed by Neuromed, Inc.,
the predecessor of ANS which was acquired by the Company in March 1995. Mr.
Dougan held various positions within the sales and marketing area at Neuromed,
Inc. including Director of International Sales and Marketing.
Mr. Erickson has been Vice President-Research and Development of ANS since
September 1996 and was Director of Electronics Research and Development of ANS
from January 1996 to September 1996. From August 1982 to October 1995, Mr.
Erickson was employed by Orthofix Inc. (formerly American Medical Electronics,
Inc.) where he held various positions within the research and development area
including Vice President of Research and Development.
Mr. Johnson has been Vice President-Manufacturing of the Company since June 1997
and was Director of Manufacturing of the Company from March 1997 to June 1997.
Mr. Johnson was employed by Orthofix Inc. (formerly American Medical
Electronics, Inc.) where he held various positions including Vice President of
Corporate Operations from 1993 to 1997.
Mr. Mock has been Vice President-Marketing of ANS since November 1996. From
November 1995 to October 1996, Mr. Mock was an independent business consultant.
From November 1987 to October 1995, Mr. Mock was employed by DSP Worldwide
(formerly Snowden-
10
<PAGE> 13
Pencer, Inc.) where he held various positions within the sales and marketing
area including Vice President, Sales and Marketing Operations.
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth, for the fiscal year ended December 31, 1997,
certain information regarding compensation, aggregate stock option grants and
exercises during 1997 and year-end stock option values for the Chief Executive
Officer and the four most highly compensated executive officers (the "Named
Executive Officers") whose total annual salary and bonus exceeded $100,000 for
the year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
====================================================================================================================
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- --------------------------------------
AWARDS PAYOUTS
------------------------ -----------
Other Restricted Securities All
Name and Annual Stock Underlying LTIP Other
Principal Salary Bonus Comp. (1) Award(s) Options/ Payouts Compensation(2)
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
--------- ------ -------- ------- --------- ---------- ----------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas C. 1997 $183,980 $15,000 -- -- -- -- $ 3,598
Thompson(3) 1996 $183,436 $18,900 -- -- -- -- $ 4,500
(C.E.O) 1995 $175,284 $41,677 -- -- -- -- $ 4,500
- --------------------------------------------------------------------------------------------------------------------
David O. 1997 $124,625 $10,000 -- -- -- -- $ 3,104
Turner(4) 1996 $124,081 $10,000 -- -- -- -- $ 4,500
(C.O.O.) 1995 $117,212 $22,806 -- -- -- -- $ 4,084
- --------------------------------------------------------------------------------------------------------------------
F. Robert 1997 $110,209 $10,000 -- -- -- -- $ 2,907
Merrill III 1996 $110,002 $12,000 -- -- -- -- $ 3,885
(C.F.O.) 1995 $ 98,931 $17,534 -- -- -- -- $ 3,404
- --------------------------------------------------------------------------------------------------------------------
Scott F. Drees 1997 $132,000 $13,000 -- -- -- -- $ 3,536
(Exec. Vice 1996 $111,385 $13,000 -- -- -- -- $ --
Pres.) 1995 $ -- $ -- -- -- -- -- $ --
- --------------------------------------------------------------------------------------------------------------------
Alan W. Mock 1997 $100,000 $ 7,500 -- -- -- -- $ 1,625
(Vice 1996 $ 10,385 $ -- -- -- -- -- $ --
President) 1995 $ -- $ -- -- -- -- -- $ --
====================================================================================================================
</TABLE>
(1) None of the Named Executive Officers received personal benefits, securities
or property in excess of the lesser of $50,000 or 10 percent of such
individual's reported salary and bonus.
(2) Reflects matching employer contributions under the Company's Employees
Savings Plan 401(k).
(3) Mr. Thompson resigned on December 31, 1997.
(4) Mr. Turner transferred employment to Atrion Corporation, the acquirer of
the CVS Operations on January 30, 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
=================================================================================================================
NUMBER OF PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/SARS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE OR STOCK PRICE APPRECIATION FOR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION OPTION TERM
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
- ------------------- ---------------- ------------------ ------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Scott F. Drees 7,000 10.5% $5.9375 04/01/07 $26,110 $66,220
================================================================================================================
</TABLE>
11
<PAGE> 14
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
=================================================================================================================
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ON EXERCISE REALIZED OPTIONS/SARS AT FY-END AT FY-END ($) (1)
NAME (#) ($) ----------------------- ----------------------------
(#) EXERCISABLE EXERCISABLE UNEXERCISABLE
UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Thompson 116,170 $548,554 12,500 0 0 0
(C.E.O)
- -----------------------------------------------------------------------------------------------------------------
David O. Turner 0 0 51,500 0 $121,540 0
(C.O.O.)
- -----------------------------------------------------------------------------------------------------------------
F. Robert Merrill III 0 0 47,820 7,500 $200,009 0
(C.F.O.)
- -----------------------------------------------------------------------------------------------------------------
Scott F. Drees 0 0 26,750 30,250 $ 1,806 $5,421
(Exec. Vice President)
- -----------------------------------------------------------------------------------------------------------------
Alan W. Mock 0 0 5,000 15,000 0 0
(Vice President)
=================================================================================================================
</TABLE>
(1) Represents the difference between the closing market price of the Common
Stock on the Nasdaq National Market System on December 31, 1997 and the
exercise price of the options.
EMPLOYMENT AGREEMENTS AND SEVERANCE AGREEMENTS
Christopher G. Chavez Mr. Chavez and the Company entered into an employment
agreement as of April 9, 1998, pursuant to which Mr. Chavez serves as Chief
Executive Officer and President of the Company. Under the employment agreement,
which has a term of two years, Mr. Chavez receives an annual base salary of
$200,000. In addition, Mr. Chavez may receive a performance-based incentive
bonus equal to 50% of his annual base salary earned by meeting certain strategic
milestones and objective measurements of profitability and shareholder value
determined annually by mutual agreement of Mr. Chavez and the Board of
Directors. If Mr. Chavez' performance exceeds the objectives so established, Mr.
Chavez is eligible for a larger bonus, and correspondingly, if performance falls
short of the objectives, Mr. Chavez may receive less than the full bonus
percentage. Mr. Chavez is also entitled to employee benefits generally made
available to other officers of the Company. If the Company terminates Mr.
Chavez' employment without cause (as defined in the agreement) within the first
year of employment, Mr. Chavez will receive severance compensation equal to
twenty-four months' salary, and if the Company terminates his employment for
cause after one year, Mr. Chavez will receive severance compensation equal to
twelve months' salary. The employment agreement also contains confidentiality,
trade secret and noncompetition provisions that are intended to protect the
Company's intellectual property, trade secrets and other confidential
information. Pursuant to the 1998 Stock Option Plan adopted by the Board of
Directors on April 9, 1998 (the "1998 Plan"), the Company granted Mr. Chavez
ten-year nonqualified stock options to purchase 200,000 share of the Company's
common stock at $8.56 per share (the closing sale price of the Company's common
stock on the date preceding grant), 50,000 of which vested upon grant and 50,000
of which will vest on the first, second and third
12
<PAGE> 15
anniversaries of the date of grant. In the event of a "sale of the corporation"
(as defined in the stock option agreement), Mr. Chavez' stock options vest
immediately.
F. Robert Merrill III Mr. Merrill and the Company entered into an employment
agreement as of April 9, 1998, pursuant to which Mr. Merrill serves as Chief
Financial Officer, Executive Vice President-Finance, Secretary and Treasurer of
the Company. Under the employment agreement, which has a term of two years, Mr.
Merrill receives an annual base salary of $121,000. In addition, Mr. Merrill may
receive a performance-based incentive bonus in accordance with Company policy
established by the Board of Directors from time to time. Mr. Merrill is also
entitled to employee benefits generally made available to other officers of the
Company. If the Company terminates Mr. Merrill's employment without cause (as
defined in the agreement), Mr. Merrill will receive severance compensation
determined pursuant to a formula. The employment agreement also contains
confidentiality, trade secret and noncompetition provisions that are intended to
protect the Company's intellectual property, trade secrets and other
confidential information. The Company also granted Mr. Merrill ten-year
nonqualified stock options under the 1998 Plan to purchase 50,000 shares of the
Company's common stock at $8.56 per share (the closing sale price of the
Company's common stock on the date preceding grant), 12,500 of which vest on the
date of grant and 12,500 of which vest on each of the first, second and third
anniversaries of the date of grant. In the event of a "sale of the corporation"
(as defined in the stock option agreement), Mr. Merrill's stock options vest
immediately. In addition, the Company agreed to pay Mr. Merrill a $50,000 bonus
upon the successful closing of the sale of the CVS Operations to Atrion
Corporation, which the Company paid in the first quarter of 1998. The Company
also extended to March 31, 1998 the period during which Mr. Merrill could
exercise 24,870 options granted in December 1987. Mr. Merrill exercised these
options in March 1998.
Scott F. Drees Mr. Drees and the Company entered into an employment agreement as
of April 9, 1998, pursuant to which Mr. Drees serves as Executive Vice President
of the Company. Under the employment agreement, which has a term of two years,
Mr. Drees receives an annual base salary of $145,000. In addition, Mr. Drees may
receive a performance-based incentive bonus in accordance with Company policy
established by the Board of Directors from time to time. Mr. Drees is also
entitled to a stock appreciation bonus payable before January 31, 1999 equal to
the difference between (i) the average closing price for the five day trading
period preceding December 31, 1998 and (ii) $6.00, multiplied by 50,000, with a
"cap" on the bonus amount of $212,500. Mr. Drees is also entitled to employee
benefits generally made available to other officers of the Company. If the
Company terminates Mr. Drees' employment without cause (as defined in the
agreement), Mr. Drees will receive severance compensation determined pursuant to
a formula. The employment agreement also contains confidentiality, trade secret
and noncompetition
13
<PAGE> 16
provisions that are intended to protect the Company's intellectual property,
trade secrets and other confidential information. The Company also granted Mr.
Drees ten-year nonqualified stock options under the 1998 Plan to purchase 50,000
shares of the Company's common stock at $8.56 per share (the closing sale price
of the Company's common stock on the date preceding grant), 12,500 of which vest
on the date of grant and 12,500 of which vest on each of the first, second and
third anniversaries of the date of grant. In the event of a "sale of the
corporation" (as defined in the stock option agreement), Mr. Drees' stock
options vest immediately.
Thomas C. Thompson Mr. Thompson and the Company entered into an agreement as of
December 31, 1997 pursuant to which Mr. Thompson resigned as an officer and
director but was retained as a consultant to the Company. The Company agreed to
pay Mr. Thompson $191,056 a year for two years for consulting services, payable
in monthly installments. In addition, the Company agreed to pay Mr. Thompson a
$100,000 bonus upon the successful closing of the sale of the CVS Operations to
Atrion Corporation, which the Company paid in the first quarter of 1998. The
Company also extended to March 31, 1998 the period during which Mr. Thompson may
exercise his options granted in December 1987. The agreement also contains
mutual releases, covenants not to sue, and confidentiality, trade secret and
noncompetition provisions that are intended to protect the Company's
intellectual property, trade secrets and other confidential information.
COMPENSATION COMMITTEE REPORT
The Compensation Committee, comprised of three independent outside directors,
recommends compensation strategies, policies and programs to the Board of
Directors and approves annual salary and cash bonus awards to senior officers
and long-term incentive awards to all employees.
The Board of Directors and the Compensation Committee believe that the Company's
success requires a small, but highly motivated, professional staff. The
compensation programs, therefore, are primarily designed to maintain market
competitiveness in order to attract and retain key employees.
The Company's executive compensation program combines base salary, annual bonus,
and a stock ownership program to attract and retain executives. Base salary
increases and annual bonuses are based on corporate performance. Among factors
on which compensation is based is a competitive analysis of compensation paid by
other comparable companies. Other primary factors influencing compensation terms
are current market conditions for recruiting highly skilled and/or specialized
talent, need to retain key employees and executives, and
14
<PAGE> 17
experience level and market worth of current employees, and performance results.
The Compensation Committee also considered the Company's structure and methods
of operation, which require a small, highly qualified executive group.
Under the Company's annual bonus plan, bonuses are based on achievement levels
of corporate goals during the prior year. Annual compensation is leveraged to
provide a strong link to corporate objectives. Competitive target bonus levels
are established annually.
The stock option programs of the Company are long-term incentive plans for
executive officers and key employees that are intended to motivate executives
and employees to improve total return to shareholders. The number granted is
based on competitive grant values for the salary level/position and the share
price at the time of grant. To encourage long-term performance, options
generally vest over a four-year period.
The Company also uses the services of independent compensation and benefits
consulting firms to provide analysis and recommendations for competitive pay
levels and programs, in addition to local and national survey data.
In 1997, the Compensation Committee recommended increases in base salary levels
of the Company's executive officers and granted cash bonuses of $64,000 to the
Company's executive officers. Based on the Company's performance, in 1997 the
base salary of the Chief Executive Officer of the Company, Thomas C. Thompson
was $183,980 and the Compensation Committee awarded Mr. Thompson a $15,000 cash
bonus.
COMPENSATION COMMITTEE
Robert C. Eberhart
Hugh M. Morrison
Michael J. Torma
This report will not be deemed to be incorporated by reference in any filing by
the Company under the Securities Act of 1933, as amended (the "Securities Act"),
or the Exchange Act of 1934, as amended (the "Exchange Act"), except to the
extent that the Company specifically incorporates this Report by reference.
15
<PAGE> 18
Performance Graph. The following graph compares the cumulative total return of
the Company's Common Stock during the period commencing January 1, 1993 through
December 31, 1997, with the Nasdaq Market Index and an index of companies within
the Standard Industrial Code for Health Services (the "Peer Index").
<TABLE>
<S> <C> <C> <C> <C> <C>
100.000 77.272 95.454 188.636 140.909 126.690
100.000 114.796 112.214 158.699 195.192 239.527
100.000 115.376 123.789 157.238 157.317 160.349
</TABLE>
[OBJECT OMITTED]
The stock price performance depicted in the Performance Graph is not necessarily
indicative of future price performance. The Performance graph will not be deemed
to be incorporated by reference in any filing by the Company under the
Securities Act or the Exchange Act.
----------------------------
PROPOSAL II
APPROVAL OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION,
AS AMENDED, TO CHANGE THE COMPANY'S NAME TO
"ADVANCED NEUROMODULATION SYSTEMS, INC."
On January 30, 1998, the company sold the assets of its CVS Operations to Atrion
Corporation including the rights to the name Quest Medical, Inc. Following the
sale, the operating activities of the Company are conducted through its
wholly-owned subsidiary Advanced Neuromodulation Systems, Inc., a Texas
corporation. Therefore, the Board of Directors deems it advisable that the
Articles of Incorporation be further amended, subject to approval by the
shareholders, to change the Company's name to "Advanced Neuromodulation
16
<PAGE> 19
Systems, Inc." to be consistent with the business of the Company since the sale
of the CVS Operations. Approval of the amendment to the Articles of
Incorporation requires the affirmative vote of a majority of all outstanding
shares of Common Stock of the Company entitled to vote at the Annual Meeting.
Abstention from voting on the proposal will have the same effect as voting
against the proposal.
The Board of Directors unanimously recommends a vote for approval of the
amendment of Article One of the Company's Articles of Incorporation so that, as
amended it shall read as follows:
"THE NAME OF THE CORPORATION IS ADVANCED NEUROMODULATION SYSTEMS, INC."
If the proposed amendment 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 the State of Texas Corporation 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."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR APPROVAL OF THE PROPOSED AMENDMENT
TO THE ARTICLES OF INCORPORATION, AS AMENDED, OF THE COMPANY
----------------------------
PROPOSAL III
APPROVAL OF THE QUEST MEDICAL, INC.
1998 STOCK OPTION PLAN
Effective April 9, 1998, the Board of Directors adopted the Quest Medical, Inc.
1998 Stock Option Plan (the "1998 Plan") (if Proposal II is approved, the name
of the 1998 Plan will be changed to the Advanced Neuromodulation Systems, Inc.
1998 Stock Option Plan). Certain options granted under the 1998 Plan are
intended to qualify as "Incentive Stock Options" pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended from time to time, ("Incentive Stock
Options") while certain other options granted under the 1998 Plan will
constitute nonqualified options. the 1998 Plan is being submitted for approval
by the shareholders of the Company to permit the granting of Incentive Stock
Options and to insure full deductibility by the Company of option exercises by
executives under the Internal Revenue Code. A summary of the material features
of the 1998 Plan follows. This summary does not
17
<PAGE> 20
purport to be complete and is qualified in its entirety by reference to the text
of the 1998 Plan, a copy of which is attached as Appendix A and is incorporated
herein by reference.
Purpose of the 1998 Plan. The purpose of the 1998 Plan is to furnish additional
equity incentives to directors, advisory directors, consultants, officers and
key employees of the Company because there are a limited number of shares of
Common Stock remaining for issuance under the Quest Medical, Inc. 1979, 1995 and
Directors' Stock Option Plans. The additional equity incentives are designed to
increase shareholder value and to advance the interests of the Company by
furnishing incentives to attract and retain the best available personnel for
positions of substantial responsibility and to provide incentives to such
personnel to promote the success of the business of the Company and its
subsidiaries. Because the Company has used stock options to successfully attract
and retain directors, advisory directors, consultants, officers and key
employees in the past, the Board of Directors determined that it would be in the
Company's best interest to adopt a new stock option plan.
Shares Issuable through the 1998 Plan. The total number of shares of Common
Stock issuable under the 1998 Plan shall be 800,000 shares, provided, however,
that on January 1 of each year (commencing on January 1, 1999), the aggregate
number of shares of common stock then issuable upon the exercise of options
shall be increased by the same percentage that the total number of issued and
outstanding shares of common stock increased from the preceding January 1 to the
following December 31 (if such percentage is positive). Notwithstanding the
above, the aggregate number of shares of Common Stock issuable upon the exercise
of Incentive Stock Options pursuant to the 1998 Plan cannot exceed 800,000
shares. Shares of Common Stock subject to stock options that are canceled,
terminated or forfeited will again be available for issuance under the 1998
Plan. the aggregate number of shares of Common Stock with respect to which
options may be granted to any single participant in any one calendar year shall
not exceed 200,000.
Directors, advisory directors, consultants, officers and key employees of the
Company are eligible to receive stock option grants under the 1998 Plan. The
Stock Option Committee has determined that employees of the Company or its
subsidiaries whose salaries exceed a certain level are eligible to receive stock
options under the 1998 Plan. Approximately 40 employees were eligible to
participate in the 1998 Plan as of April 10, 1998.
The 1998 Plan is submitted to the shareholders for approval in order to comply
with the provisions of Section 162(m) of the code. section 162(m) limits the tax
deduction available to a company with respect to compensation paid to certain of
its executive officers unless, among other conditions, the compensation is
"performance based" and is paid pursuant to a plan approved by shareholders.
18
<PAGE> 21
Each stock option granted under the 1998 plan will be evidenced by a stock
option agreement containing such terms and provisions as are approved by the
Stock Option Committee and executed on behalf of the Company by an appropriate
officer. The per share exercise price of each stock option is determined by the
Stock Option Committee, but will in no event be less than the fair market value
of the Common Stock at the time the stock option is granted. Vesting of the
stock options will be determined by the Stock Option Committee, under terms and
conditions set forth in each stock option agreement. However, no incentive Stock
Option shall be exercisable at any time after the expiration of ten (10) years
from the date of grant; provided, however, that if a participant with respect to
an Incentive Stock Option is a 10% shareholder on the date of grant of such
Incentive Stock Option, then such incentive stock option shall not be
exercisable after the expiration of five (5) years from its date of grant.
Upon exercise of a stock option under the 1998 Plan, the exercise price for the
purchased shares will be immediately payable in cash, by check, or at the Stock
Option Committee's option, shares of Common Stock that the optionee has owned
for at least six months, having a fair market value on the date immediately
preceding the exercise date equal to the exercise price. The Stock Option
Committee may, but is not required to, make financing available to the
participant for the purchase of shares of Common Stock pursuant to such stock
option on such terms as it shall specify.
The Board has the discretion at the time of a grant or at any time prior to or
upon the occurrence of a change of control or potential change of control, to
provide in whole or in part for the accelerated exercisability of each option
outstanding at the time of such change of control.
Options granted under the 1998 Plan are not assignable or transferable other
than by will or the laws of descent and distribution, and during the optionee's
lifetime, the option may be exercised only by such optionee.
Termination of Employment. If a participant dies or becomes disabled, all vested
Incentive Stock Options may be exercised at any time within one year (or the
remaining term of the stock option, if less). If a participant ceases to be a
Company officer or employee for any other reason, he or she must exercise any
vested Incentive Stock Options within three months (or their remaining term, if
less).
Administration of the 1998 Plan. The Stock Option Committee of the Board of
Directors will administer the 1998 Plan. The Stock Option Committee is generally
empowered to interpret the 1998 Plan, to prescribe, and rescind rules and
regulations relating to it, and to determine the
19
<PAGE> 22
terms and provisions of the respective stock option agreements. The Board of
Directors or the Stock Option Committee may amend or discontinue the 1998 Plan
at any time subject to certain restrictions set forth in the 1998 Plan. Except
in limited circumstances, no amendment or discontinuance may adversely affect
any previously granted stock option award without the consent of the recipient
thereof. Shareholder approval is required if the number of shares issuable under
the 1998 Plan is increased or the class of eligible employees is changed.
Federal Income Tax consequences. The following general description of federal
income tax consequences is based upon current statutes, regulations and
interpretations and does not purport to be complete. Reference should be made to
the applicable provisions of the Internal Revenue Code of 1986 (as amended, the
"Code"). There also may be state, local and foreign income tax consequences
applicable to transactions involving stock options.
Under existing federal income tax provisions, a participant who receives stock
options will not normally realize any income, nor will the Company normally
receive any deduction for federal income tax purposes upon the grant of a stock
option.
When a nonqualified stock option granted pursuant to the 1998 Plan is exercised,
the employee generally will realize ordinary income (compensation) measured by
the difference between the aggregate purchase price of the Common Stock as to
which the stock option is exercised and the aggregate fair market value of the
Common Stock on the exercise date, and the Company generally will be entitled to
a deduction in the year the stock option is exercised equal to the amount the
employee is required to treat as ordinary income. Any taxable income recognized
in connection with a nonqualified stock option exercised by an optionee who is
also an employee of the Company will be subject to tax withholding by the
Company. The basis for determining gain or loss upon a subsequent disposition of
Common Stock acquired upon the exercise of a nonqualified stock option will be
the purchase price paid to the Company for the Common Stock increased by an
amount included in the optionee's taxable income resulting from the exercise of
such stock option. The holding period for determining the rate of tax on gain or
loss on such subsequent disposition generally begins on the date on which the
optionee acquires the Common Stock.
An employee generally will not recognize any income upon the exercise of an
Incentive Stock Option, but the exercise may, depending on particular factors
relating to the employee, subject the employee to the alternative minimum tax.
An employee will recognize capital gain or loss in the amount of the difference
between the exercise price and the sale price on the sale or exchange of stock
acquired pursuant to the exercise of an Incentive Stock Option, provided that
the employee does not dispose of such stock within two years from the date of
grant and one year from the date of exercise of the Incentive Stock Option (the
"Required Holding
20
<PAGE> 23
Periods"). An employee disposing of such shares before the expiration of the
Required Holding Periods will recognize ordinary income equal to the lesser of
(i) the difference between the stock option price and the fair market value of
the stock on the date of exercise, or (ii) the total amount of gain realized.
The remaining gain or loss is generally treated as capital gain or loss, with
the tax rate depending on how long the shares are held. The Company will not be
entitled to a federal income tax deduction in connection with the exercise of an
Incentive Stock Option, except where the employee disposes of the shares of
Common Stock received upon exercise before the expiration of the required
holding periods.
The affirmative vote of the holders of a majority of the total shares of common
stock issued and outstanding is required (a) to permit the granting of incentive
stock options under the 1998 plan, and (b) to qualify awards of stock options
under the 1998 plan as "performance based" under section 162(m) of the code. If
the 1998 plan is not approved by the shareholders at the annual meeting, then
any stock options previously granted under the 1998 plan will be nonqualified
stock options, regardless of whether the stock option agreement relating thereto
purport to grant incentive stock options, and any options granted to certain
executive officers will be void.
THE BOARD OF DIRECTORS RECOMMEND A VOTE FOR
APPROVAL OF THE 1998 STOCK OPTION PLAN.
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP has been selected by the Board of Directors as the Company's
independent auditors for the current year. Representatives of Ernst & Young LLP
are expected to be present at the annual meeting and will have an opportunity to
make a statement if they desire to do so, and are expected to be available to
respond to appropriate questions.
PROPOSALS OF SHAREHOLDERS
A proper proposal submitted by a shareholder in accordance with applicable rules
and regulations for presentation at the Company's annual shareholders meeting in
1999 and received at the Company's principal executive office by January 28,
1999, will be included in the Company's Proxy Statement and form of proxy
relating to such annual meeting of shareholders.
21
<PAGE> 24
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for action at
the meeting other than the matters set forth herein. Should any other matter
requiring a vote of shareholders arise, the proxies in the enclosed form confer
upon the person or persons entitled to vote the shares represented by such
proxies discretionary authority to vote the same in accordance with their best
judgment in the interest of the company.
FINANCIAL STATEMENTS AVAILABLE
A copy of the Company's 1997 Annual Report accompanies this Proxy Statement. The
Annual Report does not constitute a part of the proxy solicitation material.
UPON WRITTEN REQUEST TO F. ROBERT MERRILL III, CORPORATE SECRETARY, QUEST
MEDICAL, INC., ONE ALLENTOWN PARKWAY, ALLEN, TEXAS 75002, THE COMPANY WILL
PROVIDE WITHOUT CHARGE COPIES OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES
AND EXCHANGE COMMISSION ON FORM 10-K.
By Order of the Board of Directors
F. Robert Merrill III
Secretary
Allen, Texas
April 27, 1998
22
<PAGE> 25
APPENDIX A
QUEST MEDICAL, INC.
1998 STOCK OPTION PLAN
1. Purpose of the Plan. This Plan shall be known as the Quest Medical, Inc.
1998 Stock Option Plan. The purposes of the Plan are (i) to attract and retain
the best available personnel for positions of substantial responsibility, (ii)
to attract and retain directors and advisory directors with a high degree of
training, experience and ability and (iii) to provide incentives to such
personnel, directors and advisory directors to promote the success of the
business of Quest Medical, Inc. and its subsidiaries.
Certain options granted under this Plan are intended to qualify as
"incentive stock options" pursuant to Section 422 of the Internal Revenue Code
of 1986, as amended from time to time, while certain other options granted under
the Plan will constitute nonqualified options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Corporation.
(b) "Common Stock" means the Common Stock, $.05 par value per share,
of the Corporation. Except as otherwise provided herein, all Common Stock issued
pursuant to the Plan shall have the same rights as all other issued and
outstanding shares of Common Stock, including but not limited to voting rights,
the right to dividends, if declared and paid, and the right to pro rata
distributions of the Corporation's assets in the event of liquidation.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(d) "Committee" means the committee described in Section 18(a) that
administers the Plan.
(e) "Corporation" means Quest Medical, Inc., a Texas corporation.
(f) "Date of Grant" means the date on which an Option is granted
pursuant to this Plan or, if the Committee so determines, the date specified by
the Committee as the date the award is to be effective.
(g) "Director" means any director, advisory director or consultant of
the Corporation or one of its Subsidiaries, but excluding any director, advisory
director or consultant who is also an officer or employee of the Corporation or
one of its Subsidiaries.
(h) "Employee" means any officer or other key employee of the
Corporation or one of its Subsidiaries, including any director who is also an
officer or key employee of the Corporation or one of its Subsidiaries.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
A-1
<PAGE> 26
(j) "Executive" means an Employee who is, or in the judgment of the
Committee may become, the Chief Executive Officer of the Corporation or one of
the other four most highly compensated executive officers of the Corporation.
(k) "Fair Market Value" means the closing sale price (or average of
the quoted closing bid and asked prices if there is no closing sale price
reported) of the Common Stock on the trading day immediately prior to the date
specified as reported by The Nasdaq Stock Market or by the principal national
stock exchange on which the Common Stock is then listed. If there is no reported
price information for the Common Stock, the Fair Market Value will be determined
by the Committee, in its sole discretion. In making such determination, the
Committee may, but shall not be obligated to, commission and rely upon an
independent appraisal of the Common Stock.
(l) "Non-Employee Director" means an individual who is a "non-employee
director" as defined in Rule 16b-3 under the Exchange Act and also an "outside
director" within the meaning of Treasury Regulation ss. 1.162-27(e)(3).
(m) "Nonqualified Option" means any Option that is not a Qualified
Option.
(n) "Option" means a stock option granted pursuant to Section 6 of
this Plan.
(o) "Optionee" means any Employee or Director who receives an Option.
(p) "Participant" means any Employee or Director who receives an
Option pursuant to this Plan.
(q) "Plan" means the Quest Medical, Inc. 1998 Stock Option Plan, as
amended from time to time.
(r) "Qualified Option" means any Option that is intended to qualify as
an "incentive stock option" within the meaning of Section 422 of the Code.
(s) "Rule 16b-3" means Rule 16b-3 of the rules and regulations under
the Exchange Act, as Rule 16b-3 may be amended from time to time, and any
successor provisions to Rule 16b-3 under the Exchange Act.
(t) "Subsidiary" means any now existing or hereinafter organized or
acquired company of which more than fifty percent (50%) of the issued and
outstanding voting stock is owned or controlled directly or indirectly by the
Corporation or through one or more Subsidiaries of the Corporation.
3. Term of Plan. The Plan has been adopted by the Board effective as of
April 9, 1998. To permit the granting of Qualified Options under the Code, and
to qualify awards of Options hereunder as "performance based" under Section
162(m) of the Code, the Plan will be submitted for approval by the shareholders
of the Corporation by the affirmative votes of the holders of a majority of the
shares of Common Stock then issued and outstanding, for approval no later than
the next annual meeting of shareholders. If the Plan is not so approved by the
shareholders of the Corporation, then any Options previously granted under the
Plan will be Nonqualified Options, regardless of whether the option agreements
relating thereto
A-2
<PAGE> 27
purport to grant Qualified Options, and any options granted to Executives will
be void. The Plan shall continue in effect until terminated pursuant to Section
18(a).
4. Shares Subject to the Plan. Except as otherwise provided in Section 17
hereof, the aggregate number of shares of Common Stock issuable upon the
exercise of Options pursuant to this Plan shall be 800,000 shares; provided,
however, that on January 1 of each year (commencing on January 1, 1999), the
aggregate number of shares of Common Stock then issuable upon the exercise of
Options shall be increased by the same percentage that the total number of
issued and outstanding shares of Common Stock increased from the preceding
January 1 to the following December 31 (if such percentage is positive). For
example, if the total number of issued and outstanding shares of Common Stock on
January 1, 1999 were 5,000,000, the total number of issued and outstanding
shares of the Corporation on December 31, 1999 were 5,500,000, and the aggregate
number of shares of Common Stock then issuable upon the exercise of Options
pursuant to this Plan were 250,000, the aggregate number of shares of Common
Stock issuable under the Plan effective January 1, 2000 would be 275,000 (a 10%
increase). Notwithstanding the above, the aggregate number of shares of Common
Stock issuable upon the exercise of Qualified Options pursuant to this Plan
shall not exceed 800,000 shares. Shares issuable upon the exercise of Options
may either be authorized but unissued shares or treasury shares. The Corporation
shall, during the term of this Plan, reserve and keep available a number of
shares of Common Stock sufficient to satisfy the requirements of the Plan. If an
Option should expire or become unexercisable for any reason without having been
exercised in full, then the shares that were subject thereto shall, unless the
Plan shall have terminated, become immediately available for the grant of
additional Options under this Plan, subject to the limitations and adjustments
set forth above. In addition, for purposes of calculating the aggregate number
of shares that may be issued under this Plan, only the net shares issued
(including the shares, if any, withheld for tax withholding requirements) shall
be counted when shares of Common Stock are used as full or partial payment for
shares issued upon exercise of a Qualified Option or a Nonqualified Stock
Option. Shares tendered by a Participant as payment for shares issued upon such
exercise shall be available for reissuance under the Plan.
5. Eligibility. Qualified Options may be granted under Section 6 of the
Plan to such Employees of the Corporation or its Subsidiaries as may be
determined by the Committee. Nonqualified Options may be granted under Section 6
of the Plan to such Employees or Directors of the Corporation or its
Subsidiaries as may be determined by the Committee. Subject to the limitations
and qualifications set forth in this Plan, the Committee shall also determine
the number of Options to be granted, the number of shares subject to each Option
grant, the exercise price or prices of each Option, the vesting and exercise
period of each Option, whether an Option may be exercised as to less than all of
the Common Stock subject thereto, and such other terms and conditions of each
Option as are consistent with the provisions of this Plan. In connection with
the granting of Qualified Options, the aggregate Fair Market Value (determined
at the Date of Grant of a Qualified Option) of the shares with respect to which
Qualified Options are exercisable for the first time by an Optionee during any
calendar year (under all such plans of the Optionee's employer corporation and
its parent and subsidiary corporations as defined in Section 424(e) and (f) of
the Code, or a corporation or a parent or subsidiary corporation of such
corporation issuing or assuming an Option in a transaction to which Section
424(a) of the Code applies (collectively, such corporations described in this
sentence are hereinafter referred to as "Related Corporations")) shall not
exceed $100,000 or such other amount as from time to time provided in Section
422(d) of the Code or any successor provision. In the event that the
Participant's total Qualified Options
A-3
<PAGE> 28
exceed the $100,000 limit in any calendar year (whether due to acceleration of
exercisability, miscalculation, error or otherwise) the amount of Qualified
Options that exceed such limit shall be treated as Nonqualified Options. The
Qualified Options granted earliest (whether under this Plan or any other
agreement or plan) shall be applied first to the $100,000 limit. In the event
that only a portion of the Qualified Options granted at the same time can be
applied to the $100,000 limit, the Corporation shall issue separate share
certificates for such number of shares as does not exceed the $100,000 limit,
and shall designate such shares as Qualified Option stock in its share transfer
records.
6. Grant of Options. Except as provided in Section 18(c), the Committee
shall determine the number of shares of Common Stock to be offered from time to
time pursuant to Options granted hereunder and shall grant Options under the
Plan. Notwithstanding the foregoing, each member of the Committee shall be
eligible to receive Options only if the Board unanimously (except for such
Committee member) grants such Option to such member. The grant of Options shall
be evidenced by Option agreements containing such terms and provisions as are
approved by the Committee and executed on behalf of the Corporation by an
appropriate officer. In connection with the granting of any Options under the
Plan, the aggregate number of shares of Common Stock with respect to which
Options may be granted to any single Executive in any one calendar year shall
not exceed 200,000. Solely for this purpose, Options that lapse or are canceled
continue to count against such limit.
7. Time of Grant of Options. The date of grant of an Option under the
Plan shall be the date on which the Committee awards the Option or, if the
Committee so determines, the date specified by the Committee as the date the
award is to be effective. Notice of the grant shall be given to each Participant
to whom an Option is granted promptly after the date of such grant.
8. Price. The exercise price for each share of Common Stock subject to
an Option (the "Exercise Price") granted pursuant to Section 6 of the Plan shall
be determined by the Committee at the Date of Grant; provided, however, that (a)
the Exercise Price for any Option shall not be less than 100% of the Fair Market
Value of the Common Stock at the Date of Grant, and (b) if the Optionee owns on
the Date of Grant more than 10 percent of the total combined voting power of all
classes of stock of the Corporation or its parent or any of its subsidiaries, as
more fully described in Section 422(b)(6) of the Code or any successor provision
(such shareholder is referred to herein as a "10-Percent Shareholder"), the
Exercise Price for any Qualified Option granted to such Optionee shall not be
less than 110% of the Fair Market Value of the Common Stock at the Date of
Grant.
9. Vesting. Subject to Section 11 of this Plan, each Option award under
the Plan shall vest or be subject to forfeiture in accordance with the
provisions set forth in the applicable Option agreement. The Committee may, but
shall not be required to, permit acceleration of vesting or termination of
forfeiture provisions upon any sale of the Corporation or similar transaction.
Notwithstanding the foregoing, in no event shall the acceleration of any Option
hereunder upon a change of control of the Corporation occur to the extent an
"excess parachute payment" (as defined in Section 280G of the Code) would
result. In the event that the Committee determines that such an excess parachute
payment would result if acceleration occurred (when added to any other payments
or benefits contingent on a change of control under any other agreements,
arrangements or plans) then the number of shares as to which exercisability is
accelerated shall be reduced so that total parachute payments do not exceed 299%
of the Optionee's "base amount," as defined in Section 280G(b)(3) of the Code. A
A-4
<PAGE> 29
Participant's Option agreement may contain such additional provisions with
respect to vesting as the Committee may specify.
10. Exercise. A Participant may pay the Exercise Price of the shares of
Common Stock as to which an Option is being exercised by the delivery of (a)
cash, (b) check, (c) at the Corporation's option, by the delivery of shares of
Common Stock having a Fair Market Value on the date immediately preceding the
exercise date equal to the Exercise Price and have been held by the Optionee at
least six (6) months prior to the date of exercise, or (d) at the Corporation's
option, any other consideration that the Corporation determines is consistent
with the Plan's purpose and applicable law. If the shares to be purchased are
covered by an effective registration statement under the Securities Act of 1933,
as amended, any Option granted under the Plan may be exercised by a
broker-dealer acting on behalf of an Optionee if (i) the broker-dealer has
received from the Optionee or the Corporation a fully- and duly-endorsed
agreement evidencing such Option, together with instructions signed by the
Optionee requesting the Corporation to deliver the shares of Common Stock
subject to such Option to the broker-dealer on behalf of the Optionee and
specifying the account into which such shares should be deposited, (ii) adequate
provision has been made with respect to the payment of any withholding taxes due
upon such exercise, and (iii) the broker-dealer and the Optionee have otherwise
complied with Section 220.3(e)(4) of Regulation T, 12 CFR Part 220, or any
successor provision.
11. When Qualified Options May be Exercised. No Qualified Option shall
be exercisable at any time after the expiration of ten (10) years from the Date
of Grant; provided, however, that if the Optionee with respect to a Qualified
Option is a 10-Percent Shareholder on the Date of Grant of such Qualified
Option, then such Option shall not be exercisable after the expiration of five
(5) years from its Date of Grant. In addition, if an Optionee of a Qualified
Option ceases to be an employee of the Corporation or any Related Corporation
for any reason, such Optionee's vested Qualified Options shall not be
exercisable after (a) three (3) months following the date such Optionee ceases
to be an employee of the Corporation or any Related Corporation, if such
cessation of service is not due to the death or permanent and total disability
(within the meaning of Section 22(e)(3) of the Code) of the Optionee, or (b)
twelve (12) months following the date such Optionee ceases to be an employee of
the Corporation or any Related Corporation, if such cessation of service is due
to the death or permanent and total disability (as defined above) of the
Optionee. Upon the death of an Optionee, any vested Qualified Option exercisable
on the date of death may be exercised by the Optionee's estate or by a person
who acquires the right to exercise such Qualified Option by bequest or
inheritance or by reason of the death of the Optionee, provided that such
exercise occurs within both the remaining option term of the Qualified Option
and twelve (12) months after the date of the Optionee's death. This Section 11
only provides the outer limits of allowable exercise dates with respect to
Qualified Options; the Committee may determine that the exercise period for a
Qualified Option shall have a shorter duration than as specified above.
12. Option Financing. Upon the exercise of any Option granted under the
Plan, the Corporation may, but shall not be required to, make financing
available to the Participant for the purchase of shares of Common Stock pursuant
to such Option on such terms as the Board or the Committee may specify.
13. Withholding of Taxes. The Committee shall make such provisions and
take such steps as it may deem necessary or appropriate for the withholding of
any taxes that the
A-5
<PAGE> 30
Corporation is required by any law or regulation of any governmental authority
to withhold in connection with any Option including, but not limited to, (a)
withholding the issuance of all or any portion of the shares of Common Stock
subject to such Option until the Participant reimburses the Corporation for the
amount it is required to withhold with respect to such taxes, (b) withholding
any portion of such issuance in an amount sufficient to reimburse the
Corporation for the amount of taxes it is required to withhold, (c) allowing the
Participant to deliver Common Stock as payment for the amount the Corporation is
required to withhold for taxes or (d) taking any other action reasonably
required to satisfy the Corporation's withholding obligation.
14. Conditions Upon Issuance of Shares.
(a) The Corporation shall not be obligated to sell or issue
any shares upon the exercise of any Option granted under the Plan unless the
issuance and delivery of shares comply with all provisions of applicable federal
and state securities laws and the requirements of The Nasdaq Stock Market or any
stock exchange upon which shares of the Common Stock may then be listed.
(b) As a condition to the exercise of an Option, the
Corporation may require the person exercising the Option to make such
representations and warranties as may be necessary to assure the availability of
an exemption from the registration requirements of applicable federal and state
securities laws.
(c) The Corporation shall not be liable for refusing to sell
or issue any shares covered by any Option if the Corporation cannot obtain
authority from the appropriate regulatory bodies deemed by the Corporation to be
necessary to sell or issue such shares in compliance with all applicable federal
and state securities laws and the requirements of The Nasdaq Stock Market or any
stock exchange upon which shares of the Common Stock may then be listed. In
addition, the Corporation shall have no obligation to any Participant, express
or implied, to list, register or otherwise qualify the shares of Common Stock
covered by any Option.
(d) No Participant will be, or will be deemed to be, a holder
of any Common Stock subject to an Option unless and until such Participant has
exercised his or her Option and paid the purchase price for the subject shares
of Common Stock.
15. Restrictions on Transfer.
(a) Options issued pursuant to the Plan shall be
nontransferable except by will or the laws of descent and distribution, and may
only be exercisable during the Participant's lifetime only by the Participant.
(b) Shares of Common Stock issued pursuant to the Plan may be
subject to restrictions on transfer under applicable federal and state
securities laws. The Committee may impose such additional restrictions on the
ownership and transfer of shares of Common Stock issued pursuant to the Plan as
it deems desirable; any such restrictions shall be set forth in any Option
agreement entered into hereunder.
A-6
<PAGE> 31
16. Modification of Plan and Options.
(a) The Committee may from time to time and at any time alter,
amend, suspend, discontinue or terminate this Plan; provided, however, that no
such action of the Committee may, without the approval of the shareholders of
the Corporation, alter the provisions of the Plan so as to (i) increase the
maximum number of shares of Common Stock that may be subject to Qualified
Options under this Plan (except as provided in Section 17 of this Plan), (ii)
change the class of employees eligible to receive Qualified Options pursuant to
this Plan, or (iii) change the annual limit on the number of Options granted to
an Executive in Section 6 above.
(b) At any time and from time to time, the Committee may
execute an instrument providing for modification, extension or renewal of any
outstanding Option, provided that no such modification, extension or renewal
shall impair the Option without the consent of the holder of the Option.
Notwithstanding the foregoing, (i) in the event of such a modification,
substitution, extension or renewal of a Qualified Option, the Committee may
increase the exercise price of such Option if necessary to retain the qualified
status of such Option, and (ii) the Committee may, in its discretion and without
the holder's consent, convert, any Qualified Option into a Nonqualified Option.
17. Effect of Change in Stock Subject to the Plan. In the event that
each of the outstanding shares of Common Stock (other than shares held by
dissenting shareholders) shall be changed into or exchanged for a different
number or kind of shares of stock of the Corporation or of another corporation
(whether by reason of merger, consolidation, recapitalization, reclassification,
split-up, combination of shares or otherwise), or in the event a stock split or
stock dividend occurs, then the Corporation may either (a) substitute for each
share of Common Stock then subject to Options or available for Options the
number and kind of shares of stock into which each outstanding share of Common
Stock (other than shares held by dissenting shareholders) shall be so changed or
exchanged, or the number of shares of Common Stock as is equitably required in
the event of a stock split or stock dividend, together with an appropriate
adjustment of the Exercise Price, or (b) cancel all such Options as of the
effective date of any merger, consolidation, recapitalization, reclassification,
split-up or combination of shares by giving written notice to each holder
thereof or his personal representatives of its intention to do so and by
permitting the exercise of all such Options, without regard to determinations of
periods or installments of exercisability during the thirty (30) day period
immediately preceding such effective date. The Committee may, but shall not be
required to, provide additional anti-dilution protection to a Participant under
the terms of the Participant's Option agreement.
18. Administration.
(a) Notwithstanding anything to the contrary herein, to the
extent necessary to comply with the requirements of Rule 16b-3, the Plan shall
be administered by the Board, if each member is a Non-Employee Director, or by a
committee comprised solely of two or more Non-Employee Directors appointed by
the Board (the group responsible for administering the Plan is referred to as
the "Committee"). Options may be granted under Section 6 only by majority
agreement of the members of the Committee. Option agreements, in the form as
approved by the Committee, and containing such terms and conditions consistent
with the provisions of this Plan as are determined by the Committee, may be
executed on behalf of the Corporation by the Chairman of the Board, the
President or any Vice President of the
A-7
<PAGE> 32
Corporation. The Committee shall have complete authority to construe, interpret
and administer the provisions of this Plan and the provisions of the Option
agreements granted hereunder; to prescribe, amend and rescind rules and
regulations pertaining to this Plan; to suspend, discontinue or terminate this
Plan; and to make all other determinations necessary or deemed advisable in the
administration of the Plan. The determinations, interpretations and
constructions made by the Committee shall be final and conclusive. No member of
the Committee shall be liable for any action taken, or failed to be taken, made
in good faith relating to the Plan or any award thereunder, and the members of
the Committee shall be entitled to indemnification and reimbursement by the
Corporation in respect of any claim, loss, damage or expense (including
attorneys' fees) arising therefrom to the fullest extent permitted by law.
(b) Members of the Committee shall be specified by the Board,
and shall consist solely of Non-Employee Directors. Non-Employee Directors may
not possess an interest in any transaction for which disclosure is required
under Section 404(a) of Regulation S-K under the Exchange Act or be engaged in a
business relationship that must be disclosed under Section 404(a) and must
qualify as `outside directors' as defined in Section 162(m) of the Code and
regulations thereunder.
(c) Although the Committee may suspend, discontinue or
terminate the Plan at any time, all Qualified Options must be granted within ten
(10) years from the effective date of the Plan or the date the Plan is approved
by the shareholders of the Corporation, whichever is earlier.
19. Continued Employment Not Presumed. Nothing in this Plan or any
document describing it nor the grant of any Option shall give any Participant
the right to continue in the employment of the Corporation or affect the right
of the Corporation to terminate the employment of any such person with or
without cause.
20. Liability of the Corporation. Neither the Corporation, its
directors, officers or employees or the Committee, nor any Subsidiary which is
in existence or hereafter comes into existence, shall be liable to any
Participant or other person if it is determined for any reason by the Internal
Revenue Service or any court having jurisdiction that any Qualified Option
granted hereunder does not qualify for tax treatment as an incentive stock
option under Section 422 of the Code.
21. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of State of Texas and the United States, as applicable,
without reference to the conflict of laws provisions thereof.
22. Severability of Provisions. If any provision of this Plan is
determined to be invalid, illegal or unenforceable, such invalidity, illegality
or unenforceability shall not affect the remaining provisions of the Plan, but
such invalid, illegal or unenforceable provision shall be fully severable, and
the Plan shall be construed and enforced as if such provision had never been
inserted herein.
A-8
<PAGE> 33
QUEST MEDICAL, INC.
BOARD OF DIRECTORS PROXY FOR THE ANNUAL MEETING
OF SHAREHOLDERS AT 10:00 A.M. THURSDAY, MAY 28, 1998
ONE ALLENTOWN PARKWAY, ALLEN, TEXAS 75002
The undersigned shareholder of Quest Medical, Inc. (the "Company") hereby
appoints F. Robert Merrill III and Hugh M. Morrison, or either of them, as
proxies, each with full powers of substitution, to vote the shares of the
undersigned at the above-stated Annual Meeting and at any adjournment(s)
thereof:
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE VOTED
IN ACCORDANCE WITH THE SPECIFICATIONS MADE ON THE REVERSE SIDE. IF A CHOICE IS
NOT INDICATED WITH RESPECT TO ITEMS (1), (2) AND (3) THIS PROXY WILL BE VOTED
"FOR" SUCH ITEM. THE PROXIES WILL USE THEIR DISCRETION WITH RESPECT TO ANY
MATTER REFERRED TO IN ITEM (4). THIS PROXY IS REVOCABLE AT ANY TIME BEFORE IT
IS EXERCISED.
Receipt herewith of the Company's Annual Report and Notice of Meeting and Proxy
Statement, dated April 27, 1998, is hereby acknowledged.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE.)
<PAGE> 34
QUEST MEDICAL, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
The Board of Directors recommends a vote FOR proposals 1, 2, and 3.
1. Election of Directors
NOMINEES: HUGH M. MORRISON, ROBERT C. EBERHART, PH.D.,
MICHAEL J. TORMA, M.D., RICHARD D. NIKOLAEV,
CHRISTOPHER G. CHAVEZ AND JOSEPH E. LAPTEWICZ, JR.
[ ] FOR [ ] WITHHOLD [ ] FOR ALL
ALL ALL EXCEPT
-----------------------------------
Nominee Exceptions
(INSTRUCTION: To withhold authority
to vote for any individual nominee,
write that nominee's name here)
2. Approval of the Amendment to the Articles of Incorporation, as amended, to
change the Company's name to "Advanced Neuromodulation Systems, Inc."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval of the 1998 Stock Option Plan for key employees, directors,
advisory directors and consultants of the Company
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. In their discretion, the proxies are authorized to vote upon such other
business or matters as may properly come before the meeting or any
adjournment thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Dated: , 1998
--------------------------------
---------------------------------------------
---------------------------------------------
(Signature(s) of Shareholder(s))
(Joint owners must EACH sign. Please sign
EXACTLY as your name(s) appear(s) on this
card. When signing as attorney, trustee,
executor, administrator, guardian or
corporate officer, please give your FULL
title.)
PLEASE SIGN, DATE AND MAIL TODAY.
