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 28, 1997 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 $2,243,368.
As of May 16, 1997, 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 $983,712 based upon closing prices on
Nasdaq of $1.38 per share of $.002 Par Value Common Stock and $.46 per share of
$4.00 Par Value Redeemable Convertible Preferred Stock.
As of May 16, 1997, 833,089 shares of the Registrant's Common Stock,
135,483 shares of Redeemable Convertible Preferred Stock and 28,068 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
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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
transcutaneous electrical nerve stimulators ("TENS") and related electrode
products.
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:
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.
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
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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") for
$5,585,000 in cash and the elimination of $32,448 in certain other liabilities
owed by the Company. 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 of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
In November 1996, as subsequently amended, the Company entered into a
non-binding letter of intent for the acquisition of substantially all of the
assets of Orion Life Systems, Inc. ("Orion"). The purchase price to be paid for
the assets will be approximately $2,850,000 consisting of $950,000 in cash and
the assumption of liabilities not to exceed $1,900,000. The cash portion is to
be paid through the issuance of a non-interest bearing promissory note of
$100,000 and two promissory notes totalling $850,000 with interest at 8% per
annum. The notes are payable at varying amounts over a four year period and
contain an acceleration provision which provides that if a minimum $2,000,000 is
raised through the sale of equity securities all $950,000 of the notes are then
payable. The letter of intent also calls for the Company to issue earn-out
shares of Common Stock to Orion's president upon Orion meeting certain net sales
and pre-tax profit goals. The closing of the acquisition is subject to several
conditions, including the determination by the Company that the results of its
due diligence investigation of Orion's business and assets are satisfactory;
approval of the Board of Directors of both companies; the execution of a
mutually acceptable definitive purchase agreement; and completing the Company's
financing. Orion specializes in contract manufacturing, packaging, and
sterilization of medical devices and single-use procedure trays as well as
manufacturing and marketing its own line of urological, respiratory, and
intravenous therapy disposable products.
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 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.
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.
Research and Development
Approximately $52,661 and $42,404 was expended on Company-sponsored
research and development ("R&D") for the years ended February 29, 1996 and
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February 28, 1997, respectively. R&D continued to be focused on the redesign of
the Company's TENS units in an effort to increase the quality and reduce the
cost for the electrotherapy product line.
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.
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., Henley Healthcare International, Inc., Apria
Healthcare Co. 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. The Company has not yet commenced any R&D 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.
Manufacturing and 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
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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.
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, Pilling - Weck, Inc. and Katena Products, Inc. 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. 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.
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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.
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, 1997, the
Company had nine full-time employees, including two employees involved in
distribution; three sales and marketing employees; and four 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
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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 subleased (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 $8,882
Hammonton, NJ 41,500 05/31/00 $9,673
Pleasanton, CA 6,200 12/14/98 $3,968
- ----------
(1) Renewable for five years at the option of the Company.
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The Company believes its facilities are adequate for its needs in the
foreseeable future and that additional space is available at reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
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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") 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 17, 1997, the Federal District Court for the Northern District
of California (the "Court") granted a motion brought by the National Association
of Securities Dealers, Inc. (the "NASD") to dismiss the Registrant's complaint
in the action entitled Sparta Surgical Corporation v. NASD, et al., Case No.
C95-3926MHP. On February 28, 1997, the Company filed a Notice of Appeal before
the United States Court of Appeals for the Ninth Circuit. The Company's counsel
has identified two primary issues for appeal: (i) the Court's earlier ruling
that it had jurisdiction over the matter, which was reached by recasting the
Company's claim as federal, rather than state causes of action; and (ii) the
Court's granting of immunity to the NASD.
On April 19, 1996, the Company was served with a complaint filed by Phyllis
C. Ballew ("Ballew"), a former employee of the Company entitled Phyllis C.
Ballew v. Sparta Surgical Corporation; Thomas F. Reiner, Docket No. 766375-0,
Superior Court of California, County of Alameda, alleging damages for wrongful
termination. The Company regards these allegations entirely meritless and
frivolous and is vigorously defending Ms. Ballew's complaint.
On August 6, 1996, the Company settled three related civil actions entitled
Sparta Surgical Corporation v. Gerald S. Kramer ("Kramer"), Docket No. 94-0372,
Plymouth County Superior Court, Massachusetts; Gerald S. Kramer v. Sparta
Surgical Corporation and Thomas F. Reiner ("Reiner"), Civil Action No.
94-CO-6337T, United States District Court, Western District, New York; and
Sparta Surgical Corporation v. Gerald S. Kramer, Docket No. 96-10716-RGS, United
States District Court, Eastern District, Massachusetts. These actions involved
disputes between the Company; Reiner, the Registrant's Chairman, President and
Chief Executive Officer; and Kramer, a former officer and Chairman of the
Company's Board of Directors and concerned Kramer's termination as an officer
and director, disputes regarding his employment agreement and various monetary
obligations between the parties.
On November 26, 1996, the Company settled a civil action entitled Sparta
Surgical Corporation v. John P. Landino ("Landino") and cross-complaint, Docket
No. 752611-8, Superior Court of California, County of Alameda. This action
involved disputes between the Company; Reiner, the Company's Chairman, President
and Chief Executive Officer; and Landino, a former Vice President of Sales of
the Company and concerned Landino's resignation as an employee of the Company.
The Company sued Landino for monies owed to the Company under a promissory note
executed by Landino. Landino cross-complained against the Company alleging
damages for wrongful termination.
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Under the settlement agreements discussed above, the Company paid to Kramer
and Landino an aggregate amount of $297,500, and issued to Kramer and Landino an
aggregate of $187,500 in promissory notes, payable monthly over five years. In
addition, the parties exchanged general releases and the Company forgave
approximately $370,712 in debts from Kramer and Landino. The Company's
management believes that it would have ultimately prevailed in the above
lawsuits, but took the opportunity to settle these actions before substantial
additional legal fees and management time were expended.
On September 27, 1996, the Company was served with a complaint filed by
Storz Instrument Company ("Storz") entitled Storz Instrument Company v. Sparta
Maxillofacial Products, Inc., et al., Docket No. 4-96-CV-01920-CDP, U.S.
District Court in St. Louis, Missouri, seeking to collect the remaining balance
of $450,000 relating to a $1,050,000 note payable in connection with the
Company's acquisition of certain assets of Storz' Oral Maxillofacial product
line. On November 27, 1996, the Company paid Storz $100,000 and entered into an
agreement pursuant to which Storz would take no further action on its complaint
in exchange for payment of $350,000, on or before April 15, 1997, together with
all accrued interest thereon through the date of payment, plus $5,000 as a fixed
sum for attorneys' fees. On March 27, 1997, the Company repaid $120,000 to Storz
against the $350,000 note payable, $5,000 as a fixed sum for attorneys' fees,
and amended its November 27, 1996 agreement pursuant to which the Company is
required to make monthly $10,000 payments to be applied to interest and
principal, plus quarterly $10,000 forbearance payments, not to be applied to
principal or interest. If these payments are not made, a judgement will
automatically be executed against the Company for the balance of the note
payable.
On November 19, 1996, the Company was served with a complaint filed by
plaintiff, Robert M. Rubin ("Rubin") entitled Robert M. Rubin v. Sparta Surgical
Corporation, Case No. C2 96-988, United States District Court, Southern District
of Ohio, Eastern Division and on an earlier date Rubin also commenced suit
against Star Bank, N.A. of Cincinnati, Ohio ("Star Bank"). On May 19, 1997, the
Company, Star Bank and Rubin agreed to consolidate the Rubin vs. Sparta Case and
Rubin vs. Star Case, under case No. C2-96-541. The complaint is in connection
with the Company's acquisition of Medical Designs, Inc. ("MDI") from Star Bank
in December 1992 through a bankruptcy proceeding initiated by MDI. The complaint
alleges three causes of action against the Company and Star: (i) breach of an
alleged agreement with Rubin , as the assignee of the claims of MDI, to purchase
the assets of MDI; (ii) conspiracy, or actions in concert, with Star Bank to
induce the Company to breach the foregoing alleged agreement; and (iii) breach
of duty of good faith and fair dealing in connection with that alleged
agreement. Rubin seeks damages to be proved at trial, which appear to be in
excess of $50,000, and possibly as much as $4,000,000, based upon these claims.
The Company and Star Bank intend to vigorously oppose the claims alleged in this
lawsuit which it considers to be baseless in law and fact. Trial counsel is also
evaluating, and intends to assert, any available counterclaims or other
sanctions, against Rubin in the matter for damages, or losses the Company may
incur as the result of the filing of this suit.
On or about November 20, 1996, Tecnol Medical Products, Inc. ("Tecnol")
initiated an arbitration action against the Company before the American
Arbitration Association in San Francisco, California ("AAA"), Case No. 74 Y 181
01129 96. Tecnol asserted claims allegedly arising out of Tecnol's purchase of
the Company's medical product line in December 1995. On March 12, 1997, the
Company settled the arbitration action initiated by Tecnol. Under the settlement
agreement Tecnol paid the Company $575,000 and eliminated $32,448 in certain
other liabilities owed by the Company in consideration for the cancellation by
the Company of a $665,000 note due from Tecnol and the dismissal with prejudice
of the arbitration action by both parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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A Special Meeting of Stockholders was held on March 27, 1997 in which
shareholders of the Company approved all three matters voted upon at the
meeting. The matters voted upon and the number of votes cast for, against,
abstain and non-votes as to each such matter follows:
1. A reverse split of the Company's Common Stock on the basis of one share for
six shares outstanding.
2. A reduction in the number of authorized shares of Common Stock from
30,000,000 shares to 8,000,000 shares.
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3. A reduction in the number of authorized shares of Preferred Stock from
5,000,000 shares to 750,000 shares.
Proposal No. For Against Abstain Non-votes
------------ --- ------- ------- ---------
1 616,802 37,579 1,223 162,206
2 621,330 31,849 2,424 162,206
3 227,411 26,198 5,169 559,031
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.
All share information and per share data throughout this report has been
retroactively adjusted for all periods presented to reflect a one share for six
shares reverse stock split approved by the Company's stockholders in March 1997.
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 1998
May 31, 1997 $ 2.25 $ 1.31
(through May 16, 1997)
Fiscal 1997
May 31, 1996 10.88 2.44
August 31, 1996 5.81 3.00
November 30, 1996 4.69 2.63
February 28, 1997 3.00 1.69
Fiscal 1996
May 31, 1995 7.32 4.50
August 31, 1995 5.28 3.00
November 30, 1995 4.86 1.69
February 29, 1996 3.96 1.69
As of May 16, 1997, the Company estimates it had approximately 500 record
holders.
As of May 16, 1997, the authorized capital stock of the Company consisted
of 8,000,000 shares of Common Stock, $.002 par value, and 750,000 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.
9
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Common Stock
At May 16, 1997, there were 833,089 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 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 137,500 shares of
Common Stock in connection with the 1994 Offering. At May 16, 1997, there were
28,068 shares of 1994 Preferred Stock outstanding convertible into 23,390 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 is 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 .833 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.
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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
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 135,483 shares of 1992
Preferred Stock (representing $541,932 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 sixth of one share
of Common Stock at an initial exercise price of $3.00 per each one sixth share
of Common Stock 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. 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.
11
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Redeemable Convertible Preferred Stock
At May 16, 1997, there were 135,483 shares of $4.00 par value Redeemable
Convertible Preferred Stock ("1992 Preferred Stock") outstanding convertible
into 45,161 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. 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 years ended February 28, 1994
and February 29, 1996, but did not pay a dividend for the fiscal year ended
February 28, 1995. The Company does not anticipate it will pay a dividend for
the fiscal year ended February 28, 1997.
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 $252.00 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 .333 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
.333 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.
12
<PAGE>
Common Stock Purchase Warrants
In connection with the 1992 Offering, the Company issued 2,573,664 Common
Stock Purchase Warrants (the "1992 Warrants") exercisable into 428,944 shares of
Common Stock. The 1992 Warrants expired on March 10, 1997.
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 until March 10, 1997 at $11.20 per Unit. Each Unit consisted
of two shares of 1992 Preferred Stock and four 1992 Warrants. The warrant
expired on March 10, 1997.
In connection with the 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, 1997, the Company had outstanding 536,831 other Common Stock
purchase warrants and options, 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.
13
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
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 sale 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 the year ended February 28, 1997 ("Fiscal
1997") do not reflect the medical product line operations, whereas for Fiscal
1996 the results of the medical product line operations are reflected. For the
reason stated above, the results for Fiscal 1997 and Fiscal 1996 are not
strictly comparable.
Year ended February 28, 1997 as Compared to Year ended February 29, 1996
Net sales for Fiscal 1997 were $2,243,368, a decrease of 61.1% from net
sales of $5,759,107 for Fiscal 1996. The decrease in net sales during Fiscal
1997 as compared to Fiscal 1996 is the result of (i) a decrease of $3,167,442 in
medical product sales which resulted from the disposition of the Company's
medical product line in December 1995; (ii) a decrease of $45,215 or 3.6% in
surgical product sales from $1,263,797 to $1,218,582; and (iii) a decrease of
$303,081 or 22.8% in electrotherapy product sales from $1,327,868 to $1,024,787.
The decrease in sales for the electrotherapy product line can be primarily
attributed to the completion in July 1995 of a one year, non-cancelable $500,000
contract with Henley Healthcare ("Henley") in which the Company provided Henley
with its Spectrum Max-SD TENS unit. During Fiscal 1996 the Company had
approximately $282,000 in sales to Henley through the completion of the
contract. During the fourth quarter Fiscal 1997 and the First Quarter Fiscal
1998, the Company received two non-cancelable purchase orders from Henley in the
approximate aggregate amount of $300,000. During Fiscal 1997 the Company had
approximately $100,000 in sales to Henley. The Company anticipates that it will
receive additional purchase orders from Henley for the fiscal year ending
February 28, 1998.
The Company intends to continue 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. In that regard, on November 1, 1996 the Company
entered into a non-binding letter of intent for the acquisition of substantially
all of the operating assets of Orion Life Systems, Inc. and its wholly owned
subsidiary, Orion Medical Products, Inc. ("Orion"). Based in Wheeling, Illinois,
Orion specializes in contract manufacturing, packaging, and sterilization of
medical devices and single-use procedure trays as well as manufacturing and
marketing its own line of urological, respiratory, and I.V. therapy disposable
products.
Gross profit was $1,013,678 or 45.2% of net sales for Fiscal 1997 as
compared to $2,493,204 or 43.3% of net sales for Fiscal 1996. During Fiscal 1997
the Company established a $275,000 reserve for slow moving inventory which
lowered the gross profit percentage. The increase in gross profit percentage is
primarily due to the sale of the medical product line in December 1995. In
general, the medical product line generated lower gross profits than the
surgical and electrotherapy product lines.
Selling, general and administrative ("SG&A") expenses for Fiscal 1997 were
$2,045,878, a 28.1% decrease from SG&A expenses of $2,844,005 for Fiscal 1996.
The decrease in SG&A expenses for Fiscal 1997 as compared to Fiscal 1996 is
primarily due to the overall decrease in operating expenses resulting from the
sale of the medical product line. This decrease is despite an increase in legal
expenses for Fiscal 1997 from approximately $160,000 for Fiscal 1996 to
approximately $200,000 incurred in connection with the Company's various
litigation proceedings. In addition, the Company has increased its sales and
marketing efforts to broaden its customer base and target distributors for each
of our product lines.
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<PAGE>
Research and development ("R&D") expenses for Fiscal 1997 were $42,404, a
19.5% decrease from R&D expenses of $52,661 for Fiscal 1996. The decrease in R&D
expenses for Fiscal 1997 as compared to Fiscal 1996 is primarily due to the
elimination of the R&D efforts related to the medical product line. During
Fiscal 1997 the R&D continued to be focused on the redesign of the Company's
TENS units in an effort to increase the quality and reduce the cost for the
electrotherapy product line.
Depreciation and amortization ("D&A") expenses for Fiscal 1997 were
$239,027, a 51.9% decrease from D&A expenses of $496,834 for Fiscal 1996. During
Fiscal 1997, D&A expenses decreased due to the elimination of the depreciation
expense on the medical product line manufacturing equipment sold to Tecnol in
December 1995.
Settlement of litigation expenses for Fiscal 1997 were $855,712. On August
6, 1996 the Company settled three related civil actions involving disputes
between the Company; Thomas F. Reiner, the Company's Chairman, President and
Chief Executive Officer; and Gerald S. Kramer, a former officer and Chairman of
the Company's Board of Directors. In addition, on November 26, 1996 the Company
settled a civil action involving disputes between the Company; Mr. Reiner; and
Landino, a former Vice President of Sales of the Company. Under the settlement
agreements discussed above, the Company paid to Kramer and Landino an aggregate
amount of $297,500, and issued to Kramer and Landino an aggregate of $187,500 in
promissory notes, payable monthly over five years. In addition, the parties
exchanged general releases and the Company forgave approximately $370,712 in
debts from Kramer and Landino. The Company's management believes that it would
have ultimately prevailed in the above lawsuits, but took the opportunity to
settle these actions before substantial additional legal fees and management
time were expended. See "Legal Proceedings."
The gain on sale of the wound care product line for Fiscal 1997 was
$607,448. On March 12, 1997, the Company settled the arbitration action
initiated by Tecnol arising out of Tecnol's purchase of the Company's medical
product line in December 1995. Under the settlement agreement Tecnol paid the
Company $575,000 and eliminated $32,448 in certain other liabilities owed by the
Company in consideration for the cancellation by the Company of the $665,000
note due from Tecnol. The $665,000 note was to become payable upon certain
conditions being met, however since the Company could not determine if the
conditions for payment of the note would be met, it established a reserve for
the entire amount of the note. Accordingly, upon settlement the Company
eliminated the related reserve and took the net proceeds into income. See "-
Liquidity and Capital Resources."
Net interest expense for Fiscal 1997 was $374,970, a 21.8% decrease from
net interest expense of $479,381 for Fiscal 1996. The decrease in net interest
expense is primarily due to the repayment of certain of the Company's
outstanding debt in December 1995 from the cash proceeds of the sale of the
Company's medical product line partially offset by $140,000 in accrued interest
under a $600,000 note. See " - Liquidity and Capital Resources"
As a result of the foregoing, the net loss for Fiscal 1997 was $1,905,230,
a decrease of $2,510,384 from net income of $605,154 for Fiscal 1996. The
decrease in net income for Fiscal 1997 as compared to Fiscal 1996 is primarily
due to the decrease in net sales and the corresponding decrease in gross profit
coupled with a one time $855,712 expense related to the settlement of the
litigation described above. In addition, during Fiscal 1996 the Company recorded
a gain in the amount of $1,984,831 as compared to $607,448 for Fiscal 1997.
Primary loss per share was $2.73 for Fiscal 1997 as compared to primary
income per share of $.88 for Fiscal 1996. Fully diluted loss per share, which
assumes all dilutive preferred share conversions and the exercise of all
dilutive stock options and warrants, was $2.73 for Fiscal 1997 as compared to
fully diluted income per share of $.84 for Fiscal 1996. The primary and fully
diluted income or loss per share computation reflects dividends paid or accrued
on the Series A Convertible Preferred Stock.
15
<PAGE>
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.
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.
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
could not determine if the conditions for payment of the note receivable would
be met prior to September 1997 it established a reserve for the entire amount of
the note receivable. In addition, the Company recorded $600,000 of accrued
liabilities as of February 29, 1996 which relate 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. See "- Liquidity and Capital Resources."
16
<PAGE>
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.
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 28, 1997, the Company had net operating loss carry forwards
of approximately $6,500,000. 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 28, 1997 was $1,066,176 as
compared to $1,246,470 at February 29, 1996. The Company's working capital
position decreased by $180,294 primarily due to a decrease in inventories
coupled with an increase in notes payable.
On December 7, 1995, the Company sold its impregnated wound care gauze
dressings product line to Tecnol for $5,585,000 in cash and the elimination of
$32,448 in certain other liabilities owed by the Company. In addition to wound
care inventory, equipment and other assets, the Company's operations in
Hammonton, New Jersey were included in the sale.
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 February 28,
1997, the outstanding balance on the Loan was $923,405 and approximately $10,000
in credit was available. The Loan is being used to provide working capital for
current operations.
In July 1996, the Company borrowed $200,000 from Asset Factoring, evidenced
by a promissory note bearing 12% interest per annum due in July 1997. The
promissory note was subordinated to FINOVA and was personally guaranteed by Mr.
Reiner. In connection with the financing, the Company issued Asset Factoring a
warrant to purchase up to 20,834 shares of its Common Stock exercisable at $3.00
per share at any time until July 18, 1999. The Company also entered into a one
year consulting agreement with Asset Factoring in which the Company paid Asset
Factoring $25,000 for one year of consulting services. On November 11, 1996, the
Company borrowed $400,000 from Halstead LLC ("Halstead"), a company controlled
by Charles C. Johnston, evidenced by a $600,000 promissory note due on the
earlier of (a) the receipt of $1,500,000 from the sale of the Company's equity
securities; (b) the payment of the note receivable from Tecnol; or (c) December
1997. Interest of $150,000 is due at maturity less $10,000 if the entire balance
is paid in full by July 1, 1997. The $600,000 promissory note was delivered to
Halstead in consideration for the cancellation of a promissory note in the
17
<PAGE>
principal amount of $200,000 owing from the Company to Asset Factoring and the
receipt by the Company of $400,000 from Halstead. See " Certain Transactions."
On March 19, 1997, the Company repaid $575,000 against the amount of
$740,000 in principal and accrued interest owing under the $600,000 promissory
note issued to Halstead. This amount was required to be paid by the Company upon
the Company's negotiated settlement with Tecnol, the settlement resulted in
Tecnol paying the Company $575,000. On that same date, the Company issued
Halstead a promissory note in the principal amount of $165,000 bearing 12%
interest per annum due December 1997. The $165,000 promissory note represents
the remaining principal amount owed of $25,000 plus the $140,000 in accrued
interest under the $600,000 note. The promissory note is subordinated to FINOVA,
the Company's primary lender, and is personally guaranteed by Mr. Reiner. See
"Certain Transactions."
On September 27, 1996, the Company was served with a complaint filed by
Storz Instrument Company ("Storz") entitled Storz Instrument Company v. Sparta
Maxillofacial Products, Inc., et al., Docket No. 4-96-CV-01920-CDP, U.S.
District Court in St. Louis, Missouri, seeking to collect the remaining balance
of $450,000 relating to a $1,050,000 note payable in connection with the
Company's acquisition of certain assets of Storz' Oral Maxillofacial product
line. On November 27, 1996, the Company paid Storz $100,000 and entered into an
agreement pursuant to which Storz would take no further action on its complaint
in exchange for payment of $350,000, on or before April 15, 1997, together with
all accrued interest thereon through the date of payment, plus $5,000 as a fixed
sum for attorneys' fees. On March 27, 1997, the Company repaid $120,000 to Storz
against the $350,000 note payable, $5,000 as a fixed sum for attorneys' fees,
and amended its November 27, 1996 agreement pursuant to which the Company is
required to make monthly payments of $10,000 to be applied to interest and
principal, plus quarterly $10,000 forbearance payments, not to be applied to
principal or interest. If these payments are not made, a judgement will
automatically be executed against the Company for the balance of the note
payable. See "Legal Proceedings."
On or about November 20, 1996, Tecnol initiated an arbitration action
against the Company before the American Arbitration Association in San
Francisco, California ("AAA"), Case No. 74 Y 181 01129 96. Tecnol asserted
claims allegedly arising out of Tecnol's purchase of the Company's medical
product line in December 1995. On March 12, 1997, the Company settled the
arbitration action initiated by Tecnol. Under the settlement agreement Tecnol
paid the Company $575,000 in consideration for the cancellation by the Company
of a $665,000 note due from Tecnol and the dismissal with prejudice of the
arbitration action by both parties. See "Legal Proceedings."
In February 1997, the Company entered into a letter of intent with an
Investment Banker to raise up to $7,000,000 through a private placement of the
Company's preferred stock. Upon completion, the Company intends on using these
funds for business opportunities and working capital.
In April 1997, the Company entered into a debt repayment agreement with Mr.
Reiner. The amounts owed by Mr. Reiner will be repaid at varying amounts through
April 2004. The repayments will be made by deducting the amounts from Mr.
Reiner's payroll checks. In addition, all amounts owed by Mr. Reiner are
extended to April 2004 and no interest will be charged on the notes owed by Mr.
Reiner and the Company will reimburse Mr. Reiner for certain income tax related
considerations. Due to the long-term nature of the notes and accounts receivable
from Mr. Reiner, they are reflected as a reduction of stockholders' equity in
the financial statements. See "Certain Transactions."
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.
18
<PAGE>
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The Company's future 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, from either debt or equity sources. If the
Company is unable to obtain such additional working capital, it may be necessary
for the Company to restructure its operations to reduce its ongoing
expenditures.
Except for the historical information contained herein, the matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks are detailed
from time to time in the Company's periodic reports filed with the Securities
and Exchange Commission, including the Company's Annual Report on Form 10-KSB,
Quarterly Reports on Form 10-QSB and other periodic filings. These
forward-looking statements speak only as of the date hereof. The Company
disclaims any intent or obligation to update these forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
- ----------------------------
See page F-1
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Financial Statements
Independent Auditors' Report ........................................... F-2
Consolidated Balance Sheet as of February 28, 1997 ..................... F-3
Consolidated Statements of Operations for the years
ended February 28, 1997 and 1996 ...................................... F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended February 28, 1997 and 1996 ................. F-6
Consolidated Statements of Cash Flows for the years
ended February 28, 1997 and 1996 ...................................... 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, 1997 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ended February 28, 1997 and 1996. 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, 1997 and the results of its
operations and its cash flows for the years ended February 28, 1997 and 1996 in
conformity with generally accepted accounting principles.
Angell & Deering
Angell & Deering
Certified Public Accountants
Denver, Colorado
April 25, 1997
F-2
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1997
ASSETS
------
Current Assets:
Cash .................................................. $ --
Accounts receivable - trade,
net of allowance for doubtful
accounts of $30,381 .................................. 321,677
Inventories ........................................... 2,260,459
Notes receivable ...................................... 578,399
Prepaid expenses and other ............................ 42,270
-----------
Total Current Assets ............................... 3,202,805
-----------
Property and Equipment, at cost:
Machinery and equipment ............................... 57,325
Other equipment ....................................... 429,072
Leasehold improvements ................................ 15,733
-----------
502,130
Less accumulated depreciation ......................... (248,318)
-----------
Net Property and Equipment ......................... 253,812
-----------
Other Assets:
Intangible assets, net of
accumulated amortization ............................. 753,871
Deposits and other .................................... 98,930
-----------
Total Other Assets ................................. 852,801
-----------
Total Assets ....................................... $ 4,309,418
===========
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, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable - trade .................................. $ 718,698
Accrued expenses:
Payroll taxes and wages .................................. 87,478
Interest ................................................. 165,051
Other .................................................... 187,173
Dividends payable ......................................... 17,543
Notes payable ............................................. 600,000
Accrued royalty payments .................................. 46,715
Current portion of long-term debt ......................... 313,971
-----------
Total Current Liabilities .............................. 2,136,629
-----------
Long-Term Debt, net of current portion above:
Obligations under capital leases .......................... 118,048
Financial institutions and other .......................... 1,455,494
Less current portion above ................................ (313,971)
-----------
Total Long-Term Debt ................................... 1,259,571
-----------
Other liabilities ........................................... 305,861
-----------
Commitments and contingencies ............................... --
Stockholders' Equity:
Preferred stock: $4.00 par value,
750,000 shares authorized;
Non-cumulative Convertible
Redeemable Preferred Stock:
$4.00 par value, 165,000
shares authorized, 160,678
shares issued and outstanding .......................... 642,712
Series A Cumulative Convertible
Preferred Stock: $4.00 par value,
30,000 shares authorized, 28,068
shares issued and outstanding .......................... 112,272
Common stock: $.002 par value,
8,000,000 shares authorized, 764,249
shares issued and outstanding ............................ 1,528
Additional paid in capital ................................ 7,926,461
Accumulated deficit ....................................... (7,506,254)
-----------
1,176,719
Receivables from officer .................................. (569,362)
-----------
Total Stockholders' Equity ............................. 607,357
-----------
Total Liabilities and Stockholders' Equity ............. $ 4,309,418
===========
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, 1997 AND 1996
1997 1996
---- ----
Net sales .................................... $ 2,243,368 $ 5,759,107
Cost of sales ................................ 1,229,690 3,265,903
----------- -----------
Gross Profit ............................ 1,013,678 2,493,204
Selling, general and
administrative expenses ..................... 2,045,878 2,844,005
Research and development expense ............. 42,404 52,661
Depreciation and amortization ................ 239,027 496,834
Litigation settlements ....................... 855,712 --
----------- -----------
Income (Loss) From Operations ........... (2,169,343) (900,296)
----------- -----------
Other Income (Expense):
Interest and other income .................. 13,798 17,554
Interest expense ........................... (388,768) (496,935)
Gain on sale of wound care product
line ...................................... 607,448 1,984,831
Gain on disposal of assets ................. 38,139 --
----------- -----------
Total Other Income (Expense) ............ 270,617 1,505,450
----------- -----------
Income (Loss) Before Provision For
Income Taxes ................................ (1,898,726) 605,154
Provision for income taxes ................... 6,504 --
----------- -----------
Net Income (Loss) ............................ (1,905,230) 605,154
Preferred stock dividends .................... (114,135) (72,253)
----------- -----------
Net Income (Loss) Applicable
To Common Shareholders ...................... $(2,019,365) $ 532,901
=========== ===========
Net Income (Loss) Per Share of
Common Stock:
Primary:
Weighted average number of
common shares outstanding ................ 740,702 608,223
=========== ===========
Net Income (Loss) ......................... $ (2.73) $ .88
=========== ===========
Fully diluted:
Weighted average number of
common shares outstanding ................ 740,702 632,090
=========== ===========
Net Income (Loss) ......................... $ (2.73) $ .84
=========== ===========
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, 1995 ...... 364,167 $ 1,456,668 136,310 $ 545,240 538,068 $ 1,076 $ 6,308,450 $(6,019,790)
Series A preferred stock
dividends paid in common
stock ............................ -- -- -- -- 28,717 58 129,320 (44,184)
Conversion of preferred stock
into common stock ................ (88,309) (353,236) (91,400) (365,600) 105,603 211 718,625 --
Conversion of notes payable
into common stock and note
receivable received for
purchase of common stock ......... -- -- -- -- 793,640 1,587 1,807,913 --
Purchase of common stock for
cash and cancellation of
note receivable .................. -- -- -- -- (793,640) (1,587) (1,807,913) --
Cancellation of common stock
held in escrow ................... -- -- -- -- (31,250) (63) 63 --
Dividends accrued on Series
A preferred stock ................ -- -- -- -- -- -- -- (28,069)
Net income ........................ -- -- -- -- -- -- -- 605,154
-------- ----------- -------- --------- -------- ------- ----------- -----------
Balance at February 28, 1996 ...... 275,858 1,103,432 44,910 179,640 641,138 1,282 7,156,458 (5,486,889)
Series A preferred stock
dividends paid in common
stock ............................ -- -- -- -- 15,830 32 53,220 (25,183)
Preferred stock dividends
paid in common stock ............. -- -- -- -- 13,185 26 71,383 (71,409)
Conversion of preferred
stock into common stock .......... (115,180) (460,720) (16,842) (67,368) 52,429 105 527,983 --
Exercise of warrants to
purchase common stock ............ -- -- -- -- 41,667 83 117,417 --
Dividends accrued on Series
A preferred stock ................ -- -- -- -- -- -- -- (17,543)
Net income (loss) ................. -- -- -- -- -- -- -- (1,905,230)
-------- ----------- -------- --------- -------- ------- ----------- -----------
Balance at February 28, 1997 ...... 160,678 $ 642,712 28,068 $ 112,272 764,249 $ 1,528 $ 7,926,461 $(7,506,254)
======== =========== ======== ========= ======== ======= =========== ===========
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, 1997 AND 1996
1997 1996
---- ----
Cash Flows From Operating Activities:
Net income (loss) ............................ $(1,905,230) $ 605,154
Adjustments to reconcile net
income (loss) to net cash (used)
by operating activities:
Depreciation and amortization .............. 239,027 496,834
Provision for uncollectible
receivables ............................... 22,030 165,530
Reserve for slow moving inventory .......... 275,000 380,000
Gain on sale of product line ............... (575,000) (1,984,831)
Gain on disposal of assets ................. (38,139) --
Litigation settlements ..................... 576,500 --
Accrued interest on note receivable ........ (12,949) (12,919)
Changes in assets and liabilities,
net of effects from sale of
product line:
Accounts receivable ...................... (55,290) 567,958
Inventories .............................. 73,928 149,141
Prepaid expenses and other ............... 39,525 79,508
Deposits and other ....................... (48,877) (2,427)
Accounts payable and accrued
expenses ................................ 45,025 (710,245)
----------- -----------
Net Cash (Used) By Operating
Activities ............................ (1,364,450) (266,297)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures ......................... (2,196) (18,047)
Proceeds from sale of product line ........... -- 5,010,000
Costs for sale of product line ............... -- (528,346)
Costs incurred related to acquisition ........ -- (87,103)
Loans to individuals ......................... -- (5,000)
Repayment of notes receivable ................ 1,539 1,886
----------- -----------
Net Cash Provided (Used) By
Investing Activities .................. (657) 4,373,390
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing ...................... 3,665,587 5,822,260
Principal payments on notes payable .......... (2,372,598) (8,828,574)
Principal payments on accrued
royalties ................................... (15,542) (69,290)
Issuance of common stock ..................... 117,500 --
Repurchase of common stock ................... -- (1,000,000)
Debt issuance costs incurred ................. (29,840) (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, 1997 AND 1996
1997 1996
---- ----
Net Cash Provided (Used) by
Financing Activities ................ $1,365,107 $(4,112,619)
---------- -----------
Net Increase (Decrease) in
Cash and Cash Equivalents ........... -- (5,526)
Cash and Cash Equivalents
at Beginning of Year ................ -- 5,526
---------- -----------
Cash and Cash Equivalents
at End of Year ...................... $ -- $ --
========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest .................................. $ 232,614 $ 541,593
Income taxes .............................. 6,504 --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Capital lease obligation
incurred for new equipment ................ $ 9,151 $ 7,000
Dividends payable on Series A
Convertible Preferred Stock ............... 17,543 28,069
Conversion of notes payable
into common stock ......................... -- 1,000,000
Dividends on Preferred Stock paid
in shares of common stock ................. 124,661 129,378
Conversion of preferred stock into
common stock .............................. 528,088 718,836
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.
Amendment to Authorized Common and Preferred Shares and Stock
-------------------------------------------------------------
Split
-----
In March 1997, the Company's stockholders adopted a resolution
approving a one for six reverse stock split of the issued and
outstanding common shares. The Company's Board of Directors also
authorized, and the shareholders approved, an amendment and
restatement of the Company's Articles of Incorporation, to reduce the
number of authorized shares of common stock from 30,000,000 to
8,000,000 shares and to reduce the number of authorized shares of
preferred stock from 5,000,000 to 750,000 shares.
All share information and per share data have been retroactively
restated for all periods presented to reflect the reverse stock split
and decrease in authorized shares.
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
Computer equipment 3-5
Exhibit and other equipment 7-10
Leasehold improvements 5
Automobiles 7
Depreciation of property and equipment charged to operations is
$77,226 and $272,927 for the years ended February 28, 1997 and 1996,
respectively.
F-9
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
(Continued)
-----------
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 10
Debt issuance costs 3
Stock-Based Compensation
------------------------
During the year ended February 28, 1997, the Company adopted Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation". 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". See Note 9 for 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.
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.
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.
F-10
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
could not determine if the conditions for payment of the note
receivable would be met prior to September 1997 it established a
reserve for the entire amount of the note receivable as of February
28, 1996.
The Company and Tecnol were involved in arbitration proceedings
regarding numerous items related to the sale of its wound care product
line in 1996. The Company and Tecnol entered into a settlement
agreement in March 1997 to settle all claims between the parties. As a
part of the settlement agreement, Tecnol agreed to pay the Company
$575,000 as payment in full under the promissory note and certain
other liabilities owed by the Company of $32,448 were eliminated. The
reduction of the reserve on the note receivable and cancellation of
liabilities resulted in the Company recognizing a gain on sale of
$607,448 during the year ended February 28, 1997.
The Company 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 $305,861 and the current portion of $187,173
is included in accrued expenses as of February 28, 1997.
3. Inventories
-----------
Inventories consists of the following:
February 28,
1997
----
Finished goods $2,915,459
Less reserve for obsolescence (655,000)
----------
Total $2,260,459
==========
4. Intangible Assets
-----------------
Intangible assets consists of the following:
Goodwill and noncompete agreements,
net of accumulated amortization of
$409,017 $486,421
F-11
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Intangible Assets (Continued)
-----------------------------
Patents and licensing agreements,
net of accumulated amortization
of $129,938 221,852
Debt issuance costs, net of
accumulated amortization of $20,867 45,598
--------
Total $753,871
========
5. Current Notes Payable
---------------------
Corporations
------------
Note dated November 1996 due on the earlier
of (1) receipt of $1,500,000 from private
sale of the Company's equity securities (2)
payment of note receivable from Tecnol (Note
2) (3) December 31, 1997. Interest of
$150,000 is due at maturity less $10,000 if
the entire balance is paid in full prior to
July 1, 1997. In March 1997 the Company
repaid $575,000 of the note and entered into
a new note for $165,000 which is comprised of
the $25,000 unpaid principal and $140,000 of
accrued interest. The note is subordinated to
a note payable to a Financial Institution and
may only be repaid upon the occurrence of
event (1) or (2) above. $600,000
========
6. Accrued Royalty Payments
------------------------
The Company entered into an agreement 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 September 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%. $ 46,715
========
7. Long-Term Debt
--------------
Long-term debt consists of the following:
Obligations Under Capital Leases
--------------------------------
11.91% installment note with monthly
principal and interest payments of $198, due
in 2001, collateralized by equipment. $ 8,492
F-12
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt (Continued)
--------------------------
8.89% installment note with monthly principal
and interest payments of $1,491, due in 1999,
collateralized by an automobile. 69,952
14.86% installment note with monthly
principal and interest payments of $210, due
in 1999, collateralized by equipment. 4,934
13.72% installment note with monthly
principal and interest payments of $3,224,
due in 1997, collateralized by equipment and
guaranteed by Mr. Reiner. 34,670
Financial Institutions and Other
--------------------------------
The line of credit facility with a financial
institution is a three year facility due in
January 1999 with a maximum of $1,500,000 and
the permitted advances under the line are
limited to (a) 75% of eligible accounts
receivable and (b) 25% of eligible finished
goods inventory not to exceed $750,000. The
credit facility bears interest at prime plus
4% (12.25% at February 28, 1997) and the
interest rate shall never be less than 6% and
an annual credit facility fee of 1.75% of the
line of credit is payable on a monthly basis.
The line of credit facility is collateralized
by substantially all assets of the Company
and is guaranteed by Mr. Reiner up to
$450,000. 923,405
7% unsecured installment note due in 2000,
monthly principal and interest payments of
$3,427. 119,589
9.75% unsecured installment note due in 2001,
monthly principal and interest payments of
$1,320. The note is subordinated to the line
of credit facility and is guaranteed by Mr.
Reiner. 62,500
5% installment note due in 2000, $120,000
principal and interest payment made in March
1997 and monthly principal and interest
payments of $10,000 are payable through 2000.
The Company must also pay quarterly
forbearance fees of $10,000 until the note is
paid in full. 350,000
----------
Total Long-Term Debt 1,573,542
Less current portion of long-term debt (313,971)
----------
F-13
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt (Continued)
--------------------------
Long-Term Debt $1,259,571
==========
Installments due on debt principal, including the capital leases, at
February 28, 1997 are as follows:
Year Ending February 28,
------------------------
1998 $ 313,971
1999 1,122,222
2000 109,485
2001 16,159
2002 11,705
----------
Total $1,573,542
==========
8. Income Taxes
------------
The Company has a net operating loss carryover available at February
28, 1997 of approximately $6,500,000. Utilization of these carryovers,
if not utilized, will expire at various dates through 2012.
At February 28, 1997 and 1996, the Company had a deferred tax asset of
approximately $2,300,000 and $1,700,000, 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 an increase of $600,000.
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
F-14
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Warrants and Options (Continued)
--------------------------------
Stock Option Plan (Continued)
-----------------------------
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, 1996 and
1997.
Number of Option Price
Shares Per Share
------ ---------
Options outstanding at
February 28, 1995 28,672 $13.50 to $52.80
Granted -- --
Exercised -- --
Cancelled (1,729) $13.50 to $52.80
------- ----------------
Options outstanding at
February 28, 1996 26,943 $13.50 to $52.80
Granted -- --
Exercised -- --
Cancelled (250) $13.50
------- ----------------
Options outstanding at
February 28, 1997 26,693 $13.50 to $52.80
======= ================
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 March 1997 to February 2004. The following
summarizes transactions outside the plan for the years ended February
28, 1996 and 1997:
Number of Option Price
Shares Per Share
------ ---------
Options outstanding at
February 28, 1995 895,749 $8.22 to $14.40
Granted 357,500 $2.25 to $ 6.00
Exercised -- --
Cancelled (166,667) $8.40 to $13.50
---------- ---------------
F-15
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Warrants and Options (Continued)
--------------------------------
Options outstanding at
February 28, 1996 1,086,582 $2.25 to $14.40
Granted 21,834 $3.00 to $ 3.18
Exercised (41,667) $2.82
Cancelled (124,334) $9.75 to $13.50
---------- ---------------
Options outstanding at
February 28, 1997 942,415 $2.25 to $14.40
========== ===============
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 one sixth of
a share of the Company's common stock at any time until March 10, 1997
at an exercise price of $14.40 per share. The warrant expired
unexercised on March 10, 1997.
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 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 one sixth of a share of the
Company's common stock at an exercise price of $3.00 per each one
sixth share of common stock. That is, six Series A warrants and $18.00
entitle the holder to one share of common stock. The warrants are
exercisable at any time until July 12, 1999.
Stock Based Compensation
------------------------
The Company adopted Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) during the
year ended February 28, 1997. In accordance with the provisions of
SFAS 123, the Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees, " and related interpretations in accounting
for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for options granted to
non-employees. If the Company had elected to recognize compensation
expense based upon the fair value at the grant date for awards under
these plans consistent with the methodology prescribed by SFAS 123,
the Company's net income and earnings per share would be reduced to
the following pro forma amounts:
1997 1996
---- ----
Net income (loss):
As reported $(1,905,230) $605,154
Pro forma $(1,905,230) $413,154
F-16
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Warrants and Options (Continued)
--------------------------------
Stock Based Compensation (Continued)
------------------------------------
Net income (loss) per share of common stock:
As reported $(2.73) $.88
Pro forma $(2.73) $.56
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period and additional options
may be granted in future years. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing
model with the following assumptions for the year ended February 28,
1996.
1996
----
Risk-free interest rate 5.57%
Expected life 7 years
Expected volatility 96.23%
Expected dividend yield 0%
The Company did not grant any stock options in 1997.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in subjective input assumptions
can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock based
compensation plans.
The following table summarized information about stock based
compensation plans outstanding at February 28, 1997:
Options Outstanding and Exercisable by Price Range as of February 28,
1997:
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
------ ----------- ---------- ----- ----------- -----
$ 2.40 103,336 .33 $ 2.40 103,336 $ 2.40
$ 13.50 137,004 4.43 $13.50 120,337 $13.50
$48.00 - 52.80 6,357 5.76 $49.97 6,357 $49.97
-------------- -------- ---- ------ -------- ------
$ 2.40 - 52.80 246,697 4.88 $ 9.79 230,030 $ 9.52
============== ======== ==== ====== ======== ======
F-17
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
165,000 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
authorized shares were reduced from 1,500,000 to 165,000 in March
1997. 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 one third of a share 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
$252.00 per share for 30 consecutive trading days ending within five
days of the notice of redemption.
Series A Preferred Stock
------------------------
In July 1994, the Company designated a new class of preferred stock
"Series A Convertible Redeemable PreferredStock" ("Series A Preferred
F-18
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' Equity (Continued)
--------------------------------
Series A Preferred Stock (Continued)
------------------------------------
Stock") and the number of shares constituting such series is 30,000
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
authorized shares were reduced from 250,000 to 30,000 in March 1997.
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 semiannually 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 is 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 $12.00 (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 .83 shares of common stock per share
of Series A Preferred Stock.
F-19
<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 160,678 shares of 1992 Preferred Stock carries
liquidation rights senior to the Series A Preferred Stock as of
February 28, 1997.
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 50,001 shares of the Company's Common Stock at $13.50 per share of
which options to purchase 33,334 are exercisable immediately. The
remaining 16,667 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-20
<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, 1997 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
------------ ------ ------ -----
1998 $ 59,912 $264,179 $324,091
1999 22,791 228,318 251,109
2000 46,365 112,800 159,165
2001 2,381 28,200 30,581
2002 1,587 -- 1,587
-------- -------- --------
Total Minimum
Lease Payments 133,036 $633,497 $766,533
======== ========
Less Amount
Representing
Interest (14,988)
--------
Present Value
of Future
Capital Lease
Obligations $118,048
========
Rental expense charged to operations was $168,582 and $239,997 for the
years ended February 28, 1997 and 1996, respectively.
Leased equipment under capital leases as of February 28, 1997 is as
follows:
Equipment $207,957
Less accumulated amortization (74,498)
--------
F-21
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and Contingencies (Continued)
-----------------------------------------
Leases (Continued)
------------------
Net Equipment Under Capital Leases $133,459
========
12. Related Party Transactions
--------------------------
The Company has entered into transactions with Thomas Reiner (Chairman
of the Board, President and Chief Executive Officer), as follows:
The Company has a note receivable from Mr. Reiner of $210,000 at
February 28, 1997. The note does not bear interest and is payable
after February 1, 1997. The Company also has a note receivable from
Mr. Reiner of $222,419 due in 2006 with interest at 6% per annum.
The Company has a receivable from Mr. Reiner of $136,943 at February
28, 1997. The receivable does not bear interest and is due on demand.
In July 1994, the Company purchased indebtedness owed to Bank
Hapoalim, B.M. jointly and severally by Mr. Reiner and Gerald Kramer
(former Chairman of the Board) for the $444,839 balance owed,
including accrued interest, in exchange for all rights held by the
Bank against such individuals. Accordingly, Mr. 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 April 1997, the Company entered into a debt repayment agreement
with Mr. Reiner. The amounts owed by Mr. Reiner will be repaid at
varying amounts through April 2004. The repayments will be made by
deducting the amounts from Mr. Reiner's payroll checks. In addition,
all amounts owed by Mr. Reiner are extended to April 2004 and no
interest will be charged on the notes owed by Mr. Reiner and the
Company will reimburse Mr. Reiner for certain income tax related
considerations.
All notes and accounts receivable from Mr. Reiner are reflected as a
reduction of stockholders' equity in the financial statements.
Under the terms of a new employment agreement, Mr. Reiner received
options to purchase 33,334 shares at $13.50 per share and is entitled
to receive options to purchase an additional 16,667 shares at $13.50
per share if the Company reports income from operations of at least
$1,000,000 for any fiscal year through February 28, 2004.
Mr. Reiner has guaranteed various debt and leases of the Company.
In connection with the Company's 1992 public stock offering, Mr.
Reiner placed 15,625 shares of the Company's common stock owned by him
F-22
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Related Party Transactions (Continued)
--------------------------------------
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 $230.88 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 Mr. Reiner to acquire 66,667 shares of common stock. The options
are exercisable at $13.50 per share through November 1, 1999.
In December 1995, the Company granted a stock option to Mr. Reiner for
83,334 shares of common stock. The options are exercisable at $2.40
per share through December 2003.
In March 1997, the Company granted stock options to Mr. Reiner for
90,000 shares of common stock. The options are exercisable at $1.98
per share through March 2004. The stock options were issued in
connection with the personal guarantee of certain debt of the Company.
13. Major Customers
---------------
Sales to major customers which accounted for 10% or more of sales are
as follows:
Year Ended February 28,
-----------------------
1997 1996
---- ----
Customer A --% 26.2%
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, 1997 and 1996. Company contributions vest as
follows:
Years of Service Percent Vested
---------------- --------------
2 20%
3 40%
4 60%
5 80%
6 100%
15. Litigation
----------
In August 1996, the Company settled three related civil actions
involving disputes between the Company, Mr. Reiner and Mr. Kramer, its
former chairman of the Board of Directors, which related to Mr.
F-23
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Litigation (Continued)
----------------------
Kramer's termination as an officer and director of the Company,
disputes regarding his employment agreement and various obligations
between the parties. Under the settlement, the Company paid Mr. Kramer
$262,500 in cash and issued him a promissory note in the amount of
$62,500 payable over five years. In addition, the parties exchanged
general releases and forgave all debts owed to each other which
included a note receivable owed by Mr. Kramer to the Company in the
amount of $370,712. The total cost of the litigation settlement to the
Company was $695,712.
In November 1996, the Company settled a civil action involving
disputes between the Company, Mr. Reiner, and a former Vice President
of Sales of the Company relating to certain employment disputes. The
Company paid the former employee $35,000 cash and issued him a
promissory note in the amount of $125,000 payable over forty-two
months. The total cost of the settlement to the Company was $160,000.
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. Letter of Intent for Acquisition
--------------------------------
In November 1996, as subsequently amended, the Company entered into a
non-binding letter of intent to acquire Orion Life Systems, Inc.
("Orion"). Under the terms of the letter of intent the Company will
acquire substantially all of the assets of Orion and assume certain
liabilities not to exceed $1,900,000. The purchase price will be
approximately $2,850,000 consisting of $950,000 cash and the
assumption of liabilities not to exceed $1,900,000. The cash portion
is to be paid through the issuance of a non-interest bearing
promissory note of $100,000 and two promissory notes totalling
$850,000 with interest at 8% per annum. The notes are payable at
varying amounts over a four year period and contain an acceleration
provision which provides that if a minimum of $2,000,000 is raised
through the sale of equity securities in a private placement all
$950,000 of the notes are payable.
The Company will also enter employment agreements and consulting
agreements with two officers of Orion which contain stock options,
bonus provisions based on sales and earnings and various other
provisions.
F-24
<PAGE>
SPARTA SURGICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Private Placement of Securities
-------------------------------
In February 1997, the Company entered into a letter of intent with an
Investment Banker to raise up to $7,000,000 through a private
placement of 350,000 units of the Company's equity securities. The
units consist of one share of Series B preferred stock and four
warrants to purchase four shares of common stock at 120% of the stock
price on the closing date. The preferred stock will be convertible
into common stock and pay an annual dividend. The Company will be
required to pay a transaction fee to the Investment Banker of 12% of
the amount raised in the private placement.
F-25
<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 51 Chairman of the Board of Directors,
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 43 Vice President of Sales
Wm. Samuel Veazey 36 Vice President of Finance
and Administration, Secretary
Michael Y. Granger 41 Director
Allan J. Korn 54 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. From 1979 to 1989 he was employed by
Superior Healthcare Group, becoming its director of purchasing/operations in
1984. 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.
20
<PAGE>
Michael Y. Granger, a director of the Company since June 1991, has been
President of Ark Capital Management, Inc., an independent investment management
consulting firm 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 Vice
President of Marketing for Ohm Labs, Inc. since January 1994. 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 28, 1997
and for each of the three fiscal years ended February 28, 1997.
<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 ............................ 1997 $274,299(1) $ 0 $ 11,976(3) 0 $ 0
Chairman, Chief Executive 1996 293,288(1) 63,000(2) 9,165(3) 83,334(4) 0
Officer, Treasurer, Director 1995 266,395(1) 0 85,538(3) 116,668(5) 0
Joseph Barbrie .............................. 1997 116,308 0 0 0 0
Vice President of Sales 1996 113,743 6,000(6) 0 8,334(7) 0
1995 105,355 0 23,576(8) 0 0
Wm. Samuel Veazey ........................... 1997 112,933 0 0 0 0
Vice President of Finance 1996 98,734 11,000(6) 0 8,334(7) 0
and Administration 1995 106,259 0 0 0 0
</TABLE>
- ----------
(1) Includes salaries and an automobile and insurance allowance. See "-
Employment Agreements."
(2) Includes a $50,000 bonus in consideration of completing the sale of the
medical product line and a bonus of $13,000 accrued in Fiscal 1996 related to
the Company's management bonus plan.
(3) Represents an unpaid vacation accrual in Fiscal 1997 and 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 83,334 shares at $2.40 per
share exercisable until December 4, 2003.
(5) Under the terms of the April 1994 employment agreement, Mr. Reiner received
options to purchase 33,334 shares at $13.50 per share and options to purchase an
additional 16,667 shares at $13.50 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 66,667 shares exercisable until November 1, 1999 at $13.50 per share.
(6) Represents paid bonuses under the Company's management bonus plan
which were accrued in Fiscal 1996.
21
<PAGE>
(7) In December 1995, in connection with the sale of the medical product line,
the Company issued options to Messrs. Barbrie and Veazey to purchase 8,334
shares each at $2.40 per share at any time until December 4, 2003.
(8) Represents reimbursement of relocation expenses.
Option Grants in Last Fiscal Year and Stock Option Grant
The following table provides information on option grants during the year
ended February 28, 1997 to the named executive officers:
Individual Grants
% of Total Options
Granted to
Options Employees in
Name Granted Fiscal Year Exercise Price Expiration Date
---- ------- ----------- -------------- ---------------
Thomas F. Reiner 0 0% $ 0 --
Joseph Barbrie 0 0 0 --
Wm. Samuel Veazey 0 0 0 --
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 28, 1997. No shares of
Common Stock were acquired upon exercise of options during the fiscal year ended
February 28, 1997.
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 198,440 16,667 $ 0 $ 0
Joseph Barbrie 12,502 0 0 0
Wm. Samuel Veazey 12,814 0 0 0
- ----------
(1) The closing price of the Common Stock on February 28, 1997 as reported by
Nasdaq was $1.69.
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 50,001 shares of the Company's Common Stock at
$13.50 per share of which options to purchase 33,334 shares were granted and
options to purchase an additional 16,667 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:
22
<PAGE>
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.
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 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.
23
<PAGE>
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, 1997, options to purchase
26,693 shares have been granted under the Plan. A total of 26,693 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 33,334 shares of Common Stock at $13.50 per share
and options to purchase an additional 16,667 shares of Common Stock at $13.50
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
66,667 shares of Common Stock at $13.50 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 104,167 shares
at $6.00 per share and options to purchase an additional 16,667 shares at $6.00
per share if the price of the Company's common stock is in excess of $13.50 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 83,334, 8,334, 8,334, 1,667, and 1,667 shares, respectively, at $2.40
per share until December 4, 2003.
In March 1997, in consideration for Mr. Reiner personally guaranteing an
aggregate of $540,000 in Company debt owed to Halstead and J & C Resources, the
Company issued to Mr. Reiner options to purchase 90,000 shares of its Common
Stock at $1.98 per share through March 2004. See "Certain Transactions."
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 "Item 10. Executive Compensation" section and by all directors and
officers as a group, as of May 16, 1997. 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, Suite 401, Pleasanton,
California 94566. The table reflects all shares of Common Stock which each
24
<PAGE>
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) 411,936 33.0%
Joseph Barbrie (2) 12,502 1.4%
Wm. Samuel Veazey (2) 12,814 1.4%
Michael Y. Granger (3) 3,334 .4%
Allan J. Korn (3) 2,501 .3%
Charles C. Johnston (4) 130,002 14.0%
Arbora A.G.(5) 93,751 9.7%
All officers and directors
as a group (five persons)(6) 443,087 34.6%
- ----------
(1) Includes shares and (i) 2,605 shares of Common Stock issuable upon exercise
of options at $52.80 per share at any time until July 1, 1997; (ii) 12,500
shares issuable upon exercise of options at $13.50 per share at any time until
February 14, 1999; (iii) 33,334 shares issuable upon exercise of options at
$13.50 per share at any time until February 28, 2004; (iv) 66,667 shares
issuable upon exercise of options at $13.50 per share at any time until November
1, 1999; (v) 83,334 shares issuable upon exercise of options at $2.40 per share
at any time until December 4, 2003; (vi) 90,000 shares issuable upon exercise of
options at $1.98 per share at any time until December 4, 2003 and (vii) 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 16,667 shares at $13.50 per share at any time until February 28, 2004
contingent upon the Company achieving certain goals. See "Management - Summary
Compensation Table."
(2) Includes 2,084 and 1,563 shares issuable upon exercise of options to Messrs.
Barbrie and Veazey, respectively, at $48.00 per share until July 1, 1997; 2,084
and 2,917 shares issuable upon exercise of options to Messrs. Barbrie and
Veazey, respectively, at $13.50 per share until February 14, 2004; and 8,334
shares issuable to each of Messrs. Barbrie and Veazey upon exercise of options
at $2.40 per share until December 4, 2003.
(3) Includes 1,667 and 834 shares of Common Stock issuable upon exercise of
options to Messrs. Granger and Korn, respectively, at $13.50 per share at any
time until February 14, 2004 and 1,667 shares of Common Stock each issuable upon
exercise of options at $2.40 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 6,667 shares at
$12.60 per share at any time until August 18, 1999, 8,334 shares at $2.25 per
share at any time until January 4, 1999, 20,834 shares at $3.00 per share at any
time until July 18, 1999, and 16,667 shares at $.60 per share at any time until
March 17, 2001.
(5) Includes warrants to purchase up to 83,334 shares at $2.82 per share issued
to Arbora and related parties at any time until November 8, 1998 and 10,417
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 402,925 shares of Common Stock issuable upon
exercise of currently exercisable options.
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 an officer which does 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. Gerald S. Kramer ("Kramer") is the Company's
former Chairman.
25
<PAGE>
The Company holds a promissory note due it from Mr. Reiner in the amount of
$210,000, at February 28, 1997. The promissory note does not bear interest and
was payable on February 1, 1997. The Company also has a receivable from Mr.
Reiner of $136,943 at February 28, 1997. The receivable does 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.
In April 1997, the Company entered into a debt repayment agreement with Mr.
Reiner. The amounts owed by Mr. Reiner will be repaid at varying amounts through
April 2004. The repayments will be made by deducting the amounts from Mr.
Reiner's payroll checks. In addition, all amounts owed by Mr. Reiner are
extended to April 2004 and no interest will be charged on the notes owed by Mr.
Reiner and the Company will reimburse Mr. Reiner for certain income tax related
considerations.
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 6,667 Common Stock
purchase warrants exercisable at $12.60 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 10,417 shares of
its Common Stock exercisable at $18.00 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 10,417 shares at
$12.00 per share at any time until August 31, 1998. Both warrants were exercised
in April 1994 based upon a net issuance of 6,667 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 8,334 shares of its Common Stock
exercisable at $2.25 per share at any time until January 4, 1999.
In July 1996, the Company borrowed $200,000 from Asset Factoring, evidenced
by a promissory note bearing 12% interest per annum due in July 1997. The
promissory note was subordinated to FINOVA and was personally guaranteed by Mr.
Reiner. In connection with the financing, the Company issued Asset Factoring a
warrant to purchase up to 20,834 shares of its Common Stock exercisable at $3.00
per share at any time until July 18, 1999. The Company also entered into a one
year consulting agreement with Asset Factoring in which the Company paid Asset
Factoring $25,000 for one year of consulting services. On November 11, 1996, the
Company borrowed $400,000 from Halstead LLC ("Halstead"), a company controlled
by Charles C. Johnston, evidenced by a $600,000 promissory note due on the
earlier of (a) the receipt of $1,500,000 from the sale of the Company's equity
securities; (b) the payment of the note receivable from Tecnol Medical Products,
Inc. ("Tecnol"); or (c) December 1997. Interest of $150,000 is due at maturity
less $10,000 if the entire balance is paid in full by July 1, 1997. The $600,000
promissory note was delivered to Halstead in consideration for the cancellation
of a promissory note in the principal amount of $200,000 owing from the Company
to Asset Factoring and the receipt by the Company of $400,000 from Halstead.
On March 19, 1997, the Company repaid $575,000 against the amount of
$740,000 in principal and accrued interest owing under the $600,000 promissory
note issued to Halstead. This amount was required to be paid by the Company upon
the Company's negotiated settlement with Tecnol, the settlement resulted in
Tecnol paying the Company $575,000. On that same date, the Company issued
Halstead a promissory note in the principal amount of $165,000 bearing 12%
interest per annum due December 1997. The $165,000 promissory note represents
the remaining principal amount owed of $25,000 plus the $140,000 in accrued
interest under the $600,000 note. The promissory note is subordinated to FINOVA,
the Company's primary lender, and is personally guaranteed by Mr. Reiner.
26
<PAGE>
On March 20, 1997, the Registrant borrowed $375,000 from J&C Resources,
Inc. ("J&C Resources"), a company controlled by Mr. Johnston evidenced by a
promissory note bearing 15% interest per annum due in March 1999. The promissory
note is subordinated to FINOVA, and is personally guaranteed by Mr. Reiner. In
connection with the financing, the Company issued J&C Resources 50,000 shares of
Common Stock and a warrant to purchase up to 16,667 shares of its Common Stock
exercisable at $.60 per share at any time until March 17, 2001. The Company also
entered into a two year consulting agreement with J&C Resources in which the
Company is required to pay J&C Resources $50,000 per year for consulting
services. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources."
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 104,167 shares
of its Common Stock at $6.00 per share and options to purchase an additional
16,667 shares of its Common Stock at $6.00 per share if the price of the
Company's Common Stock is in excess of $13.50 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.
On September 23, 1992, the Company issued to Mr. Reiner options to purchase
up to 31,250 shares at $25.44 per share at any time until May 31, 2002 if the
Company reaches certain annual gross revenue levels prior to February 28, 1998.
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 33,334 shares at $13.50 per share and
options to purchase an additional 16,667 shares at $13.50 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 "Management - Executive
Compensation - Summary Compensation Table" and "Management - Employment
Agreements."
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
83,334 shares of its Common Stock at $2.40 per share until December 4, 2003.
In connection with the 1992 Offering, Mr. Reiner placed 15,625 shares of
the Company's Common Stock owned by him in escrow, which shares were to 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 $230.88 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.
In March 1997, in consideration for Mr. Reiner personally guaranteing an
aggregate of $540,000 in Company debt owed to Halstead and J & C Resources, the
Company issued to Mr. Reiner options to purchase 90,000 shares of its Common
Stock at $1.98 per share through March 2004.
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 793,641 shares of the Company's Common Stock. The 793,641 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 166,667 shares of the Company's
Common Stock at $8.40 per share held by Arbora and issued Arbora and its
affiliated parties warrants to purchase up to 125,000 shares of the Company's
common stock at $2.82 per share at any time until November 8, 1998. In addition,
a voting trust was entered into which provided Mr. Reiner, with voting rights as
to such shares. On April 22, 1996, 41,667 shares of Common Stock were issued to
Arbora in connection with the exercise of 41,667 Common Stock purchase warrants.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
27
<PAGE>
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 of the
Registrant. (1)
3.2 Amendment to Restated Certificate of Incorporation of the Registrant.
(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)
3.11 Certificate of Amendment of Restated Certificate of Incorporation and
Certificate of Designations and the Terms and Conditions and Relative
Rights and Preferences of Series A Convertible Preferred Stock and
Certificate of Designations of Redeemable Convertible Preferred Stock
of the Registrant.
10.4 Subordinated Promissory Notes - Mr. Kramer. (1)
10.5 Subordinated Promissory Notes - Mr. Reiner. (1)
10.17 Promissory Note - Mr. 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. (8)
10.82 Voting Trust Agreement between Ulrich Rud and Rudolph Hugi, jointly
and Mr. Reiner. (8)
10.83 Stock Option Agreement dated December 12, 1995 with Mr. Reiner. (8)
10.84 Restated Employment Agreement dated April 8, 1996 - Mr. Reiner. (8)
10.85 Agreement of Settlement, General Release and Indemnity dated August
6, 1996 by and between the Registrant, Thomas F. Reiner, and Gerald
S. Kramer. (9)
10.86 Letter of Intent to purchase substantially all of the assets of Orion
Life Systems, Inc. and its wholly owned subsidiary, Orion Medical
Products, Inc. dated November 1, 1996. (10)
10.87 Stock Option Agreement dated March 18, 1997 with Mr. Reiner.
10.88 Stock Option Agreement dated March 18, 1997 with Mr. Reiner.
10.89 Debt Repayment Agreement dated April 23, 1997 by and between the
Registrant and Mr. Reiner.
27 Financial Data Schedule.
28
<PAGE>
- ----------
(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.
(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.
(8) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended February 29, 1996.
(9) Incorporated by reference to the Registrant's Form 8-K dated August 6,
1996.
(10) Incorporated by reference to the Registrant's Form 8-K dated November 1,
1996.
b. Reports on Form 8-K:
The Registrant filed a Form 8-K dated January 17, 1997 which
reported the Federal District Court's decision to grant a motion
brought by the National Association of Securities Dealers, Inc.
(the "NASD") to dismiss the Registrant's complaint in the action
entitled Sparta Surgical Corporation v. NASD, et al.
The Registrant filed a Form 8-K dated March 12, 1997 which
reported the settlement of an arbitration action initiated by
Tecnol Medical Products, Inc. ("Tecnol") in which Tecnol agreed
to pay the Registrant $575,000 in consideration of the
cancellation by the Registrant of a $665,000 note due from
Tecnol.
29
<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, 1997.
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 5/29/97
- ------------------------- Board of Directors,
Thomas F. Reiner Chief Executive Officer,
President, Treasurer,
(Principal Executive
Officer), and Director
Joseph Barbrie Vice President of 5/29/97
- ------------------------- Sales
Joseph Barbrie
Wm. Samuel Veazey Vice President of Finance 5/29/97
- ------------------------- and Administration (Principal
Wm. Samuel Veazey Accounting Officer)
and Secretary
Michael Y. Granger Director 5/29/97
- -------------------------
Michael Y. Granger
Allan J. Korn Director 5/29/97
- -------------------------
Allan J. Korn
29
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
EXHIBITS
TO
FORM 10-KSB
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
Exhibit 3.11
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
AND
CERTIFICATE OF DESIGNATIONS
AND THE TERMS AND CONDITIONS
AND RELATIVE RIGHTS AND PREFERENCES
OF SERIES A CONVERTIBLE PREFERRED STOCK
AND
CERTIFICATE OF DESIGNATIONS
OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
OF
SPARTA SURGICAL CORPORATION
Sparta Surgical Corporation (the "Corporation"), a corporation
organized and existing under the General Corporation Laws of the State of
Delaware, hereby sets forth this amendment of its (i) Restated Certificate of
Amendment filed with the Delaware Secretary of State on July 11, 1990, as
amended by a Certificate of Amendment of Restated Certificate of Incorporation
filed with the Delaware Secretary of State on February 21, 1992 (together the
"Restated Certificate of Incorporation"), (ii) Certificate of Designations and
the Terms and Conditions and Relative Rights and Preferences of Series A
Convertible Preferred Stock filed with the Delaware Secretary of State on July
12, 1994 (the "Series A Preferred Designations") and (iii) Certificate of
Designations of Redeemable Convertible Preferred Stock filed with the Delaware
Secretary of State on March 16, 1992 (the "Preferred Designations") pursuant to
ss.242 of such laws, and certifies as follows:
<PAGE>
1. The Board of Directors of the Corporation, has adopted resolutions
proposing and declaring advisable that the Restated Certificate of
Incorporation, the Series A Preferred Designations and the Preferred
Designations, of the Corporation be amended as follows:
FIRST: Article FOURTH of the Restated Certificate of Incorporation of this
Corporation is amended by striking out all of the first paragraph of subarticle
(a) of Article FOURTH and substituting in lieu thereof the following:
(a) The Corporation shall be authorized to issue Eight Million Seven
Hundred Fifty Thousand (8,750,000) shares consisting of Eight Million
(8,000,00) shares of Common Stock (Common Stock), par value $.002 per
share, and Seven Hundred Fifty Thousand (750,000) shares of Preferred Stock
(Preferred Stock), par value $4.00 per share.
SECOND: Paragraph one of the Series A Preferred Designations of this
Corporation entitled Designation and Stated Value is amended by striking out the
paragraph and substituting in lieu thereof the following:
(1) Designation and Stated Value. Thirty Thousand (30,000) shares of
Preferred Stock, par value $4.00 per share, of the Corporation are hereby
constituted as a series designated as "Series A Convertible Redeemable
Preferred Stock" (hereinafter called "Series A Preferred Stock").
THIRD: Paragraph one of the Preferred Designations of this Corporation
entitled Designation is amended by striking out the paragraph and substituting
in lieu thereof the following:
(1) Designation. The distinctive designation of such class is
"Non-Cumulative Convertible Redeemable Preferred Stock" (the "Preferred
Stock") and the number of shares constituting such series shall be One
Hundred Sixty Five Thousand (165,000), par value $4.00 per share.
- 2 -
<PAGE>
2. The Board of Directors of the Corporation, has adopted a resolution
proposing and declaring advisable that there be a reverse split of the
Corporation's Common Stock, whereby each holder of the Company's Common Stock as
of March 28, 1997 would receive one share of Common Stock for each six shares of
Common Stock held by such person as of such date (the "Reverse Split"), with
such persons becoming entitled to any fractional share of Common Stock as a
result of such Reverse Split being issued an additional share of Common Stock in
lieu thereof.
3. Thereafter, pursuant to resolution of the Board of Directors of the
Corporation, the foregoing amendments and resolutions were submitted to the
stockholders of the Corporation for approval at a Special Meeting of the
stockholders which was held on March 27, 1997.
4. The foregoing amendments and resolutions were duly adopted at a Special
Meeting of the Stockholders in accordance with the General Corporation Laws of
the State of Delaware, ss.ss.211, 212, 216, and 222.
- 3 -
<PAGE>
IN WITNESS WHEREOF, Sparta Surgical Corporation has caused its corporate seal to
be hereunto affixed, and this Certificate to be signed by its President,
Chairman of the Board and Chief Executive Officer and attested to by its
Secretary, this 27th day of March, 1997.
SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner
By: Thomas F. Reiner, President,
Chairman of the Board and
Chief Executive Officer
Attest:
/s/ Wm. Samuel Veazey
Wm. Samuel Veazey, Secretary
(Corporate Seal)
- 4 -
Exhibit 10.87
<PAGE>
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement") is made and entered into as
of the 18th day of March, 1997, 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 his providing his personal guaranty as to certain amounts
owing from the Company to J&C Resources, Inc., a New Hampshire corporation
pursuant to a promissory note in the principal amount of One Hundred Sixty Five
Thousand Dollars ($165,000); and
WHEREAS, the Company desires to grant to Optionee an option to purchase up
to 165,000 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 165,000 shares of the Company's Common Stock.
2. Purchase Price. The exercise price of the Option granted hereunder shall
be $0.33 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 March 17, 2004,
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 March 17, 1999
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 March 17, 2004.
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 Board of
Directors 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
Optionee, if so requested, the opportunity to have any Common Stock issuable
- 3 -
<PAGE>
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 (c), 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/ Allan J. Korn By: /s/ Michael Y. Granger
Allan J. Korn, Director Michael Y. Granger, Director
OPTIONEE:
/s/ Thomas F. Reiner
Thomas F. Reiner
- 6 -
Exhibit 10.88
<PAGE>
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement") is made and entered into as
of the 18th day of March, 1997, 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 his providing his personal guaranty as to certain amounts
owing from the Company to J&C Resources, Inc., a New Hampshire corporation
pursuant to a promissory note in the principal amount of Three Hundred Seventy
Five Thousand Dollars ($375,000); and
WHEREAS, the Company desires to grant to Optionee an option to purchase up
to 375,000 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 375,000 shares of the Company's Common Stock.
2. Purchase Price. The exercise price of the Option granted hereunder shall
be $0.33 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 March 17, 2004,
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 March 17, 1999
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 March 17, 2004.
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 Board of
Directors 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
Optionee, if so requested, the opportunity to have any Common Stock issuable
- 3 -
<PAGE>
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 (c), 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/ Allan J. Korn By: /s/ Michael Y. Granger
Allan J. Korn, Director Michael Y. Granger, Director
OPTIONEE:
/s/ Thomas F. Reiner
Thomas F. Reiner
- 6 -
Exhibit 10.89
<PAGE>
DEBT REPAYMENT AGREEMENT
This Agreement (the "Agreement") is made this 23rd day of April, 1997, 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 "Company"), and Thomas F. Reiner, President,
Chief Executive Officer and Chairman of the Board of the Company ("Reiner").
WHEREAS, Reiner is presently indebted to the Company in the amount of
approximately $590,400, which consists of the amount of approximately
$210,000.00 owing from him to the Company pursuant to a non-interest bearing
promissory note, the amount of $222,419.00 owing from him to the Company
pursuant to a promissory note, bearing interest at the rate of six percent (6%)
per annum (the "Interest Bearing Note") and the amount of approximately
123,994.00 owing as an account receivable of the Company, as the amounts owing
on such obligations may be increased or decreased from time to time (the
"Debt"); and
WHEREAS, Reiner has offered to repay the Debt in the manner provided for
herein out of his future salary and has agreed to permit the Company to pay such
amounts directly in the manner provided herein and the Company and Reiner agree
as follows:
1. Repayment. Reiner agrees to repay the Debt by permitting the Company to
deduct the following percentage of his annual base salary (as such term is used
in Section 4 (a) of Reiner's Employment Agreement with the Company dated April
8, 1996 (the "Employment Agreement") during each year of the term of his
Employment Agreement:
Period Percentage Deducted
4/8/1997 - 4/7/1998 Ten percent (10%)
4/8/1998 - 4/7/1999 Fifteen percent (15%)
4/8/1999 - 4/7/2000 Twenty percent (20%)
4/8/2000 - 4/7/2001 Thirty percent (30%)
4/8/2001 - 4/7/2002 Thirty Five percent (35%)
4/8/2002 - 4/7/2003 Forty percent (40%)
4/9/2003 - 4/7/2004 Forty percent (40%)
Such deductions (each being a "Debt Reduction Deduction") shall be made and
applied against the Debt on each of Reiner's regular pay dates during such term.
In the event that the entire amount of the Debt is satisfied for any reason
(including in the event of the termination of Reiner's employment pursuant to
Section 4 (g) of the Employment Agreement) Reiner shall be entitled to receive
any amounts owing to him under the Employment Agreement without the Debt
Reduction Deduction being taken.
2. Modification of Certain Terms of the Debt. In consideration of Reiner's
entering into this Agreement, the Company agrees that (i) the due date for each
portion of the Debt shall be extended to April 7, 2004; (ii) all interest owing
under the Interest Bearing Note shall be waived; and (iii) the terms of the
Interest Bearing Note shall be modified so that the Interest Bearing Note no
longer requires the payment of any interest.
<PAGE>
3. Payment of Tax Liability. The Company agrees to pay to Reiner, as
additional compensation, the amount of (i) any federal, state and local income
or excise taxes that Reiner must pay as a result of the Debt Reduction
Deduction, the waiver of interest on the Interest Bearing Note and as to any
imputed interest on the Interest Bearing Note hereafter; and (ii) an additional
sum of money, as compensation for any federal, state and local income or excise
taxes payable upon payments made pursuant to this Section 3, including any such
taxes upon payments pursuant to this subsection (ii), the intention being that
payments pursuant to this subsection (ii) shall equal such amount as is required
to entirely repay any cost to Reiner for such taxes. Payment of any amounts
pursuant to this Section 3 shall be calculated at the highest marginal tax rate
as to which Reiner might be subject for the tax year in which the income form
the forgiveness of such of the Indebtedness is recognized, regardless of
Reiner's actual marginal rates.
4. 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:
Company: Sparta Surgical Corporation
7068 Koll Center Parkway
Bernal Corporate Park, Suite 401
Pleasanton, CA 94566
Reiner: Thomas F. Reiner
3540 Roma Place
San Ramon, CA 94583
5. Successors; Binding Effect.
(a) The Company 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
Company, by agreement in form and substance satisfactory to Reiner, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall result in total forgiveness of the Debt. As used in this Agreement,
"Company" 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 5 (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 Reiner hereunder shall inure to the
benefit of an be enforceable by the administrators, successors, heirs,
distributees, devisees and legatees of Reiner.
<PAGE>
6. Arbitration. At the election of Reiner, any dispute respecting this
Agreement, whether commenced by the Company or Reiner 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 Reiner's residence at the time such action is commenced. Reiner 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.
7. Attorney's Fees and Litigation. In any litigation or arbitration
relating to this Agreement the Company shall bear all costs any attorney's fees
of both parties.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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 within that State. In the event that, notwithstanding Section
6 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 Reiner 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 is the entire agreement of the parties relating to
the subject matter herof and supersedes all previous written or oral agreements.
<PAGE>
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
Reiner abstaining
/s/ Allan J. Korn /s/ Michael Y. Granger
Allan J. Korn, Director Michael Y. Granger, Director
REINER:
/s/ Thomas F. Reiner
Thomas F. Reiner
<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 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 352,058
<ALLOWANCES> 30,381
<INVENTORY> 2,260,459
<CURRENT-ASSETS> 3,202,805
<PP&E> 502,130
<DEPRECIATION> 248,318
<TOTAL-ASSETS> 4,309,418
<CURRENT-LIABILITIES> 2,136,629
<BONDS> 1,259,571
0
754,984
<COMMON> 1,528
<OTHER-SE> 420,207
<TOTAL-LIABILITY-AND-EQUITY> 4,309,418
<SALES> 2,243,368
<TOTAL-REVENUES> 2,243,368
<CGS> 1,229,690
<TOTAL-COSTS> 1,229,690
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23,054
<INTEREST-EXPENSE> 388,768
<INCOME-PRETAX> (1,898,726)
<INCOME-TAX> 6,504
<INCOME-CONTINUING> (1,905,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,905,230)
<EPS-PRIMARY> (2.73)
<EPS-DILUTED> (2.73)
</TABLE>
