SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended February 29, 1996 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ________
Commission File No. 1-11047
SPARTA SURGICAL CORPORATION
(Name of small business issuer in its charter)
Delaware 22-2870438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7068 Koll Center Parkway, Suite 401
Pleasanton, California 94566
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (510) 417-8812
Securities registered pursuant to Section 12(b)of the Act:
Title of each Class Name of each exchange on which registered
$.002 par value Common Stock Boston Stock Exchange
$4.00 par value Redeemable Preferred Stock Boston Stock Exchange
$4.00 Par Value Series A Convertible
Redeemable Preferred Stock Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
$.002 Par Value Common Stock
$4.00 Par Value Redeemable Preferred Stock
$4.00 Par Value Series A Convertible Redeemable Preferred Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
The Registrant's revenues for its most recent fiscal year were $5,759,107.
As of May 16, 1996, the market value of the Registrant's $.002 Par Value
Common Stock and $4.00 Par Value Redeemable Convertible Preferred Stock
excluding shares held by affiliates, was $4,919,971 based upon closing prices on
Nasdaq of $1.19 per share of $.002 Par Value Common Stock and $2.13 per share of
$4.00 Par Value Redeemable Convertible Preferred Stock.
As of May 16, 1996, 4,401,926 shares of the Registrant's Common Stock,
179,323 shares of Redeemable Convertible Preferred Stock and 33,068 shares of
Series A Convertible Redeemable Preferred Stock were outstanding.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
The Company develops, manufactures, distributes and markets surgical
specialty and electrotherapy products for the healthcare industry. The surgical
specialty products group consists of (i) microsurgical hand-held instruments and
accessories; (ii) critical care hospital disposable products; and (iii) oral
maxillofacial plating systems. The electrotherapy products group consists of (i)
transcutaneous electrical nerve stimulators ("TENS") and related electrode
products.
Acquisitions, Asset Purchases and Dispositions
Since inception, a principal element of the Company's development has been
the acquisition of companies and product lines that complement the existing
business strategy. Sparta Instrument Corporation, acquired by the Company in
1987, distributed a specialty line of high quality microsurgical hand held
instruments for use in ophthalmic, ear, nose and throat ("ENT") procedures and
plastic surgery, along with related hospital disposable medical products.
Healthmed Corporation, acquired by the Company in 1988, manufactured and
marketed a specialty line of surgical products generally referred to as
"critical care hospital disposables." Sterile Products, a division of Absorbent
Cotton Company, acquired by the Company in 1989, developed, manufactured and
distributed specialty acute and chronic wound care dressings. David Simmonds
Company, Inc., also acquired by the Company in 1989, manufactured and
distributed medical supplies for intravenous anesthesia and related drugs used
in oral surgery. Certain assets of Medical Designs, Inc. ("MDI"), which was
founded to market TENS units for use in pain management and related reusable and
disposable electrode products and other rehabilitation systems, were purchased
in 1992. Certain assets of Storz Instrument Company, a wholly-owned subsidiary
of American Cyanamid Co. which developed, manufactured and marketed an oral
maxillofacial plating product line, were purchased in 1994.
On December 7, 1995, the Company sold its impregnated wound care gauze
dressings product line to Tecnol Medical Products, Inc., a medical products
manufacturer headquartered in Fort Worth, Texas (the "Tecnol Sale"). The
purchase price was $5,675,000, of which approximately $5,010,000 was paid in
cash, with the balance being paid primarily in the form of a promissory note
bearing interest at prime rate and due in September 1997 upon certain conditions
being met. In addition to wound care inventory, equipment and other assets, the
Company's operations in Hammonton, New Jersey were included in the sale. The
Company used approximately $4,500,000 of the cash proceeds of the Tecnol Sale to
repay outstanding debt and the balance was used to reduce trade payables and to
pay costs associated with the sale. See "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources."
Business Strategy
The Company seeks growth through internal expansion and continued
acquisitions of companies or products that complement or expand the Company's
existing product lines. The Company intends to continue to enter small specialty
markets that are served by relatively few competitors. The Company will also
continue efforts to develop products in collaboration with established medical
device companies while researching and developing its own products.
The Company intends to expand its distribution networks by hiring
additional sales representatives, developing an inside sales/telemarketing
group, and appointing other specialty surgical dealers and independent
manufacturing representatives to promote and market the Company's products to
hospitals, physicians and clinics. The expansion of the Company's product lines
may also promote crossover sales by dealers in each product group, although
there is no assurance that this cross-marketing strategy will be successful in
increasing sales.
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With respect to its electrotherapy product line, the Company intends to
continue to sell to durable medical equipment dealers, rather than end users,
and to introduce new or improved products consistent with the results of its
research and development programs.
Products
The Company's products are divided into two product groups:
Surgical Specialty Products:
(i) Microsurgical hand held instruments and accessories. The Company
markets a line of over 1,500 microsurgical hand held instruments and accessories
for use by: (i) ophthalmologists in various procedures including cataract,
retina and intraocular lens surgeries; (ii) ear, nose, throat and plastic
surgeons in rhinoplasty, facial plastic, reconstructive and hand surgery
procedures; and (iii) general surgeons in other surgical applications, as well
as related equipment and accessories.
(ii) Critical care hospital disposable products. The Company markets a line
of critical care and general hospital disposable products such as, (i)
Surgical-Clamps(TM), external tubing and sponge clamps; (ii) Surgi-Prep(TM), a
clinically tested medical depilatory kit for preoperative prepping; (iii)
Anesthesia Extension Tubes, anesthesia and intravenous tube sets; and (iv)
Nasostats(TM), sterile nasal balloons to control nose bleeding.
(iii) Oral Maxillofacial Plating Systems. The Company markets an oral
maxillofacial titanium plating ("OMF") product line which consists of plates,
screws and instruments to repair bone fractures in the face and head by holding
fracture ends in alignment while bone healing takes place. The OMF product line
also includes instruments used to attach the plates to bone tissue. See
"-Research and Development."
Electrotherapy Products:
(i) Transcutaneous Electrical Nerve Stimulators (TENS) and Related
Electrode Products. The Company markets TENS units which deliver low voltage
electrical current to the nerves in the spine in order to temporarily reduce or
eliminate certain types of chronic pain, especially back pain. The Company's
TENS units include Spectrum Max-SD, the Company's most advanced unit for acute
and chronic pain management; Spectrum Plus, which allows therapists to treat
less complicated pain syndromes than the Spectrum Max-SD; and Spectrum II, the
Company's least expensive TENS unit. The Company also markets both disposable
and reusable TENS electrodes.
Research and Development
Approximately $97,921 and $52,661 was expended on Company-sponsored
research and development for the years ended February 28, 1995 and February 29,
1996, respectively.
The Company intends to develop an absorbable OMF material, although any
such development will take a number of years to complete and the Company will
require a significant investment of additional funds to finance it to
completion. No such development has yet been commenced. There is no assurance
that additional funding will be available or will be available on terms
acceptable to the Company. Moreover, there can be no assurance that such
development efforts will be successful or result in products that can receive
FDA marketing approvals or, even if marketable, will be commercially viable. See
"Surgical Specialty Products" and "Products - Joint Product Development, Private
Label and Technology Arrangements."
Sales and Marketing
The Company offers its products through a network of independent
manufacturing representatives and through a network of surgical and durable
medical equipment distributors located throughout the United States and abroad
who are responsible for sales directly to hospitals, physicians and clinics.
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Support for the Company's internal and external sales force is provided by
marketing communication programs such as advertisements in medical journals,
attendance at trade shows, distribution of sales brochures, educational
seminars, sales training and telemarketing. Sales leads developed through
advertising, direct mail, trade show and customer inquiries are pursued through
direct sales contacts.
The Company's sales network reaches most of the major markets in the United
States along with a modest but expanding international market. In the United
States there are numerous independent health care distributors of the Company's
products that include Baxter Healthcare Corp., Abbey Medical, Inc., General
Medical Corp., Owens and Minor, Inc., DeRoyal Industries, Inc., Alabama
Microsurgical Instruments, Stuart Medical, Inc., ABCO Dealers, Inc., TheraLabs,
Inc., New England Surgical Corp., Texas TENS and Therapeutic Trends, Inc.
Through its various distributors and representatives, the Company's products are
marketed to private and government hospitals, clinics, physicians and physical
therapy/rehabilitation facilities.
Licensing Agreement
In connection with its purchase of certain assets of Storz Instrument
Company's OMF business in January 1994, the Company entered into a Polymer
License and Supply Agreement ("Licensing Agreement") with Davis & Geck, for
further research and development of a new technology in plating systems called
the "Absorbable Plating System" ("APS"). Storz Instrument Company is a
subsidiary of, and Davis & Geck is a division of, American Home Products
Corporation. The APS project (which the Company has not yet commenced) will
attempt to determine the feasibility of using absorbable (polymer) plates for
fixating bones so that the plates do not have to be surgically removed after the
fractures are healed. There can be no assurance that the Company can develop an
APS for which FDA permission to market can be obtained.
Under the terms of the Licensing Agreement, Davis & Geck granted the
Company exclusive rights to use certain polymers in the APS. The Licensing
Agreement grants the Company a ten-year exclusive license to certain
intellectual property for the research, development and exploitation of any
product developed within the oral maxillofacial field, including manufacturing
and marketing of such products. During the term of the Licensing Agreement, the
Company is required to pay to Davis & Geck a royalty of five percent of gross
sales. Clinical trials in humans and pre-market approval by the FDA must be
completed prior to marketing an APS product. To date no such clinical trials
have been commenced. There can be no assurance that the Company will complete
human trials or will obtain pre-market approval or subsequent marketing
permission from the FDA. The Company anticipates significant research and
development will have to be conducted in order to bring this product to market.
There can be no assurance that the Company will be successful in developing and
manufacturing any such product. See "-Research and Development."
Distribution
The Company's microsurgical hand held instruments, oral maxillofacial
products, critical care disposables and TENS units are purchased, inspected,
packaged and distributed from the Company's warehouse facility in Pleasanton,
California. Microsurgical hand-held instruments and oral maxillofacial
instruments are manufactured in Germany and the United States to the Company's
specifications. Critical care disposables and TENS units are procured
domestically under various manufacturing arrangements.
The Company has experienced difficulty from time to time in obtaining some
of its products, and there can be no assurance that its current or alternative
sources will be able to meet the Company's needs on a timely basis. Although
some products are currently available from multiple sources, at present the
Company obtains approximately 60% of the products it sells from single sources.
A lack of availability from current suppliers could cause distribution delays
and increased cost to the Company. In addition, reliance on these suppliers
could adversely affect the Company's quality control efforts and its ability to
control delivery schedules.
The Company is required to carry significant amounts of inventory to meet
rapid delivery requirements. These inventory requirements in turn require the
Company to maintain credit financing sufficient to fund the purchase of
inventory.
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All products manufactured for the Company are subject to demanding
specifications and processes in order to comply with the FDA's Good
Manufacturing Practices. See "-Government Regulation."
Product Liability
The Company carries product liability insurance of $1,000,000 per
occurrence. Although the Company believes this coverage to be adequate, there
can be no assurance that such insurance will be sufficient to protect it from
all risks to which it may be subject or exposed. To date, the Company has not
been the subject of any product liability claims.
Competition
The health care products industry is intensely competitive, and many of the
Company's competitors have financial, marketing and other resources
substantially greater than those of the Company. Some of the Company's larger
competitors enjoy an additional competitive advantage by reason of their ability
to offer product discounts for volume purchases across product lines.
In the surgical specialty market for microsurgical hand held instruments,
the Company competes with Storz Instrument Company, a division of American Home
Products Corporation, Edward Weck & Co., Inc., a division of Bristol-Myers
Squibb, Inc. and V. Mueller, a division of Baxter Healthcare Corp. In the
critical care hospital disposable products market, the Company's competitors
include Baxter Healthcare Corp., Johnson & Johnson Patient Care, Inc., Abbott
Laboratories, Inc., and Patterson Dental Co. as well as smaller domestic
competitors. In the oral maxillofacial plating market, the Company competes with
Howmedica, Inc., Synthes U.S.A., Leibinger & Fischer GMBH and Walter Lorenz
Surgical Instruments. In the TENS market, the Company competes with numerous
companies including Empi, Inc. and Staodyn, Inc.
Competitive factors for microsurgical hand held instruments, critical care
disposables and OMF products include the depth, quality and price of the product
line. Price is the only significant competitive factor with respect to the
electrotherapy product line. The Company's market share in each of its product
lines is negligible.
Patents and Trademarks
The Company sells its products under a variety of trademarks, some of which
the Company has registered in the United States and various foreign countries.
The Company currently holds two patents granted by the United States Patent
Office relating to its TENS units.
Notwithstanding the trademarks and patents held by the Company, there can
be no assurance that competitors will not develop similar trademarks outside the
Company's trademark protection or functionally similar products outside the
Company's patent protection.
There also can be no assurance that any patents issued to or licensed by
the Company will not be infringed upon or designed around by others, that others
will not obtain patents that the Company will need to license or design around,
that the Company's patents will not inadvertently infringe upon the patents of
others, or that others will not use the Company's patents upon expiration of
such patents. There can be no assurance that existing or future patents will not
be invalidated or that the Company will have adequate funds to finance the high
cost of prosecuting or defending patent validity or infringement issues.
Government Regulation
All of the Company's products must be approved, registered and/or licensed
by the United States Food and Drug Administration ("FDA") and other domestic and
foreign regulatory authorities. These authorities also regulate labeling,
advertising and other forms of product claims.
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Under the federal Food, Drug and Cosmetics Act, the Company is required to
file with the FDA a new device description and obtain FDA approval for any new
medical device which the Company proposes to manufacture and market. The
procedure for obtaining such approval differs depending upon the uniqueness of
the device, with devices similar to those marketed prior to 1976 being eligible
for expedited approval and those devices which represent significant departures
from devices on the market in 1976 requiring pre-marketing approval. The devices
are also subject to inspection by the FDA after approval, with devices that are
potentially life-threatening being subject to more stringent standards. The FDA
has established manufacturing and sterilization standards for medical devices
known as "Good Manufacturing Practices" which require the Company's distribution
facility and its suppliers to be registered annually and subject to regular
inspections by the FDA.
The Company is registered with the FDA as a medical device establishment.
The Company's office and distribution facilities in California are subject to
various state and local regulations such as zoning requirements, health and fire
codes and the like.
Although applicable government regulations vary in their provisions, they
are stringent and continuing. The cost of compliance with these regulations is
difficult to determine, but such cost is and will continue to be a significant
expense for the Company. The Company believes that it has obtained all
applicable government and regulatory approvals for its existing products,
facilities and processes and expects that all of its current licenses will be
renewed on a regular basis. There can be no assurance that the Company will
continue to be in compliance with all current regulations or that it will be
able to comply with all future regulations.
Employees
In addition to its three executive officers, as of May 16, 1996, the
Company had ten full-time employees and one part-time employee, including two
employees involved in distribution; three sales and marketing employees; and six
administrative employees. The Company believes that its relations with its
employees are satisfactory. The Company's employees are not represented by any
organized labor union and are not covered by any collective bargaining
agreements.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases corporate and warehouse facilities in Pleasanton,
California, and as a result of the sale of the medical product line in December
1995, it subleases (through December 1996) its manufacturing and warehouse
facility in Hammonton, New Jersey to Tecnol New Jersey Wound Care Products, Inc.
The associated remaining costs related to the Hammonton, NJ lease from January
1997 through its termination were accrued in December 1995 as a result of the
sale of the medical product line. The following table sets forth certain
information concerning the Company's three facilities:
Square Expiration of Monthly
Location Footage Current Lease Rental
-------- ------- ------------- ------
Pleasanton, CA (1) 9,100 11/30/98 $8,650
Hammonton, NJ 41,500 05/31/00 $9,400
Pleasanton, CA 6,200 12/14/98 $3,968
(1) Renewable for five years at the option of the Company.
The Company believes its facilities are adequate for its needs in the
foreseeable future and that additional space is available at reasonable rates.
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ITEM 3. LEGAL PROCEEDINGS
On March 4, 1994, the Company terminated for cause its December 5, 1992
employment agreement with Gerald S. Kramer, a former Chairman of the Company's
Board of Directors. The Company also offset against a promissory note in the
amount of $378,770 owed by the Company to Mr. Kramer, a receivable owed by Mr.
Kramer to the Company in the amount of $138,063, as well as $222,419
representing Mr. Kramer's share of his joint bank indebtedness which was repaid
by the Company. The net balance of $18,288 was remitted to Mr. Kramer in
December 1995.
On March 9, 1994, the Company filed a Complaint for Declaratory Relief in
the Supreme Court for Plymouth County, Massachusetts seeking a court
determination that it was not liable for salary payments to Mr. Kramer during
the pendency of any action or dispute under his December 5, 1992 employment
agreement. In response thereto, Mr. Kramer moved to enjoin the Company from
ceasing to pay his interim salary payments and moved as well for an injunction
restraining the Company from using the proceeds of the 1994 Offering during the
pendency of any litigation on the employment agreement. The motion was denied on
April 22, 1994 and appeals were denied on July 12 and August 2, 1994. On July
25, 1994, Mr. Kramer filed an answer and counterclaim seeking, among other
things, damages against the Company for termination of his employment agreement.
In July 1994, Mr. Kramer brought a separate action against the Company and
Mr. Reiner for unlawful termination of Mr. Kramer's employment agreement and for
other alleged causes of action claiming damages in the aggregate amount of
approximately $36,500,000 including (i) $378,770 for payment on a promissory
note; (ii) $1,000,000 for damage to Mr. Kramer's reputation; (iii) $5,000,000
for the value of uncompensated services provided to the Company by Mr. Kramer;
(iv) $10,000,000 for breach of Mr. Kramer's employment contract; (v) $10,000,000
for malicious and bad faith conduct on the part of the Company; and (vi)
$10,000,000 for Mr. Kramer's grief, humiliation, shame and embarrassment. The
Company believes there is no merit to any of Mr. Kramer's allegations and claims
and is vigorously defending the action. Nevertheless, a judgment against the
Company on Mr. Kramer's action or counterclaim could adversely affect the
Company's financial condition.
On March 21, 1995, the Company commenced an offering (the "Offering")
pursuant to a registration statement effective on that date on the Nasdaq
SmallCap Market ("Nasdaq") of 1,600,000 Units of its securities through Coleman
and Company Securities, Inc. ("Coleman"). On the same date, approximately one
hour after trading in the Units was initiated on Nasdaq, Nasdaq suspended the
listing of the Units and Warrants and reported to the Company that it took such
action because it believed that the Units and/or Warrants did not meet certain
Nasdaq listing criteria. Promptly after the Nasdaq action, Coleman terminated
the Underwriting Agreement with the Company, and all sales of the Units were
rescinded. On March 22, 1995, Nasdaq determined that it would permit the Company
to list the Units and Warrants and so advised the Company. Following Nasdaq's
decision to list the Units and Warrants, the Company and Coleman attempted to
resume the Offering on the same terms and conditions as indicated in the March
21, 1995 Registration Statement. On March 31, 1995, Coleman advised the Company
that it would not resume the Offering and, accordingly, the Offering was
terminated.
On September 28, 1995, the Company filed suit against the National
Association of Securities Dealers ("NASD") and The Nasdaq Stock Market, Inc.
("Nasdaq"). The lawsuit seeks damages of more than $12.5 million, relating to
the defendants' alleged mishandling of the Offering in March 1995. In the
complaint, the Company alleges that the defendants misrepresented the status of
the Company's stock listings, misapplied NASD regulations and interfered with
the Company's relationships with its underwriters and investors.
On January 5, 1995, John P. Landino ("Landino"), a former Vice President of
Sales, resigned as an employee of the Company. On February 28, 1995, the Company
sued Mr. Landino for monies owed to the Company under a certain promissory note
executed by Mr. Landino. Mr. Landino has cross-complained against the Company
alleging damages for wrongful termination. The Company regards these allegations
entirely meritless and frivolous and is vigorously defending against Mr.
Landino's claims and is also vigorously asserting its claims against Mr.
Landino.
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On April 19, 1996, Phyllis Ballew ("Ballew"), a former employee of the
Company, sued the Company alleging damages for wrongful termination. The Company
regards these allegations entirely meritless and frivolous and is vigorously
defending against Ms. Ballew's claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on Nasdaq under the symbol "SPSG"
since January 31, 1991 and on the Boston Stock Exchange under the symbol "SSG"
since March 10, 1992.
The following table sets forth for the quarters indicated the range of high
and low closing prices of the Company's Common Stock as reported by Nasdaq but
do not include retail markup, markdown or commissions.
Price
By Quarter Ended: High Low
Fiscal 1997
May 31, 1996 $1.66 $ .41
(through May 16, 1996)
Fiscal 1996
May 31, 1995 1.22 .75
August 31, 1995 .88 .50
November 30, 1995 .81 .28
February 28, 1996 .66 .28
Fiscal 1995
May 31, 1994 3.38 1.88
August 31, 1994 2.25 1.63
November 30, 1994 1.75 1.25
February 28, 1995 1.25 .96
As of May 16, 1996, the Company estimates it had approximately 399 record
holders. The Company believes there are substantially more beneficial owners
than there are holders of record.
As of May 16, 1996, the authorized capital stock of the Company consisted
of 30,000,000 shares of Common Stock, $.002 par value, and 5,000,000 shares of
Preferred Stock, $4.00 par value. Shares of Preferred Stock in addition to the
1994 Preferred Stock and the 1992 Preferred Stock may be issued from time to
time in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions thereof, as are determined by
resolution of the Board of Directors of the Company, except that so long as any
1992 Preferred Stock or 1994 Preferred Stock is outstanding, the Company may not
issue any series of stock having rights senior to either class of Preferred
Stock without the approval of holders of at least 50% of the outstanding shares
of such classes of Preferred Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by stockholders and could adversely affect the rights and
powers, including voting rights, of the holders of Common Stock. In certain
circumstances, the issuance of Preferred Stock could depress the market price of
the Common Stock.
Common Stock
At May 16, 1996, there were 4,401,926 shares of Common Stock outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders, including the
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election of directors. There is no right to cumulate votes in the election of
directors. The holders of Common Stock are entitled to any dividends that may be
declared by the Board of Directors out of funds legally available therefor
subject to the prior rights of holders of preferred stock and the Company's
contractual restrictions against the payment of dividends on Common Stock. In
the event of liquidation or dissolution of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock.
Holders of Common Stock have no preemptive rights and have no right to
convert their Common Stock into any other securities. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
Series A Convertible Redeemable Preferred Stock
The Company issued 165,000 shares of $4.00 par value Series A Convertible
Preferred Stock ("1994 Preferred Stock") convertible into 825,000 shares of
Common Stock in connection with the 1994 Offering. At May 16, 1996, there were
33,068 shares of 1994 Preferred Stock outstanding convertible into 165,340
shares of Common Stock. A summary of the 1994 Preferred Stock follows.
Dividend Rights. Holders of shares of 1994 Preferred Stock on the last day
of each of the Company's fiscal quarters (February 28, May 31, August 31 and
November 30) are entitled to receive, when, as and if declared by the Board of
Directors out of funds at the time legally available therefor, dividends at the
quarterly rate of $.375 per share, consisting of $.25 payable in Common Stock
semiannually and $.125 payable in cash, quarterly, in arrears, on March 31, June
30, September 30 and December 31 of each year. Dividends accrue and are
cumulative from the date of first issuance of the 1994 Preferred Stock and are
payable to holders of record as they appear on the stock books of the Company on
such record dates as are fixed by the Board of Directors. If the Company does
not have at least $500,000 of cash or cash equivalents indicated on its balance
sheet on the last day of any fiscal quarter, the Company may pay the entire
dividend in Common Stock on the quarterly payment date in lieu of the cash
dividend for such quarter. The value of the Common Stock to be issued as a
dividend will be based upon the last reported sales price of the Common Stock on
Nasdaq on the last day of the fiscal quarter. Common Stock issuable as a Common
Stock dividend on the 1994 Preferred Stock was registered in the 1994 Offering.
Redemption. The 1994 Preferred Stock may not be redeemed until July 12,
1996. Any shares of 1994 Preferred Stock outstanding thereafter are redeemable
for cash, in whole or in part, at any time, at the option of the Company, at
$10.00 per share plus any accrued and unpaid dividends, whether or not declared.
Notice of redemption must be mailed at least 30 days but not more than 60 days
before the redemption date to each holder of record of 1994 Preferred Stock to
be redeemed at the holder's address shown on the stock transfer books of the
Company. After the redemption date, unless there shall have been a default in
payment of the redemption price, dividends will cease to accrue on the shares of
1994 Preferred Stock called for redemption, and all rights of the holders of
such 1994 Preferred Stock will terminate except the right to receive the
redemption price without interest.
If at any time the closing price for the 1994 Preferred Stock, as quoted on
Nasdaq or any national securities exchange, exceeds $14.00 per share for ten
consecutive trading days, then the 1994 Preferred Stock will be automatically
converted into Common Stock at the Conversion Rate described below.
Additionally, the holder of any shares of Preferred Stock will have the right,
at the holder's option, to convert any or all such shares into Common Stock at
the rate of five shares of Common Stock for each share of 1994 Preferred Stock.
The Conversion Price is subject to adjustment for stock splits, reverse stock
splits and other similar capitalizations, although the 1994 Preferred Stock does
not contain provisions protecting against dilution resulting from the sale of
Common Stock at a price below the Conversion Price or the current market price
of the Company's securities.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, holders of shares of 1994 Preferred Stock are
entitled to receive, out of legally available assets, a liquidation preference
of $10.00 per share, plus an amount equal to any accrued and unpaid dividends to
the payment date, and no more, before any payment or distribution is made to the
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holders of Common Stock or any series or class of the Company's stock hereafter
issued that ranks junior as to liquidation rights to the 1994 Preferred Stock,
but the holders of the shares of the 1994 Preferred Stock will not be entitled
to receive the liquidation preference on such shares until the liquidation
preference of any other series or class of the Company's stock previously or
hereafter issued that ranks senior as to liquidation rights to the 1994
Preferred Stock has been paid in full. An aggregate of 179,323 shares of 1992
Preferred Stock (representing $717,292 of face value) carries liquidation rights
senior to the 1994 Preferred Stock.
Voting Rights. The holders of the 1994 Preferred Stock have no voting
rights except as to matters affecting the rights of 1994 Preferred Stockholders
or as required by law. In connection with any such vote, each outstanding share
of 1994 Preferred Stock is entitled to one vote, excluding shares held by the
Company or any entity controlled by the Company, which shares shall have no
voting rights.
Series A Common Stock Purchase Warrants
In connection with the 1994 Offering, the Company issued Series A Common
Stock Purchase Warrants (the "1994 Warrants") of which 660,000 are currently
outstanding. A brief summary of the 1994 Warrants follows.
Each 1994 Warrant represents the right to purchase one share of Common
Stock at an initial exercise price of $3.00 per share until July 12, 1999. The
exercise price and the number of shares issuable upon exercise of the 1994
Warrants are subject to adjustment in certain events, to the extent that such
events occur after the effective date of the 1994 Warrant Agreement, including
the issuance of Common Stock as a dividend on shares of Common Stock,
subdivisions or combinations of the Common Stock or similar events. The 1994
Warrants do not contain provisions protecting against dilution resulting from
the sale of additional shares of Common Stock for less than the exercise price
of the 1994 Warrants or the current market price of the Company's securities.
The 1994 Warrants are exercisable during the period ending July 12, 1999
unless earlier redeemed. The outstanding 1994 Warrants are redeemable, in whole
or in part, at the option of the Company, upon 30 days' written notice, at $.05
per 1994 Warrant beginning July 12, 1996 or earlier if the Company reports after
tax net income for any fiscal year of $250,000 or more. If any 1994 Warrant
called for redemption is not exercised by such time, it will cease to be
exercisable, and the holder will be entitled only to the redemption price.
Holders of 1994 Warrants may exercise their 1994 Warrants for the purchase
of shares of Common Stock only if a current prospectus relating to such shares
is then in effect and only if such shares are qualified for sale, or deemed to
be exempt from qualification, under applicable state securities laws. The
Company is required to use its best efforts to maintain a current Prospectus
relating to such shares of Common Stock at all times when the market price of
the Common Stock exceeds the exercise price of the 1994 Warrants until the
expiration date of the 1994 Warrants, although there can be no assurance that
the Company will be able to do so.
The shares of Common Stock issuable on exercise of the 1994 Warrants will
be, when issued in accordance with the 1994 Warrants, fully paid and
non-assessable. The holders of the 1994 Warrants have no rights as stockholders
until they exercise their 1994 Warrants.
For the life of the 1994 Warrants, the holders thereof have the opportunity
to profit from a rise in the market for the Company's Common Stock, with a
resulting dilution in the interest of all other stockholders. So long as the
1994 Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of such 1994 Warrants
might be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital by a new offering of securities
on terms more favorable than those provided for by such 1994 Warrants.
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Redeemable Convertible Preferred Stock
At May 16 , 1996, there were 179,323 shares of $4.00 par value Redeemable
Convertible Preferred Stock ("1992 Preferred Stock") outstanding convertible
into 358,646 shares of Common Stock which were issued in connection with the
1992 Offering. A summary of the 1992 Preferred Stock follows.
Dividend Rights. Holders of the 1992 Preferred Stock are entitled to
receive, in each fiscal year in which the Company attains net income after
taxes, as defined below, from funds legally available therefor, non-cumulative
dividends at the annual rate of $.40 per share, payable within 120 days of the
end of the Company's fiscal year, commencing with the fiscal year ended February
28, 1993. The dividends are payable in cash for each fiscal year in which the
Company has net income (excluding any items of non-cash extraordinary income)
after taxes of at least $650,000, and, if net income is less than that amount,
in cash, Common Stock or a combination of cash and Common Stock, to be
determined at the election of the Company. The Common Stock, if any, payable as
the 1992 Preferred Stock dividend will be valued at the average closing bid
price for the Common Stock during the 30 business days prior to the dividend
payment date as reported by Nasdaq, and will be registered and free trading
securities. As used herein, "net income after taxes" means net income (inclusive
of extraordinary gains and losses) after payment of federal and state corporate
income taxes as determined by the Company's independent accountants in
accordance with generally accepted accounting principles applied on a consistent
basis. Dividends are non-cumulative and will be payable to holders of record on
such record dates as shall be fixed by the Board of Directors of the Company.
Dividends payable for any period less than a full year will be computed on the
basis of a 360-day year with equal months of 30 days. The Company paid a $.40
per share dividend in Common Stock for the fiscal year ended February 28, 1994,
but did not pay a dividend for the fiscal year ended February 28, 1995. The
Company anticipates it will pay a $.40 per share dividend in Common Stock for
the fiscal year ended February 29, 1996 on or about June 28, 1996.
Redemption. The Company may, with the consent of the Underwriter of the
1992 Offering, at any time, redeem the shares of 1992 Preferred Stock for $4.00
per share, in whole or in part, upon written notice mailed to each holder of
record of shares to be redeemed. Such notice must be given not more than 60 days
and not less than 30 days prior to the redemption date. The Company may also
redeem the shares of 1992 Preferred Stock without such Underwriter's consent at
the same price per share if the closing bid price (as reported by Nasdaq) of the
Common Stock shall have averaged in excess of $42.00 per share (subject to
equitable adjustment for stock splits, reverse stock splits and similar
recapitalizations) for at least 30 consecutive trading days ending within five
days prior to the date notice of redemption is given.
Conversion Rights. Each share of 1992 Preferred Stock is convertible at the
option of the holder into two shares of Common Stock of the Company. The shares
of Common Stock issued upon conversion of the 1992 Preferred Stock will be free
trading securities and will be fully paid and non-assessable if the Company has
a current registration statement on file with the Commission covering the
underlying shares at the time of conversion.
Liquidation Preference. Upon any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary, the 1992 Preferred Stock has
preference and priority over the Common Stock and any other class or series of
stock ranking junior to the 1992 Preferred Stock upon liquidation, dissolution
or winding up for payment out of the assets of the Company or proceeds thereof
available for distribution to stockholders of $4.00 per share plus all dividends
payable and unpaid thereon to the date of such distribution, and after such
payment, the holders of the Preferred Stock shall be entitled to no other
payments.
Voting Rights. Each share of 1992 Preferred Stock votes the equivalent of
two shares of Common Stock as a single class on all matters except that the
written consent or affirmative vote of the holders of a majority of the
outstanding shares of 1992 Preferred Stock is required to approve any proposed
amendment to the Company's Certificate of Incorporation or certificate of
designation of the 1992 Preferred Stock that would increase or decrease the
aggregate number of authorized shares of the 1992 Preferred Stock, increase or
decrease the par value of the 1992 Preferred Stock, or alter or change the
powers, preferences, or special rights of the shares of the 1992 Preferred Stock
so as to affect them adversely.
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Common Stock Purchase Warrants
In connection with the 1992 Offering, the Company issued Common Stock
Purchase Warrants (the "1992 Warrants"), of which 2,573,664 are currently
outstanding. A summary of the 1992 Warrants follows.
Each 1992 Warrant entitles the holder thereof to purchase one share of
Common Stock for $2.00 at any time until March 10, 1997, subject to adjustment
upon the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications on or of the Common Stock or sale by the
Company of shares of its Common Stock.
The 1992 Warrants are redeemable with the prior written consent of the
Underwriter of the 1992 Offering at $.05 per Warrant on 30 days' written notice
by the Company. If any 1992 Warrant called for redemption is not exercised by
such time, it will cease to be exercisable, and the holder will be entitled only
to the redemption price.
The shares of Common Stock issuable on exercise of the 1992 Warrants will
be, when issued in accordance with the 1992 Warrants, fully paid and
non-assessable. The holders of the 1992 Warrants have no rights as stockholders
until they exercise their 1992 Warrants.
For the life of the 1992 Warrants, the holders thereof have the opportunity
to profit from a rise in the market for the Company's Common Stock, with a
resulting dilution in the interest of all other stockholders. So long as the
1992 Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of such 1992 Warrants
might be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital by a new offering of securities
on terms more favorable than those provided for by such 1992 Warrants.
1992 and 1994 Representative's Warrants and Other Warrants
In connection with the 1992 Offering, the Company issued to its
Underwriter, Thomas James Associates, Inc., a warrant to purchase 57,500 Units
of its securities at any time from March 10, 1993 until March 10, 1997 at $11.20
per Unit. Each Unit consists of two shares of 1992 Preferred Stock and four 1992
Warrants.
In connection with its 1994 Offering, the Company issued to its
underwriter, Paulson Investment Company, Inc., a warrant to purchase 16,500
Units of its securities at any time from July 12, 1995 until July 12, 1999 at
$12.00 per Unit. Each Unit consists of one share of 1994 Preferred Stock and
four 1994 Warrants.
At May 16, 1996, the Company had outstanding 988,272 other Common Stock
purchase warrants, convertible into an equal number of shares of Common Stock.
Stock Transfer and Warrant Agent
The Company uses American Stock Transfer and Trust Company, 40 Wall Street,
New York, New York, as the transfer and warrant agent for its securities.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and intends
to retain earnings, if any, for use in the operation and expansion of its
business. The amount of future dividends, if any, will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements and other conditions. The Company is required to pay
dividends on the 1992 Preferred Stock and 1994 Preferred Stock.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
On December 7, 1995, the Company sold its medical product line, which
consisted primarily of wound care gauze dressings, to Tecnol Medical Products,
Inc. ("Tecnol"), which resulted in the Company's elimination of the medical
product line from its business operations approximately three months before the
year ended February 29, 1996 ("Fiscal 1996"). Following this disposition of
assets, the Company implemented a restructuring plan involving a reduction of
personnel, the reorganization of the sales department, and the consolidation of
operating facilities. Therefore, the results for Fiscal 1996 reflect
approximately nine months of medical product line operations, whereas for the
year ended February 28, 1995 ("Fiscal 1995") the results reflect medical product
line operations for the entire fiscal year. For these reason stated above, the
results for Fiscal 1996 and Fiscal 1995 are not strictly comparable.
Year Ended February 29, 1996 as Compared to Year Ended February 28, 1995
Net sales for Fiscal 1996 were $5,759,107, a 19.4% decrease from net sales
of $7,142,293 for Fiscal 1995. The net sales decrease during Fiscal 1996 as
compared to Fiscal 1995 is the result of (i) a decrease of $511,215 or 13.9% in
medical product sales from $3,678,657 to $3,167,442 which resulted from the
disposition of the Company's medical product line in December 1995; (ii) a
decrease of $327,925 or 20.1% in surgical product sales from $1,588,791 to
$1,260,866; and (iii) a decrease of $544,046 or 29.0% in electrotherapy product
sales from $1,874,845 to $1,330,799. The decrease in sales for the surgical and
electrotherapy product lines can be primarily attributed to the decrease in the
Company's working capital which caused the shifting of financial resources and
sales and marketing efforts more towards the Company's medical product line and
manufacturing operations as the Company continued to fulfill orders under its
long term private label arrangements.
The medical product line, which was sold on December 7, 1995, generated
approximately $3,167,442 or 54.9% of the Company's revenues during Fiscal 1996.
However, the medical product line required considerable capital investment to
maintain its operations and its growth. The Company believes that the sale will
enable it to concentrate on more profitable product lines, such as microsurgical
instruments, critical care disposables, oral maxillofacial plating systems and
electrotherapy products. The Company intends to concentrate its efforts on
increasing its level of sales to achieve profitable operations. In addition, the
Company intends to consider growth through selective strategic acquisitions in
complementary lines of business. See "- Liquidity and Capital Resources."
Gross profit was $2,493,204 or 43.3% of net sales for Fiscal 1996 as
compared to $3,086,011 or 43.2% of net sales for Fiscal 1995. The decrease in
gross profit is primarily due to an overall decrease in net sales, an increase
in private label sales, which generally have lower gross profits than other
sales, and a year end inventory reserve of $380,000 which includes a reserve of
approximately $200,000 related to the Company's decision to abandon the further
development of the Biotherapy System product line as it does not fit the
Company's current market strategy and as it would require a significant
investment of additional funds to finance it to completion. The Company is
currently seeking to dispose of the product line through an asset sale.
Selling, general and administrative ("SG&A") expenses for Fiscal 1996 were
$2,844,005, a decrease of $780,945 or 21.5% from SG&A expenses of $3,624,950 for
Fiscal 1995. The decrease in SG&A expenses for Fiscal 1996 as compared to Fiscal
1995 is primarily due to a company-wide cost reduction program which was
implemented during Fiscal 1996.
Research and development ("R&D") expenses for Fiscal 1996 were $52,661, a
46.2% decrease from R&D expenses of $97,921 for Fiscal 1995. R&D for Fiscal 1996
included expenses related to the completion of the development and the
preparation for market introduction of the new Hydrogel Wound Dressing and
expenses related to the redesign of the Company's TENS units in an effort to
reduce the product cost for the electrotherapy product line.
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Depreciation and amortization ("D&A") expenses for Fiscal 1996 were
$496,834, a 35.7% decrease from D&A expenses of $772,682 for Fiscal 1995. During
Fiscal 1996, D&A expenses decreased due to the complete amortization of certain
loan costs, the full depreciation of certain assets and the elimination of the
depreciation expenses on the medical product line manufacturing equipment sold
to Tecnol in December 1995. As a result of the sale of the medical product line,
the Company's D&A expenses will be substantially reduced for the fiscal year
ending February 28, 1997 ("Fiscal 1997").
Net interest expense for Fiscal 1996 was $479,381, a 36.4% decrease from
net interest expense of $753,430 for Fiscal 1995. The decrease in net interest
expense is primarily due to the elimination of all accrued interest for Fiscal
1996 in the approximate aggregate amount of $76,125 in connection with the
Company's settlement of its claim against Storz in October 1995 and the
repayment of most of its outstanding debt in December 1995 from the cash
proceeds of the medical product line sale. The repayment of debt in Fiscal 1996
should result in substantially reduced interest expenses in Fiscal 1997. See "-
Liquidity and Capital Resources."
Gain on sale of the wound care product line for Fiscal 1996 was $1,984,831,
which represents the net of the sales price reduced by various costs and
expenses of the transaction. The sales price was approximately $5,675,000 of
which approximately $5,010,000 was paid in cash, with the balance being paid in
the form of a promissory note bearing interest at the prime rate and due in
September 1997 upon certain conditions being met. The assets sold consisted of
wound care inventory, equipment and various other assets. Since the Company
cannot determine if the conditions for payment of the note receivable will be
met prior to September 1997 it has established a reserve for the entire amount
of the note receivable. In addition, the Company has recorded $600,000 of
accrued liabilities as of February 29, 1996 which relates to lease termination
costs, moving costs and various other expenditures relating to the sale. The
$600,000 of accrued liabilities were recorded as a reduction of the gain on the
sale of the wound care product line.
As a result of the foregoing, net income for Fiscal 1996 was $605,154, an
increase of $3,355,165 from a net loss of $2,750,011 for Fiscal 1995. The
increase in net income for Fiscal 1996 as compared to Fiscal 1995 is primarily
due to a decrease in operating expenses as partially offset by the effect on
gross profit of the net sales decrease during Fiscal 1996 and the other income
realized from the gain on sale of wound care product line discussed above.
Primary income per share was $.15 for Fiscal 1996 as compared to a primary
loss per share of $1.16 for Fiscal 1995. Fully diluted income per share, which
assumes all dilutive preferred share conversions and the exercise of all
dilutive stock options and warrants, was $.14 for Fiscal 1996 as compared to a
fully diluted loss of $1.16 per share for Fiscal 1995. The primary and fully
diluted income per share computations reflect dividends paid or accrued on the
Series A Convertible Preferred Stock.
Year Ended February 28, 1995 as Compared to Year Ended February 28, 1994
Net sales for Fiscal 1995 were $7,142,293, a 3% decrease from net sales of
$7,334,831 for the year ended February 28, 1994 ("Fiscal 1994"). Although net
sales decreased slightly during Fiscal 1995 as compared to Fiscal 1994, sales
for the medical and surgical product lines increased by approximately 11% while
sales for the electrotherapy product line decreased by approximately 37%.
Sales for the medical and surgical product lines increased over such period
primarily as a result of (i) an increase in sales from joint product development
and private label arrangements entered into during such period with various
healthcare companies such as Kendall Healthcare Products Co., Inc. ("Kendall")
and Derma Sciences, Inc. ("Derma Sciences"); and (ii) an increase in sales for
the surgical specialty product line resulting from the Company's acquisition of
certain assets of the OMF product line of Storz in January 1994. Initially the
Company anticipated significantly higher sales from the OMF product line. The
Company filed an arbitration proceeding against Storz seeking to recover damages
for lost sales alleging that material misrepresentations and omissions were made
by Storz in connection with the Company's acquisition of the product line. This
proceeding has been settled. See "- Liquidity and Capital Resources."
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Sales for the electrotherapy product line decreased, primarily as a result
of (i) a carryover of back orders following the acquisition of the product line
which was reflected in the results for Fiscal 1994; (ii) limits on certain
Medicare reimbursements; and (iii) the Company's inability to respond rapidly to
TENS inventory requirements due to the long lead time in the procurement of TENS
devices manufactured in Taiwan.
In an effort to continue to grow sales in the medical and surgical product
lines and in response to the industry pressures faced in the electrotherapy
product line, the Company during this period took several measures. In June
1994, after approximately 12 months of development, in collaboration with a
domestic electronics manufacturer, the Company successfully completed its first
production of TENS units made in the United States. The Company believes that
domestic production will not only reduce lead times and provide a more constant
supply, but will improve product quality while profit margins are expected to be
maintained or improved. The Company also increased its sales and marketing
efforts to broaden the customer base and target distributors for each of our
product lines as well as seek other joint product development and private label
arrangements. As a result of the aforementioned efforts, on October 25, 1994 the
Company signed a twelve month, non-cancelable $500,000 contract with Henley
Healthcare ("Henley") a division of Maxxim Medical, Inc. in which the Company
will provide Henley with its Spectrum Max-SD TENS units. In addition, on January
1, 1995, the Company entered into a 30 month exclusive private label agreement
with Kendall valued at $4,500,000.
Gross profit was $3,086,011 or 43% of net sales for Fiscal 1995 as compared
to $4,232,808 or 58% of net sales for Fiscal 1994. The decrease in gross profit
was primarily due to an overall decrease in net sales, an increase in private
label sales which generally have lower gross profits than other sales, a year
end inventory reserve of $200,000 and a write off of slow-moving inventory.
Selling, general and administrative ("SG&A") expenses for Fiscal 1995 were
$3,624,950, a 13% increase over SG&A expenses of $3,200,865 for Fiscal 1994. The
increase in SG&A expenses for Fiscal 1995 as compared to Fiscal 1994 was
primarily due to (i) a write off of uncollectible receivables in the approximate
amount of $204,382; (ii) legal and accounting expenses associated with the
filing of a post-effective amendment to one of the Registration Statements
relating to the Company's Redeemable Convertible Preferred Stock and the filing
of a second Registration Statement relating to the registration of the common
stock underlying certain warrants, options and common stock issued in connection
with the conversion of notes payable; (iii) legal expenses associated with
various litigation; and (iv) increased commissions to an independent
manufacturers' representative group which was hired in May 1994 and was
terminated in March 1995. See "Legal Proceedings."
Research and development ("R&D") expenses for Fiscal 1995 were $97,921, a
49% decrease from R&D expenses of $198,848 for Fiscal 1994. The decrease in R&D
expenses for Fiscal 1995 as compared to Fiscal 1994 is primarily due to the
completion in June 1994 of the development, in collaboration with a domestic
electronics manufacturer, of the Company's TENS units made in the United States.
Depreciation and amortization ("D&A") expenses for Fiscal 1995 were
$772,682, a 29% increase over D&A expenses of $598,054 for Fiscal 1994. During
Fiscal 1995, amortization expense increased due to (i) increases in intangible
assets such as patents, licensing and non-compete agreements which were recorded
as a result of the Company's acquisition of certain assets of the OMF product
line of Storz in January 1994; and (ii) from the loan costs incurred in
connection with a $1,000,000 loan received on November, 1994. See "- Liquidity
and Capital Resources."
Net interest expense for Fiscal 1995 was $753,430, a 58% increase over net
interest expense of $477,099 for Fiscal 1994. The increase in net interest
expense was primarily due to (i) the assumption of debt associated with the
acquisition of certain assets of the OMF product line of Storz in January 1994;
(ii) a minimum borrowing monthly fee payable to Congress Financial Corporation
("Congress") beginning in March 1994, equal to the difference between the
interest actually paid with respect to the Company's outstanding loan and the
interest which would have been paid if the principal amount of the outstanding
loan had equaled $3,500,000; and (iii) interest paid in connection with a
$1,000,000 loan received in November 1994. See "- Liquidity and Capital
Resources."
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Other expense for Fiscal 1995 was $587,039, which was incurred during the
fourth quarter Fiscal 1995 in connection with an abandoned public offering.
Other income for Fiscal 1994 was $136,999, which was the result of a gain
realized on the buy out of equipment under a capital lease. In addition, during
Fiscal 1994, the Company recognized an extraordinary gain of $319,125 for
forgiveness of debt as a result of the repayment of two promissory notes to its
equipment lessor. See "- Liquidity and Capital Resources."
As a result of the foregoing, net loss for Fiscal 1995 was $2,750,011, a
decrease of $2,964,077 over net income of $214,066 for Fiscal 1994. The increase
in net loss for Fiscal 1995 as compared to Fiscal 1994 was primarily due to a
decrease in gross profit coupled with an increase in amortization, interest
expense and other expenses incurred from the abandoned offering discussed above.
In addition, other income and an extraordinary gain which were recognized in
Fiscal 1994 were not repeated in Fiscal 1995.
Primary loss per share was $1.16 for Fiscal 1995 as compared to a primary
income per share of $.04 for Fiscal 1994. Fully diluted loss per share, which
assumes all dilutive preferred share conversions and the exercise of all
dilutive stock options and warrants, was $1.16 for Fiscal 1995 as compared to
fully diluted income of $.04 per share for the Fiscal 1994. The primary and
fully diluted earnings per share computation for Fiscal 1995 reflects dividends
on the Series A Convertible Preferred Stock which were paid in Common Stock in
September 1994 and December 1994 and accrued dividends which were paid in March
1995. The primary and fully diluted earnings per share computation for Fiscal
1994 reflects dividends on the Redeemable Preferred Stock which were paid in
Common Stock in June 1994.
Liquidity and Capital Resources
Since inception, the Company's primary sources of working capital have been
revenues from operations, bank and private party loans and proceeds from the
sale of securities.
As of February 29, 1996, the Company had net operating loss carry forwards
of approximately $5,000,000. Availability of the Company's net operating loss
carry forwards, if not utilized, will expire at various dates through the year
2011.
The Company's working capital at February 29, 1996 was $1,246,470 as
compared to $2,335,067 at February 28, 1995. The Company's working capital
position decreased by $1,088,597 primarily due to the sale of the wound care
product line in December 1995.
On October 4, 1993, the Company entered into a financing agreement with
Congress Financial Corporation ("Congress") pursuant to which Congress provided
the Company with a Revolving Loan Facility of up to $5,000,000 (the "Loan
Facility"). The Company agreed to pay Congress interest on the average
outstanding principal amount of the Loan Facility at a per annum rate of prime
plus 3%. In addition, beginning in March 1994, the Company agreed to pay
Congress a minimum borrowing monthly fee equal to the difference between the
interest actually paid with respect to the Loan Facility and the interest which
would have been paid if the principal amount of the Loan Facility had equaled
$3,500,000. The Loan Facility was advanced to the Company based on a percentage
of eligible assets and was secured by a first lien on all of the assets of the
Company. Accordingly, the amount of available funds under the Loan Facility were
substantially less than $5,000,000. In addition, the Loan Facility was subject
to certain financial covenants related to working capital and tangible net worth
and was personally guaranteed by Thomas F. Reiner, the Company's Chief Executive
Officer and Chairman. On December 8, 1995 the Company repaid substantially all
of the amounts owing under its Loan Facility from Congress. In connection with
such repayment, Congress was paid a $100,000 termination fee.
On January 20, 1994, Sparta Maxillofacial Products, Inc. ("SMPI"), a wholly
owned subsidiary of the Company purchased certain assets of the OMF product line
of Storz, a subsidiary of American Cyanamid Company, for $1,550,000 including
$100,000 in cash and the issuance of a $1,450,000 promissory note to Storz
bearing interest at 9% per annum due January 20, 2002 (the "January 20, 1994
Agreement"). On September 8, 1994, SMPI filed a claim against Storz with the New
York Office of the American Arbitration Association. The claim alleged that
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certain material misrepresentations and omissions were made by Storz in
connection with the Company's purchase of certain assets of Storz' OMF product
line on January 20, 1994 and sought to recover an as yet undetermined amount of
damages it sustained. In October 1994, Storz filed a response and counterclaim
to the Company's action seeking to accelerate all amounts due under the
$1,450,000 promissory note issued to it by the Company. On October 17, 1995, the
Company settled its claim against Storz. The terms of the settlement agreement
consisted of a reduction of the Company's note payable to Storz from $1,450,000
to $1,050,000. In addition, all accrued interest, accrued royalties and future
royalties in connection with the acquisition of the product line were forgiven
by Storz. The net impact of this settlement to the Company was approximately
$700,000 which consisted of a reduction in the note payable and goodwill and
eliminated all accrued interest, royalty and legal expenses. On December 13,
1995 the Company repaid $600,000 to Storz in connection with the note payable.
The Company is currently in default for the payment of the $450,000 balance due
to Storz and is currently negotiating a payment arrangement.
On December 7, 1995, the Company sold its impregnated wound care gauze
dressings product line to Tecnol Medical Products, Inc., a medical products
manufacturer headquartered in Fort Worth, Texas (the "Tecnol Sale"). The
purchase price was $5,675,000, of which approximately $5,010,000 was paid in
cash, with the balance being paid primarily in the form of a promissory note
bearing interest at prime rate and due in September 1997 upon certain conditions
being met. In addition to wound care inventory, equipment and other assets, the
Company's operations in Hammonton, New Jersey were included in the sale.
The Company has used the cash proceeds of the Tecnol Sale to repay most of
its outstanding debt including (i) $2,282,505 owed to Congress Financial
Corporation under a revolving credit facility; (ii) $111,602 owed for the
purchase of certain manufacturing equipment which was subject to a lease; (iii)
$469,710 owed to Asset Factoring, Inc., consisting of the principal due on
certain promissory note plus accrued interest; (iv) $600,000 owed to Storz
Instrument Company relating to a $1,050,000 note payable in connection with the
Company's acquisition of certain assets of Storz' Oral Maxillofacial product
line; and (v) $1,000,000 to Arbora, A.G. ("Arbora") as of December 14, 1995,
which together with the return of a $809,500 promissory note issued to the
Company by an affiliate of Arbora, served as principal consideration to redeem
and cancel 4,761,842 shares of the Company's Common Stock. The 4,761,842 shares
were issued to Arbora on December 4, 1995 in consideration of the conversion of
a $1,000,000 note into equity and the issuance to the Company of a promissory
note in the amount of $809,500 by an affiliate of Arbora pursuant to an
agreement reached between it and the Company. In connection with this
transaction, the Company also canceled a warrant to purchase 1,000,000 shares of
the Company's Common Stock at $1.40 per share held by Arbora and issued Arbora
and its affiliated parties warrants to purchase up to 750,000 shares of the
Company's common stock at $.47 per share at any time until November 8, 1998. In
addition, a voting trust was entered into which provided the Company's Chairman,
President and Chief Executive Officer, Thomas F. Reiner, with voting rights as
to such shares. On April 22, 1996, 250,000 shares of Common Stock were issued to
Arbora in connection with the exercise of 250,000 Common Stock purchase
warrants. See "Certain Transactions."
On March 11, 1996, FINOVA Capital Corporation ("FINOVA") provided the
Company with a 36-month Revolving Line of Credit of up to $1,500,000 (the
"Loan"). The Company agreed to pay FINOVA interest on the average outstanding
principal amount of the Loan at a per annum rate of prime plus 4%. The Loan is
advanced to the Company based on a percentage of eligible assets and is secured
by a first lien on all of the assets of the Company. Accordingly, the amount of
available funds under the Loan may be substantially less than $1,500,000. In
addition, $450,000 of the Loan is personally guaranteed by Thomas F. Reiner, the
Company's Chairman, President and Chief Executive Officer. As of April 30, 1996,
the outstanding balance on the Loan was $488,577 and approximately $52,333 in
credit was available. Approximately $250,000 of the otherwise available line of
credit is considered unavailable until a certain lien against the Company's
assets is released. The Loan is being used to provide additional working capital
for current operations and growth.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which the
Company will adopt prospectively as required in Fiscal 1997. Pursuant to this
Statement, companies are required to investigate potential impairments of
long-lived assets, certain identifiable intangibles, and associated goodwill, on
17
<PAGE>
an exception basis, when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. The adoption of SFAS 121 is
not expected to have a significant impact on the Company's financial position or
result of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation," SFAS 123 will be adopted by the Company as required for its
Fiscal 1997 financial statements and is not expected to have a material effect
on the Company's financial position or results of operations. Upon adoption of
SFAS 123, the company will continue to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and will provide pro forma disclosures of net income and earnings per share as
if the fair value-based method prescribed by SFAS 123 had been applied in
measuring compensation expense.
The Company may make additional acquisitions of companies, divisions of
companies or products in the future. Acquisitions entail numerous risks,
including difficulties or an inability to successfully assimilate acquired
operations and products, diversion of management's attention and loss of key
employees of acquired businesses, all of which the Company has encountered with
previous acquisitions. Future acquisitions by the Company may require dilutive
issuances of equity securities and the incurrence of additional debt, and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The Company's capital
requirements will depend on numerous factors, including the acquisition of new
product lines and/or other business operations and the continued development of
existing product sales, distribution and marketing capabilities. In order to
continue its current level of operations, it will be necessary for the Company
to obtain additional working capital, whether from debt or equity sources. If
the Company is unable to obtain additional working capital from the placement of
debt or equity instruments or the sale of some of its assets, it may be
necessary for the Company to restructure its operations to reduce its ongoing
expenditures.
ITEM 7. FINANCIAL STATEMENTS
See page F-1
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Financial Statements
Independent Auditors' Report .......................................... F-2
Consolidated Balance Sheet as of February 28, 1996 .................... F-3
Consolidated Statements of Operations for the years
ended February 28, 1996 and 1995 ..................................... F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended February 28, 1996 and 1995 ................ F-6
Consolidated Statements of Cash Flows for the years
ended February 28, 1996 and 1995 ..................................... F-7
Notes to Consolidated Financial Statements ............................ F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Sparta Surgical Corporation
We have audited the accompanying consolidated balance sheet of Sparta Surgical
Corporation and Subsidiary as of February 28, 1996 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended February 28, 1996 and 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sparta Surgical
Corporation and Subsidiary as of February 28, 1996 and the results of its
operations and its cash flows for the years ended February 28, 1996 and 1995 in
conformity with generally accepted accounting principles.
Angell & Deering
Angell & Deering
Certified Public Accountants
Denver, Colorado
April 27, 1996, except for
the second paragraph of
Note 17 as to which the
date is May 22, 1996
F-2
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1996
ASSETS
------
Current Assets:
Cash .................................................... $ --
Accounts receivable - trade,
net of allowance for doubtful
accounts of $108,664 ................................... 288,417
Inventories ............................................. 2,609,387
Notes receivable ........................................ 2,782
Prepaid expenses and other .............................. 81,795
-----------
Total Current Assets ................................. 2,982,381
-----------
Property and Equipment, at cost:
Machinery and equipment ................................. 56,000
Other equipment ......................................... 490,720
Leasehold improvements .................................. 15,733
-----------
562,453
Less accumulated depreciation ........................... (227,394)
-----------
Net Property and Equipment ........................... 335,059
-----------
Other Assets:
Intangible assets, net of
accumulated amortization ............................... 885,832
Deposits and other ...................................... 52,209
Accounts receivable-related entities .................... 123,994
Notes receivable-related entities ....................... 821,419
-----------
Total Other Assets ................................... 1,883,454
-----------
Total Assets ......................................... $ 5,200,894
===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable - trade ................................. $ 878,999
Accrued expenses:
Payroll taxes and wages ................................. 129,463
Interest and other ...................................... 8,974
Dividends payable ........................................ 28,069
Notes payable ............................................ 528,723
Accrued royalty payments ................................. 62,257
Current portion of long-term debt ........................ 99,426
-----------
Total Current Liabilities ............................. 1,735,911
-----------
Long-Term Debt, net of current portion above:
Obligations under capital leases ......................... 155,179
Financial institutions and other ......................... 53,507
Less current portion above ............................... (99,426)
-----------
Total Long-Term Debt .................................. 109,260
-----------
Other liabilities .......................................... 401,800
-----------
Commitments and contingencies .............................. --
Stockholders' Equity:
Preferred stock: $4.00 par value,
5,000,000 shares authorized;
Non-cumulative Convertible
Redeemable Preferred Stock:
$4.00 par value, 1,500,000
shares authorized, 275,858
shares issued and outstanding ......................... 1,103,432
Series A Cumulative Convertible
Preferred Stock: $4.00 par value,
250,000 shares authorized, 44,910
shares issued and outstanding ......................... 179,640
Common stock: $.002 par value,
30,000,000 shares authorized,
3,846,826 shares issued and
outstanding ............................................. 7,694
Additional paid in capital ............................... 7,150,046
Accumulated deficit ...................................... (5,486,889)
-----------
Total Stockholders' Equity ............................ 2,953,923
-----------
Total Liabilities and
Stockholders' Equity ................................. $ 5,200,894
===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28, 1996 AND 1995
1996 1995
---- ----
Net sales .................................... $ 5,759,107 $ 7,142,293
Cost of sales ................................ 3,265,903 4,056,282
----------- -----------
Gross Profit ............................ 2,493,204 3,086,011
Selling, general and
administrative expenses ..................... 2,844,005 3,624,950
Research and development expense ............. 52,661 97,921
Depreciation and amortization ................ 496,834 772,682
----------- -----------
Income (Loss) From Operations ........... (900,296) (1,409,542)
----------- -----------
Other Income (Expense):
Interest and other income .................. 17,554 11,283
Interest expense ........................... (496,935) (764,713)
Gain on sale of wound care product
line ...................................... 1,984,831 --
Offering costs absorbed .................... -- (587,039)
----------- -----------
Total Other Income (Expense) ............ 1,505,450 (1,340,469)
----------- -----------
Income (Loss) Before Provision For
Income Taxes ................................ 605,154 (2,750,011)
Provision for income taxes ................... -- --
----------- -----------
Net Income (Loss) ............................ 605,154 (2,750,011)
Preferred stock dividends .................... (72,253) (135,783)
----------- -----------
Net Income (Loss) Applicable
To Common Shareholders ...................... $ 532,901 $(2,885,794)
=========== ===========
Net Income (Loss) Per Share of
Common Stock:
Primary:
Weighted average number of
common shares outstanding ................ 3,649,339 2,494,456
=========== ===========
Net Income (Loss) ......................... $ .15 $ (1.16)
=========== ===========
Fully diluted:
Weighted average number of
common shares outstanding ................ 3,792,539 2,494,456
=========== ===========
Net Income (Loss) ......................... $ .14 $ (1.16)
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE>
<TABLE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Series A Cumulative
Redeemable Redeemable
Preferred Stock Preferred Stock Common Stock Additional
--------------- --------------- ------------ Paid in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February
28, 1994 ....................... 364,167 $ 1,456,668 -- $ -- 1,726,977 $ 3,454 $ 4,494,002 $(3,133,996)
Conversion of notes
payable into common
stock .......................... -- -- -- -- 964,975 1,930 1,166,262 --
Exercise of warrants to
purchase common stock,
net of shares repurchased ...... -- -- -- -- 223,081 446 167,955 --
Preferred stock dividends paid
in common stock ................ -- -- -- -- 69,713 139 145,528 --
Issuance of common stock for
cash and services .............. -- -- -- -- 65,812 132 59,098 --
Issuance of preferred stock in
public offering (net of
offering costs of $884,769) .... -- -- 165,000 660,000 -- -- 105,231 --
Series A preferred stock
dividends paid in common stock . -- -- -- -- 34,400 69 50,520 (50,589)
Dividends accrued on Series A
preferred stock ................ -- -- -- -- -- -- -- (85,194)
Conversion of preferred stock
into common stock .............. -- -- (28,690) (114,760) 143,450 287 114,473 --
Net income (loss) ............... -- -- -- -- -- -- -- (2,750,011)
------- ----------- ------- --------- --------- ------- ----------- -----------
Balance at February 28, 1995 .... 364,167 1,456,668 136,310 545,240 3,228,408 6,457 6,303,069 (6,019,790)
Series A preferred stock
dividends paid in common
stock .......................... -- -- -- -- 172,300 345 129,033 (44,184)
Conversion of preferred stock
into common stock .............. (88,309) (353,236) (91,400) (365,600) 633,618 1,267 717,569 --
Conversion of notes payable
into common stock and note
receivable received for
purchase of common stock ....... -- -- -- -- 4,761,842 9,524 1,799,976 --
Purchase of common stock for
cash and cancellation of
note receivable ................ -- -- -- -- (4,761,842) (9,524) (1,799,976) --
Cancellation of common stock
held in escrow ................. -- -- -- -- (187,500) (375) 375 --
Dividends accrued on Series
A preferred stock .............. -- -- -- -- -- -- -- (28,069)
Net income ...................... -- -- -- -- -- -- -- 605,154
------- ----------- ------- --------- --------- ------- ----------- -----------
Balance at February 28, 1996 .... 275,858 $ 1,103,432 44,910 $ 179,640 3,846,826 $ 7,694 $ 7,150,046 $(5,486,889)
======= =========== ======= ========= ========= ======= =========== ===========
The accompanying notes are an
integral part of these consolidated financial statements.
F-6
</TABLE>
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 1996 AND 1995
1996 1995
---- ----
Cash Flows From Operating Activities:
Net income (loss) ............................ $ 605,154 $(2,750,011)
Adjustments to reconcile net
income (loss) to net cash (used)
by operating activities:
Depreciation and amortization .............. 496,834 772,682
Provision for uncollectible
receivables ............................... 165,530 20,000
Reserve for slow moving inventory .......... 380,000 200,000
Gain on sale of product line ............... (1,984,831) --
Forgiveness of debt by stockholder ......... -- (1,053)
Accrued interest on note receivable ........ (12,919) (8,080)
Changes in assets and liabilities, net
of effects from sale of product line:
Decrease in accounts receivable .......... 567,958 351,241
Decrease in inventories .................. 149,141 413,531
Decrease in prepaid expenses and
other ................................... 79,508 10,329
(Increase) in deposits and other ......... (2,427) (7,191)
(Increase) in debt issuance costs ........ -- (87,500)
(Decrease) in accounts
payable and accrued expenses ............ (710,245) (84,163)
--------- ----------
Net Cash (Used) By
Operating Activities .................. (266,297) (1,170,215)
--------- ----------
Cash Flows From Investing Activities:
Capital expenditures ......................... (18,047) (131,101)
Proceeds from sale of product line ........... 5,010,000 --
Costs for sale of product line ............... (528,346) --
Increase in intangible assets ................ -- (1,537)
Costs incurred related to acquisition ........ (87,103) --
Increase in receivables from related
entities .................................... -- (441,163)
Loans to individuals ......................... (5,000) --
Repayment of notes receivable ................ 1,886 --
--------- ----------
Net Cash Provided (Used) By
Investing Activities .................. 4,373,390 (573,801)
--------- ----------
Cash Flows From Financing Activities:
Proceeds from borrowing ...................... 5,822,260 8,659,430
Principal payments on notes payable .......... (8,828,574) (8,382,974)
Principal payments on accrued
royalties ................................... (69,290) (60,282)
Issuance of common stock ..................... -- 227,631
Repurchase of common stock ................... (1,000,000) --
Offering costs incurred ...................... -- (358,059)
Issuance of redeemable preferred
stock in public offering .................... -- 1,650,000
Debt issuance costs incurred ................. (37,015) --
---------- ----------
The accompanying notes are an
integral part of these consolidated financial statements.
F-7
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 1996 AND 1995
1996 1995
---- ----
Net Cash Provided (Used) by
Financing Activities .................. $(4,112,619) $ 1,735,746
----------- -----------
Net Increase (Decrease) in
Cash and Cash Equivalents ............. (5,526) (8,270)
Cash and Cash Equivalents
at Beginning of Year .................. 5,526 13,796
----------- -----------
Cash and Cash Equivalents
at End of Year ........................ $ -- $ 5,526
=========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest .................................... $ 541,593 $ 643,409
Income taxes ................................ -- --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Capital lease obligation
incurred for new equipment .................. $ 7,000 $ 194,690
Dividends payable on Series A
Convertible Preferred Stock ................. 28,069 85,194
Conversion of notes payable
into common stock ........................... 1,000,000 1,168,192
Dividends on redeemable preferred
stock paid in shares of common stock ........ -- 145,667
Deferred offering costs offset
against proceeds of public offering ......... -- 186,710
Reduction of intangibles due to
adjustment in acquisition cost .............. -- 12,884
Dividends on Series A Convertible
Preferred Stock paid in shares of
common stock ................................ 129,378 50,589
Conversion of preferred stock into
common stock ................................ 718,836 114,760
Account receivable from related
entities offset against note payable ........ -- 360,482
Reduction of intangible assets and
accounts receivable as a result
of the reduction of note payable
and accrued expenses in OMF
acquisition ................................. 589,914 --
Issuance of common stock for note
receivable .................................. 809,500 --
Repurchase of common stock and
cancellation of note receivable ............. 809,500 --
The accompanying notes are an
integral part of these consolidated financial statements.
F-8
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization
------------
Sparta Surgical Corporation (the "Company") was incorporated in
Delaware on July 15, 1987. The Company develops, manufactures,
distributes and markets, surgical and electrotherapy products for the
worldwide healthcare industry. The Company's product line includes
critical care hospital disposables, microsurgical instruments, oral
maxillofacial/craniofacial plating systems and transcutaneous
electrical nerve stimulators.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average cost pricing method.
Property and Equipment
----------------------
Depreciation of the primary asset classifications is calculated based
on the following estimated useful lives using the straight-line
method.
Classification Useful Life in Years
-------------- --------------------
Office equipment 5-10
Manufacturing equipment 7-10
Computer equipment 3-5
Exhibit equipment 7-10
Leasehold improvements 2-5
Automobiles 7
Depreciation of property and equipment charged to operations is
$272,927 and $332,760 for the years ended February 28, 1996 and 1995,
respectively.
Intangible Assets
-----------------
Intangible assets are being amortized using the straight-line method
based on the following estimated useful lives.
Description Useful Life in Years
----------- --------------------
Noncompete agreements 5
Goodwill 5-10
Patents and licensing agreements 5-10
Debt issuance costs 2-5
Income Taxes
------------
Deferred income taxes result from temporary differences in the
recognition of revenue and expenses for income tax and financial
reporting purposes. These differences are primarily due to
depreciation and amortization.
F-9
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
(Continued)
-----------
Net Income (Loss) Per Share of Common Stock
-------------------------------------------
Net income (loss) per share of common stock is based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each period. Common stock equivalents represent
the dilutive effect of the assumed exercise of certain outstanding
stock options and warrants.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Estimates
---------
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires the Company's
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 those estimates.
2. Sale of Wound Care Product Line
-------------------------------
On December 7, 1995, the Company sold its impregnated wound care
gauze dressings product line to Tecnol New Jersey Wound Care, Inc.,
("Tecnol"), a subsidiary of Tecnol, Inc., a medical products
manufacturer headquartered in Fort Worth, Texas. The sales price was
approximately $5,675,000 of which approximately $5,010,000 was paid
in cash, with the balance being paid in the form of a promissory note
with interest at the prime rate which is due in September 1997 upon
certain conditions being met. The assets sold consisted of wound care
inventory, equipment, and various other assets. Since the Company
cannot determine if the conditions for payment of the note receivable
will be met prior to September 1997 it has established a reserve for
the entire amount of the note receivable.
The Company has recorded $600,000 of accrued liabilities as of
February 28, 1996 which relate to lease termination costs, moving
cost and various other expenditures relating to the sale. The
$600,000 of accrued liabilities were recorded as a reduction of the
gain on sale of the wound care product line. The other liabilities
are reflected as a long-term liability of $401,800 and the current
portion of $198,200 is included in accounts payable as of February
28, 1996.
F-10
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
-----------
Inventories consists of the following:
February 28,
1996
----
Raw materials $ 227,263
Finished goods 2,762,124
Less reserve for obsolescence (380,000)
-----------
Total $ 2,609,387
===========
4. Intangible Assets
-----------------
Intangible assets consists of the following:
Goodwill and noncompete agreements,
net of accumulated amortization
of $303,262 $592,176
Patents and licensing agreements,
net of accumulated amortization
of $94,759 257,031
Debt issuance costs, net of
accumulated amortization of $-- 36,625
--------
Total $885,832
========
5. Current Notes Payable
---------------------
Corporations
------------
Unsecured note due January 1996 with
interest at the prime rate. The Company
repaid the note in March 1996. $ 78,723
5% note due November 1995 (Note 15). 450,000
--------
Total $528,723
========
6. Accrued Royalty Payments
------------------------
The Company entered into agreements to pay certain minimum royalties
in connection with the acquisition of certain assets, as follows:
Sterile Products
----------------
The Company agreed to pay the seller royalty
payments in the aggregate amount of
$750,000, with minimum annual payments of
$100,000 which are payable on a quarterly
basis with the final payment due in March
1996. The royalty payments are equal to 5%
of Product Sales and 2% of Contract
Packaging Sales, with minimum annual
payments of $100,000. The Company discounted
the total royalty payments using an imputed
interest rate of 11.0%. $ 62,257
========
7. Long-Term Debt
--------------
Long-term debt consists of the following:
F-11
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt (Continued)
--------------------------
Obligations Under Capital Leases
--------------------------------
23.8% installment notes with monthly
principal and interest payments of $254, due
in 1996, collateralized by equipment. $ 1,608
8.89% installment note with monthly
principal and interest payments of $1,491,
due in 1999, collateralized by an automobile. 81,063
14.86% installment note with monthly
principal and interest payments of $210, due
in 1999, collateralized by equipment. 6,303
13.72% installment note with monthly
principal and interest payments of $3,224,
due in 1997, collateralized by equipment and
guaranteed by Thomas Reiner. 66,205
Financial Institutions and Other
--------------------------------
12.25% installment note with monthly
principal and interest payments of $1,084
with a balloon payment of $25,725 in 1998,
collateralized by an automobile. 53,507
--------
Total Long-Term Debt 208,686
Less current portion of long-term debt (99,426)
--------
Long-Term Debt $109,260
========
Installments due on debt principal, including the capital leases, at
February 28, 1996 are as follows:
Year Ending February 28,
------------------------
1997 $ 99,426
1998 48,748
1999 15,519
2000 44,993
--------
Total $208,686
========
8. Income Taxes
------------
The Company has a net operating loss carryover available at February
28, 1996 of approximately $5,000,000. Utilization of these
carryovers, if not utilized, will expire at various dates through
2011.
At February 28, 1996 and 1995, the Company had a deferred tax asset
of approximately $1,700,000 and $2,400,000, respectively, resulting
from net operating loss carryforwards, which has been offset in its
entirety by a valuation allowance. The net change in the valuation
allowance for deferred tax assets was a decrease of $700,000.
F-12
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Warrants and Options
--------------------
Stock Option Plan
-----------------
The Company adopted a stock option plan which consists of both
Incentive Stock Options and Non-qualified Options. A total of 250,000
shares of common stock have been reserved for grant to key personnel.
The Plan is administered by the Board of Directors, which determines
those individuals who shall receive options, the time period during
which the options may be exercised, the number of shares of common
stock that may be purchased under each option, and the option price.
The per share exercise price of the common stock subject to an
incentive stock option may not be less than the fair market value of
the common stock on the date the option is granted. The per share
exercise price of the common stock subject to a non-qualified option
is established by the Board of Directors. The aggregate fair market
value (determined as of the date the option is granted) of the common
stock that any employee may purchase in any calendar year pursuant to
the exercise of incentive stock options may not exceed $100,000. No
person who owns, directly or indirectly, at the time of the granting
of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the Plan unless
the option price is at least 110% of the fair market value of the
common stock subject to the option, determined on the date of grant.
Non-qualified options are not subject to this limitation.
Options under the Plan must be granted within ten years from the
effective date of the Plan. The incentive stock options granted under
the Plan cannot be exercised more than ten years from the date of
grant except that incentive stock options issued to 10% or greater
stockholders are limited to five year terms. All options granted
under the Plan provide for the payment of the exercise price in cash
or by delivery to the Company of shares of common stock already owned
by the optionee having a fair market value equal to the exercise
price of the options being exercised, or by a combination of such
methods of payment. The outstanding agreements expire from July 1997
to February 2004. The following table summarizes the stock options
under the Company's stock option plan for the years ended February
28, 1995 and 1996.
Number of Option Price
Shares Per Share
------ ---------
Options outstanding at
March 1, 1994 191,000 $2.25 to $8.80
Granted 15,000 $2.00
Exercised -- --
Cancelled (34,000) $2.00 to $8.80
-------- --------------
F-13
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Warrants and Options (Continued)
--------------------------------
Stock Option Plan (Continued)
-----------------------------
Options outstanding at
February 28, 1995 172,000 $2.25 to $8.80
Granted -- --
Exercised -- --
Cancelled (10,375) $2.00 to $8.80
-------- --------------
Options outstanding at
February 28, 1996 161,625 $2.25 to $8.80
======== ==============
In addition to the stock option plan discussed previously, the
Company has several warrant and option agreements outside of the plan
with certain officers, consultants, lenders and others. The
outstanding agreements expire from December 1996 to February 2004.
The following summarizes transactions outside the plan for the years
ended February 28, 1995 and 1996:
Number of Option Price
Shares Per Share
------ ---------
Options outstanding at
March 1, 1994 1,347,396 $1.88 to $16.80
Granted 4,899,024 $1.37 to $ 2.25
Exercised (490,734) $1.88 to $ 2.40
Cancelled (381,250) $2.00 to $ 4.24
---------- ---------------
Options outstanding at
February 28, 1995 5,374,436 $1.37 to $ 2.40
Granted 2,145,000 $ .38 to $ 1.00
Exercised -- --
Cancelled (1,000,000) $1.40
---------- ---------------
Options outstanding at
February 28, 1996 6,519,436 $ .38 to $ 2.40
========== ===============
Underwriter's Options
---------------------
In connection with the Company's 1992 public offering, the Company
issued the Underwriter a warrant to purchase 57,500 units of its
securities at any time until March 10, 1997 at an exercise price of
$11.20 per unit. Each unit consists of two shares of noncumulative
convertible preferred stock and four warrants to purchase a share of
the Company's common stock at any time until March 10, 1997 at an
exercise price of $2.40 per share.
In connection with the Company's 1994 public offering, the Company
issued the Underwriter a warrant to purchase 16,500 units of its
securities at any time from July 12, 1995 until July 12, 1999 at an
exercise price of $12.00 per unit. Each unit consists of one share of
Series A preferred stock and four warrants to purchase a share of the
Company's common
F-14
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Warrants and Options (Continued)
--------------------------------
Underwriter's Options (Continued)
---------------------------------
stock at any time until July 12, 1999 at an exercise price of $3.00
per share.
10. Stockholders' Equity
--------------------
Preferred Stock
---------------
The Preferred Stock may be issued in series from time to time with
such designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of Preferred Stock may
differ with respect to such matters as may be determined by the Board
of Directors, including, without limitation, the rate of dividends,
method and nature of payment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions, conversion
rights and voting rights.
1992 Preferred Stock
--------------------
In February 1992, the Company designated a new class of preferred
stock "Non-Cumulative Convertible Redeemable Preferred Stock" ("1992
Preferred Stock") and the number of shares constituting such series
is 1,500,000 shares with a par value of $4.00 per share. The new
series was authorized in connection with the Company's public stock
offering. The holders of the 1992 Preferred Stock shall be entitled
to receive, non-cumulative dividends at the rate of 10% per annum or
$.40 per share of 1992 Preferred Stock each year which the Company
has net income after taxes. The dividends are payable on an annual
basis. The dividends on the 1992 Preferred Stock shall be payable in
cash for any year in which the Company's net income after taxes is at
least $650,000, exclusive of any extraordinary items of non-cash
income. For any year in which net income after taxes is less than
$650,000 the Company may, at its option, pay dividends in cash,
common stock, or a combination of cash and common stock.
The holders of the 1992 Preferred Stock shall be entitled to vote on
all matters upon which holders of the common stock have the right to
vote, and shall be entitled to the number of votes equal to the
largest number of full shares of common stock into which such shares
of 1992 Preferred Stock could be converted.
Each share of 1992 Preferred Stock is convertible at the option of
the holder into two shares of common stock of the Company. Each
preferred share is subject to redemption at $4.00 per share on not
less than 30 nor more than 60 days written notice any time, with the
Underwriter's prior written consent or without such consent if the
closing bid price of the common stock shall have averaged in excess
of $42.00 per share for 30 consecutive trading days ending within
five days of the notice of redemption.
F-15
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' Equity (Continued)
--------------------------------
Series A Preferred Stock
------------------------
In July 1994, the Company designated a new class of preferred stock
"Series A Convertible Redeemable Preferred Stock" ("Series A
Preferred Stock") and the number of shares constituting such series
is 250,000 shares with a par value of $4.00 per share. The new series
was authorized in connection with the Company's public stock
offering. The holders of the preferred stock shall be entitled to
receive cumulative dividends at the quarterly rate of $.375 per
share, consisting of $.25 payable in common stock semi- annually and
$.125 payable in cash, quarterly, in arrears. If the Company does not
have at least $500,000 of cash or cash equivalents indicated on its
balance sheet on the last day of any fiscal quarter, the Company may
pay the entire dividend in common stock on the quarterly payment date
in lieu of the cash dividend for such quarter. The value of the
common stock to be issued as a dividend will be based upon the last
reported sales price of the common stock on Nasdaq on the last day of
the fiscal quarter.
The holders of the Series A Preferred Stock will have no voting
rights except as to matters affecting the rights of Preferred
Stockholders or as required by law. In connection with any such vote,
each outstanding share of Series A Preferred Stock will be entitled
to one vote, excluding shares held by the Company or any entity
controlled by the Company, which shares shall have no voting rights.
The Series A Preferred Stock may not be redeemed until July 12, 1996.
Any shares of Series A Preferred Stock outstanding thereafter are
redeemable for cash, in whole or in part, at anytime, at the option
of the Company, at $10.00 per share plus any accrued and unpaid
dividends, whether or not declared. If at any time the closing price
of the Units or Series A Preferred Stock, as quoted on Nasdaq or any
national securities exchange, exceeds $14.00 per Unit or per share
for ten consecutive trading days, then the Series A Preferred Stock
will be automatically converted into common stock at the Conversion
Rate described below.
The holder of any shares of Series A Preferred Stock will have the
right, at the holder's option, to convert any or all such shares into
common stock. The number of shares of common stock issuable upon
conversion of a share of Series A Preferred Stock (the "Conversion
Rate") is equal to $10.00, plus accrued and unpaid dividends through
the date of conversion (to the extent unpaid within 15 business days
following the date of conversion), divided by $2.00 (the "Conversion
Price"). Although the Conversion Price is subject to adjustment for
stock splits, reverse stock splits and other similar capitalizations,
the Series A Preferred Stock does not contain provisions protecting
against dilution resulting from the sale of common stock at a price
below the Conversion Price or the current market price of the
Company's securities. Assuming no accrued and unpaid dividends, the
initial Conversion Rate will be five shares of common stock per share
of Series A Preferred Stock.
F-16
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' Equity (Continued)
--------------------------------
Series A Preferred Stock (Continued)
------------------------------------
In the event of any liquidation, dissolution or winding up of the
Company, holders of shares of Series A Preferred Stock are entitled
to receive, out of legally available assets, a liquidation preference
of $10.00 per share, plus an amount equal to any accrued and unpaid
dividends to the payment date, and no more, before any payment or
distribution is made to the holders of common stock or any series or
class of the Company's stock hereafter issued that ranks junior as to
liquidation rights to the Series A Preferred Stock, but the holders
of the shares of the Series A Preferred Stock will not be entitled to
receive the liquidation preference on such shares until the
liquidation preference of any other series or class of the Company's
stock previously or hereafter issued that ranks senior as to
liquidation rights to the Series A Preferred Stock has been paid in
full. An aggregate of 275,858 shares of 1992 Preferred Stock carries
liquidation rights senior to the Series A Preferred Stock.
11. Commitments and Contingencies
-----------------------------
Employment Agreements
---------------------
On April 8, 1996, the Company entered into a new employment agreement
through February 28, 2003 ("Agreement") with Mr. Reiner (replacing
his prior employment agreement) renewable for an additional three
years. The Agreement provides for a base salary of $239,500 per year,
(with annual increases based upon the Producer Price Index for
Surgical and Medical Instruments and Apparatus published by the U.S.
Department of Labor) or four percent, which ever is greater, a
$500,000 whole life insurance policy and a $1,000,000 term life
insurance policy which are to be owned by Mr. Reiner, and references
stock options to purchase up to 300,000 shares of the Company's
Common Stock at $2.25 per share of which options to purchase 200,000
are exercisable immediately. The remaining 100,000 shares are
exercisable if the Company reports Income from Operations defined as
net sales less cost of goods sold, less selling, general and
administrative expenses, of at least $1,000,000 for any fiscal year
through February 28, 2004. Mr. Reiner is also to receive annual cash
bonuses based upon the Company reaching certain annual levels of
Income from Operations during the term of the Agreement as follows:
Annual Income from Operations Amount of Bonus
----------------------------- ---------------
$ 150,000 $ 15,000
210,000 30,000
300,000 50,000
450,000 65,000
600,000 75,000
750,000 85,000
900,000 95,000
F-17
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and Contingencies (Continued)
-----------------------------------------
Employment Agreements (Continued)
---------------------------------
Fifty percent of any bonus amount will be applied to reduce any
indebtedness of Mr. Reiner to the Company as of the date of the bonus
payment. The Company also loaned Mr. Reiner, from the proceeds of its
public stock offering, approximately $222,419 to repay a bank loan
which Messrs. Reiner and Kramer were jointly and severally liable
(Note 12). Mr. Reiner will execute a promissory note evidencing the
obligation, bearing interest at 6% per annum which shall be payable
on April 22, 2006. However, if the Agreement is terminated by the
Company for any reason other than "cause", as defined in the
Agreement, any and all indebtedness owed by Mr. Reiner to the Company
is automatically cancelled.
Leases
------
The Company leases its office and warehouse facilities under
long-term leasing arrangements. The Company also leases equipment
under various leasing arrangements.
The following is a schedule of future minimum lease payments at
February 28, 1996 under the Company's capital leases (together with
the present value of minimum lease payments) and operating leases
that have initial or remaining noncancellable lease terms in excess
of one year:
Year Ending Capital Operating
February 28, Leases Leases Total
------------ ------ ------ -----
1997 $ 60,796 $179,579 $240,375
1998 57,531 264,179 321,710
1999 20,410 228,318 248,728
2000 18,524 112,800 131,324
2001 17,895 28,200 46,095
Later years 7,456 -- 7,456
-------- -------- --------
Total Minimum
Lease Payments 182,612 $813,076 $995,688
======== ========
Less Amount
Representing
Interest (27,433)
-------
Present Value
of Future
Capital Lease
Obligations $155,179
========
Rental expense charged to operations was $239,997 and $257,812 for
the years ended February 28, 1996 and 1995, respectively.
F-18
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and Contingencies (Continued)
-----------------------------------------
Leases (Continued)
------------------
Leased equipment under capital leases is as follows:
1996
----
Equipment $205,789
Less accumulated amortization (43,324)
-------
Net Equipment Under Capital Leases $162,465
========
12. Related Party Transactions
--------------------------
The Company has entered into transactions with Thomas Reiner
(Chairman of the Board, President and Chief Executive Officer), and
Gerald Kramer (former Chairman of the Board), as follows:
The Company has notes receivable from Thomas Reiner and Gerald Kramer
of $210,000 and $389,000, respectively, at February 28, 1996. The
notes do not bear interest and are payable after February 1, 1997.
The Company also has a note receivable from Thomas Reiner of $222,419
due in 2006 with interest at 6% per annum.
The Company has a receivable from Thomas Reiner of $123,994 at
February 28, 1996. The receivable does not bear interest and is due
on demand.
The Company repaid a subordinated note payable to Gerald Kramer of
$18,288 in December 1995. A receivable from Gerald Kramer in the
amount of $360,482 was offset against the note payable of $378,770
during the year ended February 28, 1995 (Note 15). Mr. Kramer had
elected to forego the payment of interest on the note payable to him
since the Company has a non-interest bearing note receivable from him
in an amount that exceeds the note payable to him.
In July 1994, the Company purchased indebtedness owed to Bank
Hapoalim, B.M. jointly and severally by Thomas Reiner and Gerald
Kramer for the $444,839 balance owed, including accrued interest, in
exchange for all rights held by the Bank against such individuals.
Accordingly, Thomas Reiner owes one half of this amount to the
Company which is represented by a note receivable discussed above and
Mr. Kramer's half was offset against the note payable owed by the
Company to Mr. Kramer.
In March 1994, Mr. Reiner voluntarily cancelled his stock options to
purchase 187,500 shares as a part of his execution of a new
employment agreement with the Company. Under the terms of the new
employment agreement, Mr. Reiner received options to purchase 200,000
shares at $2.25 per share and is entitled to receive options to
purchase an additional 100,000 shares at $2.25 per share if the
Company reports income from operations of at least $1,000,000 for any
fiscal year through February 28, 2004.
F-19
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Related Party Transactions (Continued)
--------------------------------------
Thomas Reiner has guaranteed various debt and leases of the Company.
In connection with the Company's 1992 public stock offering, Thomas
Reiner and Gerald Kramer placed a total of 187,500 shares (93,750
shares each) of the Company's common stock owned by them in escrow,
which shares were to be cancelled on February 28, 1996 unless the
closing bid price of the Company's common stock as reported by Nasdaq
averaged in excess of $38.48 for 30 consecutive trading days, at any
time prior to February 28, 1996. The Company did not meet any of the
criteria and the shares were cancelled effective February 28, 1996.
In October 1994, the Company entered into a stock option agreement
with Thomas Reiner to acquire 400,000 shares of common stock. The
options are exercisable at $2.25 per share through November 1, 1999.
In July 1995, the Company granted a stock option to Thomas Reiner for
725,000 shares of common stock, of which 625,000 shares are
exercisable immediately, and 100,000 shares are exercisable if the
Company's closing stock price is in excess of $2.25 per share for ten
consecutive trading days. The options are exercisable at $1.00 per
share through February 28, 2000 (Note 17).
In December 1995, the Company granted a stock option to Thomas Reiner
for 500,000 shares of common stock. The options are exercisable at
$.40 per share through December 2003.
13. Major Customers
---------------
Sales to major customers which accounted for 10% or more of sales are
as follows:
Year Ended February 28,
-----------------------
1996 1995
---- ----
Customer A 26.2% 17.8%
14. Employee Benefit Plan
---------------------
Effective January 1, 1993, the Company adopted a 401(K) savings plan
for employees who are not covered by any collective bargaining
agreement, have attained age 21 and have completed one year of
service. Employee and Company matching contributions are
discretionary. The Company made no matching contributions for the
years ended February 28, 1996 and 1995. Company contributions vest as
follows:
Years of Service Percent Vested
---------------- --------------
2 20%
3 40%
4 60%
5 80%
6 100%
F-20
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Litigation
----------
On March 4, 1994, the Company terminated for cause its December 5,
1992 employment agreement with Mr. Kramer. On March 9, 1994, the
Company filed a Complaint for Declaratory Relief in the Supreme Court
for Plymouth County, Massachusetts seeking a court determination as
to whether it is liable for salary payments to Mr. Kramer under his
December 5, 1992 employment agreement.
Mr. Kramer has moved to enjoin the Company from ceasing to pay his
interim salary payments, and moved for an injunction restraining the
Company from utilizing the proceeds of its public stock offering. The
motion was heard on April 12, 1994 and was denied on April 22, 1994.
Mr. Kramer appealed the decision and the appeal of the court's
decision by Mr. Kramer was denied on July 12, 1994 and August 2,
1994. On July 25, 1994, Mr. Kramer filed an answer and counterclaim
seeking, among other things, damages against the Company for
termination of his employment agreement. In July 1994, Mr. Kramer
brought a separate action against the Company and Mr. Reiner alleging
unlawful termination of Mr. Kramer's employment agreement and other
related causes of action and is seeking damages in the aggregate
amount of $36,500,000. The Company believes that there is no merit to
any cause of action brought by Mr. Kramer and intends to vigorously
defend the action. However, should Mr. Kramer prevail in any such
action against the Company, the Company's working capital and
operations would be substantially and adversely affected.
In September 1994, Sparta Maxillofacial Products, Inc., a wholly
owned subsidiary of the Company, brought a claim against Storz before
the American Arbitration Association, to recover an as of yet
undetermined amount in damages it has sustained as a result of
various material misrepresentations and omissions made by Storz and
failure to perform certain contractual obligations regarding the
purchase of certain assets of the OMF product line on January 20,
1994.
On or about July 12, 1994, the Company had a $300,000 payment due to
Storz under the terms of a promissory note. As a result of the
wrongful actions by Storz, on July 18, 1994 the Company made a claim
to offset $400,000 against the promissory note as provided in the
Asset Purchase Agreement. In October 1994, Storz filed a response and
counterclaim to the Company's action, seeking to accelerate all
amounts due under the $1,450,000 promissory note issued to it by the
Company.
In October 1995, the Company entered into a Settlement Agreement with
Storz to avoid arbitration. Under the Agreement, the note payable for
the acquisition was reduced by $400,000 and all accrued interest
under the original
F-21
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Litigation (Continued)
----------------------
note was forgiven and Storz agreed to forego any claim for future
royalties which would have been owed pursuant to the Royalty
Agreement. The remaining $1,050,000 due under the note payable was to
be paid on or before November 17, 1995. The Company paid Storz
$600,000 in December 1995 and $450,000 is owed as of February 28,
1996. The Company is currently in default under the terms of the
Settlement Agreement. Since the Company is in default under the
payment provisions of the Settlement Agreement, the balance due
accrues interest at 5% and the Company may be liable for any attorney
fees which are incurred by Storz.
16. Concentration of Credit Risk
----------------------------
The Company provides credit, in the normal course of business, to a
large number of distributors and wholesalers, concentrated in the
medical supply industry. Accounts receivable are due from customers
located throughout the United States and various foreign countries.
The Company performs periodic credit evaluations of its customers'
financial condition and generally requires no collateral. The Company
maintains reserves for potential credit losses, and such losses have
not exceeded management's expectations.
17. Subsequent Events
-----------------
Loan Agreement
--------------
On March 11, 1996, the Company entered into a loan agreement with
FINOVA Capital Corporation ("FINOVA"). The loan agreement provides
the Company with a three year revolving line of credit of up to
$1,500,000 with interest at prime plus 4%. The line of credit is
advanced to the Company based on a percentage of eligible assets and
is collateralized by substantially all assets of the Company. In
addition, $450,000 of the line of credit is personally guaranteed by
Thomas Reiner.
Stock Option Cancellation
-------------------------
On May 22, 1996, Thomas Reiner agreed to cancel his July 1995 stock
option which was for 725,000 shares of common stock (Note 12).
F-22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not filed a Form 8-K under the Exchange Act within 24
months prior to the date of the most recent financial statements reporting a
change in accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information regarding the Company's
executive officers and directors:
Name Age Office
Thomas F. Reiner 50 Chairman of the Board of Directors,
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 42 Vice President of Sales
Wm. Samuel Veazey 35 Vice President of Finance
and Administration, Secretary
Michael Y. Granger 40 Director
Allan J. Korn 53 Director
Directors hold office for a period of one year from their election at the
annual meeting of stockholders and until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. None of the above individuals has any family
relationship with any other. The Board of Directors has audit and compensation
committees composed of Messrs. Reiner, Granger and Korn. Messrs. Granger and
Korn receive $750 each per meeting for attending Board of Directors' meetings
and are reimbursed for out-of-pocket expenses.
The following is a summary of the business experience of each officer and
director of the Company:
Thomas F. Reiner co-founded the Company and has been Chief Executive
Officer, President and a director of the Company since its organization in July
1987 and Chairman since January 1994. From 1972 to 1983, Mr. Reiner was employed
by Sparta Instrument Corporation, becoming its President in 1979. Mr. Reiner
co-founded Healthmed in 1983, serving as Vice President of Sales and Marketing
until 1985 and President until 1987. Mr. Reiner earned a B.S. degree in Business
Management and an M.B.A. degree in finance and general management from Fairleigh
Dickinson University.
Joseph Barbrie has been Vice President of Operations since March 1989 and
Vice President of Sales since March 1996. Mr. Barbrie earned a B.A. degree in
Business Management from Johnson & Wales College.
Wm. Samuel Veazey has been Vice President of Finance and Administration
since January 1990 and Secretary since January 1994. From January 1988 to
December 1989, he was Vice President of Corporate Finance for Interco Funding
Group, Inc., a Florida-based investment banking firm. Mr. Veazey earned a B.S.
degree in Biology and Chemistry, an M.S. degree in Biomedical Engineering and an
M.B.A. degree in Finance and General Management, all from the University of
Miami.
19
<PAGE>
Michael Y. Granger, a director of the Company since June 1991, has been an
independent investment management consultant since April 1991. From March 1990
to April 1991, he was Vice President and Portfolio Manager for LINC Capital
Management ("LINC"), one of the Company's former lenders, where he was
responsible for negotiating and structuring financial transactions for emerging
growth companies in health care and other advanced technology fields. From July
1986 to March 1990, Mr. Granger was Investment Manager for Xerox Venture
Capital, with responsibility for structuring investments in high technology
emerging growth companies. Mr. Granger earned a B.S. degree in Electrical
Engineering from the University of Massachusetts at Amherst and an M.B.A. degree
in Finance and General Management from Dartmouth College.
Allan J. Korn, a director of the Company since February 1994, has been an
independent sales and marketing consultant to the medical and pharmaceutical
industry since October 1993. From March 1985 until September 1993, he held
various sales and marketing executive positions with DuPont Multi-Source
Products, Inc. Mr. Korn earned a B.A. degree in Economics from Queens College,
Flushing, New York and an M.B.A. degree in Marketing from Fairleigh Dickinson
University. Mr. Korn is also an Adjunct Professor in Business Administration at
Union County College.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation for services rendered to
the Company in all capacities awarded to, earned by, or paid to the Chief
Executive Officer and the Company's other executive officers who received
compensation of more than $100,000 in the fiscal year ended February 29, 1996
and for each of the three fiscal years ended February 29, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Other Annual Awards All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Reiner ........................... 1996 $293,288(1) $ 63,000(2) $ 9,165(3) 500,000(4) $ 0
Chairman, Chief Executive ............. 1995 266,395(1) 0 85,538(3) 700,000(5) 0
Officer, Treasurer, Director .......... 1994 198,765(1) 11,785(6) 0 75,000(7) 0
Joseph Barbrie ............................. 1996 113,743 6,000(8) 0 50,000(9) 0
Vice President of Sales ............... 1995 105,355 0 23,576(10) 0 0
1994 99,413 5,600(6) 0 12,500(7) 0
Wm. Samuel Veazey .......................... 1996 98,734 11,000(8) 0 50,000(9) 0
Vice President of Finance ............. 1995 106,259 0 0 0 0
and Administration .................... 1994 84,761 5,600(6) 0 17,500(7) 0
John P. Landino (11) ....................... 1996 0 0 0 0 0
1995 100,712 0 0 0 0
1994 130,717 0 22,128(10) 0 0
Gerald S. Kramer (12) ...................... 1996 0 0 0 0 0
1995 54,615 0 0 0 0
1994 170,339 0 0 0 0
</TABLE>
(1) Includes salaries and an automobile and insurance allowance. See
"-Employment Agreements."
(2) Includes a paid $50,000 bonus in consideration of completing the sale of the
medical product line and an unpaid bonus of $13,000 accrued in Fiscal 1996
related to the Company's management bonus plan.
(3) Represents paid vacation accruals in Fiscal 1996 and Fiscal 1995.
(4) In December 1995, in connection with the sale of the medical product line,
the Company issued to Mr. Reiner options to purchase 500,000 shares at $.40 per
share exercisable until December 4, 2003.
Does not include options to purchase 725,000 shares granted to Mr. Reiner in
July 1995 which were canceled by him in May 1996.
(5) Under the terms of the April 1994 employment agreement, Mr. Reiner received
options to purchase 200,000 shares at $2.25 per share and options to purchase an
20
<PAGE>
additional 100,000 shares at $2.25 per share if the Company reports income from
operations of $1,000,000 or more for any fiscal year through the fiscal year
ending February 28, 2004. See "-Employment Agreements."
In October 1994, the Company issued to Mr. Reiner stock options to purchase
up to 400,000 shares exercisable until November 1, 1999 at $2.25 per share.
(6) In July 1994, bonuses were paid under the Company's management bonus plan
which were accrued in Fiscal 1994.
(7) In February 1994, the Company granted stock options under the Company's 1987
Stock Option Plan which are exercisable at $2.25 per share until February 14,
2004 except for Mr. Reiner's which are exercisable until February 14, 1999.
(8) Represents unpaid bonuses under the Company's management bonus plan which
were accrued in Fiscal 1996.
(9) In December 1995, in connection with the sale of the medical product line,
the Company issued options to Messrs. Barbrie and Veazey to purchase 50,000
shares each at $.40 per share at any time until December 4, 2003.
(10) Represents reimbursement of relocation expenses.
(11) Mr. Landino was employed by the Company from December 1992 until his
resignation in January 1995.
(12) Mr. Kramer orally resigned as a director of the Company in January 1994 and
was terminated as an executive officer in March 1994.
Option Grants in Last Fiscal Year and Stock Option Grant
The following table provides information on option grants during the year
ended February 29, 1996 to the named executive officers:
Individual Grants
% of Total Options
Options Granted to
Granted Employees in
Name (1) Fiscal Year Exercise Price Expiration Date
---- --- ----------- -------------- ---------------
Thomas F. Reiner 500,000 83.3% $ .40 December 4, 2003
Joseph Barbrie 50,000 8.3 .40 December 4, 2003
Wm. Samuel Veazey 50,000 8.3 .40 December 4, 2003
John P. Landino 0 - - -
Gerald S. Kramer 0 - - -
(1) See footnotes (4) and (9) to the Summary Compensation Table.
21
<PAGE>
Aggregate Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options at February 29, 1996. No shares of
Common Stock were acquired upon exercise of options during the fiscal year ended
February 29, 1996.
Number of Value of Unexercised
Unexercised Options In-The-Money Options
at Fiscal Year End (1) at Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Thomas F. Reiner 1,190,625 100,000 $65,000 0
Joseph Barbrie 75,000 0 6,500 0
Wm. Samuel Veazey 76,875 0 6,500 0
John P. Landino 0 0 0 0
Gerald S. Kramer 0 0 0 0
(1) The closing price of the Common Stock on February 29, 1996 as reported by
Nasdaq was $.53.
Employment Agreements
On April 8, 1996, the Company entered into an employment agreement through
February 28, 2003 ("Agreement") with Mr. Reiner replacing the April 22, 1994,
and as subsequently amended, employment agreement which replaced the September
29, 1993 employment agreement. The Agreement provides for a base salary of
$239,500 per year, (with annual increases based upon the greater of 4% or the
Producer Price Index For Surgical and Medical Instruments and Apparatus
published by the U.S. Department of Labor), 50% of the Management Bonus,
$500,000 whole life and $1,000,000 term life insurance policies to be owned by
Mr. Reiner, an automobile allowance and significant termination payments to Mr.
Reiner (aggregating over seven times his annual salary) in the event the
Agreement is canceled for any reason other than cause, and references existing
stock options to purchase up to 300,000 shares of the Company's Common Stock at
$2.25 per share of which options to purchase 200,000 shares were granted and
options to purchase an additional 100,000 shares were granted but may not be
exercised unless the Company reports income from operations of at least
$1,000,000 for any fiscal year through February 28, 2004. Mr. Reiner is also to
receive annual cash bonuses based upon the Company reaching certain annual
levels of income from operations during the term of the Agreement as follows:
Income from
Operations Amount of Bonus (1)
$150,000 $15,000
210,000 30,000
300,000 50,000
450,000 65,000
600,000 75,000
750,000 85,000
900,000 95,000
On April 8, 1996, the Company amended the Management Bonus Plan providing
for pooled bonuses of 8% of the Company's pre-tax net income to be shared among
the Company's management for the fiscal years through February 28, 2003,
(1) Fifty percent of any bonus amount will be applied to reduce any indebtedness
of Mr. Reiner to the Company as of the date of the bonus payment. However, if
the Agreement is terminated by the Company for any reason other than "cause" as
defined in the Agreement, any indebtedness owed by Mr. Reiner to the Company is
automatically canceled.
22
<PAGE>
Stock Option Plan and Stock Option Grant
In 1987, the Company adopted its 1987 Stock Option Plan (the "Plan"), which
provides for the grant to employees, officers, directors and consultants of
options to purchase up to 62,500 shares of Common Stock, consisting of both
"incentive stock options" within the meaning of Section 422A of the United
States Internal Revenue Code of 1986 (the "Code") and "non-qualified" options.
Incentive stock options are issuable only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants and
others, as well as to employees of the Company. In January 1994, the Company's
stockholders approved an increase in the number of stock options available under
the Plan to a total of 250,000 options.
The Plan is administered by the Board of Directors, which determines those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of Common Stock that
may be purchased under each option, and the option price.
The per share exercise price of the Common Stock subject to an incentive
stock option or nonqualified option may not be less than the fair market value
of the Common Stock on the date the option is granted. The per share exercise
price of the Common Stock subject to a non-qualified option is established by
the Board of Directors. The aggregate fair market value (determined as of the
date the option is granted) of the Common Stock that any employee may purchase
in any calendar year pursuant to the exercise of incentive stock options may not
exceed $100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company is eligible to
receive any incentive stock options under the Plan unless the option price is at
least 110% of the fair market value of the Common Stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to this
limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination during which he or she can exercise the
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, his or her option remains exercisable for one year
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the Plan must be granted within ten years from the effective
date of the Plan. The incentive stock options granted under the Plan cannot be
exercised more than ten years from the date of grant except that incentive stock
options issued to 10% or greater stockholders are limited to five year terms.
All options granted under the Plan provide for the payment of the exercise price
in cash or by delivery to the Company of shares of Common Stock already owned by
the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of Common Stock to purchase
additional shares of Common Stock and may theoretically exercise all of his
stock options with no additional investment other than his original shares.
Any unexercised options that expire or that terminate upon an optionee
ceasing to be an officer, director or an employee of the Company become
available once again for issuance. As of May 16, 1996, options to purchase
160,125 shares have been granted under the Plan. A total of 160,125 options are
currently exercisable, and no options have been exercised.
In April 1994, under the terms of the employment agreement, Mr. Reiner
received options to purchase 200,000 shares of Common Stock at $2.25 per share
and options to purchase an additional 100,000 shares of Common Stock at $2.25
per share if the Company reports income from operations of $1,000,000 or more
for any fiscal year through the fiscal year ending February 28, 2004. See
"-Employment Agreements."
In October 1994, the Company issued to Mr. Reiner options to purchase up to
400,000 shares of Common Stock at $2.25 per share until November 1, 1999 in
consideration for Mr. Reiner providing personal guarantees for the Congress loan
and certain other debts of the Company.
23
<PAGE>
In July 1995, in consideration for Mr. Reiner's efforts in successfully
negotiating long term contracts having an aggregate value of approximately
$7,500,000, the Company issued to Mr. Reiner options to purchase 625,000 shares
at $1.00 per share and options to purchase an additional 100,000 shares at $1.00
per share if the price of the Company's common stock is in excess of $2.25 per
share for a period of ten consecutive trading days through the fiscal year
ending February 28, 2000. In May 1996, Mr. Reiner canceled these options.
In December 1995, in consideration of negotiating and completing the sale
of the medical product line for a sale price of approximately $5,700,000, the
Company issued to Messrs. Reiner, Barbrie, Veazey, Granger and Korn options to
purchase 500,000, 50,000, 50,000, 10,000, and 10,000 shares, respectively, at
$.40 per share until December 4, 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning stock
ownership of the Company's $.002 par value Common Stock by all persons known to
the Company to own beneficially 5% or more of the outstanding shares of Common
Stock, by each director, by all individuals named in the "Summary Compensation
Table" of the "Management" section and by all directors and officers as a group,
as of May 16, 1996. None of the named individuals or any other executive
officers own any shares of 1992 Preferred Stock or 1994 Preferred Stock nor does
any person own beneficially 5% or more of the outstanding shares of 1992 or 1994
Preferred Stock. For purposes of determining the percentage ownership of the
individuals and group listed in the table, the 1992 Preferred Stock and the
Common Stock have been treated as one class, since both classes are entitled to
vote share for share on all matters on which the Common Stock is entitled to
vote. The 1994 Preferred Stock has not been included as it is non-voting.
The Company knows of no arrangements that will result in a change in
control at a date subsequent hereto. Except as otherwise noted, the persons
named in the table own the shares beneficially and of record and have sole
voting and investment power with respect to all shares shown as owned by them,
subject to community property laws, where applicable. Each stockholder's address
is in care of the Company at 7068 Koll Center Parkway, Pleasanton, California
94566. The table reflects all shares of Common Stock which each individual has
the right to acquire within 60 days from the date hereof upon exercise of
options, warrants, rights or other conversion privileges or similar obligations.
Number Percent
of Shares of of Class of
Common Common
Name Stock Owned Stock Owned
---- ----------- -----------
Thomas F. Reiner (1) 2,114,095 31.5%
Joseph Barbrie (2) 75,000 1.6%
Wm. Samuel Veazey (2) 76,875 1.6%
Michael Y. Granger (3) 20,000 .4%
Allan J. Korn (3) 15,000 .3%
Charles C. Johnston (4) 255,000 5.3%
Arbora A.G.(5) 750,000 14.3%
All officers and directors
as a group (five persons) (6) 2,300,970 32.6%
(1) Includes (i) 15,625 shares of Common Stock issuable upon exercise of options
at $8.80 per share at any time until July 1, 1997; (ii) 75,000 shares issuable
upon exercise of options at $2.25 per share at any time until February 14, 1999;
(iii) 200,000 shares issuable upon exercise of options at $2.25 per share at any
time until February 28, 2004; (iv) 400,000 shares issuable upon exercise of
options at $2.25 per share at any time until November 1, 1999; (v) 500,000
shares issuable upon exercise of options at $.40 per share at any time until
December 4, 2003; and (vi) certain shares and options to purchase shares for
which Mr. Reiner acts as trustee under a voting trust agreement. See Footnote 5,
below. Does not include options to purchase 100,000 shares at $2.25 per share at
any time until February 28, 2004 contingent upon the Company achieving certain
goals. See "Management-Summary Compensation Table."
24
<PAGE>
(2) Includes 12,500 and 9,375 shares issuable upon exercise of options to
Messrs. Barbrie and Veazey, respectively, at $8.00 per share until July 1, 1997;
12,500 and 17,500 shares issuable upon exercise of options to Messrs. Barbrie
and Veazey, respectively, at $2.25 per share until February 14, 2004; and 50,000
shares issuable to each of Messrs. Barbrie and Veazey upon exercise of options
at $.40 per share until December 4, 2003.
(3) Includes 10,000 and 5,000 shares of Common Stock issuable upon exercise of
options to Messrs. Granger and Korn, respectively, at $2.25 per share at any
time until February 14, 2004 and 10,000 shares of Common Stock each issuable
upon exercise of options at $.40 per share until December 4, 2003.
(4) Includes shares and warrants owned by Mr. Johnston or by companies
controlled by Mr. Johnston which entitle them to purchase up to 40,000 shares at
$2.10 per share at any time until August 18, 1999 and 50,000 shares at $.375 per
share at any time until January 4, 1999.
(5) Includes warrants to purchase up to 500,000 shares at $.47 per share issued
to Arbora and related parties at any time until November 8, 1998 and 250,000
shares of Common Stock currently owned by Arbora. These warrants and shares are
subject to a voting trust agreement which provides the Company's Chairman,
President and Chief Executive Officer, Thomas F. Reiner with voting rights.
(6) Includes an aggregate of 1,877,500 shares of Common Stock issuable upon
exercise of currently exercisable options.
Stock Escrow
In connection with the 1992 Offering, Messrs. Reiner and Kramer, the
Company's Chairman and former Chairman, respectively, placed a total of 187,500
shares (93,750 shares each) of the Company's Common Stock owned by them in
escrow, pursuant to which the shares would be canceled on February 28, 1996
unless the closing bid price of the Company's Common Stock, as reported by
Nasdaq, averaged in excess of $38.48 per share for 30 consecutive trading days
at any time prior to February 28, 1996. The Company did not meet any of the
criteria for release of the shares from escrow and consequently the shares were
canceled effective February 28, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management is of the opinion that each transaction described below between
the Company and its officers, directors or stockholders was on terms at least as
fair to the Company as had the transaction been concluded with an unaffiliated
party, except for the loans advanced by the Company to certain of the officers
which do not bear interest. All material transactions between the Company and
its officers, directors or principal stockholders are subject to approval by a
majority of the Company's directors not having an interest in the transaction.
There are currently two outside directors. Mr. Reiner is the Company's Chairman,
Chief Executive Officer and President. Mr. Kramer is the Company's former
Chairman.
On September 23, 1992, the Company issued to Messrs. Kramer and Reiner
options to purchase up to 187,500 shares each at $4.24 per share at any time
until May 31, 2002 if the Company reaches certain annual gross revenue levels
prior to February 28, 1998. Mr. Kramer's option was canceled when the Company
terminated his employment for cause on March 4, 1994, and Mr. Reiner's option
was canceled by mutual agreement of Mr. Reiner and the Company in connection
with the execution of an employment agreement with Mr. Reiner on April 22, 1994.
Under the terms of the new employment agreement, Mr. Reiner received options to
purchase 200,000 shares at $2.25 per share and options to purchase an additional
100,000 shares at $2.25 per share if the Company reports income from operations
of $1,000,000 or more for any fiscal year through the fiscal year ending
February 28, 2004. See "Business-Litigation," "Management-Executive
Compensation-Summary Compensation Table" and "Management-Employment Agreements."
The Company holds promissory notes due it from Messrs. Kramer and Reiner in
the amounts of $389,000 and $210,000, respectively, at February 29, 1996. The
promissory notes do not bear interest (although the Internal Revenue Service may
impute interest) and are payable on February 1, 1997. The Company also has a
receivable from Mr. Reiner of $123,994 at February 29, 1996. The receivable does
25
<PAGE>
not bear interest and is due on demand. The Company also has a note receivable
from Mr. Reiner of $222,419 due in July 2006 with interest at 6% per annum.
On March 4, 1994, the Company terminated for cause its December 5, 1992
employment agreement with Gerald S. Kramer, a former Chairman of the Company's
Board of Directors. The Company also offset against a promissory note in the
amount of $378,770 owed by the Company to Mr. Kramer, a receivable owed by Mr.
Kramer to the Company in the amount of $138,063, as well as $222,419
representing Mr. Kramer's share of his joint bank indebtedness which was repaid
by the Company. A payment in the amount of the net balance of $18,288 was
remitted to Mr. Kramer in December 1995. See "Legal Proceedings."
In July 1994, the Company purchased an indebtedness owed to Bank Hapoalim
B.M. jointly and severally by Messrs. Reiner and Kramer, for the $444,838
balance, in exchange for all rights held by the Bank as against such
individuals. Accordingly, Mr. Reiner owes one half of this amount to the
Company, and Mr. Kramer's half was offset against other indebtedness owed by the
Company to Mr. Kramer, which indebtedness is currently the subject of
litigation. See "Legal Proceedings."
In April 1993, the Company borrowed $350,000 from Asset Factoring
International, Inc. ("Asset Factoring"), a company controlled by Charles C.
Johnston, a principal stockholder of the Company, evidenced by a promissory
note. The principal due on the promissory note plus $50,000 in interest was due
in October 1995. The promissory note was subordinated to the promissory note
payable to Congress Financial Corporation ("Congress") and was guaranteed by
Messrs. Kramer and Reiner. In August 1994, the Company issued 40,000 Common
Stock purchase warrants exercisable at $2.10 per share at any time until August
18, 1999 in consideration of Asset Factoring extending the due date of the
$350,000 promissory note and $50,000 interest payment until June 1995. In
connection with the financing, the Company issued a warrant to purchase up to
62,500 shares of its Common Stock exercisable at $3.00 per share at any time
until March 31, 1998. In connection with the subordination of the loan to
Congress, Asset Factoring received an additional warrant to purchase up to
62,500 shares at $2.00 per share at any time until August 31, 1998. Both
warrants were exercised in April 1994 based upon a net issuance of 40,000 shares
of Common Stock. The Company also entered into a one year consulting agreement
with Asset Factoring in which the Company paid Asset Factoring $50,000 for one
year of consulting services. In December 1995, the Company paid Asset Factoring
$469,710 consisting of the principal due on the promissory note plus accrued
interest. In addition, in connection with extending the promissory note through
December 1995, Mr. Johnston received a warrant to purchase up to 50,000 shares
of its Common Stock exercisable at $.375 per share at any time until January 4,
1999.
In October 1994, the Company issued to Mr. Reiner options to purchase up to
400,000 shares at $2.25 per share until November 1, 1999 in consideration for
Mr. Reiner providing personal guarantees for the Congress loan and certain other
debts of the Company.
In July 1995, in consideration for Mr. Reiner's efforts in successfully
negotiating long term contracts having an aggregate value of approximately
$7,500,000, the Company issued to Mr. Reiner options to purchase 625,000 shares
at $1.00 per share and options to purchase an additional 100,000 shares at $1.00
per share if the price of the Company's Common Stock is in excess of $2.25 per
share for a period of ten consecutive trading days through the fiscal year
ending February 28, 2000. In May 1996, Mr. Reiner canceled these options.
In December 1995, in consideration of locating a purchaser for and
negotiating the sale of the medical product line for a purchase price of
approximately $5,700,000, the Company issued to Mr. Reiner options to purchase
500,000 shares at $.40 per share until December 4, 2003.
The Company repaid $1,000,000 to Arbora, A.G. ("Arbora") as of December
14, 1995, which together with the return of a $809,500 promissory note issued to
the Company by an affiliate of Arbora, served as principal consideration to
redeem and cancel 4,761,842 shares of the Company's Common Stock. The 4,761,842
shares were issued to Arbora on December 4, 1995 in consideration of the
conversion of a $1,000,000 note into equity and the issuance to the Company of a
promissory note in the amount of $809,500 by an affiliate of Arbora pursuant to
an agreement reached between it and the Company. In connection with this
26
<PAGE>
transaction, the Company also canceled a warrant to purchase 1,000,000 shares of
the Company's Common Stock at $1.40 per share held by Arbora and issued Arbora
and its affiliated parties warrants to purchase up to 750,000 shares of the
Company's common stock at $.47 per share at any time until November 8, 1998. In
addition, a voting trust was entered into which provided the Company's Chairman,
President and Chief Executive Officer, Thomas F. Reiner, with voting rights as
to such shares. On April 22, 1996, 250,000 shares of Common Stock were issued to
Arbora in connection with the exercise of 250,000 Common Stock purchase
warrants. See "Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit No. Title
3(a) Certificate of Incorporation (BioMetallics, Inc.) (1)
3(b) Restated Certificate of Incorporation (BioMetallics, Inc.) (1)
3(c) Bylaws (BioMetallics, Inc.) (1)
3.1 Certificate for Renewal of Certificate of Incorporation (Sparta
Surgical Corporation) (1)
3.2 Amendment to Restated Certificate of Incorporation (Sparta Surgical
Corporation) (1)
3.3 Restated Certificate of Incorporation of the Registrant (1)
3.4 Restated Certificate of Incorporation of the Registrant (1)
3.5 Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant (2)
3.6 Certificate of Designation of Preferences for Series A Preferred Stock
(4)
3.7 Articles of Incorporation of Sparta Maxillofacial Products, Inc. (4)
3.8 Bylaws of Sparta Maxillofacial Products, Inc. (4)
3.9 Restated Bylaws of the Registrant. (4)
3.10 Bylaws of the Registrant (April 1994). (4)
10.4 Subordinated Promissory notes - Mr. Kramer (1)
10.5 Subordinated Promissory notes - Mr. Reiner (1)
10.17 Promissory Note (Kramer) (2)
10.45 Employment Agreement dated December 5, 1992, with Mr. Kramer (3)
10.68 Civil Action entitled "Gerald S. Kramer vs. Sparta Surgical
Corporation, Thomas F. Reiner," Civil Action No. 94-CO-63377; United
States District Court, Western District of New York (5)
10.77 Asset Purchase Agreement dated December 7, 1995 between the
Registrant and Tecnol Medical Products, Inc. (6)
10.78 Restructuring of Loan and Warrants Agreement dated December 1, 1995
between the Registrant and Arbora A.G. (6)
10.79 Security Agreement dated January 31, 1996 between the Registrant and
FINOVA Capital Corporation (7)
10.80 Loan Document Release From Escrow Letter dated March 11, 1996 between
the Registrant and FINOVA Capital Corporation (7)
10.81 Voting Trust Agreement between Arbora A.G. and Mr. Reiner
10.82 Voting Trust Agreement between Ulrich Rud and Rudolph Hugi, jointly
and Mr. Reiner
10.83 Stock Option Agreement dated December 12, 1995 with Mr. Reiner
10.84 Restated Employment Agreement dated April 8, 1996 - Mr. Reiner
27 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-18 and Post-Effective Amendments thereto, file number 33-16303-NY.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 file number 33-43307 declared effective on March 10, 1992 and post
effective amendment thereto declared effective on August 26, 1994.
(3) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended February 28, 1993.
27
<PAGE>
(4) Previously filed as a part of the Registrant's Registration Statement, File
No. 33-76782, declared effective on July 12, 1994.
(5) Incorporated by reference to the Registrant's Form 8-K dated August 2,
1994.
(6) Incorporated by reference to the Registrant's Form 8-K dated December 7,
1995.
(7) Incorporated by reference to the Registrant's Form 8-K dated March 11,
1996.
b. Reports on Form 8-K:
The Registrant filed a Form 8-K dated December 7, 1995 which reported
the sale of its medical product line to Tecnol Medical Products, Inc.
The Registrant filed a Form 8-K dated March 11, 1996 which reported
the receipt of a line of credit from FINOVA Capital Corporation.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Pleasanton, California, on May 29, 1996.
SPARTA SURGICAL CORPORATION
By: Thomas F. Reiner
---------------------------
Thomas F. Reiner
Chairman, CEO & President
Pursuant to the requirements of the Exchange Act as amended, this Report
has been signed below by the following persons on the dates indicated.
Signature Title Date
--------- ----- ----
Thomas F. Reiner Chairman of the 5/29/96
- ------------------------- Board of Directors,
Thomas F. Reiner Chief Executive Officer,
President, Treasurer,
(Principal Executive
Officer), and Director
Joseph Barbrie Vice President of 5/29/96
- ------------------------- Sales
Joseph Barbrie
Wm. Samuel Veazey Vice President of Finance 5/29/96
- ------------------------- and Administration (Principal
Wm. Samuel Veazey Accounting Officer)
and Secretary
Michael Y. Granger Director 5/29/96
- -------------------------
Michael Y. Granger
Allan J. Korn Director 5/29/96
- -------------------------
Allan J. Korn
29
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
EXHIBITS
TO
FORM 10-KSB
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 1996
Exhibit 10.81
<PAGE>
VOTING TRUST AGREEMENT
This Agreement is entered into as of this 8th day of November, 1995, by and
between Thomas F. Reiner ("Trustee") and Arbora, A.G. (the "Investor") who holds
Four Million Seven Hundred Sixty One Thousand Eight Hundred Forty Two
(4,761,842) shares of the common stock, $0.002 par value (the "Stock") of Sparta
Surgical Corporation, a Delaware corporation (the "Company") and who holds
warrants to purchase an additional 500,000 shares of the Stock. The Investor
believes that the establishment of this voting trust will promote the stability
and continuity of management and the policies of the Company and it is deemed to
be mutually advantageous that the Trustee shall have the voting power of the
shares of the Stock held by the Investor.
In order to induce the Investor to make certain investments in the Company,
the parties hereby agree as follows:
1. Delivery of Shares. The Investor agrees that the certificate or
certificates representing the Stock owned by it now or hereafter shall held by
the Trustee and that such Stock shall be registered in the name of the Trustee.
If the Company shall pay a stock dividend or effect a stock split, any
additional shares issued with respect to the Stock deposited hereunder shall be
deposited and registered in the name of the Trustee.
2. Trustee's Agreement. The Trustee shall hold in trust for the benefit of
the Investor, upon the terms and conditions set forth herein, the shares of
Stock deposited with the Trustee hereunder (the "Deposited Shares").
3. Voting Trust Certificates. The Trustee shall, upon receipt of any
Deposited Shares, issue a Voting Trust Certificate to represent such Deposited
Shares. The form of Voting Trust Certificate shall be as determined from time to
time by the Trustee. Subject to such reasonable rules as the Trustee may
prescribe from time to time, the Voting Trust Certificates, and the beneficial
interests in the shares represented thereby, shall be transferable upon the
books of the Trustee upon surrender of the Voting Trust Certificate duly
endorsed by the holder, or assigned for transfer. Until so transferred, the
Trustee may treat as the owner for all purposes the person registered on the
books of the Trustee as the holder of a Voting Trust Certificate. Every
transferee of a Voting Trust Certificate, by acceptance thereof, shall become a
party hereto, and included in the term "Investor".
4. Transfer Records. During the term of this agreement, the Trustee shall
keep a record of the names and addresses of all Voting Trust Certificate
holders, the number of shares of Stock held by each, and the correct books of
account of all matters relating to the Deposited Shares. These records shall be
made available for inspection by the Voting Trust Certificate holders. The books
of transfer of Voting Trust Certificates may be closed by the Trustee at any
time in anticipation of a dividend or other distribution or for any other
purpose which the Trustee considers proper.
<PAGE>
5. Term. This agreement shall be perpetual in duration and may be
terminated only by (i) the cancellation of the Deposited Shares on the books of
the Company upon their surrender thereto; or (ii) the written consent of the
Trustee together with all of the registered holders of Voting Trust
Certificates.
6. Cash Dividends. Each holder of a Voting Trust Certificate shall be
entitled to receive payments equal to the cash dividends received by the Trustee
with respect to the Deposited Shares represented by the Investor's Voting Trust
Certificate. The Trustee may instruct the Company to have such dividends paid
directly to the registered holder of the Voting Trust Certificates.
7. Proxy; Limitation on Power to Transfer Deposited Shares. The Trustee
shall be entitled in his discretion to exercise in person or by proxy any and
all of the voting rights and powers of the absolute owners of the Deposited
Shares, including the right to consent to or vote for any merger, transfer of
all or substantially all of the assets of the Company, or any readjustment of
the capital structure of the Company, whether or not any such transaction has
the effect of transferring control of the Company. The Trustee shall have no
right or power to sell, assign, pledge, encumber or otherwise transfer the
Deposited Shares other than to the holders of the Voting Trust Certificates upon
the termination of this trust.
8. Limited Liability of Trustee; Interest in Transactions. The Trustee will
exercise his best judgement, but assumes no responsibility in respect of any
action taken by him and shall incur no responsibility as stockholder, trustee or
otherwise by reason of any error of law or of any matter or anything done or
omitted to be done under this agreement, except for his own intentional
misconduct. The Trustee may become interested, individually or in another
capacity in the Company as a stockholder, director, officer or otherwise and in
such connection may receive compensation from the Company in the form of salary
or in any other manner, as though he were not a Trustee hereunder.
9. Notices. All notices to holders of Voting Trust Certificates shall be
given by mail at the address furnished by the holders to the Trustee, and such
mailing shall be the only notice required to be given to holders of Voting Trust
Certificates hereunder.
10. Indemnification of Trustee. The Trustee shall not be entitled to any
compensation for his services. The holders of the Voting Trust Certificates
agree to keep the Trustee indemnified and exonerated against all cost, loss and
liability arising as a result of the Trustee's performance of his powers
hereunder. Until fully reimbursed and indemnified, the Trustee shall be entitled
to reimbursement and indemnity out of the Deposited Shares.
2
<PAGE>
11. Legend. The certificates evidencing Stock held by the Company on
account of the holder of any Voting Trust Certificate shall be conspicuously
stamped or otherwise imprinted with a legend in substantially the following
form:
"The securities represented by this
certificate are subject to the terms of the
Voting Trust Agreement by and among the
original holders of such securities and the
Trustee of such agreement. A copy of such
agreement will be furnished without charge by
the Company to the holder of this certificate
upon the holder's written request."
12. Miscellaneous. This agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and the same
instrument.
TRUSTEE:
/s/ Thomas F. Reiner
-----------------------
Thomas F. Reiner
INVESTOR:
ARBORA, A.G.
/s/ Ulrich W. Rud
-----------------------
Ulrich W. Rud, Partner
/s/ Rudolph O. Hugi
-----------------------
Rudolph O. Hugi, Partner
3
Exhibit 10.82
<PAGE>
VOTING TRUST AGREEMENT
This Agreement is entered into as of this 8th day of November, 1995, by and
between Thomas F. Reiner ("Trustee") and Ulrich W. Rud and Rudolph O. Hugi,
jointly (the "Investors") who hold warrants to purchase 250,000 shares of the
common stock, $0.002 par value (the "Stock") of Sparta Surgical Corporation, a
Delaware corporation (the "Company"). The Investors believe that the
establishment of this voting trust will promote the stability and continuity of
management and the policies of the Company and it is deemed to be mutually
advantageous that the Trustee shall have the voting power of the shares of the
Stock held by the Investors.
In order to induce the Investor to make certain investments in the Company,
the parties hereby agree as follows:
1. Delivery of Shares. The Investor agrees that the certificate or
certificates representing the Stock owned by it now or hereafter shall held by
the Trustee and that such Stock shall be registered in the name of the Trustee.
If the Company shall pay a stock dividend or effect a stock split, any
additional shares issued with respect to the Stock deposited hereunder shall be
deposited and registered in the name of the Trustee.
2. Trustee's Agreement. The Trustee shall hold in trust for the benefit of
the Investor, upon the terms and conditions set forth herein, the shares of
Stock deposited with the Trustee hereunder (the "Deposited Shares").
3. Voting Trust Certificates. The Trustee shall, upon receipt of any
Deposited Shares, issue a Voting Trust Certificate to represent such Deposited
Shares. The form of Voting Trust Certificate shall be as determined from time to
time by the Trustee. Subject to such reasonable rules as the Trustee may
prescribe from time to time, the Voting Trust Certificates, and the beneficial
interests in the shares represented thereby, shall be transferable upon the
books of the Trustee upon surrender of the Voting Trust Certificate duly
endorsed by the holder, or assigned for transfer. Until so transferred, the
Trustee may treat as the owner for all purposes the person registered on the
books of the Trustee as the holder of a Voting Trust Certificate. Every
transferee of a Voting Trust Certificate, by acceptance thereof, shall become a
party hereto, and included in the term "Investor".
4. Transfer Records. During the term of this agreement, the Trustee shall
keep a record of the names and addresses of all Voting Trust Certificate
holders, the number of shares of Stock held by each, and the correct books of
account of all matters relating to the Deposited Shares. These records shall be
made available for inspection by the Voting Trust Certificate holders. The books
of transfer of Voting Trust Certificates may be closed by the Trustee at any
time in anticipation of a dividend or other distribution or for any other
purpose which the Trustee considers proper.
<PAGE>
5. Term. This agreement shall be perpetual in duration and may be
terminated only by (i) the cancellation of the Deposited Shares on the books of
the Company upon their surrender thereto; or (ii) the written consent of the
Trustee together with all of the registered holders of Voting Trust
Certificates.
6. Cash Dividends. Each holder of a Voting Trust Certificate shall be
entitled to receive payments equal to the cash dividends received by the Trustee
with respect to the Deposited Shares represented by the Investor's Voting Trust
Certificate. The Trustee may instruct the Company to have such dividends paid
directly to the registered holder of the Voting Trust Certificates.
7. Proxy; Limitation on Power to Transfer Deposited Shares. The Trustee
shall be entitled in his discretion to exercise in person or by proxy any and
all of the voting rights and powers of the absolute owners of the Deposited
Shares, including the right to consent to or vote for any merger, transfer of
all or substantially all of the assets of the Company, or any readjustment of
the capital structure of the Company, whether or not any such transaction has
the effect of transferring control of the Company. The Trustee shall have no
right or power to sell, assign, pledge, encumber or otherwise transfer the
Deposited Shares other than to the holders of the Voting Trust Certificates upon
the termination of this trust.
8. Limited Liability of Trustee; Interest in Transactions. The Trustee will
exercise his best judgement, but assumes no responsibility in respect of any
action taken by him and shall incur no responsibility as stockholder, trustee or
otherwise by reason of any error of law or of any matter or anything done or
omitted to be done under this agreement, except for his own intentional
misconduct. The Trustee may become interested, individually or in another
capacity in the Company as a stockholder, director, officer or otherwise and in
such connection may receive compensation from the Company in the form of salary
or in any other manner, as though he were not a Trustee hereunder.
9. Notices. All notices to holders of Voting Trust Certificates shall be
given by mail at the address furnished by the holders to the Trustee, and such
mailing shall be the only notice required to be given to holders of Voting Trust
Certificates hereunder.
10. Indemnification of Trustee. The Trustee shall not be entitled to any
compensation for his services. The holders of the Voting Trust Certificates
agree to keep the Trustee indemnified and exonerated against all cost, loss and
liability arising as a result of the Trustee's performance of his powers
hereunder. Until fully reimbursed and indemnified, the Trustee shall be entitled
to reimbursement and indemnity out of the Deposited Shares.
2
<PAGE>
11. Legend. The certificates evidencing Stock held by the Company on
account of the holder of any Voting Trust Certificate shall be conspicuously
stamped or otherwise imprinted with a legend in substantially the following
form:
"The securities represented by this
certificate are subject to the terms of the
Voting Trust Agreement by and among the
original holders of such securities and the
Trustee of such agreement. A copy of such
agreement will be furnished without charge by
the Company to the holder of this certificate
upon the holder's written request."
12. Miscellaneous. This agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original and the same
instrument.
TRUSTEE:
/s/ Thomas F. Reiner
-----------------------
Thomas F. Reiner
INVESTOR:
/s/ Ulrich W. Rud
-----------------------
Ulrich W. Rud, Partner
/s/ Rudolph O. Hugi
-----------------------
Rudolph O. Hugi, Partner
Exhibit 10.83
<PAGE>
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement") is made and entered into as
of the 12th day of December , 1995, by and between Sparta Surgical Corporation,
a Delaware corporation (the "Company") and Thomas F. Reiner (the "Optionee").
WHEREAS, Optionee is the President, Chief Executive Officer, Chairman and
Treasurer of the Company;
WHEREAS, the Company desires to issue to the Optionee options in
consideration for the exemplary services he has rendered to the Company during
the prior fiscal year and specifically for his efforts in locating a purchaser
for and negotiating the sale of the Company's woundcare products line of
business to Tecnol, Inc. for a purchase price of approximately Five Million Two
Hundred Fifty Thousand Dollars; and
WHEREAS, the Company desires to grant to Optionee an option to purchase up
to 500,000 shares of the Company's Common Stock, and the Optionee desires to
accept such options, upon the terms and conditions set forth herein;
NOW THEREFORE, the parties hereto agree as follows:
1. Grant of Option. Subject to the provisions set forth herein and in
consideration of the agreements of the Optionee herein provided, the Company
hereby grants to Optionee an option (hereinafter the "Option") to purchase a
total of 500,000 shares of the Company's Common Stock.
2. Purchase Price. The exercise price of the Option granted hereunder shall
be $0.40 per share of Common Stock, which is in excess of the fair market value
of the Common Stock on the date hereof.
3. Period of Exercise.
(a) The Option being granted hereunder shall expire on December 4, 2003,
unless otherwise provided for in this Agreement.
(b) Optionee may exercise the Option granted hereunder so long as he is an
employee of the Company, except as provided in Paragraph 4 with respect to
termination of employment.
4. Termination of Employment. In the event that the employment of the
Optionee with the Company is terminated for any reason, the Optionee may
exercise the Option within three (3) months after the date of such termination;
provided, however, that:
(a) If the Optionee's employment is terminated because he is disabled
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, then the Optionee shall have one (1) year to exercise the Option (to
the extent it is exercisable at the date of termination).
<PAGE>
(b) If the Optionee dies, then the Optionee's legal representative or a
person who acquired the right to exercise such Option by bequest or inheritance
or by reason of the death of the Optionee may exercise the Option (to the extent
it is exercisable at the date of termination), but Optionee's legal
representative or a person who acquired the right to exercise such Option by
bequest or inheritance or by reason of the death of the Optionee must exercise
the Option within one (1) year after the date of Optionee's death.
(c) If Optionee's employment is terminated for "cause" the Option shall
terminate immediately.
(d) If Optionee's employment is terminated on or before December 4, 1997
other than for the reasons set forth in subsections (a), (b) or (c) of this
Section 4, the Optionee shall be entitled to purchase the entire amount of
shares available under this Option.
(e) In no event (including by death of the Optionee) may the Option be
exercised after December 4, 2003.
For purposes of this Agreement, "cause" shall be considered as the
occurrence of any of the following events: (i) Optionee's refusal or intentional
failure to carry out the reasonable directives of the Board of Directors,
repeated after written notice of such refusal or failure has been given to
Optionee, and having a material adverse effect upon the Company's business or
financial circumstances; (ii) Optionee's habitual gross neglect of a substantial
portion of his duties with the Company, which has not been cured by the Optionee
within 30 days after prior written notice thereof is given by the Company to the
Optionee; and (iii) the Optionee's conviction of a felony involving fraud,
theft, or embezzlement. In no event shall "cause" be deemed to mean the Board of
Director's mere disagreement, after the fact, with any lawful action undertaken
by the Optionee in the good faith exercise of his business judgment.
5. Adjustment Provisions. The aggregate number of shares of Common Stock
subject to the Option and the option price per share shall be appropriately
adjusted for any increase or decrease in the number of shares of issued Common
Stock resulting from a subdivision or consolidation of the shares, whether
through reorganization, recapitalization, stock split-up, stock distribution, or
a combination of shares, or resulting from the payment of a share dividend or
other increase or decrease in the number of such shares outstanding effected
without receipt of consideration by the Company.
2
<PAGE>
6. Method of Exercise. The Optionee may exercise the Option by written
notice to the Company accompanied by payment (in such form as the Company may
specify) of the full purchase price of the shares of Common Stock to be issued
and, in the event of an exercise under the terms of Paragraphs 4 (b) hereof,
appropriate proof of the right to exercise the Option, registered in the name of
the Optionee (or other purchaser under Paragraph 4 hereof) as soon as
practicable after receipt of the notice.
7. Withholding. In any case where withholding is required or advisable
under federal, state, or local law in connection with any exercise by the
Optionee hereunder, the Company is authorized to withhold appropriate amounts
from amounts payable to the Optionee or may require the Optionee to remit to the
Company an amount equal to such appropriate amounts prior to the delivery of any
stock certificate or certificates for shares of Common Stock.
8. Acquisition, Merger, and Liquidation.
(a) Subject to any required action by the Company's shareholders, if the
Company shall be the surviving corporation in any merger or consolidation, any
Option granted hereunder shall pertain to and apply to the securities to which a
holder of the number of shares of Common Stock subject to the Option would have
been entitled in such merger or consolidation.
(b) A dissolution or a liquidation of the Company or a merger and
consolidation in which the Company is not the surviving corporation shall cause
every Option outstanding hereunder to terminate as of the effective date of such
dissolution, liquidation, merger, or consolidation. However, the Optionee either
shall be provided a firm commitment whereby the resulting or surviving
corporation in a merger or consolidation shall tender to the Optionee an option
to purchase its shares and which shall otherwise substantially preserve to the
Optionee the rights and benefits of the Option outstanding hereunder granted by
the Company, or in the Optionee's sole discretion, the Optionee shall have the
right immediately prior to such dissolution, liquidation, merger, or
consolidation to exercise any unexercised Option whether or not then
exercisable, subject to the provisions of this Agreement.
9. Securities Registration.
(a) If, at any time or times after the date hereof, the Company shall file
any registration statement pursuant to the Securities Act of 1933, as amended,
covering securities of the same class as the Common Stock issuable upon the
exercise of the Option (hereinafter referred to as "Registration", and the act
of so doing as "to Register") other than solely for the purpose of specific
acquisitions of subsidiary enterprises, the Company will give the Optionee
advance written notice of such Registration, and the Company will afford the
3
<PAGE>
Optionee, if so requested, the opportunity to have any Common Stock issuable
pursuant to the Option then held by him included in the Registration, if such
request is made within 15 days after receiving such notice, to the extent and
under the condition that such Registration is permissible under applicable laws;
provided, however, that the notice provisions and other rights under this
Section 9 shall not apply to any Registration by the Company to the extent that,
in the good faith opinion of the managing underwriter used by the Company in
such Registration (which opinion shall be delivered to Optionee in writing,
signed by an officer of such underwriter), the inclusion of the Registrable
Shares or of more than a designed portion thereof in such Registration would be
detrimental to the public offering attendant to such Registration, in which case
such "underwriter's cutback" shall be allocated among any other selling
stockholders on a pro rata basis in accordance with theirrespective amounts of
Common Stock then owned of record (or issuable pursuant to Option owned of
record) which they have requested in writing to be Registered as set forth
herein. The Optionee shall comply with such reasonable requirements as may be
imposed by the Company or the managing underwriter upon offering stockholders of
the Company generally, in order to effect an orderly distribution.
(b) At the Optionee's request and expense, and after exercise of the
Option, upon a single occasion only, the Company shall be required to register
the Common Stock acquired by Optionee upon the exercise of the Option under the
Securities Act of 1933, as amended. No request may be made under this Section 9
within 120 days after the effective date of a registration statement filed by
the Company respecting a firm commitment underwritten public offering in which
the Optionee shall have been entitled to join pursuant to Section 9 (a) hereof.
10. Requirements of Law. The granting of the Option and the issuance of
shares of Common Stock upon the exercise of such Option shall be subject to all
applicable federal and state laws, rules and regulations.
11. No Obligation to Exercise Option. The grant of the Option hereunder
shall impose no obligation upon the Optionee to exercise such Option.
12. Transferability. The Option may be exercised only by the Optionee,
during the Optionee's lifetime, and may not be transferred other than by will or
the applicable laws or descent or distribution. This Agreement and the Option
granted hereunder shall not otherwise be transferred, assigned, pledged, or
hypothecated for any purpose whatsoever and are not subject, in whole or in
part, to execution, attachment, or similar process. Any attempted assignment,
transfer, pledge, or hypothecation or other disposition of this Agreement and
the Option granted hereunder, other than in accordance with the terms set forth
herein, shall be void and of no effect.
4
<PAGE>
13. Representation. The Optionee represents for himself and his heirs and
legatees that any and all Common Stock purchased under this Agreement shall be
acquired for the Optionee's own account for investment and not with a view to,
or for sale in connection with, any distribution of the Common Stock so
purchased or, in the case of acquisition by the Optionee's estate, that the
Common Stock shall be acquired for resale in a transaction which, in the opinion
of counsel for the Company, shall not violate any federal or state law. The
Company will, if it is deemed necessary, require that an appropriate legend be
inscribed on any certificates issued under this Agreement, indicating that
transfer of the share of Common Stock is restricted, and an appropriate stop
transfer order shall be entered with the Company's transfer agent with respect
to such share of Common Stock.
14. Shareholder Rights. Neither the Optionee nor any other person entitled
to exercise the Option under the terms hereof shall be, or have any of the
rights or privileges of, a shareholder of the Company with respect to any of the
shares of Common Stock issuable on exercise of the Option, unless and until the
purchase price of such shares of Common Stock shall have been paid in full.
15. Standard Provisions.
(a) This Agreement constitutes the entire agreement of the parties and
supersedes any prior or contemporaneous understandings or agreements of the
parties with respect to the matters covered hereunder.
(b) No amendment, change, or modification of any of the terms, provision,
or conditions of this Agreement shall be effective unless made in writing and
signed or initiated on behalf of the parties hereto.
(c) At the election of the Optionee, any dispute respecting this Agreement,
whether commenced by the Company or Optionee may be resolved by arbitration
before a three person panel of independent arbitrators to the Commercial Rules
of the American Arbitration Association ("AAA"). Any arbitration compelled to
this section shall be held at the AAA office nearest to the Optionee's residence
at the time such action is commenced. The Optionee shall be entitled to a stay
of any legal proceeding instituted against by the Company in the event that an
election to arbitrate pursuant to this Section is made.
(d) If a suit or action is instituted in connection with any controversy
arising out of this Agreement or in the enforcement of any rights hereunder, the
Optionee shall be entitled to recover his actual costs and reasonable attorneys'
fees, including fees on any appeal.
5
<PAGE>
(e) If any clause, sentence, provision, or other portion of this Agreement
is or becomes illegal, null, void, or unenforceable for any reason, or is held
by any court of competent jurisdiction to be so, the remaining portion shall
remain in force and effect.
(f) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same document.
(g) This Agreement shall be interpreted and construed in accordance with
the laws of the State of California. In the event that, notwithstanding Section
15 (g), any litigation relating to this Agreement is held to be permissible, the
venue thereof shall be in the appropriate court with jurisdiction over the
matter in dispute for the county in which the Optionee resides at the time of
the filing of the lawsuit in question.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement as of the effective date first set forth above.
COMPANY:
SPARTA SURGICAL CORPORATION
By:/s/ W. Samuel Veazey
--------------------------------
W. Samuel Veazey, Vice President
of Finance
OPTIONEE:
/s/ Thomas F. Reiner
--------------------------------
Thomas F. Reiner
6
Exhibit 10.84
<PAGE>
EXHIBIT A
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made this 8th day of April,
1996, by and between Sparta Surgical Corporation, a Delaware corporation, having
its principal offices at 7068 Koll Center Parkway, Bernal Corporate Park, Suite
401, Pleasanton, California 94566 (the "Employer"), and Thomas F. Reiner (the
"Employee"). This Agreement supersedes any and all prior employment agreements
between the Employer and Employee and the terms of such prior agreements shall
hereafter be deemed to be null and void and of no continuing effect.
WHEREAS, the Employer and Employee are desirous of entering into a
Employment Agreement to replace all prior employment agreements and restated or
amended employment agreements which have been entered into between the Employee
and the Employer; and
WHEREAS, after discussion of the goals and interests of the Employer, the
Employee has offered to make certain accommodations as to the term of his
existing employment agreement and the Employer and the Employee have reached the
agreement as to the terms of the continued employment of the Employee as are
more fully set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Employer and the
Employee agree as follows:
1. Employment. The Employer hereby agrees to employ the Employee, and the
Employee hereby accepts employment, all upon the terms, conditions and covenants
set forth in this Agreement.
2. Duties. The Employer hereby employs the Employee to serve as its
President, Chief Executive Officer and Chairman of the Board and such other
offices as Employee may be elected to hold from time to time, with all powers
and duties customarily associated with such titles. During the term of this
Agreement, the Employee shall serve also, without additional compensation, as a
Director of the Employer, if and when so elected by the shareholders of the
Employer. The Employee shall be required to devote an average of 40 hours per
week to his duties hereunder. Nothing contained herein shall be deemed to
prohibit the Employee from devoting any of his time, attention, and energies to
other business interests, however, provided that such other business interests
are not directly competitive with the business of the Employer; and further
provided that such other interests shall not materially detract from such
efforts which, in Employee's reasonable judgment, are necessary in order to
promote the interests of the Employer. The Employee's duties hereunder will be
performed primarily within the State of California, and, until otherwise changed
by mutual agreement, his work location shall be Alameda County, or Contra Costa
County, California.
<PAGE>
3. Term. Subject to Section 11, the term of this Agreement shall begin on
the date hereof and, unless terminated sooner pursuant to Section 11, shall
continue until February 28, 2003 (the "Term"). The Term shall automatically be
renewed for an additional three year period unless, not later than 90 days prior
to the expiration of the Term, the party desiring to terminate this Agreement
shall have notified the other in writing of its intention to terminate, which in
the case of the Employer shall be authorized by the Employer's Board of
Directors.
4. Compensation and Benefits.
(a) In each year of this Agreement the Employer shall pay to the Employee
an annual base salary, which in the first year of the Term shall be in the
amount of Two Hundred Thirty Nine Thousand Five Hundred Dollars ($239,500.00);
in each subsequent year the base salary shall be increased by a percentage equal
to the amount of the Producer Price Index -- Surgical and Medical Instruments
and Apparatus, U.S. Department of Labor, Bureau of Labor Statistics (or in the
event such index is no longer maintained, the Consumer Price Index) or four
percent (4%), whichever is greater, from the amount of salary payable in the
immediately preceding year. The payment of the annual salary shall be made in
accordance with the Employer's general payroll policies and shall be prorated
for any partial years of employment hereunder. The Board of Directors shall have
the right to increase, but not decrease, the annual salary from year to year,
and, in its discretion, to pay bonuses to the Employee as it deems appropriate.
(b) The Employee was granted options on February 14, 1994 to purchase from
the Employer up to Five Hundred Thousand (500,000) shares of the Employer's
authorized but unissued common stock, $0.002 par value (the "Common Stock"), at
an exercise price of $2.25 per share, which options are subject to the terms and
conditions to be set forth more specifically in a Stock Option Agreement dated
March 9, 1994. Such options were in addition to certain other options previously
granted to the Employee, but in lieu of and not in addition to any options to
which the Employee might be entitled to pursuant to the Stock Option Agreement
dated September 23, 1992, as amended on September 27, 1993 or the Stock Option
Agreement dated on or about March 9, 1994. The Employee has agreed to cancel
200,000 of these options leaving 300,000 options outstanding. Of these options
200,000 are exercisable immediately. The remaining 100,000 options are
exercisable upon the conditions provided for in the Stock Option Agreement with
the additional condition that they may not be exercised until such time during
the term of such agreement as the Employer's Income from Operations (as defined
in Section 4 (f)) is equal to or exceeds $1,000,000. A Restated Stock Option
Agreement was executed by the Employer and Employee which sets forth these
conditions.
2
<PAGE>
(c) The Employee shall be entitled to participate (to the extend that he is
eligible) in all other employee benefits, if any, provided by the Employer for
its employees, including participation in any qualified pension or profit
sharing plan, eligibility for participation in any group life, health (including
family dependant coverage), dental and eye care benefits. If a "change in
control" occurs (as defined in Section 13), the Employee may choose, within one
year following the event giving rise to the change in control, to receive
instead of any regularly-provided employee benefit or other benefit provided for
hereunder, the similar benefit provided by the Employer prior to such event, for
the balance of the Term hereunder. If there is no benefit then provided which is
similar to a previously-provided employee benefit, or if the benefit elected by
the Employee cannot be provided by the Employer, then the Employer (or its
successor) shall pay the Employee, no less than monthly, as additional
compensation, a cash amount equal to the value of the benefit to the Employee.
This provision shall survive any termination of this Agreement.
(d) The Employer shall provide or reimburse the Employee for disability
insurance coverage in the minimum amount of $12,500 per month, and whole life
insurance coverage in the minimum amount of $500,000 and term life insurance in
the minimum amount of $1,000,000 during the Term, which policies shall be in the
name of the Employee and payable to such beneficiaries as designated by
Employee. The Employer shall provide the Employee with key man life insurance
coverage in the minimum amount of $1,000,000 during the Term, which policy shall
list the Employer as beneficiary.
(e) In addition to all benefits, Employee shall also be entitled to 50% of
all pooled management bonuses to be shared among the Employer's management
during the Term, which pooled management bonuses shall be equal to 8% of the
Employer's pre-tax earnings for each fiscal year. For purposes hereof, pre-tax
earnings will be determined before reduction for any bonus accrual for
management or other similar bonus arrangements in accordance with generally
accepted accounting principles consistently applied. Such bonus will be paid no
later than 10 days following public release of annual financial statements for
said year. Notwithstanding the date of this Agreement, as no pooled management
bonus has yet been paid respecting the Employer's fiscal year ended February 28,
1996, the preceding bonus shall also be payable with respect to such period
following the release of the Employer's financial statements.
(f) In addition to all other benefits and not in lieu thereof, Employee
shall also be entitled to a bonus in the event that the Employer's Income from
Operations (defined as Net Sales less (i) Cost of Goods Sold; and (ii) Operating
3
<PAGE>
Expenses, which expenses include Selling, General and Administrative Expenses
but do not include Depreciation and Amortization, and Interest expenses) exceeds
certain amounts for any fiscal year during the Term, which bonus shall be
calculated as follows: (i) In the event Income from Operations for any fiscal
year exceeds $150,000, Employee shall be paid a bonus of $15,000; (ii) In the
event Income from Operations for any fiscal year exceeds $210,000, Employee
shall be paid a bonus of $30,000; (iii) In the event Income from Operations for
any fiscal year exceeds $300,000, Employee shall be paid a bonus of $50,000;
(iv) In the event Income from Operations for any fiscal year exceeds $450,000,
Employee shall be paid a bonus of $65,000; (v) In the event Income from
Operations for any fiscal year exceeds $600,000, Employee shall be paid a bonus
of $75,000; (vi) In the event Income from Operations for any fiscal year exceeds
$750,000, Employee shall be paid a bonus of $85,000; (vii) In the event Income
from Operations for any fiscal year exceeds $900,000, Employee shall be paid a
bonus of $95,000. However, fifty percent (50%) of all such bonuses shall be
offset by Employer against any indebtedness of Employee to Employer then
outstanding, including but not limited to the Note defined in Section 4(g)
below. Notwithstanding the date of this Agreement, as no bonus has yet been paid
respecting the Employer's fiscal year ended February 28, 1996, the preceding
bonus shall also be payable with respect to such period following the release of
the Employer's financial statements.
(g) In consideration for the past services rendered by Employee and the
outstanding efforts made by Employee on behalf of the Employer, the Employer
agrees to completely repay a certain obligation with a current balance of
approximately $420,000, as to which Employee is jointly and severally liable
together with another party to Bank Hapoalim, in return for which Employee will
owe one half of such amount, or $210,000, to Employer. Employee shall deliver to
Employer, upon Employer's request promptly upon such repayment, a promissory
note in said amount (the "Note") documenting such obligation. The amount of
principal and all interest accruing under the Note shall be due and payable
twelve (12) years from April 22, 1994, subject to any prepayments otherwise
required by the terms of this Agreement (which prepayments shall be applied
first to accrued interest and thereafter to repay principal) and shall bear
interest at a rate of six percent (6%) per annum. In the event Employee's
employment with the Employer terminates for any reason except for "cause" (as
defined in Section 11 (c) hereunder), any and all obligations from Employee to
Employer which remain at such time under the Note shall be forgiven by the
Employer (and any successor).
5. Sick Pay and Disability Income. Salary, employee benefits, vacation
accruals, automobile allowance and all other benefits set forth herein shall be
paid to the Employee for any temporary periods of illness during which the
Employee is unable to work and through the period of any disability (as defined
hereinafter).
4
<PAGE>
6. Vacation and Conventions. The Employee shall be entitled each year to
four weeks of paid vacation, prorated for any partial year. Unused vacation time
(including time accumulated prior to the date hereof) shall accumulate from year
to year and the Employee will be compensated for any unused vacation accumulated
upon demand at any time following its accrual (including any vacation time
accrued prior to the date of this agreement for which payment has not yet been
made). In addition, the Employee will be entitled to leaves of absence, at full
pay, for attendance at conventions, seminars or as otherwise reasonably
determined by the Employee. In the event any vacation time shall not be taken by
the Employee during any given year and compensation is not rendered for such
unused vacation time, Employee shall be entitled to carry over such time into
any subsequent year or years during the Term. In the event that Employee has any
unused vacation time accrued under this Agreement upon the termination of
Employee's employment or at the conclusion of the Term, Employee shall be
entitled to be compensated for such unused vacation time.
7. Reimbursement for Expenses. The Employer shall reimburse the Employee
for items of travel, entertainment or meals incurred while working outside of
the Company's principal office (including working at the Employee's home), and
miscellaneous expenses incurred or paid by the Employee in the performance of
his duties under this Agreement (including conventions and seminars), within ten
(10) days following presentation by the Employee of such expense statements,
vouchers or other supporting information as the Employer may reasonably require.
8. Automobile. The Employer will provide the Employee with either an
automobile allowance of a minimum of $1,300.00 per month (increased at the
beginning of each year, only, by the Consumer Price Index as determined by the
United States Department of Commerce, or any replacement index), or, if Employee
so elects, with free use of any automobile of Employee's choice. In addition,
the Employer will either pay directly or reimburse the Employee for all expenses
incurred in connection with such automobile, including without limitation,
insurance, fuel, maintenance and repairs. Reimbursement shall be made within ten
(10) days following the Employer's receipt of a signed itemized list of such
expenses. The value of any benefits given to or of any amounts paid to the
Employee under this Section 8 in excess of Employee's actual costs and expenses
incurred in the performance of services for Employer shall be deemed additional
compensation under this Agreement and not subject to reimbursement to the
Employer.
9. Office. The Employer shall provide the Employee with an office,
secretarial and administrative assistance, office equipment and supplies and
such other facilities and services as are suitable to the Employee's position
5
<PAGE>
and adequate for the performance of his duties. In addition, the Employer shall
reimburse the Employee for any expenses incurred by the Employee for use of his
home for business purposes on behalf of the Employer and any associated
expenses, including but not limited to those referenced in paragraph 7 hereof.
10. Withholding. The Employer shall withhold or deduct from the Employee's
compensation any amounts required by law to be so withheld or deducted.
11. Termination. This Agreement shall be terminated (except for those
obligations of the Employer which by their terms survive termination) by the
occurrence of any of the following:
(a) The Employee's death.
(b) The action by the Board of Directors following the Employee's
"disability". For this purpose, "disability" means a physical or mental illness
or other incapacity which renders the Employee unable to perform substantially
all of his duties for a period of 36 months. For purposes of this Agreement,
disability shall be deemed a continuation of any prior disability if the
disability is related to the prior disability and commences within 12 months of
the termination of the prior disability. Disability, and any relation to any
prior disability, shall be determined by a physician mutually acceptable to the
parties to this Agreement or appointed by a court having personal jurisdiction
over the Employee.
(c) Action of the Board of Directors of the Employer for Cause. "Cause" is
defined as the occurrence of any of the following events: (i) Employee's willful
breach of this Agreement, repeated after written notice of such breach has been
given to Employee, and having a material adverse effect upon the Employer's
business or financial circumstances; (ii) Employee's refusal or intentional
failure to carry out the reasonable directives of the Board of Directors,
repeated after written notice of such refusal or failure has been given to
Employee, and having a material adverse effect upon the Employer's business or
financial circumstances; (iii) Employee's habitual gross neglect of a
substantial portion of his duties hereunder, which has not been cured by the
Employee within 30 days after prior written notice thereof is given by the
Employer to the Employee; and (iv) the Employee's conviction of a felony
involving fraud, theft, or embezzlement. In no event shall "cause" be deemed to
mean the Board of Director's mere disagreement, after the fact, with any lawful
action undertaken by the Employee in the good faith exercise of his business
judgment.
(d) Upon the election of the Employee by written notice to the Employer not
less than: (i) 120 days prior to the effective date of termination, or (ii)
after a change in control (as defined in Section 13), 30 days prior to the
effective date of termination.
6
<PAGE>
(e) Upon the election of the Employee with "good reason". "Good reason" is
defined as a material breach of this Agreement by the Employer and includes, but
is not limited to, any decrease in the salary or benefits provided to the
Employee, relegating the Employee to duties which are unrelated to or at a lower
level of responsibility than those currently performed by Employee, having
Employee report to any other officer rather than directly to the Board of
Directors, altering Employee's title as Chairman, President or Chief Executive
Officer, or relocating the Employee to a location unreasonably distant from his
work location. Provided, however, that for the purposes of this Section 11 (e)
the term Employer shall include (A) the surviving entity in the event of any
merger between the Employer and another entity; or (B) any company holding at
least a majority of the outstanding common stock of the Employer, in the event
that a controlling interest in the shares of the Employer were acquired by any
other entity.
12. Damages for Breach by Employer.
(a) The employment provisions in this Agreement are a material inducement
to the Employee in continuing to render services to the Employer during the Term
and thereafter. The parties acknowledge that if the Employer should breach such
provisions, the Employee may be required to bring legal action for damages and
that questions of mitigation of damages would be presented which could be very
difficult to resolve prior to expiration of the Term. For the sake of certainty
and to avoid the cost, difficulty and delay of proving damages in such
circumstances, both parties agree that the Employee shall be entitled to the
amount of liquidated damages as set forth in Section 12 (c) in the event of the
Employer's breach.
(b) If (i) the Employee terminates this Agreement for "good reason", or
(ii) If during the Term hereof, the Employer (or any successor) terminates the
Employee's employment for any reason other than "cause", as defined herein,
then, in either such case, the Employer shall pay to the Employee, not later
than ten days after the date of such termination, the amount of damages as set
forth in Section 12 (c).
(c) In the event of the termination of this Agreement to Sections 12 (a) or
(b), Employee shall be entitled to an amount of damages equal to: (i) 100% of
the Employee's base salary (including any required increases) for the remainder
of the Term, but in no event for less than five (5) years from the date of
termination, plus (ii) an additional 50% of such base salary, paid in a lump
sum, to compensate for the loss of fringe benefits, plus (iii) the average
annual bonus paid by the Employer to the Employee for the three (3) full fiscal
7
<PAGE>
years of the Employer prior to the year in which termination occurred,
multiplied by the years or fraction thereof in the period described in
subsection (i) hereof, provided however, that Employer shall not be required to
pay the Employee in excess of $4,000,000 pursuant to this Section 12 (c). The
Employee shall not be required to mitigate the amount of any payment provided
for in this Section 12 (c) by seeking other employment or otherwise, nor shall
the Employee's income from any source after such termination be deducted for any
reason from the sum computed under this Section 12 (c).
(d) If the Employer refuses to pay the Employee any amount due the Employee
under this Agreement, including salary, benefits or the amount provided in
Sections 12 (a) or (b), and the Employee disputes the Employer's legal right to
do so, and whether or not such refusal is occasioned by a termination or
purported termination of this Agreement, then, regardless of whether the
Employee has a right to do so, the Employer shall pay to the Employee the
amounts due (including all future amounts) consistent with the Employer's normal
payroll policies and procedures until the dispute is settled or adjudicated. The
Employer shall also reimburse the Employee (in the manner described in Section
7) for any fees or expenses related to the dispute within ten (10) days of its
receipt of an invoice evidencing the same from the Employee. If the Employer
prevails in resolution of such dispute, the Employee shall repay the Employer
all sums received under this Section 12 (d) (including fees and expenses),
without interest. The parties acknowledge that if the Employer should fail to
honor its obligations under this Section 12 (d), the Employee could be
irreparably injured by, among other things, not being able to support himself
and also support the enforcement of his rights under this Agreement and
accordingly the eventual award of damages would under the circumstances not be
an adequate remedy.
(e) The provisions of this Section 12 shall survive any termination of this
Agreement.
13. Change in Control Defined. A "change in control" occurs upon the
occurrence of one of the following events, but only if the Employee elects,
within five years thereafter, to have such event treated as a change in control:
(a) An event that would be required to be reported in response to Item 5
(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"), or any successor thereof, assuming the
Employer was a reporting company or was otherwise required to file reports under
the Exchange Act.
(b) Any "person" (as such term is defined in Sections 13 (d) and 14 (d) (2)
of the Exchange Act) who is not currently an owner of securities of the
Employer, is or becomes the beneficial owner, directly or indirectly, of
securities of the Employer representing 20% or more of the combined voting power
of the Employer's then outstanding securities pursuant to a tender offer or
otherwise.
8
<PAGE>
(c) During any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Employer cease
for any reason to constitute at least a majority thereof unless the election of
each director, who was not a director at the beginning of the period, was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period.
14. Indemnification.
(a) The Employer agrees to indemnify the Employee in any suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Employer) by reason of the fact that the
Employee is or was a Director, officer, employee or agent of the Employer, or is
or was serving at the request of the Employer as a Director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Employer and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the Employee did not act in good faith and in manner which he reasonably
believed to be in or not opposed to the best interests of the Employer and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
(b) The Employer shall indemnify the Employee in any threatened, pending or
completed action or suit by or in the right of the Employer to procure a
judgment in its favor by reason of the fact that the Employee is or was a
Director, officer, employee or agent of the Employer, or is or was serving at
the request of the Employer as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Employer; except that no indemnification shall be made in
respect of any claim, issue or matter as to which the Employee shall have been
adjudged to be liable to the Employer unless and only to the extent that the
9
<PAGE>
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses which the Court or Chancery or such
other court shall deem proper.
(c) Any indemnification under this Section 14 (unless ordered by a court)
shall be made by the Employer only as authorized in the specific case upon a
determination that indemnification of the Employee in the circumstances because
he has met the applicable standard of conduct set forth in paragraphs (a) or (b)
of this Section 14, as the case may be. Such determination shall be made (i) by
the Board of Directors by a majority vote of a quorum consisting of Directors
who were not parties to such action, suit or proceeding, or (ii) if such a
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
Directors so directs, by independent legal counsel in a written opinion, or
(iii) by the Employee's stockholders. To the extent, however, that the Employee
has been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorney's fees) actually
and reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific.
(d) For purposes of any determination under paragraph (c) of this Section
14, the Employee shall be deemed to have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Employer, or, with respect to any criminal action or proceeding, to have had no
reasonable cause to believe his conduct was unlawful, if his action is based on
the records or books of account of the Employer or another enterprise, or on
information supplied to him by the Officers of the Employer or another
enterprise in the course of their duties, or on the advice of legal counsel for
the Employer or another enterprise or on information or records given or reports
made to the Employer or another enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Employer or another enterprise. The term "another enterprise" as used in
this paragraph (d) shall mean any other corporation or any partnership, joint
venture, trust, employment benefit plan or other enterprise of which the
Employee is or was serving at the request of the Employer as a Director,
officer, employee or agent. The provisions of this paragraph (d) shall not be
deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in
paragraphs (a) or (b) of this Section, as the case may be.
(e) Notwithstanding any contrary determination in the specific case under
paragraph (c) of this Section 14, and notwithstanding the absence of any
10
<PAGE>
determination thereunder, the Employee may apply to any court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under paragraphs (a) and (b) of this Section 14. The basis
of such indemnification by a court shall be determination by such court that
indemnification of the Employee is proper in the circumstances because he has
met the application for indemnification pursuant to this paragraph (e) shall be
given to the Employer promptly upon the filing of such application.
(f) Expenses incurred in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Employer in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the Employee to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Employer.
(g) The indemnification and advancement of expenses provided by or granted
pursuant to the other paragraphs of this Section 14 shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement or expenses may be entitled under any By-Law, agreement, contract,
vote of the Employer's stockholders or disinterested Directors or pursuant to
the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in the Employee's official capacity and as to
action in another capacity while holding such office it being the policy of the
Employer that indemnification of the persons specified in paragraphs (a) and (b)
of this Section 14 shall be made to the fullest extent permitted by law. The
indemnification and advancement of expenses provided, or granted pursuant to,
this Section 14 shall, unless otherwise provided when authorized or ratified,
continue in the event the Employee has ceased to be a Director, officer,
employee or agent of the Employer and shall inure to the benefit of the heirs,
executors and administrators of the Employee.
15. Notice: Any notices required to be given pursuant to the provisions of
this Agreement shall be in writing and delivered by hand delivery, express
delivery service or by certified mail return receipt requested to the parties at
the following addresses:
Employer: Sparta Surgical Corporation
7068 Koll Center Parkway
Bernal Corporate Park, Suite 401
Pleasanton, California 94566
Employee: Thomas F. Reiner
3540 Roma Place
San Ramon, California 94583
11
<PAGE>
16. Successors; Binding Effect.
(a) The Employer shall require any successor (whether direct or indirect by
purchase of assets, purchase or exchange of stock, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Employer, by agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Employer would be required to perform it if no such
succession had taken place. Failure of the Employer to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement. As used in this Agreement, "Employer" shall mean Sparta Surgical
Corporation and any successor to the business and/or assets of Sparta Surgical
Corporation which executes and delivers the agreement provided for in this
Section 15 (a) or which otherwise becomes bound by all of the terms and
provisions of this Agreement by operation of law.
(b) This Agreement and all rights of the Employee hereunder shall inure to
the benefit of and be enforceable by the administrators, successors, heirs,
distributees, devisees and legatees of the Employee. If the Employee should die
prior to the payment to him of any amounts due him hereunder, all such payments
shall be made in accordance with this Section 15 (b).
17. Arbitration. At the election of the Employee, any dispute respecting
this Agreement, whether commenced by the Employer or Employee may be resolved by
arbitration before a three person panel of independent arbitrators pursuant to
the Commercial Rules of the American Arbitration Association ("AAA"). Any
arbitration compelled pursuant to this section shall be held at the AAA office
nearest to Employee's residence at the time such action is commenced. Employee
shall be entitled to a stay of any legal proceeding instituted against by the
Employer in the event that an election to arbitrate pursuant to this Section is
made.
18. Attorney's Fees and Litigation. In any litigation or arbitration
relating to this Agreement, including litigation or arbitration with respect to
any instrument, document or other agreement made under or in connection with
this Agreement, the Employer shall bear all costs and attorney's fees of both
parties.
19. Authority. Each party represents that its undersigned representative or
corporate officer has all requisite power and authority to enter into this
agreement and to execute any and all instruments and documents on its behalf
necessary to and in performance of their respective obligations hereunder.
20. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed original, but all of which together
shall constitute one and the same instrument.
12
<PAGE>
21. Severability. If any provisions of this Agreement shall be held to be
invalid or unenforceable to any extent or in any application, then the remainder
of this Agreement and such term and condition, except to such extent or in such
application, shall not be affected thereby, and each and every term and
condition of this Agreement shall be valid and enforced to the fullest extent
and in the broadest application permitted by law.
22. Headings: The paragraph headings contained herein are for convenience
and reference only, and shall be given no effect in the interpretation of any
term or condition of this Agreement.
23. Miscellaneous. This Agreement is entered into and shall be construed
under the laws of the State of California applicable to contracts made and to be
entirely performed which that State. In the event that, notwithstanding Section
16 hereof, any litigation relating to this Agreement is held to be permissible,
the venue thereof shall be in the appropriate court with jurisdiction over the
matter in dispute for the county in which the Employee resides at the time of
the filing of the lawsuit in question. This Agreement shall be amended, modified
or terminated only by an instrument in writing, signed by the party or parties
to be charged. This Agreement shall inure to the benefits of the parties and
their successors in interest. This Agreement is the entire agreement of the
parties relating to the employment of the Employee by the Employer and
supersedes all previous written or oral agreements.
IN WITNESS WHEREOF the parties have executed this Agreement under seal the
day and year first above written.
SPARTA SURGICAL CORPORATION
By its Board of Directors with
the Employee abstaining
/S/ Alan J. Korn /s/ Michel Y. Granger
- ----------------------------- ------------------------------
Alan J. Korn, Director Michael Y. Granger, Director
EMPLOYEE:
/s/ Thomas F. Reiner
------------------------------
Thomas F. Reiner
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-KSB FOR SPARTA SURGICAL CORPORATION FOR THE YEAR ENDED
FEBRUARY 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 397,081
<ALLOWANCES> 108,664
<INVENTORY> 2,609,387
<CURRENT-ASSETS> 2,982,381
<PP&E> 562,453
<DEPRECIATION> 227,394
<TOTAL-ASSETS> 5,200,894
<CURRENT-LIABILITIES> 1,735,911
<BONDS> 109,260
0
1,283,072
<COMMON> 7,694
<OTHER-SE> 1,663,157
<TOTAL-LIABILITY-AND-EQUITY> 5,200,894
<SALES> 5,759,107
<TOTAL-REVENUES> 5,759,107
<CGS> 3,265,903
<TOTAL-COSTS> 3,265,903
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 165,530
<INTEREST-EXPENSE> 496,935
<INCOME-PRETAX> 605,154
<INCOME-TAX> 0
<INCOME-CONTINUING> 605,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 605,154
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
</TABLE>
