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, 1998 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 Convertible
Preferred Stock Boston Stock Exchange
$4.00 Par Value Series A Convertible
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 Convertible Preferred Stock
$4.00 Par Value Series A Convertible 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 $2,272,000.
As of June 5, 1998, 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 $715,529 based upon closing prices on
Nasdaq of $.88 per share of $.002 Par Value Common Stock and $.29 per share of
$4.00 Par Value Redeemable Convertible Preferred Stock.
As of June 5, 1998, 1,851,229 shares of the Registrant's Common Stock,
121,783 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
Introduction
Sparta Surgical Corporation (the "Company") develops, manufactures,
distributes and markets surgical specialty and electrotherapy products for the
healthcare industry worldwide. The surgical specialty products group consists of
(i) microsurgical hand-held instruments and accessories; (ii) critical care
hospital disposable products; and (iii) oral maxillofacial implant plating
systems. The surgical specialty products are widely used in ophthalmic, ear,
nose, throat, plastic, reconstructive, general and oral maxillofacial surgical
procedures. The electrotherapy products group consists of pain management
devices including (i) transcutaneous electrical nerve stimulators ("TENS"); and
(ii) related disposable and reusable electrodes and accessories.
The Company's business operations began in July 1987 with the acquisition
of Sparta Instrument Corporation. Since that time, the Company's business has
been primarily built and expanded by means of additional acquisitions of
companies and products that compliment or expanded the Company's existing
product lines. The Company's principal offices are located at 7068 Koll Center
Parkway, Suite 401, Pleasanton, California. The Company's telephone number is
(925) 417-8812.
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 stainless steel instruments
and related hospital equipment and accessories for use by: (i) ophthalmologists
in various procedures including cataract, retina and intraocular lens and radial
keratotomy procedures; (ii) ear, nose, throat and plastic and reconstructive,
and oral maxillofacial surgeons in rhinoplasty, facial plastic, and
reconstructive and hand surgery procedures; and (iii) general surgeons in other
general surgical applications, such as ob/gyn and cardiovascular procedures.
(ii) Critical care hospital disposable products. The Company markets a line
of proprietary critical care general hospital disposable products such as, (i)
Surgi-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 latex balloons used to control nose bleeding.
(iii) Oral Maxillofacial Implant Plating Systems. The Company markets an
oral maxillofacial implant titanium plating ("OMF") system 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.
Electrotherapy Products:
Transcutaneous Electrical Nerve Stimulators (TENS), Electrodes and related
accessories. The Company markets patented and proprietary TENS units which
deliver low voltage electrical current to the nerves in the spine in order to
temporarily reduce or control certain types of acute or chronic pain. The
Company's pain management TENS units include the patented Spectrum Max-SD, the
Company's most advanced patented 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 and
related accessories. The electrotherapy pain management devices and related
accessories are prescribed by a wide range of professionals including
physicians, and physical and occupational therapists for use in clinics,
rehabilitation facilities and patient homes.
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Acquisitions, Asset Purchases and Dispositions
Since inception, a principal element of the Company's development has been
the acquisition of companies and product lines that complement the existing
business strategy. Sparta Instrument Corporation, acquired by the Company in
1987, distributed a specialty line of high quality microsurgical hand held
instruments for use in ophthalmic, ear, nose and throat ("ENT") procedures and
plastic surgery, along with related hospital disposable medical products.
Healthmed Corporation, acquired by the Company in 1988, manufactured and
marketed a specialty line of surgical products generally referred to as
"critical care hospital disposables." Sterile Products, a division of Absorbent
Cotton Company, acquired by the Company in 1989, developed, manufactured and
distributed specialty acute and chronic wound care dressings. David Simmonds
Company, Inc., also acquired by the Company in 1989, manufactured and
distributed medical supplies for intravenous anesthesia and related drugs used
in oral surgery. Certain assets of Medical Designs, Inc. ("MDI"), which was
founded to manufacture and 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
which developed, manufactured and marketed an oral maxillofacial plating product
line, were purchased in 1994.
On December 7, 1995, the Company sold its wound care dressings product line
to Tecnol Medical Products, Inc., a publicly traded 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 of the business.
On May 29, 1998 the Company entered into a non-binding letter of intent for
the acquisition of all of the outstanding common stock of Med-E-Quip, Locators,
Inc. ("Med-E-Quip") based in St. Louis, Missouri. The purchase price will be
approximately $4,000,000 consisting of $2,750,000 in cash, $500,000 in notes
payable over three (3) years, $100,000 in royalties up to 4.5% of net sales, and
$650,000 in Common Stock. The letter of intent also calls for the Company to
issue earn-out common shares to Med-E-Quip's principals which is subject to
Med-E-Quip meeting certain minimum net sales and net income goals beginning the
fiscal year ending February 28, 1999. The closing of the acquisition is subject
to several conditions, including approval by Sparta's Board of Directors;
satisfactory completion of due diligence on Med-E-Quip's business and assets;
and completing financing.
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
niche markets that are served by relatively few competitors. The Company will
also continue efforts to develop products in collaboration with established
medical device companies on an OEM/private label basis while researching and
developing its own products.
The Company intends to expand its distribution networks by appointing other
specialty surgical dealers and selected 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 improved products consistent with the results of its research
and development programs.
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Research and Development
Approximately $42,000 and $15,000 was expended on Company-sponsored
research and development ("R&D") for the years ended February 28, 1997 and
February 28, 1998, respectively. R&D continues 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 selected independent
manufacturing representatives and through a network of medical/surgical and
durable medical equipment distributors located throughout the United States and
abroad who are responsible for sales directly to hospitals, physicians, clinics,
physical and occupational therapists and rehabilitation facilities. 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. In addition, the Company markets its products under various OEM
manufacturing arrangements.
A significant portion of the Company's TENS sales are derived from various
annual purchase contracts and OEM manufacturing arrangements with companies such
as Henley Healthcare, Texas TENS, Modern Medical Corp. and Masters Medical Co.
There can be no assurance that the Company will be able to maintain these
arrangements in the future and the loss of any of these contracts could have a
material adverse effect on the Company's business, operating results and
financial condition.
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 and overseas there are numerous independent health care distributors of
the Company's products that include Baxter Healthcare Corp., Abbey Medical,
Inc., General Medical Corp., Alliance Healthcare Inc., Owens and Minor, Inc.,
DeRoyal Industries, Inc., Alabama Microsurgical Instruments, Salvin Dental Co.,
ABCO Dealers, Inc., TheraLabs, Inc., New England Surgical Corp., Therapeutic
Trends, Inc., and Dong-Jin International Co. Through its various distributors
and representatives, the Company's products are marketed to private and
government hospitals, rehabilitation facilities, clinics, physicians, and
occupational and physical therapists.
Manufacturing and Distribution
The Company's microsurgical hand held instruments, oral maxillofacial
implant plating systems, critical care hospital 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 implant plating systems are manufactured in Germany, Switzerland
and the United States to the Company's specifications. Critical care hospital
disposables and TENS units are manufactured domestically to the Company's
specifications under various manufacturing arrangements.
The Company has experienced difficulty from time to time in obtaining some
of its products, and there can be no assurance that its current or alternative
sources will be able to meet the Company's needs on a timely basis. Although
some products are currently available from multiple sources, at present the
Company obtains approximately 70% of the products it sells from single sources.
A lack of availability from current suppliers could cause distribution delays,
increased cost to the Company and decrease in levels of sales. 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. The Company has experienced difficulty from time to time in obtaining
some of its products due to the lack of working capital. No assurance can be
given that the Company will be able to obtain the necessary working capital 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
United States Food and Drug Administration's ("FDA") Good Manufacturing
Practices. See "- Government Regulation."
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Product Liability
The Company carries product liability insurance of $1,000,000 per
occurrence. Like most producers of surgical and electrotherapy products, the
Company faces the risk of product liability claims and unfavorable publicity in
the event that the use of its products causes injury. 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. Some of
the companies which the Company competes, have significantly greater resources,
established sales organizations and greater experience in marketing and sales
products through direct distribution and is dominated by general industry giants
such as Johnson and Johnson and Baxter Healthcare Corporation.
In the surgical specialty market for microsurgical hand held instruments,
the Company competes with Storz Instrument Company, Pilling - Weck, Inc., Katena
Products, Inc. and Stille AB. 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 other smaller competitors. In the oral maxillofacial implant plating
market, the Company competes with Howmedica, Inc., Synthes U.S.A. and Walter
Lorenz Surgical Instruments as well as other smaller competitors. In the TENS
market, the Company competes with numerous companies including Empi, Inc. and
Staodyn, Inc., the market leaders in the Electrotherapy industry.
The pain management market is a relatively mature and competitive market,
subject to significant fluctuations in profitability caused by foreign
competition, questions of therapeutic efficacy, governmental regulations and
private rates of reimbursement. The rehabilitation market is an evolving and
fragmented market with a number of different companies offering competing
treatments without any clear indication of preference among treating clinicians.
There can be no assurance that the Company will ever be able to capture a
significant portion of the pain management market or that it can establish a
significant position in the rehabilitation market.
Several states and the federal government are investigating a variety of
alternatives to reform the health care delivery system and further reduce and
control health care spending. These reform efforts include proposals to limit
spending on health care items and services, limit coverage for new technology,
and limit or control directly the prices health care providers and drug and
device manufacturers may charge for their services and products. The scope and
timing of such reforms cannot be predicted at this time, but if adopted and
implemented, they could have a material adverse effect on the Company's
business, operating results and financial condition.
Competitive factors for microsurgical hand held instruments, critical care
hospital 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. There can be no assurance that the Company will be
able to compete effectively.
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 obtained through the acquisition of MDI.
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.
Therefore, the scope or enforceability of claims allowed in the patents on which
the Company will rely, cannot be predicted with any certainty.
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Government Regulation
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.
All of the Company's products must be approved, registered and/or licensed
by the 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.
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 June 5, 1998, the
Company had five full-time, one part-time employee including three employees
involved in distribution; two sales and marketing; and four administrative. 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.
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. In particular, the services of Thomas
F. Reiner the Company's Chairman, President and CEO would be difficult to
replace. The Company has entered into an employment agreement with Mr. Reiner.
The loss of the services of any of its executive officers or other key employees
could have a material adverse effect on the business, results of operations or
financial condition of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases corporate and warehouse facilities in Pleasanton,
California. The Company is also party to a lease which was abandoned in December
1996. See Item 3 "Legal Proceedings." The Company believes its facilities are
adequate for its needs in the foreseeable future and that additional space is
available at reasonable rates. The following table sets forth certain
information concerning the Company's two facilities:
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Square Expiration of Monthly
Location Footage Current Lease Rental
-------- ------- ------------- ------
Pleasanton, CA 9,100 11/30/98 $8,882
Pleasanton, CA 6,200 12/14/98 $3,968
ITEM 3. LEGAL PROCEEDINGS
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") through Coleman and Company Securities, Inc.
("Coleman"). On the same date, approximately one hour after trading in the Units
was initiated on Nasdaq, Nasdaq suspended the listing of the Units and Warrants
and reported to the Company that it took such action because it believed that
the Units and/or Warrants did not meet certain Nasdaq listing criteria. Promptly
after the Nasdaq action, Coleman terminated the Underwriting Agreement with the
Company, and all sales of the Units were rescinded. On March 22, 1995, Nasdaq
determined that it would permit the Company to list the Units and Warrants and
so advised the Company. Following Nasdaq's decision to list the Units and
Warrants, the Company and Coleman attempted to resume the Offering on the same
terms and conditions as indicated in the March 21, 1995 Registration Statement.
On March 31, 1995, Coleman advised the Company that it would not resume the
Offering and, accordingly, the Offering was terminated.
On September 28, 1995, the Company filed suit against the National
Association of Securities Dealers, Inc. ("NASD") and The Nasdaq Stock Market,
Inc. The lawsuit seeks damages of more than $12,500,000 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 NASD to dismiss the
Company'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 in San
Francisco, California. 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 February 9, 1998, the matter was heard by the United States Court of
Appeals for the North Circuit. As of June 5, 1998, the Court of Appeals for the
Ninth Circuit had not ruled on the Company's appeal.
On April 19, 1996, the Company was served with a complaint filed by Phyllis
C. 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 February 9, 1998, the Company
filed a cross-complaint against Ms. Ballew for breach of fiduciary duty,
conversion and breach of contract for general damages in excess of $500,000. In
addition the cross-complaint seeks punitive and exemplatory damages, and for
cost of suit.
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 v. Sparta case,
under case No. C2-96-541. The complaint was in connection with the Company's
acquisition of MDI from Star Bank in December 1992 through a bankruptcy
proceeding initiated by MDI. On July 8, 1997, the Company reached a tentative
settlement agreement under which the Company agreed to issue to Rubin 65,000
Common Stock Purchase Warrants at an exercise price of $0.75 per share and
35,000 shares of the Company's Common Stock. On May 24, 1998, the settlement
agreement was executed. The Company's management believes that it would have
ultimately prevailed in the above action, but took the opportunity to settle
this action before substantial additional legal fees and management time were
expended.
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On February 2, 1998, the Company filed suit in the Superior Court of New
Jersey, Law Division, Atlantic County, Docket No. ATL-L-430-98 against Company's
former landlord, River Road Associated, L.P. ("RRA") and RRA's general partner
Jerome Raifman. In this suit the Company claims that RRA has breached the lease
agreement between it and the Company respecting property located in Hammonton,
New Jersey due to RRA's failure to maintain and make repairs to the demised
premises. The Company alleges that because of RRA's failure to maintain the
demised premised that the Company could not sublet such premises and suffered
damages as a result. The Company also alleges that it has been constructively
evicted from the demised premises and that the lease with RRA is therefore
terminated. On March 2, 1998, RRA instituted proceedings to enforce a confession
of judgement against the Company in the approximate amount of $361,400 for
unpaid rent and other charges allegedly due under the lease through the end of
the lease term in May, 2000. The Company intends to vigorously oppose this
action by RRA and will seek to consolidate these proceedings with the original
suit initiated by the Company. Any adverse ruling in the claim made by RRA
against the Company is likely to have a significant material adverse effect on
the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq SmallCap Market under
the symbol "SPSG" since January 31, 1991 and on the Boston Stock Exchange under
the symbol "SSG" since March 10, 1992. On May 1, 1998, Nasdaq delisted the
Company's securities from the Nasdaq SmallCap Market. Trading in the Company's
securities is currently being conducted in the Nasdaq OTC Bulletin Board which
could substantially reduce the markets for the Company's securities.
All share information and per share data throughout this report has been
adjusted 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 1999
May 31, 1998 $1.69 $0.75
August 31, 1998 1.06 0.88
(through June 5, 1998)
Fiscal 1998
May 31, 1997 4.00 1.25
August 31, 1997 2.00 1.00
November 30, 1997 2.25 1.87
February 28, 1998 1.62 0.75
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
As of June 5, 1998, the Company estimates it had approximately 500 record
holders.
As of June 5, 1998, 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
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time in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions thereof, as are determined by
resolution of the Board of Directors of the Company, except that so long as any
1992 Preferred Stock or 1994 Preferred Stock is outstanding, the Company may not
issue any series of stock having rights senior to either class of Preferred
Stock without the approval of holders of at least 50% of the outstanding shares
of such classes of Preferred Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by stockholders and could adversely affect the rights and
powers, including voting rights, of the holders of Common Stock. In certain
circumstances, the issuance of Preferred Stock could depress the market price of
the Common Stock.
Common Stock
At June 5, 1998 there were 1,851,229 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 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 June 5, 1998 there were
28,068 shares of 1994 Preferred Stock outstanding convertible into 23,380 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 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.
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
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Stock at a price below the Conversion Price or the current market price of the
Company's securities. 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.
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 121,783 shares of 1992
Preferred Stock (representing $487,132 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
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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.
Redeemable Convertible Preferred Stock
At June 5, 1998 there were 121,783 shares of $4.00 par value Redeemable
Convertible Preferred Stock ("1992 Preferred Stock") outstanding convertible
into 40,554 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. 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 years ended February 28, 1995 and February 28, 1997. The Company does
not anticipate it will pay a dividend for the fiscal year ended February 28,
1998.
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 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.
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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 June 5, 1998, the Company had outstanding 1,415,223 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 under certain conditions, and 1994
Preferred Stock.
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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, 1998 as Compared to Year ended February 28, 1997
Net sales for the year ended February 28, 1998 ("Fiscal 1998") were
$2,272,000, an increase of 1.3% from net sales of $2,243,000 for Fiscal 1997.
The increase in net sales during Fiscal 1998 as compared to Fiscal 1997 is the
result of (i) a $221,000 or 21.6% increase in electrotherapy product sales from
$1,025,000 to $1,246,000; and (ii) a decrease of $192,000 or 15.8% in surgical
product sales from $1,218,000 to $1,026,000. The increase in sales for the
electrotherapy product line can be primarily attributed to the receipt of
various non-cancellable purchase orders in the approximate amount of $650,000
from various customers. The decrease of the surgical product line sales is
primarily due to a reduction in the number of the Company's independent
manufacturing sales representatives, the non-attendance by the Company to
various trade shows, and the unavailability of certain of its critical care
disposable products during the fourth quarter, all as a result of the lack of
working capital.
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.
Gross profit was $1,206,000 or 53.1% of net sales for Fiscal 1998 as
compared to $1,014,000 or 45.2% of net sales for Fiscal 1997. The increase in
gross profit percentage is primarily due the recording of a $275,000 reserve for
slow moving inventory during Fiscal 1997 which lowered the gross profit
percentage and was not repeated during Fiscal 1998. Gross profit percentage net
of the reserve for slow moving inventory during Fiscal 1997 was 57.4%. The
decrease in gross profit percentage during Fiscal 1998 is primarily due to the
increase in electrotherapy product sales. In general, the electrotherapy product
line generates lower gross profits than the surgical product line.
Selling, general and administrative ("SG&A") expenses for Fiscal 1998 were
$2,121,000, a 7.5% decrease from SG&A expenses of $2,292,000 for Fiscal 1997.
The decrease in SG&A expenses for Fiscal 1998 as compared to Fiscal 1997 is
primarily due to legal expenses incurred during Fiscal 1997 which were not
repeated during Fiscal 1998. In addition, lower SG&A expenses were experienced
for Fiscal 1998 due to the Company's implementation in June 1997 of a
restructuring plan involving a reduction of personnel, a Company wide reduction
in salaries, and an overall cost containment program. The decrease in SG&A
expenses for Fiscal 1998 is despite an increase of $236,000 in depreciation and
amortization expenses from $240,000 during Fiscal 1997 as compared to 476,000
during Fiscal 1998, one-time extraordinary expenses to abandoned acquisition
costs in the approximate amount of $75,000, and the write-off of debt financing
cost in the approximate amount of $165,000 which were accrued in connection with
the closing of the NationsCredit Commercial Funding line of credit.
Research and development ("R&D") expenses for Fiscal 1998 were $15,000 a
65.5% decrease from R&D expenses of $42,000 for Fiscal 1997. In Fiscal 1997, the
Company R&D efforts were focused on its redesign of the MAX-SD TENS units
resulting in increased quality and lower product cost for the electrotherapy
product line. During Fiscal 1998, the R&D continued to be focused on the
redesign of the Company's TENS units in an effort to continue to increase the
quality and reduce the cost for the electrotherapy product line.
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Total other expense for Fiscal 1998 was $928,000, an increase of $1,199,000
from total other income of $271,000 for Fiscal 1997. The increase in total other
expense is primarily due to the recording of a provision for uncollectable note
receivable in the amount of $548,000, an increase of $16,000 in interest expense
resulting primarily from higher loan balances and banking expenses to the
Company's primary lender coupled with a one-time gain of $607,000 on the sale of
the wound care product line recognized during Fiscal 1997.
As a result of the foregoing, the net loss for Fiscal 1998 was $1,858,000,
a decrease of $47,000 from net loss of $1,905,000 for Fiscal 1997. The decrease
in net loss for Fiscal 1998 as compared to Fiscal 1997 is primarily due to the
decrease in SG&A expenses, a litigatuon settlement expense in the amount of
$856,000 was incurred during Fiscal 1997.
Basic and diluted loss per share was $2.27 for Fiscal 1998 as compared to
$2.73 for Fiscal 1997. The basic and diluted loss per share computation reflect
paid and accrued dividends on the Series A Convertible Preferred Stock which
were paid in March 31, 1997 and 1998.
Year ended February 28, 1997 as Compared to Year ended February 29, 1996
Net sales for Fiscal 1997 were $2,243,000, a decrease of 61.1% from net
sales of $5,759,000 for Fiscal 1996. The decrease in net sales during Fiscal
1997 as compared to Fiscal 1996 is the result of (i) a decrease of $3,167,000 in
medical product sales which resulted from the disposition of the Company's
medical product line in December 1995; (ii) a decrease of $45,000 or 3.6% in
surgical product sales from $1,264,000 to $1,219,000; and (iii) a decrease of
$303,000 or 22.8% in electrotherapy product sales from $1,328,000 to $1,025,000.
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.
Gross profit was $1,014,000 or 45.2% of net sales for Fiscal 1997 as
compared to $2,493,000 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
$2,292,000, a 31.4% decrease from SG&A expenses of $3,341,000 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.
Research and development ("R&D") expenses for Fiscal 1997 were $42,000, a
20.8% decrease from R&D expenses of $53,000 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.
Settlement of litigation expenses for Fiscal 1997 were $856,000. 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
John P. Landino, a former Vice President of Sales of the Company. Under the
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settlement agreements discussed above, the Company paid to Kramer and Landino an
aggregate amount of $298,000, and issued to Kramer and Landino an aggregate of
$188,000 in promissory notes, payable monthly over five years. In addition, the
parties exchanged general releases and the Company forgave approximately
$371,000 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
$607,000. 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 $32,000 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 $374,000, a 21.9% decrease from
net interest expense of $479,000 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 $1,905,000,
a decrease of $2,510,000 from net income of $605,000 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 $856,000 expense related to the settlement of the
litigation described above. In addition, during Fiscal 1996 the Company recorded
a gain in the amount of $1,985,000 as compared to $607,000 for Fiscal 1997.
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, 1998, the Company had net operating loss carry forwards
of approximately $9,450,000. Availability of the Company's net operating loss
carry forwards, if not utilized, will expire at various dates through the year
2013.
The Company's working capital at February 28, 1998 was $1,122,000 as
compared to $1,066,000 at February 28, 1997. The Company's working capital
position increased by $56,000.
Prior to 1998, Mr. Reiner had entered into several note agreements with the
Company. Under the terms of these agreements, as of February 28, 1997, Mr.
Reiner was obligated to pay the Company $569,000. In April 1997, the Company
entered into a Debt Repayment Agreement with Mr. Reiner. The amounts owed by Mr.
Reiner were to be repaid at varying amounts through April 2004. The repayments
were made by deducting the amounts from Mr. Reiner's payroll checks. In
addition, all amounts owed by Mr. Reiner were extended to April 2004, no
interest was charged on the notes owed by Mr. Reiner and the Company was
required to reimburse Mr. Reiner for certain income tax related considerations.
During Fiscal 1998, Mr. Reiner made repayments in the amount of $21,000. On
February 23, 1998, in consideration of Mr. Reiner agreeing to reduce his salary
to $175,000 per year, cancel his right to an automatic extension under his
Employment Agreement, and provide the Company with a Working Capital Facility,
the Company cancelled his indebtedness to the Company. On May 8, 1998 the
Company entered into an Agreement Regarding Indebtedness, pursuant to which the
Company and Mr. Reiner agreed to reinstate the debt in the approximate amount of
$548,000 providing that Mr. Reiner shall be relieved of any obligation to repay
any of the indebtedness upon the occurrence of any of the following conditions;
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(i) any change in control for the Company; (ii) the termination of Mr. Reiner's
employment with the Company by either party for any reason; (iii) the Company
becoming insolvent or filing for bankruptcy; or (iv) the Company's net sales
exceeding $2.5 million during any fiscal year through May 2004. Due to the
modification of the notes receivable, the Company does not consider collection
of the notes probable and recorded a charge to operations of $548,000 during
Fiscal 1998. See Item 12 "Certain Relationships and Related Transactions."
On May 31, 1997, Mr. Reiner, provided the Company with a Working Capital
Credit Facility of up to $200,000, bearing 12% interest per annum. In June 1998,
Mr. Reiner increased the Working Capital Facility to $500,000. The advances made
under the Working Capital Credit Facility are due the earlier of (i) thirty (30)
calendar days including accrued interest; (ii) upon the closing of a minimum of
$1,000,000 equity or debt financing by the Company; or (iii) at the option of
Mr. Reiner, with five (5) day notice to the Company. In addition, Mr. Reiner has
the option to convert all amounts under the Working Capital Credit Facility into
the Company's Common Stock at 75% of the average closing bid prices as reported
on Nasdaq for the five (5) trading days preceding the conversion date. As of
June 5, 1998, the amount due to Mr. Reiner under the Working Capital Credit
Facility was approximately $270,000. See Item 12 "Certain Relationships and
Related Transactions."
On July 25, 1997, NationsCredit Commercial Funding Division of
NationsCredit Commercial Corporation, A NationsBank Company ("NationsCredit")
provided the Company with a 48-month Revolving Line of Credit of up to
$2,500,000 (the "Loan"). The Company agreed to pay NationsCredit interest on the
average outstanding principal amount of the Loan at a per annum rate of prime
plus 3%. The Loan is advanced to the Company based on a percentage of eligible
assets and is secured by a first position security interest on all of the assets
of the Company. In addition, $250,000 of the Loan is personally guaranteed by
Thomas F. Reiner, the Company's Chairman, President and Chief Executive Officer.
As of June 5, 1998, the outstanding balance on the Loan was $1,525,000 and
approximately $12,000 in credit was available. The Loan is being used to provide
working capital for current operations.
In connection with the financing, the Company issued NationsCredit a
warrant to purchase up to 42,500 shares of its Common Stock exercisable at $1.11
per share at any time until July 25, 2002. In consideration for Mr. Reiner
providing his personal guarantee for the NationsCredit Loan, on July 25, 1997,
the Company issued to Mr. Reiner 80,000 shares of Common Stock and an option to
purchase up to 150,000 of its Common Stock exercisable at $1.25 per share at any
time until July 25, 2004.
On April 17, 1998, the Company entered into an agreement with Nova Bancorp,
USA ("Nova") to act as its exclusive financial advisor. In its role as a
financial advisor, Nova Bancorp will advise Sparta on the targeting, planning
and execution as to provide on a best efforts basis $3.5 million private
placement. The proposed private placement financing is to be issued to finance
potential acquisitions, and to provide financing for repayment of debts, working
capital, sales and marketing expenses and research and development. In
consideration for providing these services, the Company agreed to issue to Nova
an option to purchase 150,000 shares of the Company's Common Stock at $1.00 per
share at any time until January 16, 2000. In addition, upon completion of the
$3.5 million financing, the Company agreed to issue to Nova an option to
purchase up to 10% of the outstanding shares of the Common Stock of the Company
on a fully-diluted basis at an exercise price equal to 110% of the fair market
value price of the Common Stock at the time of the Closing of the financing.
On April 29, 1998, the Company entered into a letter of intent with The
Tyler Jay High Yield Fund ("Tyler") to provide the Company with a $500,000 loan
bearing 13% interest per annum due 24 months after the closing of the loan. The
loan will be secured by a second lien on all of the assets of the Company and
will be personally guaranteed by Mr. Reiner. In connection with the financing,
the Company will issue to Tyler 50,000 shares of Common Stock and an option to
purchase up to 100,000 of its Common Stock exercisable at $.75 per share with an
expiration date of three years from the closing of the loan. The loan is
expected to close in June 1998.
On February 23, 1998, the Nasdaq Stock Market materially increased the
financial and other criteria necessary to qualify for continued listing on the
Nasdaq National and SmallCap Markets. As of that date the Company was not in
compliance with any of the new net tangible, market capitalization or net income
requirements for continued listing on the Nasdaq SmallCap Market. On February
25, 1998, the Nasdaq Stock Market, Inc. notified the Company that its securities
would be delisted from the Nasdaq SmallCap Market effective with the close of
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business on March 4, 1998. The Company appealed Nasdaq's decision and a hearing
was scheduled for April 9, 1998. On May 1, 1998, Nasdaq delisted the Company's
securities from the Nasdaq SmallCap Market. Trading in the Company's securities
is currently being conducted in the Nasdaq OTC Bulletin Board which could
substantially reduce the markets for the Company's securities.
The Company may make additional acquisitions of companies, divisions of
companies or products in the future. Acquisitions entail numerous risks,
including difficulties or an inability to successfully assimilate acquired
operations and products, diversion of management's attention and loss of key
employees of acquired businesses, all of which the Company has encountered with
previous acquisitions. Future acquisitions by the Company may require dilutive
issuances of equity securities and the incurrence of additional debt, and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's current operations continue to be cash flow negative, further
straining the Company's working capital resources. The Company's 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.
Management has taken the following steps to address its operating and
financial requirements: signed a letter of intent for a $500,000 mezzanine loan
which is expected to close in June 1998; initiated a cost reduction program
which the Company estimates will reduce annual operating expenses by
approximately $500,000; and, engaged an investment advisor to promote a private
offering of equity and debt securities up to $8,500,000. Management believes
these actions will be sufficient to fund operations through February 28, 1999;
however, there can be no assurance that the Company will be able to successfully
complete any of the above mentioned financings or that the planned cost
reductions will materialize.
The Company is currently evaluating the potential impact of the year 2000
on the processing of date-sensitive information by the Company's computerized
information system. The year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable year.
Any of the Company's computer programs that have time-sensitve software may
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. Based on preliminary
information, the costs of addressing the potential problems are not currently
expected to have a material adverse effect on the Company's financial position,
liquidity or results of operations in future periods. However, if the Company,
or its customers or vendors, are unable to resolve such processing issues in a
timely manner, it could pose a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant year 2000
issues in a timely manner.
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
-17-
<PAGE>
SPARTA SURGICAL CORPORATION
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
February 28, 1998 and 1997
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Sparta Surgical Corporation
We have audited the accompanying balance sheet of Sparta Surgical Corporation
(the "Company"), as of February 28, 1998, and the related statements of
operations, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of February 28,
1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
June 5, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Sparta Surgical Corporation
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Sparta Surgical Corporation and
Subsidiary for the year ended February 28, 1997. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the operations and the cash
flows of Sparta Surgical Corporation and Subsidiary for the year ended February
28, 1997 in conformity with generally accepted accounting principles.
Angell & Deering
Angell & Deering
Certified Public Accountants
Denver, Colorado
April 25, 1997
<PAGE>
Sparta Surgical Corporation
CONSOLIDATED BALANCE SHEET
February 28, 1998
ASSETS
Current assets
Cash ....................................................... $ 1,000
Accounts receivable, net of allowance for
doubtful accounts of $34,000 .............................. 215,000
Inventories ................................................ 2,165,000
Other ...................................................... 57,000
-----------
Total current assets ............................. 2,438,000
Property and equipment, at cost:
Equipment .................................................. 485,000
Other ...................................................... 16,000
-----------
501,000
Less accumulated depreciation .............................. (315,000)
-----------
Net property and equipment ....................... 186,000
Other assets
Intangible assets .......................................... 648,000
Other ...................................................... 56,000
-----------
Total other assets ............................... 704,000
-----------
Total assets ..................................... $ 3,328,000
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long term obligations ................... $ 449,000
Accounts payable - trade ................................... 552,000
Accrued expenses ........................................... 315,000
-----------
Total current liabilities ........................ 1,316,000
Revolving credit facility and long term obligations ............ 2,282,000
Other long term liabilities .................................... 275,000
Stockholders' deficit:
Preferred stock: $4 par value, 750,000 shares authorized;
Non-cumulative convertible redeemable preferred stock:
$4 par value, 165,000 shares authorized, 122,583
shares issued and outstanding ........................ 490,000
Series A cumulative convertible preferred stock:
$4 par value, 30,000 shares authorized,
28,068 shares issued and outstanding ................. 112,000
Common stock: $0.002 par value, 8,000,000 shares
authorized, 1,578,207 shares issued and outstanding .. 2,000
Additional paid in capital ................................. 8,257,000
Accumulated deficit ........................................ (9,406,000)
-----------
Total stockholders' deficit ...................... (545,000)
-----------
Total liabilities and stockholders' deficit ...... $ 3,328,000
===========
The accompanying notes are an integral part of these statements.
<PAGE>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended February 28,
1998 1997
----------- -----------
Net sales ........................................ $ 2,272,000 $ 2,243,000
Cost of sales .................................... 1,066,000 1,229,000
----------- -----------
Gross profit ............................. 1,206,000 1,014,000
Selling, general and administrative expenses ..... 2,121,000 2,292,000
Research and development expense ................. 15,000 42,000
Litigation settlements ........................... -- 856,000
----------- -----------
Loss from operations ..................... (930,000) (2,176,000)
Other income (expense):
Interest and other income .................... 24,000 14,000
Interest expense ............................. (404,000) (388,000)
Provision for uncollectible note receivable .. (548,000) --
Gain on sale of wound care product line ...... -- 607,000
Gain on disposal of assets ................... -- 38,000
----------- -----------
Total other income (expense) ............. (928,000) 271,000
----------- -----------
Loss before provision for income taxes ... (1,858,000) (1,905,000)
Provision for income taxes ....................... -- --
----------- -----------
Net loss ................................. (1,858,000) (1,905,000)
Preferred stock dividends ........................ (42,000) (114,000)
----------- -----------
Net loss applicable to common shareholders $(1,900,000) $(2,019,000)
=========== ===========
Basic and diluted net loss per common share ...... $ (2.27) $ (2.73)
=========== ===========
Shares used to calculate basic and diluted net
loss per common share ............................ 836,189 740,702
=========== ===========
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
Sparta Surgical Corporation
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<CAPTION>
Series A Cumulative
Redeemable Redeemable
Preferred Stock Preferred Stock Common Stock Additional
--------------------- ------------------- ----------------- Paid in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
-------- ----------- ------- --------- --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1996 ... 275,858 $ 1,104,000 44,910 $ 179,000 641,138 $1,000 $7,157,000 $(5,487,000) $ 2,954,000
Preferred stock dividends
paid in common stock ... -- -- -- -- 29,015 -- 124,000 (96,000) 28,000
Conversion of preferred
stock into common stock (115,180) (461,000) (16,842) (67,000) 52,429 -- 528,000 -- --
Exercise of warrants to
purchase common stock .. -- -- -- -- 41,667 -- 117,000 -- 117,000
Dividends accrued on
Series A preferred stock -- -- -- -- -- -- -- (18,000) (18,000)
Net loss ................ -- -- -- -- -- -- -- (1,905,000) (1,905,000)
-------- ----------- ------- --------- --------- ------ ---------- ----------- -----------
Balance at February 28, 1997 160,678 643,000 28,068 112,000 764,249 1,000 7,926,000 (7,506,000) 1,176,000
Preferred stock dividends
paid in common stock ... -- -- -- -- 23,274 -- 42,000 (42,000) --
Conversion of preferred
stock into common stock (38,095) (153,000) -- -- 12,698 1,000 152,000 -- --
Issuance of common stock
under escrow agreement . -- -- -- -- 727,986 -- -- -- --
Issuance of stock and
warrants with debt ..... -- -- -- -- 50,000 -- 137,000 -- 137,000
Net loss ................ -- -- -- -- -- -- -- (1,858,000) (1,858,000)
-------- ----------- ------- --------- --------- ------ ---------- ----------- -----------
Balance at February 28, 1998 122,583 $ 490,000 28,068 $ 112,000 1,578,207 $2,000 $8,257,000 $(9,406,000) $ (545,000)
======== =========== ======= ========= ========= ====== ========== =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended February 28,
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................................. $(1,858,000) $(1,905,000)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ...................................................... 476,000 240,000
Provision for uncollectible note receivable ........................................ 548,000 --
Gain on sale of product line ....................................................... -- (575,000)
Gain on disposal of assets ......................................................... -- (38,000)
Litigation settlements ............................................................. -- 576,000
Changes in operating assets and liabilities
Accounts receivable ......................................................... 107,000 (33,000)
Inventories ................................................................. 95,000 348,000
Other assets ................................................................ 28,000 (22,000)
Accounts payable and accrued expenses ....................................... (171,000) 29,000
----------- -----------
Net cash used by operating activities .................................... (775,000) (1,380,000)
Cash flows from investing activities:
Capital expenditures ..................................................................... -- (2,000)
Repayment of notes receivable ............................................................ 599,000 2,000
----------- -----------
Net cash provided by investing activities ................................ 599,000 --
Cash flows from financing activities:
Proceeds from borrowing .................................................................. 2,129,000 3,666,000
Principal payments on long term obligations .............................................. (1,787,000) (2,373,000)
Issuance of common stock ................................................................. -- 117,000
Debt issuance costs incurred ............................................................. (165,000) (30,000)
----------- -----------
Net cash provided by financing activities ................................ 177,000 1,380,000
----------- -----------
Net change in cash and cash equivalents .................................. 1,000 --
Cash and cash equivalents at beginning of year ............................................... -- --
----------- -----------
Cash and cash equivalents at end of year ..................................................... $ 1,000 $ --
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest .............................................................................. $ 483,000 $ 233,000
Income taxes .......................................................................... -- --
Supplemental disclosure of non-cash financing activities:
In 1998, the Company converted $216,000 of trade payables and accrued interest into a term note.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1998 and 1997
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Revenue Recognition
-------------------
The Company recognizes revenue when goods are shipped.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average method.
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.
Basic and Diluted Net Loss Per Share
------------------------------------
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 128, "Earnings per Share" during the year ended February 28, 1998.
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable upon conversion
of convertible securities (using the if-converted method) and shares
issuable upon the exercise of stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the
computation if their effect is anti-dilutive. Contingently issuable
shares are included in diluted earnings per share when the related
conditions are satisfied. The Company has restated the 1997 net loss per
share amount in accordance with SFAS No. 128. This restatement had no
effect on the reported amount.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
----------------------
Property and equipment consists primarily of warehouse and office
equipment and automobiles. Depreciation is calculated based on the
following estimated useful lives using the straight-line method.
Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful life of the improvement.
Equipment 3 - 10 years
Automobiles 7 years
Intangible Assets
-----------------
The Company evaluates the realizability of intangibles to determine
potential impairment by comparing the undiscounted cash flows of the
related assets. The Company provides for losses if an impairment is
indicated. Intangible assets are being amortized using the straight-line
method based on the following estimated useful lives. Debt issuance
costs are amortized over the term of the related debt agreement.
Non-compete agreements 5 years
Goodwill 5 - 10 years
Patents and licensing agreement 10 years
Stock-Based Compensation
------------------------
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, compensation cost is recognized
over the vesting period based on the excess, if any, on the date of
grant, of the fair value of the Company's stock over the amount an
employee must pay to acquire the stock.
Income Taxes
------------
Income taxes are computed using an asset and liability method. Under an
asset and liability method, deferred income tax assets and liabilities
are determined based on the differences between the financial reporting
and tax bases of assets and liabilities and are measured using currently
enacted tax rates and laws.
Fair Value of Financial Instruments
-----------------------------------
The fair value of cash, accounts receivable and trade payables
approximate carrying value due to the short term nature of such
instruments. The fair value of long term obligations from financial
institutions approximates carrying value based on terms available for
similar instruments. The fair value of long term obligations with
related parties and individuals is not determinable.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of 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.
Concentrations
--------------
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. For the year ended February 28, 1998, one
customer accounted for 22% of net sales. In 1998, the Company purchased
the products sold to this customer from a single source vendor.
Purchases from this vendor were 33% of total cost of sales for the year
ended February 28, 1998. The Company has identified an alternate
supplier for this product; however, no purchases have been made from
this vendor.
Recent Accounting Pronouncements
--------------------------------
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation
adjustments and unrealized gains/losses on available-for-sale
securities. The disclosure prescribed by SFAS No. 130 must be made
beginning with the first quarter of 1999.
The FASB also has issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes
standards for the way companies report information about operating
segments in financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. The Company has not yet determined the impact, if any,
of adopting this new standard. The disclosures prescribed by SFAS No.
131 will be effective for the year ending February 28, 1999.
Reclassifications
-----------------
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 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 "Wound Care Sale"). The assets
sold consisted of wound care inventory, equipment, and various other
assets. The sales price was $5,675,000 of which $5,010,000 was paid in
cash, with the remaining $575,000 in the form of a promissory note with
interest at the prime rate. The Company could not determine if certain
conditions for collection of the note would be met prior to its due date
and, as of February 28, 1996, deferred recognition of the portion of the
gain on sale relating to the note. The Company accrued lease termination
costs, moving costs and various other expenditures relating to the Wound
Care Sale, that reduced the gain recognized on the sale by $600,000.
The Company and Tecnol were involved in arbitration proceedings
regarding numerous items related to the Wound Care Sale. A settlement
was reached in March 1997 whereby Tecnol agreed to pay the amount
outstanding under the promissory note and release certain other
liabilities owed by the Company. As a result of the settlement, the
Company recognized additional gain relating to the Wound Care Sale of
$607,000 during the year ended February 28, 1997.
NOTE 3 - INTANGIBLE ASSETS
Intangible assets consists of the following at February 28, 1998:
Goodwill, net of accumulated
amortization of $514,000 $ 381,000
Patents, net of accumulated
amortization of $165,000 187,000
Debt issuance costs, net of
accumulated amortization of $127,000 80,000
-------------
Total $ 648,000
=============
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 4 - REVOLVING CREDIT FACILITY AND LONG TERM OBLIGATIONS
Long term obligations consist of the following at February 28, 1998:
The Company has a revolving credit facility with a
financial institution (the "Bank Line") that bears
interest at prime (8.5% at February 28, 1998) plus
3% and expires in July 2001. Borrowings under this
line of credit are limited to the lesser of 85% of
eligible accounts receivable and 55% of eligible
inventory or $2,500,000. The line of credit facility
is collateralized by substantially all assets of the
Company and is guaranteed by Mr. Thomas F. Reiner,
the Company's President, Chief Executive Officer and
Chairman, up to $250,000. At February 28, 1998, as a
result of the borrowing limits, the Company had no
amounts available under this line of credit. $ 1,473,000
Mr. Reiner has provided the Company with a $500,000
line of credit (the "Reiner Line") that bears
interest at 12%. Borrowings under this line of
credit are due in June 1999. At February 28, 1998,
the Company had $359,000 available under this line
of credit. Mr. Reiner may convert any outstanding
balance into common stock at 75% of the average
trading price of the Company's common stock. 141,000
5% installment note due in 2000, monthly principal
and interest payments of $10,000. The Company must
also pay quarterly forbearance fees of $10,000 until
the note is paid in full. 158,000
4.5% installment note due in 2000, variable
principal and interest payments from $4,000 to
$10,000 per month. 188,000
12% unsecured note due in June 1998. 165,000
15% unsecured note due in full by March 1999, and
guaranteed by Mr. Reiner. 375,000
7% unsecured installment note due in 2000, monthly
principal and interest payments of $3,000. 83,000
9.75% unsecured installment note due in 2001, and
guaranteed by Mr. Reiner. 62,000
Obligations under capital leases 86,000
-------------
2,731,000
Less current portion of long term debt (449,000)
-------------
Long term debt $ 2,282,000
=============
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 4 - REVOLVING CREDIT FACILITY AND LONG TERM OBLIGATIONS (continued)
Installments due on debt principal, including the capital leases, are as
follows:
Year ending February 28,
------------------------
1999 $ 449,000
2000 710,000
2001 36,000
2002 1,536,000
-------------
$ 2,731,000
=============
In 1998, the Company issued 50,000 shares of common stock and 69,167
warrants to purchase shares of common stock in connection with the issuance
of long term debt. The Company determined the aggregate fair value of these
warrants and shares to be $136,000 and is amortizing this amount as interest
expense over the life of the related debt agreement. As of February 28,
1998, the Company had 243,301 warrants outstanding which had been issued in
connection with long term debt.
NOTE 5 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through February 28, 1998. The
following table sets forth the primary components of deferred tax assets at
February 28, 1998:
Net operating loss and credit carryforwards $ 2,700,000
Non-deductible reserves and expenses 300,000
-------------
Gross deferred tax assets 3,000,000
Valuation allowance (3,000,000)
-------------
$ --
=============
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation
allowance is required. At February 28, 1998, the Company had approximately
$7,700,000 of federal net operating loss carryforwards for tax reporting
purposes available to offset future taxable income; such carryforwards will
expire from 2007 to 2013. Additionally, the Company has approximately
$1,750,000 of state net operating loss carryforwards for tax reporting
purposes which will expire from 1999 to 2002.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 6 - STOCKHOLDERS' EQUITY
Amendment to Authorized Common and Preferred Stock
In March 1997, the Company's stockholders adopted a resolution approving
a one for six reverse stock split of the issued and outstanding shares
of common stock. 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 restated for
all periods presented to reflect the reverse stock split and decrease in
authorized shares.
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. The Company has authorized 165,000 shares of
Non-Cumulative Convertible Redeemable Preferred Stock (the "1992
Preferred Stock"). 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, for each year that the Company has net income
after taxes. The holders of the 1992 Preferred Stock are 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
number of full shares of common stock into which the 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 one share
of common stock. Each preferred share is subject to redemption at $4.00
per share under certain conditions. The liquidation preference for the
1992 Preferred Stock is $4.00 per share. Warrants issued with the 1992
Preferred Stock expired in the year ended February 28, 1998.
Series A Preferred Stock. The Company has authorized 30,000 shares of
Series A Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock"). The holders of the Series A Preferred Stock receive cumulative
dividends at the quarterly rate of $0.375 per share. The holders of the
Series A Preferred Stock 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 has one vote. The Series A Preferred Stock is redeemable
for cash at $10.00 per share plus any accrued and unpaid dividends. The
Series A Preferred Stock is convertible into shares of common stock at
the rate 0.833 shares of Common Stock for each share of Series A
Preferred Stock. The liquidation preference for the Series A Preferred
Stock is $10 per share. The 1992 Preferred Stock carries liquidation
rights senior to the Series A Preferred Stock.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
Series A Warrants
The securities sold in the Company's 1994 public offering (the "Units)
consisted of one share of Series A Preferred Stock and four common stock
purchase warrants (the "Series A Warrants"). As a result of stock splits
since the offering, six Series A Warrants and $18.00 are convertible
into one share of common stock. In connection with the offering, the
Company issued to the underwriter, warrants to purchase 16,500 Units at
an exercise price of $12.00 per Unit (the "Underwriters' Warrants"). The
Series A Warrants and the Underwriters' Warrants are exercisable at any
time until July 12, 1999. As of February 28, 1998, none of the
Underwriters' Warrants had been exercised and 121,000 Series A Warrants
remain outstanding, including 11,000 issuable upon the exercise of the
Underwriters' Warrants.
Stock Options and Warrants
The 1987 Stock Option Plan (the "Plan") provided for the grant of both
incentive stock options and non-qualified stock options. The Plan
expired in 1997. Options granted under the Plan generally vested within
one year and terminate between five and ten years from the date of
grant.
The Company has also granted options and warrants to purchase common
stock outside of the Plan to officers, vendors, directors and
consultants. These instruments generally vest within one year.
Stock option and warrant activity, excluding the Series A Warrants, the
Underwriters' Warrants and warrants issued in connection with long term
debt, is summarized as follows:
Weighted
Average
Exercise
Shares Price
-------------- -------------
Balance at March 1, 1996 256,281 $ 9.88
Granted - -
Exercised - -
Cancelled (250) 13.50
-------------- -------------
Balance at February 28, 1997 256,031 9.88
Granted 647,000 1.26
Exercised - -
Cancelled (44,858) 10.47
-------------- -------------
Balance at February 28, 1998 858,173 $ 3.35
============== =============
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
The following table summarizes information about stock options and warrants
outstanding as of February 28, 1998:
Weighted
Weighted Average Weighted
Range or Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Term Exercisable Price
-------------- ----------- -------- ----------- ----------- --------
$0.59 - $1.375 527,000 $1.14 7 years 434,500 $1.11
$1.98 - $3.18 194,336 2.21 6 years 194,336 2.21
$13.50 136,837 13.50 3 years 136,837 13.50
----------- -----------
858,173 765,673
=========== ===========
The following table depicts the Company's pro forma results for the years
ending February 28, had compensation expense for employee stock options been
determined based on the fair value at the grant dates as prescribed in SFAS
123:
1998 1997
------------- -----------
Net loss applicable to common
shareholders
As reported $ (1,900,000) $ (2,019,000)
Pro forma (2,618,000) (2,019,000)
Basic and diluted net loss
per share
As reported $(2.27) $(2.73)
Pro forma $(3.13) $(2.73)
The fair value of each option grant was determined using the Black-Scholes
model. The weighted average fair value of options granted to employees
during 1998 was $1.10. No grants were made in 1997. The following weighted
average assumptions were used to perform the calculations: expected life of
7 years; interest rate of 6.3%; volatility of 125%; and no dividend yield.
The pro forma disclosures above may not be representative of pro forma
effects on reported financial results for future years.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 7 - COMMITMENTS
The Company leases equipment and facilities under operating lease
agreements. Rental expense was $160,000 and $169,000 for the years ended
February 28, 1998 and 1997, respectively. The following is a schedule of
future minimum lease payments under the Company's operating leases that have
initial or remaining noncancellable lease terms in excess of one year:
Year ending February 28,
------------------------
1999 $ 124,000
2000 6,000
The Company has an agreement with one of its lenders, who is also a
shareholder, for consulting services in the amount of $100,000 for two years
commencing March 1997.
In April 1998, the Company signed an investment agreement which provides for
the financial advisor to receive warrants to purchase 150,000 shares of
Common Stock at $1.00 per share.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company has entered into several transactions with Mr. Reiner for the
issuance of shares of common stock or the granting of options to purchase
shares of common stock. Mr. Reiner has been granted 659,502 options to
purchase shares of common stock. These options have been granted both from
the Plan and from outside the Plan.
Mr. Reiner has also been granted 952,986 (727,986 as of February 28, 1998)
shares of common stock for providing the Reiner Line and for guaranteeing
certain debt obligations of the Company. The Company and Mr. Reiner entered
into an escrow agreement whereby the issuance of the 952,986 shares is
contingent upon the Company meeting certain performance goals prior to May
2004. The Company has not satisfied these conditions. Mr. Reiner has voting
authority over these shares and these shares are considered outstanding as
of February 28, 1998, although for purposes of calculating the net loss per
share, these shares are excluded.
Prior to 1998, Mr. Reiner had entered into several note agreements with the
Company. Under the terms of these agreements, as of February 28, 1997, Mr.
Reiner was obligated to pay the Company $569,000. During 1998, Mr. Reiner
made repayments in the amount of $21,000. The Company has agreed to forgive
the amounts owed under the notes if the performance criteria contained in
the escrow agreement are achieved prior to May 2004. The Company does not
consider collection of the notes to be probable and recorded a charge to
operations of $548,000 during the year ended February 28, 1998. At February
28, 1997, these notes were presented as a reduction of stockholders' equity.
In total, Mr. Reiner directly holds 43,745 shares of common stock, has
options or warrants to purchase 659,502 shares of common stock at prices
ranging from $0.59 to $13.50 per share and has voting authority over
1,007,148 shares of common stock. Mr. Reiner also is the trustee over voting
trusts for 125,834 shares of common stock issuable upon the exercise of
outstanding warrants.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 8 - RELATED PARTY TRANSACTIONS (continued)
Under the terms of an employment agreement, Mr. Reiner's daughter, an
employee of the Company, has been granted options to purchase 150,000 shares
of common stock. These options vest over three years and are exercisable at
$0.75 per share.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company sponsors 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, 1998 and 1997.
NOTE 10 - LITIGATION
In August 1996, the Company settled three related civil actions involving
disputes between the Company, Mr. Reiner and the Company's former chairman
of the Board of Directors. These disputes related to the chairman's
termination as an officer and director of the Company, his employment
agreement and various other obligations between the parties. Under the
settlement, the Company paid $263,000 in cash and issued a promissory note
in the amount of $62,000 payable in five years. In addition, all debts owing
between the parties were forgiven. The total cost for the settlement was
$696,000.
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 $35,000 in
cash and issued 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.
In May 1998, the Company settled an action stemming from an acquisition in
1992. As settlement, the Company issued warrants to purchase 65,000 shares
of Common Stock at $0.75 per share and 35,000 shares of Common Stock.
The Company is currently litigating a dispute in connection with the
termination of the lease of the Company's former facilities in New Jersey.
The Company has accrued $275,000 for lease termination costs.
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1998 and 1997
NOTE 11 - LIQUIDITY AND CAPITAL RESOURCES
In 1995, the Company sold its wound care product line and has not been able
to replace the revenues which were attributable to the product line. The
Company has incurred losses for the years ended February 28, 1998 and 1997,
of $1,858,000 and $1,905,000. In May 1998, the Company entered into a
non-binding letter of intent to acquire all of the outstanding common stock
of Med-E-Quip, Locators, Inc., a supplier of medical products.
Management has taken the following steps to address its operating and
financial requirements: signed a letter of intent for a $500,000 mezzanine
loan which is expected to close in June 1998; initiated a cost reduction
program which the Company estimates will reduce annual operating expenses by
approximately $500,000; and, engaged an investment advisor to promote a
private offering of equity and debt securities up to $8,500,000. Management
believes these actions will be sufficient to fund operations through
February 28, 1999; however, there can be no assurance that the Company will
be able to successfully complete any of the above mentioned financings or
that the planned cost reductions will materialize.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a Form 8-K dated October 9, 1997 which reported the
dismissal of Angell & Deering as the Company's principal independent accountant
engaged to audit the Company's financial statements and the appointment of Grant
Thornton LLP as its new independent 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 for the fiscal year ended February 28, 1998:
Name Age Office
---- --- ------
Thomas F. Reiner 52 Chairman of the Board of Directors,
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 44 Vice President of Sales
H. Dale Biggs 67 Controller/Chief Financial Officer
Michael Y. Granger 42 Director
Allan J. Korn 55 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.
Wm. Samuel Veazey, the Company's former Vice President of Finance, resigned
from his position on March 2, 1998.
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 an A.S. degree in Business Management from Johnson &
Wales College.
H. Dale Biggs has been Controller/Chief Financial Officer since March 9,
1998. From July 1990 to November 1994, Mr. Biggs held the position of Accounting
Manager and in 1994 was promoted to the position of Controller. From 1969
through 1987, Mr. Biggs held various accounting management positions with Kaiser
Cement and Gypsum, Inc. Mr. Biggs holds a B.S. degree in Business Administration
from Fresno State University. He is a Certified Public Accountant.
-18-
<PAGE>
Michael Y. Granger, a director of the Company since June 1991, has been
President of Ark Capital Management, Inc., an independent management consulting
firm since April 1991. From March 1990 to April 1991, he was Vice President and
Portfolio Manager for LINC Capital Management, a large independent health-care
financial services company, where his responsibilities included providing
financing for private health-care companies. Prior to joining LINC, Mr. Granger
was an Investment Manager with Xerox Venture Capital, a $100 million early-stage
venture capital fund, where he was responsible for identifying, selecting and
managing investments in high technology companies. Earlier, he was a principal
at CIGNA Venture Capital, Inc., an investment subsidiary of CIGNA Investments,
where he was responsible for managing a $160 million private equity investment
program. Mr. Granger's operating experience includes management positions at
AT&T. Mr. Granger earned his Bachelor of Science degree in Electrical
Engineering from the University of Massachusetts at Amherst and M.B. A. degree
in Finance and General Management from Dartmouth College's Amos Tuck School of
Business. Mr. Granger has been a venture capital professional since 1985.
Allan J. Korn, a director of the Company since February 1994, has been Vice
President of Sales and Marketing since August 1997 with A and Z Pharmecutical,
Inc. From 1994 he held the position of Vice President of Marketing for Ohm Labs,
Inc. 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, 1998
and for each of the three fiscal years ended February 28, 1998.
<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 .......................... 1998 $275,581(1) $ 0 $ 7,543(3) 447,000(4) $ -- (6)
Chairman, Chief Executive 1997 274,299(1) 0 11,976(3) 0 0
Officer, Treasurer, Director 1996 293,288(1) 63,000(2) 9,165(3) 83,334(5) 0
Joseph Barbrie ............................ 1998 104,050 0 0 40,000(8) 0
Vice President of Sales 1997 116,308 0 0 0 0
1996 113,743 6,000(7) 0 8,334(8) 0
Wm. Samuel Veazey (9) ..................... 1998 102,711 0 0 40,000(8) 0
Vice President of Finance 1997 112,933 0 0 0 0
and Administration 1996 98,734 11,000(7) 0 8,334(8) 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 1998 and paid vacation
accruals in Fiscal 1997 and Fiscal 1996.
(4) Includes options to purchase an aggregate of 447,000 shares at prices
ranging from $.59 to $1.98 per share exercisable through various dates
until January 15, 2005. See Item 12 "Certain Relationships and Related
Transactions."
(5) 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.
-19-
<PAGE>
(6) Excludes 952,986 shares of Common Stock contingently issuable to Mr. Reiner
pursuant to a Stock Escrow Agreement upon the Company achieving certain
goals or the occurrence of certain events prior to May 2004. In addition,
in connection with the Agreement Regarding Indebtedness, the Company agreed
to forgive $548,000 in notes receivable from Mr. Reiner in the event the
same performance criteria are achieved prior to May 2004. See Item 12
"Certain Relationships and Related Transactions."
(7) Represents paid bonuses under the Company's management bonus plan which
were accrued in Fiscal 1996.
(8) 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. In June
1997, in connection with a restructuring plan involving a Company wide
reduction in salaries, the Company issued options to Messrs. Barbrie and
Veazey to purchase 40,000 shares each at $1.25 per share at any time until
June 5, 2004. (9) Mr. Veazey, the Company's former Vice President of
Finance, resigned from his position on March 2, 1998. Mr. Veazey's options
to purchase 40,000 and 8,334 shares expired on June 2, 1998 as a result of
his resignation.
Option Grants in Last Fiscal Year and Stock Option Grant
The following table provides information on option grants during the year
ended February 28, 1998 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 62,500 9.7% $1.98 March 17, 2004
27,500 4.3 1.98 March 17, 2004
97,000 15.0 1.28 May 21, 2002
15,000 2.3 1.38 June 5, 2004
150,000 23.2 1.25 July 25, 2004
95,000 14.9 .59 January 15, 2005
Joseph Barbrie 40,000 6.2 1.25 June 5, 2004
Wm. Samuel Veazey 40,000 6.2 1.25 June 5, 2004
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, 1998. No shares of
Common Stock were acquired upon exercise of options during the fiscal year ended
February 28, 1998.
Number of Value of Unexercised
Unexercised Options In-The-Money Options
at Fiscal Year End at Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Thomas F. Reiner 635,335 24,167 $ 93,325 $ 0
Joseph Barbrie 30,418 20,000 2,500 2,500
Wm. Samuel Veazey 31,251 20,000 2,500 2,500
- -----------
(1) The closing price of the Common Stock on February 28, 1998 as reported by
Nasdaq was $1.375
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
-20-
<PAGE>
$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 in the event the Agreement is canceled for any reason other than cause,
and references existing stock options to purchase up to 50,000 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:
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
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. On
February 23, 1998, the Company amended the April 8, 1996 Agreement, whereby, Mr.
Reiner agreed to reduce his base salary from $239,500 per year to $175,000 and
to cancel his right to an automatic three (3) year extension under such
agreement. On February 23, 1998,in consideration of Mr. Reiner agreeing to amend
his Agreement and provide the Company with a Working Capital Facility, the
Company cancelled Mr. Reiner's indebtedness under the Debt Repayment Agreement
dated April 1997 in the approximate amount of $548,000. On May 8, 1998, the
Company entered into an Agreement Regarding Indebtedness, whereby, the Company
and Mr. Reiner agreed to reinstate the debt in the approximate amount of
$548,000 providing that Mr. Reiner shall be relieved of any obligation to repay
any of the Indebtedness contingent upon the Company achieving certain goals or
the occurrence of certain events prior to May 2004. See Item 12 "Certain
Relationships and Related Transactions."
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 1987 Stock Option Plan expired on July 1, 1997.
The Plan was administered by the Board of Directors, which determined those
individuals who received 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
-21-
<PAGE>
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company is eligible to
receive any incentive stock options under the Plan unless the option price is at
least 110% of the fair market value of the Common Stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to this
limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination during which he or she can exercise the
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, his or her option remains exercisable for one year
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the Plan must be granted within ten years from the effective
date of the Plan. The incentive stock options granted under the Plan cannot be
exercised more than ten years from the date of grant except that incentive stock
options issued to 10% or greater stockholders are limited to five year terms.
All options granted under the Plan provide for the payment of the exercise price
in cash or by delivery to the Company of shares of Common Stock already owned by
the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of Common Stock to purchase
additional shares of Common Stock and may theoretically exercise all of his
stock options with no additional investment other than his original shares.
Any unexercised options that expire or that terminate upon an optionee
ceasing to be an officer, director or an employee of the Company become
available once again for issuance. As of June 5, 1998, options to purchase
162,252 shares have been granted under the Plan. A total of 162,252 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 guaranteeing 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 Item 12 "Certain Relationships
and Related Transactions."
In June 1997, in connection with the Company's implementation of a
restructuring plan involving a reduction of personnel, a Company wide reduction
in salaries, and an overall cost containment program, the Company issued to Mr.
Reiner options to purchase 15,000 shares of its Common Stock at $1.38 per share
-22-
<PAGE>
and to Messrs. Barbrie, Veazey, Granger and Korn options to purchase 40,000,
40,000, 10,000, and 10,000 shares, respectively, at $1.25 per share all until
June 5, 2004.
On July 25, 1997, in consideration for Mr. Reiner providing his personal
guarantee for the NationsCredit Loan, the Company issued to Mr. Reiner 80,000
shares of common stock and an option to purchase up to 150,000 of its Common
Stock exercisable at $1.25 per share at any time until July 25, 2004.
On July 25, 1997, in consideration of Mr. Reiner having provided the
Company with a Working Capital Credit Facility, the Company agreed to issue to
Mr. Reiner an option to purchase 97,000 shares of the Company's Common Stock at
$1.28 per share at any time until May 21, 2002.
On January 15, 1998, in consideration for Mr. Reiner's efforts in
successfully negotiating long-term non-cancellable contracts having an aggregate
value of approximately $1,723,000, the Company issued to Mr. Reiner options to
purchase 95,000 shares of its Common Stock at $.59 per share at any time until
January 15, 2005.
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 June 5, 1998. 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
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) 1,966,681 69.1%
Joseph Barbrie (2) 50,418 2.6%
Michael Y. Granger (3) 13,334 0.7%
Allan J. Korn (3) 12,501 0.7%
Charles C. Johnston (4) 130,002 6.7%
All officers and directors as
a group (four persons) (5) 2,042,934 69.9%
- -------------
(1) Includes shares and (i) 659,502 shares issuable upon exercise of options at
prices ranging from $.59 to $13.50 per share through various dates until
January 15, 2005; (ii) certain shares and options to purchase shares for
which Mr. Reiner acts as trustee under a voting trust agreement; (iii)
174,197 shares and options to purchase shares currently owned by Mr.
Reiner's two daughters; and (iv) 952,986 shares contingently issuable to
Mr. Reiner pursuant to a Stock Escrow Agreement dated May 8, 1998 which
provides Mr. Reiner with full voting rights until their release. See Item
12 "Certain Relationships and Related Transactions."
(2) Includes 2,084 shares issuable upon exercise of options at $13.50 per share
until February 14, 2004; 8,334 shares issuable upon exercise of options at
$2.40 per share until December 4, 2003; and 40,000 shares issuable upon
exercise of options at $1.25 per share until June 5, 2004.
-23-
<PAGE>
(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
and 10,000 shares issuable to each of Messrs. Granger and Korn upon
exercise of options at $1.25 per share until June 4, 2005.
(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 an aggregate of 1,031,756 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 and are subject to an Agreement Regarding Indebtedness. 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.
Prior to 1998, Mr. Reiner had entered into several note agreements with the
Company. Under the terms of these agreements, as of February 28, 1997, Mr.
Reiner was obligated to pay the Company $569,000. In April 1997, the Company
entered into a Debt Repayment Agreement with Mr. Reiner. The amounts owed by Mr.
Reiner were to be repaid at varying amounts through April 2004. The repayments
were made by deducting the amounts from Mr. Reiner's payroll checks. In
addition, all amounts owed by Mr. Reiner were extended to April 2004, no
interest was charged on the notes owed by Mr. Reiner and the Company was
required to reimburse Mr. Reiner for certain income tax related considerations.
During Fiscal 1998, Mr. Reiner made repayments in the amount of $21,000. On
February 23, 1998, in consideration of Mr. Reiner agreeing to reduce his salary
to $175,000 per year, cancel his right to an automatic extension under his
Employment Agreement, and provide the Company with a Working Capital Facility,
the Company cancelled his indebtedness to the Company. On May 8, 1998 the
Company entered into an Agreement Regarding Indebtedness, pursuant to which the
Company and Mr. Reiner agreed to reinstate the debt in the approximate amount of
$548,000 providing that Mr. Reiner shall be relieved of any obligation to repay
any of the indebtedness upon the occurrence of any of the following conditions;
(i) any change in control for the Company; (ii) the termination of Mr. Reiner's
employment with the Company by either party for any reason; (iii) the Company
becoming insolvent or filing for bankruptcy; or (iv) the Company's net sales
exceeding $2.5 million during any fiscal year through May 2004. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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
-24-
<PAGE>
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.
On March 20, 1997, the Company 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 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 guaranteeing 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.
On July 25, 1997, in consideration for Mr. Reiner providing his personal
guarantee for the NationsCredit Loan, the Company issued to Mr. Reiner 80,000
shares of common stock and an option to purchase up to 150,000 of its Common
Stock exercisable at $1.25 per share at any time until July 25, 2004.
Since inception, the Company has been undercapitalized and has experienced
financial difficulties. 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. Many of the bank and private party loans and certain
other Company obligations have required personal guarantees from Mr. Reiner for
which he has been compensated by the Company. In addition, from time to time,
Mr. Reiner has provided the Company with the required working capital in order
to continue to operate.
-25-
<PAGE>
On May 31, 1997, Mr. Reiner, provided the Company with a Working Capital
Credit Facility of up to $200,000 (which was subsequently ammended to up to
$500,000), bearing 12% interest per annum. The advances made under the Working
Capital Credit Facility are due the earlier of (i) thirty (30) calendar days
including accrued interest; (ii) upon the closing of a minimum of $1,000,000
equity or debt financing by the Company; or (iii) at the option of Mr. Reiner,
with five (5) day notice to the Company. In addition, Mr. Reiner has the option
to convert all amounts under the Working Capital Credit Facility into the
Company's Common Stock at 75% of the average closing bid prices as reported on
Nasdaq for the five (5) trading days preceding the conversion date.
In June 1997, in connection with the Company's implementation of a
restructuring plan involving a reduction of personnel, a Company wide reduction
in salaries, and an overall cost containment program, the Company issued to Mr.
Reiner an option to purchase 15,000 shares of its Common Stock at $1.38 per
share at any time until June 5, 2004.
On July 25, 1997, in consideration of Mr. Reiner having provided the
Company with a Working Capital Credit Facility, the Company agreed to issue to
Mr. Reiner an option to purchase 97,000 shares of the Company's Common Stock at
$1.28 per share at any time until May 21, 2002.
On January 15, 1998, in consideration for Mr. Reiner's efforts in
successfully negotiating long-term non-cancellable contracts having an aggregate
value of approximately $1,723,000, the Company issued to Mr. Reiner options to
purchase 95,000 shares of its Common Stock at $.59 per share at any time until
January 15, 2005.
On February 10, 1998, in consideration of Mr. Reiner having provided
personal guarantees on the settlement of an action entitled Sparta Surgical
Corp. v. John P. Landino, the Company issued to Mr. Reiner 198,000 shares of the
Company's Common Stock.
On February 20, 1998, in consideration of Mr. Reiner having provided
various personal guarantees for the Company's debts in the approximate amount of
$715,000, the Company issued to Mr. Reiner 299,986 shares of the Company's
Common Stock.
On February 25, 1998, in consideration for increasing the Working Capital
Credit Facility from $200,000 to $250,000, the Company issued to Mr. Reiner
150,000 shares of the Company's Common Stock.
On April 1, 1998, in consideration for increasing the Working Capital
Credit Facility from $250,000 to $300,000, the Company agreed to issue to Mr.
Reiner 75,000 shares of the Company's Common Stock.
On April 9, 1998, in consideration for increasing the Working Capital
Credit Facility from $300,000 to $400,000, the Company agreed to issue to Mr.
Reiner 150,000 shares of the Company's Common Stock.
On June 11, 1998, Mr. Reiner agreed to increase the Working Capital Credit
Facility to up to $500,000 and to defer all principal and interest payments
until June 1999. As of June 11, 1998, the amount due to Mr. Reiner under the
Working Capital Credit Facility was approximately $270,000.
On May 8, 1998, the Company and Mr. Reiner entered into a Stock Escrow
Agreement pursuant to which an aggregate of 952,986 shares of Common Stock
previously issued to Mr. Reiner between July 25, 1997 and April 9, 1998 were
cancelled and re-issued subject to the conditions on the Stock Escrow Agreement.
The Stock Escrow Agreement provides for the escrowed shares to be released and
assigned to the Company for cancellation unless they are released to Mr. Reiner
upon the occurrence of an earlier condition of release. Following are the shares
to be released upon the conditions being met by May 2004; (i) 35% of the
escrowed shares in the event that the Company has net sales in excess of $2.4
million during any fiscal year; (ii) 70% of the escrowed shares in the event
that the Company has net sales in excess of $2.6 million during any fiscal year;
(iii) 100% of the escrowed shares in the event that the Company has net sales in
excess of $2.75 million during any fiscal year; (iv) 50% of the escrowed shares
in the event that the Company has net income from operations in excess of
$200,000 during any fiscal year; (v) 100% of the escrowed shares in the event
that the Company has net income from operations in excess of $300,000 during any
fiscal year; (vi) 100% of the escrowed shares in the event that there is any
change in control for the Company; (vii) 100% of the escrowed shares in the
event that Mr. Reiner's employment with the Company is terminated by either
party for any reason; or (viii) 100% of the escrowed shares in the event that
the Company becomes insolvent or files for bankruptcy.
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<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.
(3)
3.7 Articles of Incorporation of Sparta Maxillofacial Products, Inc. (3)
3.8 Bylaws of Sparta Maxillofacial Products, Inc. (3)
3.9 Restated Bylaws of the Registrant. (3)
3.10 Bylaws of the Registrant (April 1994.) (3)
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. (7)
10.77 Asset Purchase Agreement dated December 7, 1995 between the Registrant
and Tecnol Medical Products, Inc. (4)
10.78 Restructuring of Loan and Warrants Agreement dated December 1, 1995
between the Registrant and Arbora A.G. (4)
10.79 Security Agreement dated January 31, 1996 between the Registrant and
FINOVA Capital Corporation. (5) 10.80 Loan Document Release From Escrow
Letter dated March 11, 1996 between the Registrant and FINOVA Capital
Corporation. (5)
10.81 Voting Trust Agreement between Arbora A.G. and Mr. Reiner. (6)
10.82 Voting Trust Agreement between Ulrich Rud and Rudolph Hugi, jointly and
Mr. Reiner.(6)
10.83 Stock Option Agreement dated December 12, 1995 with Mr. Reiner. (6)
10.84 Restated Employment Agreement dated April 8, 1996 - Mr. Reiner. (6)
10.87 Stock Option Agreement dated March 18, 1997 with Mr. Reiner. (7)
10.88 Stock Option Agreement dated March 18, 1997 with Mr. Reiner. (7)
10.89 Debt Repayment Agreement dated April 23, 1997 by and between the
Registrant and Mr. Reiner. (7)
10.92 Loan and Security Agreement dated July 25, 1997 between the Registrant
and NationCredit Commercial Funding Division of NationsCredit Commercial
Corporation. (8)
10.93 Stock Option Agreement dated July 25, 1998 with Mr. Thomas F. Reiner.
(8)
10.94 Stock Escrow Agreement dated May 8, 1998 between the Registrant and Mr.
Reiner.
10.95 Agreement Regarding Indebtedness dated May 8, 1998 between the
Registrant and Mr. Reiner.
16.1 Letter from Angell & Deering agreeing to the statements made in the Form
8-K regarding the dismissal of independent accountant. (9)
27 Financial Data Schedule.
- -----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-18 and Post-Effective Amendments thereto, file number 33-16303-NY.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 file number 33-43307 declared effective on March 10, 1992 and post
effective amendment thereto declared effective on August 26, 1994.
(3) Previously filed as a part of the Registrant's Registration Statement, File
No. 33-76782, declared effective on July 12, 1994.
(4) Incorporated by reference to the Registrant's Form 8-K dated December 7,
1995.
(5) Incorporated by reference to the Registrant's Form 8-K dated March 11,
1996.
(6) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended February 29, 1996.
(7) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended February 28, 1997.
(8) Incorporated by reference to the Registrant's Form 8-K dated July 25, 1997.
(9) Incorporated by reference to the Registrant's Form 8-K dated October 9,
1997.
b. Reports on Form 8-K:
The Registrant filed a Form 8-K dated February 25, 1998 which reported
Nasdaq's notification to the Registrant that it was not in compliance
with the new SmallCap Market continued listing requirements and that
its securities would be delisted on March 4, 1998.
<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 June 12, 1998.
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 June 12, 1998
- ------------------------- Board of Directors,
Thomas F. Reiner Chief Executive Officer,
President, Treasurer,
(Principal Executive
Officer), and Director
Joseph Barbrie Vice President of June 12, 1998
- ------------------------- Sales
Joseph Barbrie
H. Dale Biggs Controller and June 12, 1998
- ------------------------- Chief Financial Officer
H. Dale Biggs (Principal Accounting Officer)
Michael Y. Granger Director June 12, 1998
- -------------------------
Michael Y. Granger
Allan J. Korn Director June 12, 1998
- -------------------------
Allan J. Korn
29
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
EXHIBITS
TO
FORM 10-KSB
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
Exhibit 10.94
<PAGE>
STOCK ESCROW AGREEMENT
THIS ESCROW AGREEMENT, dated as of this day of May 8, 1998, between and
among Thomas F. Reiner, in his capacity as President and Chief Executive Officer
(the "Escrow Agent") of Sparta Surgical Corporation, a Delaware corporation
("Sparta"), Sparta and Thomas F. Reiner ("Reiner");
WITNESSETH THAT:
WHEREAS, Reiner has agreed to the cancellation of certain shares of the
common stock, $0.002 par value of Sparta (the "Common Stock") listed on Schedule
A hereto, which were to have been issued to him by Sparta for the consideration
set forth on such Schedule A (the "Shares");
WHEREAS, Sparta is issuing to Reiner on or about the date hereof, 952,986
shares of Common Stock, which shares are being issued for the consideration set
forth on Schedule A hereto, and which shares are to be held by the Escrow Agent
for the benefit of Sparta until the expiration of this agreement, in which case
such shares shall be released back to Sparta, or until the occurrence of an
earlier condition of release to Reiner, all upon the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual undertakings contained
herein and in consideration for Reiner's agreement to cancel the Shares before
issuance, and each party's entering into this Agreement, the parties hereto,
intending to be legally bound, agree as follows:
1. Reiner and Sparta hereby appoint Thomas F. Reiner as the Escrow Agent
for the purposes herein.
2. This Agreement shall be effective for a period of six (6) years from the
date hereof (the "Term").
<PAGE>
3. The securities being placed in escrow subject to this Agreement shall
include: (a) the 952,986 shares of Common Stock being issued to Reiner (to be
held in his name and as to which Reiner shall be considered the owner for
purposes of Rule 144 under the Securities Act of 1933) on or about the date
hereof, (b) any stock or cash dividends that may be paid thereon during the term
of this Agreement, (c) any additional securities issued through, or by reason of
stock split or reverse split (for the sole purpose of keeping the Escrowed
Securities from becoming diluted by such issuances), and (d) any other dividends
or distributions of any kind with respect to the securities being held subject
to escrow under this Agreement. All of the foregoing shall be collectively
referred to herein as the "Escrowed Securities".
Any dividends or distributions of any kind with respect to the Escrowed
Securities that may be paid during the term of this Agreement shall be paid to
the Escrow Agent and held pursuant to the terms hereof. Such dividends or
distributions of any kind with respect to the Escrowed Securities shall be
available for distribution in accordance with the provisions of Paragraph 5
hereof.
4. Upon issuance the certificates evidencing the Escrowed Securities shall
be delivered to the Escrow Agent for deposit pursuant to the terms hereof.
5. The Escrowed Securities shall be held in escrow hereunder until the end
of the Term, in which case they shall be released and assigned over to Sparta
for cancellation or deposit into Sparta's treasury, or upon the occurrence of
any the following conditions:
(a) Up to 35% of the Escrowed Securities, in the event that Sparta has net
sales in excess of $2.4 Million during any fiscal year (as determined
from Sparta's audited financial statements), upon Reiner's providing
the Escrow Agent with written notice of his intention that such event
be grounds for the release of the Escrowed Shares from escrow (which
notice may be given at any time, in the sole discretion of Reiner,
during the Term);
<PAGE>
(b) Up to 70% of the Escrowed Securities (less the percentage of any of
the Escrowed Securities previously released), in the event that Sparta
has net sales in excess of $2.6 Million during any fiscal year (as
determined from Sparta's audited financial statements), upon Reiner's
providing the Escrow Agent with written notice of his intention that
such event be grounds for the release of the Escrowed Shares from
escrow (which notice may be given at any time, in the sole discretion
of Reiner, during the Term);
(c) Up to 100% of the Escrowed Securities (less the percentage of any of
the Escrowed Securities previously released), in the event that Sparta
has net sales in excess of $2.75 Million during any fiscal year (as
determined from Sparta's audited financial statements), upon Reiner's
providing the Escrow Agent with written notice of his intention that
such event be grounds for the release of the Escrowed Shares from
escrow (which notice may be given at any time, in the sole discretion
of Reiner, during the Term);
(d) Up to 50% of the Escrowed Securities (less the percentage of any of
the Escrowed Securities previously released), in the event that Sparta
has Income from Operations (as hereinafter defined) in excess of
$200,000 during any fiscal year (as determined from Sparta's audited
financial statements), upon Reiner's providing the Escrow Agent with
written notice of his intention that such event be grounds for the
release of the Escrowed Shares from escrow (which notice may be given
at any time, in the sole discretion of Reiner, during the Term);
(e) Up to 100% of the Escrowed Securities (less the percentage of any of
the Escrowed Securities previously released), in the event that Sparta
has Income from Operations (as hereinafter defined) in excess of
$300,000 during any fiscal year (as determined from Sparta's audited
financial statements), upon Reiner's providing the Escrow Agent with
written notice of his intention that such event be grounds for the
release of the Escrowed Shares from escrow (which notice may be given
at any time, in the sole discretion of Reiner, during the Term);
(f) Upon any "change in control" of Sparta. A "change in control" occurs
upon the occurrence of one of the following events, but only if Reiner
notifies Sparta in writing of his intention that such event be treated
as a change in control (which notice may be given at any time, in the
sole discretion of Reiner, during the Term): (i) An event that would
be required to be reported in response to Item 5 (f) of Schedule 14A
of Regulation 14A promulgated under the Securities Exchange Act of
1934 (the "Exchange Act"), or any successor thereof, assuming that
Sparta was a reporting company or was otherwise required to file
reports under the Exchange Act, (ii) Any "person" (as such term is
defined in Sections 13 (d) and 14 (d) (2) of the Exchange Act) who is
not currently an owner of securities of Sparta, is or becomes the
beneficial owner, directly or indirectly, of securities of Sparta
representing 20% or more of the combined voting power of Sparta's then
outstanding securities pursuant to a tender offer or otherwise, or
(iii) During any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
Sparta cease for any reason to constitute at least a majority thereof
unless the election of each director, who was not a director at the
beginning of the period, was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the
beginning of the period;
<PAGE>
(g) Upon the termination of Reiner's employment with Sparta for any reason
(including his resignation), or Reiner's being terminated as
President, Chief Executive Officer or Chairman of Sparta, upon
Reiner's providing the Escrow Agent with written notice of his
intention that such event be grounds for the release of the Escrowed
Shares from escrow (which notice may be given at any time, in the sole
discretion of Reiner, during the Term); and
(h) If (i) an order is entered for relief against Sparta, or declaring
that Sparta is insolvent, or resulting in a finding that Sparta is
insolvent, or if Sparta voluntarily files for bankruptcy, or if
similar relief is granted with respect to Sparta, under any law now or
hereafter in effect relating to bankruptcy, insolvency, relief of
debtors, protection of creditors; (ii) a receiver, trustee, custodian,
liquidator, assignee, sequestrator or other similar official is
appointed for such Sparta or for all or any substantial part of
Sparta's property; or (iii) if a proceeding is brought under the
federal bankruptcy code, Sparta fails to file a proper answer thereto
(including a request that the petitioner post adequate bond under
Section 303(e) of said code) within thirty days of receipt of notice
of said proceeding, upon Reiner's providing the Escrow Agent with
written notice of his intention that such event be grounds for the
release of the Escrowed Shares from escrow (which notice may be given
at any time, in the sole discretion of Reiner, during the Term).
The parties agree and acknowledge that in the event Reiner fails to provide
any of the written notices specified in subparagraphs (a) through (h), that the
condition shall not be considered to have occurred and that the Escrowed
Securities shall remain in escrow pursuant to this Agreement. Upon receipt by
the Escrow Agent of the required written notice by Reiner which states that one
of the conditions referred to in subparagraphs (a) through (h) of this Paragraph
5 have occured (which absent any actual knowledge on the part of the Escrow
Agent to the contrary shall be accepted as absolute grounds for release
hereunder), the Escrowed Securities shall be shall be released by the Escrow
Agent to Reiner. Following the release of the Escrowed Securities hereunder,
this Agreement shall terminate and the Escrow Agent shall be relieved of all
responsibility hereunder.
<PAGE>
For purposes of this paragraph 5, the term "Income from Operations" shall
mean net sales, less cost of goods sold and selling, general and administrative
expenses, and shall not have deducted from it any depreciation or amortization
expense or any extraordinary charges or expenses.
6. During the existence of this Agreement, the parties agree that the
Escrowed Securities may not in any way be offered for sale, sold, pledged,
hypothecated, transferred, assigned or in any other manner disposed of, except
as expressly provided for in this Agreement.
7. During the Term or until such time as all of the Escrowed Securities are
released to Reiner, Reiner shall retain full voting power over such shares,
which total 952,986 shares.
8. This Agreement shall inure to the benefit of and be binding upon Sparta,
and its successors and assigns, and Reiner and his heirs, personal
representatives or assigns.
9. A legend in substantially the following form has been or will be placed
upon any certificate or other document evidencing the Escrowed Securities:
The securities evidenced by this certificate are subject to
restrictions on their sale, pledge, or other transfer as set
forth in a certain Stock Escrow Agreement dated May 8, 1998, by
and among Sparta Surgical Corporation ("Sparta"), Thomas F.
Reiner and the Escrow Agent (as defined thereunder). Sparta will
furnish to the record owner of this certificate a copy of said
Agreement without charge upon written request to Sparta at its
principal place of business. The rights of the holder of this
certificate are subject to all of the terms and conditions of
such Agreement, by which the holder, by the acceptance of this
certificate, agrees to be bound.
<PAGE>
Stop transfer instructions to Sparta's transfer agent have been or will be
placed with respect to the Escrowed Securities so as to restrict their sale,
pledge or other transfer. The foregoing legend and stop transfer instructions
will be placed with respect to any new certificate or document issued upon the
presentment of any original certificates or other documents evidencing the
Escrowed Securities. Upon the release of any of the Escrowed Securities from the
escrow hereunder, the Escrow Agent and/or Sparta shall be required to notify
Sparta's transfer agent to remove the legend set forth on the share certificates
evidencing those of the Escrowed Securities being released and the transfer
agent shall be entitled to rely upon such notification in so doing.
10. Sparta agrees to indemnify and hold harmless the Escrow Agent and
Reiner from any costs, damages, expenses, losses or claims, including attorneys
fees, which the Escrow Agent or Reiner may incur or sustain as a result of or
arising out of this Agreement or the Escrow Agent's or Reiner's duties relating
thereto, and agrees to pay such costs, damages, expenses, losses or claims to
the Escrow Agent on demand.
IN WITNESS WHEREOF, Sparta, Reiner and the Escrow Agent have caused this
Escrow Agreement to be executed by their respective authorized agents.
ESCROW AGENT SPARTA SURGICAL CORPORATION
Thomas F. Reiner Allan J. Korn
- ---------------------------- ----------------------------
Thomas F. Reiner Allan J. Korn, Director,
duly authorized
<PAGE>
Schedule A
----------
Date of Number of
Original Issuance Shares Consideration
- ----------------- ------ -------------
7/25/1997 80,000 Reiner's providing his personal guaranty
in an amount up to $250,000 as to the
obligations owing from Sparta to its
secured lender NationsCredit Commercial
Corporation
2/10/1998 198,000 Reiner's personally guarantying the
obligations owing from Sparta to John
Landino for the purpose of obtaining a
reasonable settlement for Sparta in
litigation with Landino and Reiner's
continued efforts to advance funding to
Sparta through $200,000 Credit Facility
between Reiner and Sparta pursuant to
that certain agreement dated May 1997,
notwithstanding the unstable financial
condition of Sparta, and to otherwise
advance amounts to Sparta, thus
permitting Sparta to avoid a default
penalty with Landino
2/19/1998 299,986 Reiner's giving personal guaranty as to
$715,000 of Sparta's indebtedness,
including: Lyon Credit, $100,000.00,
7/95, Computer Lease; J&C Resources,
$165,000.00, 12/17/96, Bridge Loan; J&C
Resources, $375,000.00, 3/17/97, Bridge
Loan; and Mercedes Benz, $ 75,000.00,
8/4/94, Company Auto Lease
2/25/1998 150,000 Reiner's increasing the amount of the
Credit Facility between he and Sparta to
$250,000, due to Sparta's continued
negative cash flow and loss from
operations
4/03/1998 75,000 Reiner's increasing the amount of the
Credit Facility between he and Sparta to
$300,000, due to Sparta's continued
negative cash flow and loss from
operations
4/09/1998 150,000 Reiner's increasing the amount of the
Credit Facility between he and Sparta to
$400,000, due to Sparta's continued
negative cash flow and loss from
operations
Exhibit 10.95
<PAGE>
AGREEMENT
THIS AGREEMENT, dated as of this 8th day of May, 1998, between and among
Thomas F. Reiner ("Reiner") and Sparta Surgical Corporation, a Delaware
corporation ("Sparta");
WITNESSETH THAT:
WHEREAS, Reiner has agreed to the cancellation of certain shares of the
common stock, $0.002 par value of Sparta (the "Common Stock") listed on Schedule
A hereto, which were to have been issued to him by Sparta for the consideration
set forth on such Schedule A (the "Shares");
WHEREAS, Sparta is issuing to Reiner on or about the date hereof, 952,986
shares of Common Stock, which shares are being issued for the consideration set
forth on Schedule A hereto, and which shares are to be held in escrow pursuant
to the terms of a Stock Escrow Agreement of even date herewith (the "Escrow
Agreement"); and
WHEREAS, in consideration of Reiner's agreement to cancel the Shares and to
accept the issuance of shares of Sparta's Common Stock pursuant to the terms and
conditions of the Escrow Agreement, Sparta has agreed that certain indebtedness
owing from Reiner to Sparta in the amount of approximately $522,000 (the
"Indebtedness") be forgiven upon the occurance of certain events, all upon the
terms set forth herein;
NOW, THEREFORE, in consideration of the mutual undertakings contained
herein and in consideration for Reiner's agreement to cancel the Shares before
issuance, and each party's entering into this Agreement and the Escrow
Agreement, the parties hereto, intending to be legally bound, agree as follows:
<PAGE>
1. This Agreement shall be effective for a period of six (6) years from the
date hereof (the "Term").
2. During the Term, Sparta agrees that Reiner shall be relieved of any
obligation to repay any of the Indebtedness upon the occurance of any the
following conditions:
(a) Upon any "change in control" of Sparta. A "change in control" occurs
upon the occurrence of one of the following events, but only if Reiner
notifies Sparta in writing of his intention that such event be treated
as a change in control (which notice may be given at any time, in the
sole discretion of Reiner, during the Term): (i) An event that would
be required to be reported in response to Item 5 (f) of Schedule 14A
of Regulation 14A promulgated under the Securities Exchange Act of
1934 (the "Exchange Act"), or any successor thereof, assuming that
Sparta was a reporting company or was otherwise required to file
reports under the Exchange Act, (ii) Any "person" (as such term is
defined in Sections 13 (d) and 14 (d) (2) of the Exchange Act) who is
not currently an owner of securities of Sparta, is or becomes the
beneficial owner, directly or indirectly, of securities of Sparta
representing 20% or more of the combined voting power of Sparta's then
outstanding securities pursuant to a tender offer or otherwise, or
(iii) During any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of
Sparta cease for any reason to constitute at least a majority thereof
unless the election of each director, who was not a director at the
beginning of the period, was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the
beginning of the period;
(b) Upon the termination of Reiner's employment with Sparta for any
reason, upon Reiner's providing Sparta with written notice of his
intention that such event be grounds for forgiveness of the
Indebtedness (which notice may be given at any time, in the sole
discretion of Reiner, during the Term);
(c) If (i) an order is entered for relief against Sparta, or declaring
that Sparta is insolvent, or resulting in a finding that Sparta is
insolvent, or if Sparta voluntarily files for bankruptcy, or if
similar relief is granted with respect to Sparta, under any law now or
hereafter in effect relating to bankruptcy, insolvency, relief of
debtors, protection of creditors; (ii) a receiver, trustee, custodian,
liquidator, assignee, sequestrator or other similar official is
appointed for such Sparta or for all or any substantial part of
Sparta's property; or (iii) if a proceeding is brought under the
federal bankruptcy code, Sparta fails to file a proper answer thereto
(including a request that the petitioner post adequate bond under
Section 303(e) of said code) within thirty days of receipt of notice
of said proceeding, upon Reiner's providing Sparta with written notice
of his intention that such event be grounds for forgiveness of the
Indebtedness (which notice may be given at any time, in the sole
discretion of Reiner, during the Term); and
<PAGE>
(d) In the event that Sparta has net sales in excess of $2.5 Million
during any fiscal year (as determined from Sparta's audited financial
statements), upon Reiner's providing Sparta with written notice of his
intention that such event be grounds for forgiveness of the
Indebtedness (which notice may be given at any time, in the sole
discretion of Reiner, during the Term).
The parties agree and acknowledge that in the event Reiner fails to provide
any of the written notices specified in subparagraphs (a) through (d), that the
condition shall not be considered to have occurred and that the Indebtedness
shall not be considered to have been forgiven. The parties hereto agree that
there is a substantial likelihood that one of the conditions set forth in
subparagraphs (a) through (d) may be satisfied and that it is appropriate for
Sparta to establish a reserve against repayment of the Indebtedness.
3. This Agreement shall inure to the benefit of and be binding upon Sparta,
and its successors and assigns, and Reiner and his heirs, personal
representatives or assigns.
IN WITNESS WHEREOF, Sparta and Reiner have caused this Agreement to be
executed by their respective authorized agents.
REINER SPARTA SURGICAL CORPORATION
Thomas F. Reiner Allan J. Korn
- ---------------------------- ---------------------------
Thomas F. Reiner Allan Korn, Director,
duly authorized
<PAGE>
Schedule A
----------
Date of Number of
Original Issuance Shares Consideration
- ----------------- ------ -------------
7/25/1997 80,000 Reiner's providing his personal guaranty
in an amount up to $250,000 as to the
obligations owing from Sparta to its
secured lender NationsCredit Commercial
Corporation
2/10/1998 198,000 Reiner's personally guarantying the
obligations owing from Sparta to John
Landino for the purpose of obtaining a
reasonable settlement for Sparta in
litigation with Landino and Reiner's
continued efforts to advance funding to
Sparta through $200,000 Credit Facility
between Reiner and Sparta pursuant to
that certain agreement dated May 1997,
notwithstanding the unstable financial
condition of Sparta, and to otherwise
advance amounts to Sparta, thus
permitting Sparta to avoid a default
penalty with Landino
2/19/1998 299,986 Reiner's giving personal guaranty as to
$715,000 of Sparta's indebtedness,
including: Lyon Credit, $100,000.00,
7/95, Computer Lease; J&C Resources,
$165,000.00, 12/17/96, Bridge Loan; J&C
Resources, $375,000.00, 3/17/97, Bridge
Loan; and Mercedes Benz, $ 75,000.00,
8/4/94, Company Auto Lease
2/25/1998 150,000 Reiner's increasing the amount of the
Credit Facility between he and Sparta to
$250,000, due to Sparta's continued
negative cash flow and loss from
operations
4/03/1998 75,000 Reiner's increasing the amount of the
Credit Facility between he and Sparta to
$300,000, due to Sparta's continued
negative cash flow and loss from
operations
4/09/1998 150,000 Reiner's increasing the amount of the
Credit Facility between he and Sparta to
$400,000, due to Sparta's continued
negative cash flow and loss from
operations
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 249,000
<ALLOWANCES> 34,000
<INVENTORY> 2,165,000
<CURRENT-ASSETS> 2,438,000
<PP&E> 501,000
<DEPRECIATION> 315,000
<TOTAL-ASSETS> 3,328,000
<CURRENT-LIABILITIES> 1,316,000
<BONDS> 2,282,000
0
602,000
<COMMON> 2,000
<OTHER-SE> (1,149,000)
<TOTAL-LIABILITY-AND-EQUITY> 3,328,000
<SALES> 2,272,000
<TOTAL-REVENUES> 2,272,000
<CGS> 1,066,000
<TOTAL-COSTS> 1,066,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 404,000
<INCOME-PRETAX> (1,858,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,858,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,858,000)
<EPS-PRIMARY> (2.27)
<EPS-DILUTED> (2.27)
</TABLE>
