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, 1999 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 425
Pleasanton, California 94566
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (925) 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 None.
$4.00 Par Value Redeemable Convertible Preferred Stock None.
$4.00 Par Value Series A Convertible Preferred Stock None.
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 $1,984,000.
As of June 9, 1999, 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 $6,392,712 based upon closing prices on
NASDAQ's OTC Bulletin Board of $2.22 per share of $.002 Par Value Common Stock
and $.29 per share of $4.00 Par Value Redeemable Convertible Preferred Stock.
As of June 9, 1999, 2,879,607 shares of the Registrant's Common Stock,
116,583 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.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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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 medical equipment 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 expand the Company's existing product
lines. The Company's principal offices are located at 7068 Koll Center Parkway,
Suite 425, 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 full line of 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 DME 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.
In 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.
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 to the home health care market. 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.
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.
3
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A significant portion of the Company's TENS sales are derived from various
annual purchase contracts and OEM manufacturing agreements with companies such
as 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 a 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."
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.
4
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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 with which the Company competes, have significantly greater
resources, established sales organizations and greater experience in marketing
and sales of products through direct distribution. The industry 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, TFX Surgical, 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
RehabiLicare, 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 in year 2002. 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.
5
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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 two executive officers, as of June 9, 1999, the Company
had five full-time employees including one employee 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:
Square Expiration of Monthly
Location Footage Current Lease Rental
-------- ------- ------------- ------
Pleasanton, CA 4,344 09/30/01 $6,299
Pleasanton, CA 3,968 10/31/01 $2,864
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ITEM 3. LEGAL PROCEEDINGS
- -------------------------
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 claimed that RRA 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. The
Company alleges that because of RRA's failure to maintain the demised premises
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 judgment
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. On April 6, 1998, the Court set aside the enforcement of the
confession of judgment sought by RRA and consolidated both proceedings. On June
6, 1998, the Company received a summary judgment against River Road Associates,
L.P. ("RRA"), whereby the Company was relieved of its obligations relating to
facilities formerly leased from RRA. In Connection with this judgment, the
Company reversed lease termination costs which had been accrued in prior years
amounting to $361,400. 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. On April 12, 1998, Boston
Stock Exchange delisted the Company's securities. 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 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 2000
May 31, 1999 $2.50 $1.75
August 31, 1999 2.36 2.22
(through June 9, 1999)
Fiscal 1999
May 31, 1998 1.69 0.75
August 31, 1998 1.75 0.75
November 30, 1998 1.75 0.87
February 28, 1999 1.00 0.43
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
As of June 9, 1999, the Company estimates it had approximately 500
shareholders of record.
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As of June 9, 1999, the authorized capital stock of the Company consisted
of 8,000,000 shares of Common Stock, $.002 par value, and 2,000,000 shares of
Preferred Stock, $4.00 par value. Shares of Preferred Stock in addition to the
Series A Preferred Stock and the 1992 Preferred Stock may be issued from time to
time in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions thereof, as are determined by
resolution of the Board of Directors of the Company, except that so long as any
1992 Preferred Stock or Series A 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 9, 1999 there were 2,879,607 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 convertible into 137,500 shares of Common Stock in connection
with the 1994 Offering. At June 9, 1999 there were 28,068 shares of Series A
Preferred Stock outstanding convertible into 23,380 shares of Common Stock. A
summary of the Series A Preferred Stock follows.
Dividend Rights. Holders of shares of Series A 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 Series A 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
Series A Preferred Stock was registered in the 1994 Offering.
Redemption. The Series A 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 Series A 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 the Series A
Preferred Stock called for redemption, and all rights of the holders of such
Series A Preferred Stock will terminate except the right to receive the
redemption price without interest.
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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 the Series A Preferred Stock.
The Conversion Price is subject to adjustment for stock splits, reverse stock
splits and other similar capitalizations, although the Series A Preferred Stock
does not contain provisions protecting against dilution resulting from the sale
of Common Stock at a price below the Conversion Price or the current market
price of the Company's securities. If at any time the closing price for the
Series A Preferred Stock, as quoted on NASDAQ or any national securities
exchange, exceeds $14.00 per share for ten consecutive trading days, then the
Series A 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 Series A Preferred Stock are
entitled to receive, out of legally available assets, a liquidation preference
of $10.00 per share, plus an amount equal to any accrued and unpaid dividends to
the payment date, and no more, before any payment or distribution is made to the
holders of Common Stock or any series or class of the Company's stock hereafter
issued that ranks junior as to liquidation rights to the Series A Preferred
Stock, but the holders of the shares of the Series A Preferred Stock will not be
entitled to receive the liquidation preference on such shares until the
liquidation preference of any other series or class of the Company's stock
previously or hereafter issued that ranks senior as to liquidation rights to the
Series A Preferred Stock has been paid in full. An aggregate of 116,583 shares
of 1992 Preferred Stock (representing $466,332 of face value) carries
liquidation rights senior to the Series A Preferred Stock.
Voting Rights. The holders of the Series A Preferred Stock have no voting
rights except as to matters affecting the rights of Series A Preferred
Stockholders or as required by law. In connection with any such vote, each
outstanding share of Series A 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 "Series A Warrants") of which 660,000 are currently
outstanding. A brief summary of the Series A Warrants follows.
Each Series A 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 Series A Warrants are subject to adjustment
in certain events, to the extent that such events occur after the effective date
of the Series A 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 Series A 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 Series A Warrants or the
current market price of the Company's securities.
The Series A Warrants are exercisable during the period ending July 12,
1999 unless earlier redeemed. The outstanding Series A Warrants are redeemable,
in whole or in part, at the option of the Company, upon 30 days' written notice,
at $.05 per Series A Warrant. If any Series A 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 Series A Warrants may exercise their Series A 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 Series A Warrants until the
expiration date of the Series A Warrants, although there can be no assurance
that the Company will be able to do so.
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The shares of Common Stock issuable on exercise of the Series A Warrants
will be, when issued in accordance with the Series A Warrants, fully paid and
non-assessable. The holders of the Series A Warrants have no rights as
stockholders until they exercise their Series A Warrants.
For the life of the Series A 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 Series A Warrants are outstanding, the terms on which the Company could
obtain additional capital may be adversely affected. The holders of such Series
A 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 Series A
Warrants.
Redeemable Convertible Preferred Stock
At June 9, 1999 there were 116,583 shares of $4.00 par value Redeemable
Convertible Preferred Stock ("1992 Preferred Stock") outstanding convertible
into 38,861 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, February 28, 1997 and February 28,
1998. The Company does not anticipate it will pay a dividend for the fiscal year
ended February 28, 1999.
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
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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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Series AA Convertible Redeemable Preferred Stock
At June 9, 1999 there were 39,938 shares of Preferred Stock of $4.00 par
value (constituted as a series distinguished as "Series AA Preferred Stock")
outstanding, convertible into 179,721 shares of common stock which were issued
in connection with the conversion of certain indebtedness. A summary of the
Series AA Preferred Stock is as follows:
Dividend Rights. The holders of Series AA Preferred Stock, in preference to
any of the holders of any stock that is Junior and subordinate to any of the
holders of any stock that is Senior (as such terms are hereinafter defined) to
such series of Preferred Stock as to dividends, shall be entitled to receive out
of the assets of the Corporation which are by law available for the payment of
dividends, when and as declared by the Board of Directors, cumulative dividends
at the per annum rate of $0.28 per share, and no more, payable either in the
form of cash, common stock or some combination thereof, in the sole discretion
of the Company, semi-annually in arrears on November 30th and May 31st of each
year, which dividends shall be payable on the last day of the month following
such period, except that if any such date is a Saturday, Sunday or legal
holiday, then such dividend shall be payable on the next day that is not a
Saturday, Sunday or legal holiday (each of such periods being hereinafter called
a "Dividend Period") and which dividends shall be pro rated for any partial
Dividend Period. References to a stock that is "Senior" to, on a "Parity" with
or "Junior" to other stock as to (1) "dividends" or (2) "liquidation" shall
refer, respectively, to rights of priority of one series or class of stock over
another (i) in the payment of dividends or (ii) in the distribution of assets on
any liquidation, dissolution or winding up of the Corporation. The Series AA
Preferred Stock shall be Senior to the Common Stock of the Corporation (as
defined in the Restated Certificate of Incorporation of the Corporation) as to
dividends and liquidation. The Series AA Preferred Stock shall be Junior to the
Corporation's Non-Cumulative Convertible Redeemable Preferred Stock, as defined
in a Certificate of Designations filed in February 1992 as "Redeemable
Convertible Preferred Stock" and the Corporation's Series A Convertible
Redeemable Preferred Stock, as defined in a Certificate of Designations filed in
July of 1994 as "Series A Preferred Stock" (the "Existing Preferred Stock") as
to dividends and liquidation.
No dividends shall be declared upon or paid to the holders of Series AA
Preferred Stock in respect of any Dividend Period, unless there shall likewise
be declared on or paid to shares of stock at the time outstanding, which is on a
Parity therewith as to dividends, like dividends for such Dividend Period,
ratably in proportion to the respective dividend rates per annum fixed
therefore.
Conversion Rights. Subject to the limitations set forth in the Dividend
Rights and this Section each two shares of Series AA Preferred Stock (a "Unit")
then outstanding:
(i) shall be convertible, in whole or in part, into nine (9) fully paid and
non-assessable shares of the Corporation's common stock, $0.002 par value (the
"Common Stock") at the option of the holder of such Unit, at any time or from
time to time on or before February 10, 2001 (with such period being referred to
hereinafter as the "Conversion Period"), upon notice duly given as provided in
this Section 4.
(ii) shall automatically convert into nine (9) shares of Common Stock in the
event that during the "Conversion Period" the daily average bid and ask price of
the Common Stock averages $3.00 per share or more over a thirty consecutive day
period.
Redemption Rights. Subject to the limitations set forth in the preceding
Dividend Rights, the shares of Series AA Preferred Stock then outstanding shall
be redeemable, in whole or in part at the option of the Corporation expressed by
resolution of the Corporation's Board of Directors:
(i) at any time or from time to time following the expiration of the Conversion
Period, upon notice duly given as provided in the Conversion Rights, at a price
of $10.00 per Unit, in the event the daily average bid and ask price of the
Common Stock averages $2.00 per share or more over a thirty consecutive day
period.
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(ii) at any time or from time to time following the expiration of the Conversion
Period, upon notice duly given as provided in the Conversion Rights, at a price
of $8.00 per Unit, in the event the daily average bid and ask price of the
Common Stock averages $3.00 per share or more over a thirty consecutive day
period.
Liquidation or Dissolution. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, holders of each
outstanding share of Series AA Preferred Stock shall be entitled to be paid
first out of the assets of the Corporation available for distribution to
stockholders, whether such assets are capital, surplus, or earnings, an amount
equal to $4.00 per share of Series AA Preferred Stock held, plus an amount equal
to all Accrued and Unpaid Dividends, before any payment shall be made to the
holders of the Common Stock, or any other stock of the Corporation ranking as to
dividends or assets Junior to the Series AA Preferred Stock, but the holders of
the shares of the Series AA Preferred Stock shall not be entitled to receive the
liquidation preference of such shares until the liquidation preference of such
shares until the liquidation preference of any other series of or class of the
Corporation's stock hereafter issued that ranks Senior as to liquidation rights
to the Series AA Preferred Stock (including the Existing Preferred Stock, which
has a liquidation preference of $4.00 per share) has been paid in full.
Voting Rights. Except as otherwise expressly provided herein or as required
by law, the holder of each share of Series AA Preferred Stock shall have no
voting rights. In connection with any vote permitted the holder of each share of
Series AA Preferred Stock shall be entitled to one vote per share.
The vote of the holders of at least 50% of all outstanding shares of Series
AA Preferred Stock, voting as a separate class after proper notice, shall be
required before the Corporation may (i) amend, alter or repeal any provision of
Certificate of Incorporation or the Bylaws of the Corporation so as to directly
and adversely affect the relative rights, preferences, qualifications,
limitations or restrictions of the Series AA Preferred Stock as set forth
herein; (ii) authorize or issue, or increase the authorized amount of, any
additional class or series of stock, or any security convertible into stock of
such class or series, ranking senior to the Series AA Preferred Stock as to
dividends or upon liquidation dissolution or winding up of the Corporation;
(iii) effect any reclassification of the Series AA Preferred Stock; or (iv)
effect a capital reorganization of the Company or a merger or consolidation of
the Company, or the sale, mortgage, pledge, exchange, transfer or other
disposition of all or substantially all of the Company's properties and assets
to any other person or persons (an "Event of Merger or Sale"), if the
stockholders of the Corporation immediately prior to such Event of Merger or
Sale will own less than 50% of the shares of the surviving (in the case of a
merger) or acquiring (in the case of a sale of assets) corporation immediately
following such merger or sale.
Warrants and Options
In connection with the Series A 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 Series A Preferred Stock and
four Series A Warrants.
At June 9, 1999, 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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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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.
Year ended February 28, 1999 as Compared to Year ended February 28, 1998
Net sales for the year ended February 28, 1999 ("Fiscal 1999") were
$1,984,000, a decrease of 12.7% from net sales of $2,272,000 for Fiscal 1998.
The decrease in net sales during Fiscal 1999 as compared to Fiscal 1998 is the
result of (i) a $215,000 or 9.4% decrease in electrotherapy product sales from
$1,245,000 to $1,030,000; and (ii) a decrease of $73,000 or 7.1% in surgical
product sales from $1,026,000 to $954,000. The decrease in sales for the
electrotherapy product line can be primarily attributed to the completion of
standing purchase orders in the approximate amount of $650,000 from one of the
electrotherapy OEM accounts. 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, and the decision by the Company not to
attend various trade shows 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 as well as expanding into the growing home
healthcare industry.
Gross profit was $956,000 or 48% of net sales for Fiscal 1999 as compared
to $1,206,000 or 53% of net sales for Fiscal 1998. The decrease in gross profit
is primarily due to the decrease in sales from fiscal year 1998 and the decrease
in gross profit percentage in Fiscal 1999 is primarily due to the decrease in
surgical and electrotherapy sales. In general, the electrotherapy product line
generates lower gross profits than the surgical line. In connection with certain
sales promotions, certain price concessions were made in the surgical product
line with the Company's distributors.
Selling, general and administrative ("SG&A") expenses for Fiscal 1999 were
$927,000, a 44.8% or $752,000 decrease from SG&A expenses of $1,679,000 for
Fiscal 1998. The decrease in SG&A expenses for Fiscal 1999 as compared to Fiscal
1998 is primarily due to the Company's further implementation of a restructuring
plan involving a reduction of personnel, a Company wide reduction in salaries,
and an overall cost containment program.
Depreciation and amortization ("D & A") expenses for Fiscal 1999 were
$198,000, a 10% or $19,000 decrease from D & A expenses of $217,000 for Fiscal
1998. The decrease in D & A is primarily due to the decrease in the net book
value of property and equipment as certain assets become fully depreciated.
The decrease in other expense is primarily attributed to a $548,000
provision for an uncollectible note receivable in 1998 that was not repeated in
1999. The decrease is also the result of a favorable settlement of litigation
related to a terminated lease obligation, resulting in the reversal of accrued
rent of approximately $300,000.
As a result of the foregoing, the net loss for Fiscal 1999 was $344,000, a
decrease of $1,514,000, or 81% from net loss of $1,858,000 for Fiscal 1998.
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Basic and diluted loss per share was $0.28 for Fiscal 1999 as compared to
$2.27 for Fiscal 1998. The basic and diluted loss per share computation reflect
paid and accrued dividends on the Series A Convertible Preferred Stock paid on
March 31, 1998 and 1999.
Year ended February 28, 1998 as Compared to Year ended February 29, 1997
Net sales for the year ended February 28, 1998 ("Fiscal 1998") were
$2,272,000, a 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-cancelable purchase orders in the approximate amount of $650,000
from various customers including Healey Healthcare Inc. 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.
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 to 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
$1,679,000, a 18.1% decrease from SG&A expenses of $2,052,000 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.
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's R&D efforts were focused on its redesign of the MAX-SD TENS units
resulting in increased quality and lower production cost for the electrotherapy
product line.
Total other expense for Fiscal 1998 was $1,153,000, an decrease of
$1,424,000 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 and a settlement expense in the amount of $856,000
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 reflects
paid and accrued dividends on the Series A Convertible Preferred Stock, paid on
March 31, 1997 and 1998.
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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, 1999, the Company had federal and state net operating
loss carry forwards of approximately $9,200,000. Availability of the Company's
net operating loss carry forwards, if not utilized, will expire at various dates
through the year 2019.
The Company's working capital at February 28, 1999 was $1,313,000 as
compared to $1,122,000 at February 28, 1998. The Company's working capital
position increased by $191,000.
In 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 and in June 1999
increased the facility to $750,000. The advances and accrued interest made under
the Working Capital Credit Facility are due the earlier of (i) June 2000; (ii)
upon the closing of a minimum of $1,000,000 equity or debt financing by the
Company; or (iii) upon default. In addition, Mr. Reiner has the option to
convert all amounts under the Working Capital Credit Facility into the Company's
Common Stock at 100% of the average closing bid prices as reported on NASDAQ for
the five (5) trading days preceding the conversion date. As of June 9, 1999, the
amount due to Mr. Reiner under the Working Capital Credit Facility was
approximately $509,000. See Item 12 "Certain Relationships and Related
Transactions."
On July 25, 1997, the 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
Mr. Reiner. As of June 9, 1999, the outstanding balance on the Loan was
$1,349,000 and approximately $20,000 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. The Company recorded loan costs of
approximately $6,000 related to the warrants and is amortizing them over the 48
month term of the agreement. 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. In connection with a May 1998 Stock Escrow Agreement between the
Company and Mr. Reiner, such shares and options were canceled.
In August 1998, the Company negotiated the conversion of certain notes
payable to entities related to one of its significant shareholders into
preferred and common stock. The aggregate principal and accrued interest
amounted to $911,000 and was converted into 39,938 shares of Series AA
convertible redeemable preferred stock and 1,001,733 shares of common stock. The
Company recorded a charge of $75,000 related to unamortized loan costs
associated with the converted debt. In addition, in April 1998, the Company
issued warrants to purchase 150,000 shares of common stock to a financial
advisor. The Company elected to terminate the financial advisor and as a result,
the Company recorded a charge of $125,000 related to unamortized financing
costs.
On March 4, 1999, the Company entered into a Consulting Agreement and
appointed IGC of New York Corporation as its financial advisor. In its role as a
financial advisor, IGC will advise Sparta on mergers and acquisitions, assist in
providing financing for working capital, repayment of debts, and to finance
potential acquisitions. The Company issued IGC a warrant to purchase up to
300,000 shares of its common stock, $0.002 par value, exercisable at $0.95 per
share at any time until March 3, 2002 and the warrants shall have piggyback
registration rights with respect to any shares issued upon their exercise. In
addition, IGC shall receive a finders fee upon the closing and funding of any
types of financing, including senior secured debt, mezzanine / subordinated debt
and private equity. In addition, IGC shall receive upon the closing and funding
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a private placement financing in the minimum amount of $10,000,000, a warrant to
purchase up to 500,000 shares of its common stock, par value $0.002, exercisable
at $0.95 per share. In addition, IGC shall be paid $8,000 per month, in the form
of equal monthly installments over 24 months, provided that a secondary public
offering has been completed and funded, through an underwriter introduced by IGC
to the Company, in net proceeds to the Company in an amount of not less than
$10,000,000 on or before August 31, 1999.
On April 13, 1999, the Company retained SJS Holdings to assist and locate
an underwriter for a proposed secondary public offering in connection with the
Company's various potential acquisitions in the home health care industry. The
Company issued SJS Holdings a warrant to purchase up to 50,000 shares of its
common stock, par value $0.002, exercisable at $2.00 per share at any time until
April 12, 2002 and the warrants shall have piggyback registration rights with
respect to any shares issued upon their exercise.
During the period of March 1999 through May 1999, the Company raised
$350,000 from various individual investors. These individual loans range from
$25,000 to $75,000, with interest rates ranging from 7% to 12%. The proceeds
from these loans are designated to be used primarily for working capital, legal
and accounting expenses related to the various acquisitions that the Company has
targeted. In accordance with the terms of the loans, the principal is to be
repaid by the Company at the earlier of six months from the date of issuance of
the loan or from a $25 Million secondary public offering.
On February 12, 1999, CCJ Trust ("CCJ") agreed to convert the amount of
indebtedness owing to it from the Company in the amount of $159,750 (which
consists of principal and accrued interest) into 39,938 shares of Series AA
Preferred Stock. The Series AA Preferred Stock yields a 7% per annum
non-cumulative dividend payable semi-annually in the form of additional shares
of common stock, $0.02 par value, or cash at the Company's option. The Series AA
Preferred Stock features redemption and conversion rights during the two year
period following the increase of shares.
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 has
identified certain lenders to raise additional debt or equity financing.
In recent years the Company has experienced losses from operations and
suffers from a deficiency in available working capital. In fiscal 1999, the
Company substantially improved its operating performance, principally as a
result of significant reductions in operating expenses. However, revenues from
existing product lines have not been sufficient to generate adequate working
capital. Management intends to continue the steps it has taken to improve
operations and aggressively pursue capital for its acquisition program through
debt and equity securities offerings. Management has retained the services of an
investment advisor to pursue capital through such private equity and debt
offerings. Management intends to continue to pursue viable acquisition
candidates and currently has one binding letter of intent and two non-binding
letters of intent with target companies, in addition to the acquisition
agreement with Olsen Electrosurgical, Inc., signed in June 1999. Management
believes its actions will be sufficient to fund operations through February 29,
2000; however, there can be no assurance that the Company will be able to
complete planned debt or equity offerings or targeted acquisitions.
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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 (estimated not to exceed $25,000) 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.
ITEM 7. FINANCIAL STATEMENTS
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See page F-1
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SPARTA SURGICAL CORPORATION
---------------------------
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
February 28, 1999 and 1998
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Sparta Surgical Corporation
We have audited the accompanying consolidated balance sheet of Sparta Surgical
Corporation (the "Company") as of February 28, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
February 28, 1999, and the consolidated results of its operations and its cash
flows for each of the two years then ended, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
June 10, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED BALANCE SHEET
February 28, 1999
ASSETS
Current assets
<S> <C>
Cash $ 1,000
Accounts receivable, net of allowance for doubtful accounts of $34,000 162,000
Inventories 2,026,000
Other 66,000
-----------
Total current assets 2,255,000
Property and equipment, net 137,000
Other assets
Intangible assets 461,000
Other 144,000
-----------
Total other assets 605,000
-----------
Total assets $ 2,997,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term obligations $ 219,000
Accounts payable - trade 422,000
Accrued expenses 301,000
-----------
Total current liabilities 942,000
Revolving credit facilities and long-term obligations 1,833,000
Stockholders' equity
Preferred stock: $4.00 par value, 2,000,000 shares authorized;
1992 non-cumulative convertible redeemable preferred stock: 165,000 shares
authorized, 116,583 shares issued and outstanding 466,000
Series A cumulative convertible preferred stock: 30,000 shares authorized,
28,068 shares issued and outstanding 112,000
Series AA cumulative convertible redeemable preferred stock: 875,000 shares
shares authorized, 39,938 shares issued and outstanding 160,000
Common stock: $0.002 par value, 8,000,000 shares authorized, 2,879,607 shares
issued and outstanding 4,000
Additional paid in capital 9,272,000
Accumulated deficit (9,792,000)
Total stockholders' equity 222,000
-----------
Total liabilities and stockholders' equity $ 2,997,000
===========
See accompanying notes to consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended February 28,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 1,984,000 $ 2,272,000
Cost of sales 1,028,000 1,066,000
----------- -----------
Gross profit 956,000 1,206,000
Selling, general and administrative expenses 927,000 1,679,000
Depreciation and amortization expenses 198,000 217,000
Research and development expenses -- 15,000
----------- -----------
Loss from operations (169,000) (705,000)
Other income (expense):
Interest expense (623,000) (629,000)
Litigation settlements 214,000 --
Provision for uncollectible note receivable -- (548,000)
Gain on disposition of long-term liabilities 199,000 --
Other 35,000 24,000
----------- -----------
Total other income (expense) (175,000) (1,153,000)
----------- -----------
Net loss (344,000) (1,858,000)
Preferred stock dividends (42,000) (42,000)
----------- -----------
Net loss applicable to common stockholders $ (386,000) $(1,900,000)
=========== ===========
Basic and diluted net loss per common share $ (0.28) (2.27)
=========== ===========
Shares used to calculate basic and diluted net loss per common share 1,395,276 836,189
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Two years ended February 28, 1999
1992 Series A Series AA
Redeemable Redeemable Redeemable
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1997 160,678 $ 643,000 28,068 $ 112,000 -- $ --
Preferred stock dividends
paid in common stock -- -- -- -- -- --
Conversion of preferred
stock into common stock (38,095) (153,000) -- -- -- --
Issuance of common stock
under escrow agreement -- -- -- -- -- --
Issuance of stock and
warrants with debt -- -- -- -- -- --
Net loss -- -- -- -- -- --
Balance at February 28, 1998 122,583 490,000 28,068 112,000 -- --
Preferred stock dividends
paid in common stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- -- --
Conversion of preferred
stock into common stock (6,000) (24,000) -- -- -- --
Conversion of debt into
common and preferred stock -- -- -- -- 39,938 160,000
Issuance of common stock
under escrow agreement -- -- -- -- -- --
Issuance of warrants with debt -- -- -- -- -- --
Net loss -- -- -- -- -- --
Balance at February 28, 1999 116,583 $ 466,000 28,068 $ 112,000 39,938 $ 160,000
=========== =========== =========== =========== =========== ===========
(Table is continued on next page.)
F-4
<PAGE>
Sparta Surgical Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Two years ended February 28, 1999
(Continued)
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance at March 1, 1997 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 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 1,578,207 2,000 8,257,000 (9,406,000) (545,000)
Preferred stock dividends
paid in common stock 32,487 -- 42,000 (42,000) --
Issuance of common stock 40,180 -- -- -- --
Conversion of preferred
stock into common stock 2,000 -- 24,000 -- --
Conversion of debt into
common and preferred stock 1,001,733 2,000 749,000 -- 911,000
Issuance of common stock
under escrow agreement 225,000 -- -- -- --
Issuance of warrants with debt -- -- 200,000 -- 200,000
Net loss -- -- -- (344,000) (344,000)
Balance at February 28, 1999 2,879,607 $ 4,000 $ 9,272,000 $(9,792,000) $ 222,000
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended February 28,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (344,000) $(1,858,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 198,000 217,000
Amortization of debt issuance costs,
including warrants 265,000 225,000
Provision for uncollectible note receivable -- 548,000
Gain on disposition of long-term liabilities (199,000) --
Litigation settlements (214,000) --
Changes in operating assets and liabilities:
Accounts receivable 53,000 107,000
Inventories 139,000 95,000
Other assets (97,000) 66,000
Accounts payable and accrued expenses 16,000 (171,000)
----------- -----------
Net cash used in operating activities (183,000) (771,000)
Cash flows from investing activities:
Capital expenditures (10,000) --
Repayment of notes receivable -- 599,000
----------- -----------
Net cash provided by (used in)
investing activities (10,000) 599,000
Cash flows from financing activities:
Proceeds from borrowings 2,867,000 2,129,000
Principal payments on long-term obligations (2,657,000) (1,787,000)
Debt issuance costs incurred (17,000) (169,000)
Net cash provided by financing activities 193,000 173,000
----------- -----------
Net change in cash and cash equivalents -- 1,000
Cash and cash equivalents at beginning of year 1,000 --
----------- -----------
Cash and cash equivalents at end of year $ 1,000 1,000
=========== ===========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 308,000 $ 483,000
Income taxes -- --
Supplemental disclosure of non-cash financing activities:
- ---------------------------------------------------------
In 1999, the Company converted $911,000 of long-term debt and accrued
interest into Company stock. In 1998, the Company converted $216,000 of
trade payables and accrued interest into long-term debt. The Company also
issued warrants and stock of $200,000 and $136,000 in connection with
long-term debt borrowings in 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999 and 1998
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 investments purchased with a maturity of three months or less
to be cash equivalents.
Basic and Diluted Net Loss Per Share
------------------------------------
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 following table sets forth the computation of basic and diluted loss
per share ("EPS"):
Year ended February 28
------------------------
1999 1998
---- ----
Numerator
Net loss applicable to common stockholders (386,000) (1,900,000)
Denominator
Average outstanding during the year 2,348,262 1,789,175
Less: Shares subject to escrow
agreement (Note 9) 952,986 952,986
---------- ----------
Number of shares on which EPS is calculated 1,395,276 836,189
========== ==========
Basic and diluted loss per common share $ (0.28) $ (2.27)
========== ==========
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 amortized over the shorter of the lease term or the
estimated useful life of the improvement.
Equipment 3 - 10 years
Automobiles 7 years
F-7
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets
-----------------
The Company evaluates the realizability of intangibles to determine
potential impairment by comparing the undiscounted cash flows of the
related assets to the carrying value. 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 agreements 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 of the fair value of the Company's stock
on the measurement date 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 approximates
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.
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.
F-8
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. One
electrotherapy products customer accounted for 20% and 22% of net sales for
the years ended February 28, 1999 and 1998, respectively. In 1999 and 1998,
the Company purchased the products sold to this customer from a single
source vendor. Purchases from this vendor were 43% and 33% of total cost of
sales for the years ended February 28, 1999 and 1998, respectively. The
Company has identified an alternate supplier for this product; however, no
purchases have been made from this vendor.
Reclassifications
-----------------
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Equipment $ 323,000
Automobiles 94,000
Leasehold improvements 20,000
---------
437,000
Less accumulated depreciation and amortization (300,000)
---------
$ 137,000
=========
NOTE 3 - INTANGIBLE ASSETS
Intangible assets consist of the following:
Goodwill, net of accumulated amortization of $618,000 $277,000
Patents, net of accumulated amortization of $200,000 152,000
Debt issuance costs, net of accumulated
amortization of $325,000 32,000
--------
Total $461,000
========
F-9
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 4 - REVOLVING CREDIT FACILITIES AND LONG-TERM OBLIGATIONS
Revolving credit facilities and long-term obligations consist of the
following:
The Company has a revolving credit facility with a
financial institution (the "Bank Line") that bears
interest at prime (7.75% at February 28, 1999)
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, 1999, as a result of the borrowing
limits, the Company had no amounts available under
this line. $ 1,340,000
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 2000. Mr. Reiner may
convert any outstanding balance into common stock
at 100% of the average trading price of the
Company's common stock. 455,000
4.5% installment note due in 2000, variable
principal and interest payments from $4,000 to
$10,000 per month. 156,000
7% unsecured installment note due in 2000, monthly
principal and interest payments of $3,000. 50,000
Obligations under capital leases 51,000
-----------
2,052,000
Less current portion (219,000)
-----------
Long-term debt $ 1,833,000
===========
Installments due on debt principal, including the capital leases, are as
follows:
Year ending February 28,
------------------------
2000 $ 219,000
2001 491,000
2002 1,342,000
-----------
$ 2,052,000
===========
In 1999, the Company issued warrants to purchase 300,000 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
$200,000 and is amortizing this amount as interest expense over the life of
the related debt. As of February 28, 1999, the Company had 376,634 warrants
outstanding which had been issued in connection with long-term debt.
F-10
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
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, 1999. The
following table sets forth the primary components of deferred tax assets at
February 28, 1999:
Net operating loss and credit carryforwards $ 2,700,000
Non-deductible reserves and expenses 520,000
-----------
Gross deferred tax assets 3,220,000
Valuation allowance (3,220,000)
-----------
$ --
===========
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation
allowance is required. During fiscal 1999 the valuation allowance increased
$220,000. At February 28, 1999, the Company had approximately $7,530,000 of
federal net operating loss carryforwards for tax reporting purposes
available to offset future taxable income; such carryforwards will expire
from 2007 to 2009. Additionally, the Company has approximately $1,680,000
of state net operating loss carryforwards for tax reporting purposes which
will expire from 1999 to 2004.
NOTE 6 - STOCKHOLDERS' EQUITY
Amendment to Authorized Common and Preferred Stock
--------------------------------------------------
In February 1999, the Company's Board of Directors authorized an amendment
and restatement of the Company's Articles of Incorporation to increase the
number of authorized shares of preferred stock from 750,000 to 2,000,000
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.
F-11
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
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 of
0.833 shares of common stock for each share of Series A Preferred Stock.
The liquidation preference for the Series A Preferred Stock is $10.00 per
share. The 1992 Preferred Stock carries liquidation rights senior to the
Series A Preferred Stock.
Series AA Preferred Stock. The Company has authorized 875,000 shares of
Series AA Convertible Redeemable Preferred Stock (the "Series AA Preferred
Stock"). The holders of the Series AA Preferred Stock receive cumulative
dividends at the annual rate of $0.28 per share, payable semi-annually. The
holders of the Series AA 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 AA
Preferred Stock has one vote. The Series AA Preferred Stock is convertible
at any time through February 10, 2001 into shares of common stock at the
rate of 9 shares of common stock for each two shares of Series AA Preferred
Stock. The Series AA Preferred Stock will automatically be converted into
common stock at this rate in the event that the daily average bid and ask
price of the common stock averages $3.00 per share or more over a thrity
consecutive day period through February 10, 2001. At any time subsequent to
February 10, 2001, each two shares of Series AA Preferred Stock are
redeemable for cash at $10.00 or $8.00, plus any accrued and unpaid
dividends, in the event that the daily average bid and ask price of the
common stock averages at least $2.00 per share or $3.00 per share,
respectively, over a thirty consecutive day period. The liquidation
preference for the Series AA Preferred Stock is $4.00 per share. The 1992
Preferred Stock and Series A Preferred Stock carry liquidation rights
senior to the Series AA Preferred Stock.
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, 1999, 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.
F-12
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
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, 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
Granted 335,000 0.97
Exercised -- --
Cancelled (73,751) 3.94
---------- ------
Balance at February 28, 1999 1,119,422 $ 2.60
========== ======
The following table summarizes information about stock options and warrants
outstanding as of February 28, 1999:
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Term Exercisable Price
----- ----------- ----- ---- ----------- -----
$0.59 - $1.47 812,000 $1.06 6 years 712,000 $1.10
$1.98 - $3.18 186,002 2.20 5 years 186,002 2.20
$13.50 121,420 13.50 3 years 121,420 13.50
--------- ---------
1,119,422 1,019,422
========= =========
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:
1999 1998
----------- ------------
Net loss applicable to common stockholders
As reported $ (386,000) $ (1,900,000)
Pro forma (760,000) (2,618,000)
Basic and diluted net loss per share
As reported $ (0.28) $ (2.27)
Pro forma (0.54) (3.13)
F-13
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
The fair value of each option grant was determined using the Black-Scholes
model. The weighted average fair value of options and warrants granted
during 1999 and 1998 was $1.12 and $1.10, respectively. The following
weighted average assumptions were used to perform the calculations:
expected life of 7 years; interest rate of 6%; 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.
NOTE 7 - BUSINESS SEGMENTS
The Company's products are divided into two product groups: Surgical
Specialty Products and Electrotherapy DME Products. The Company's
reportable product group segments are strategic business units that offer
different ranges of products. Surgical Specialty Products consist of
microsurgical hand held instruments and accessories, critical care hospital
disposable products and oral maxillofacial implant plating systems.
Electrotherapy DME Products consist of transcutaneous electrical nerve
stimulators, electrodes and related accessories.
Information by product group segment is set forth below for the year ended
February 28,:
1999 1998
---------- ----------
Net sales:
Surgical Specialty Products $ 954,000 $1,027,000
Electrotherapy DME Products 1,030,000 1,245,000
---------- ----------
$1,984,000 $2,272,000
========== ==========
Gross profit:
Surgical Specialty Products $ 545,000 $ 671,000
Electrotherapy DME Products 411,000 535,000
---------- ----------
$ 956,000 $1,206,000
========== ==========
Due to the shared and integrated resources in personnel and facilities for
the two product group segments, information on assets, operating expenses
and income from operations is not identifiable for each of the two business
segments.
NOTE 8 - COMMITMENTS
The Company leases equipment and facilities under operating lease
agreements. Rental expense was $145,000 and $160,000 for the years ended
February 28, 1999 and 1998, 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,
------------------------
2000 $ 119,000
2001 118,000
2002 73,000
F-14
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 9 - 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. As of February 28, 1999, Mr. Reiner has been
granted options to purchase 747,002 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 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, 1999,
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, Mr. Reiner was obligated to
pay the Company $569,000. During 1998, Mr. Reiner made repayments in the
amount of $21,000. The Company 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.
In total, at February 28, 1999, Mr. Reiner directly holds 52,059 shares of
common stock, has options or warrants to purchase 747,002 shares of common
stock at prices ranging from $0.59 to $13.50 per share and has voting
authority over 1,015,462 shares of common stock. Mr. Reiner also is the
trustee over voting trusts for 692,500 shares of common stock issuable upon
the exercise of outstanding warrants.
Under the terms of an employment agreement, Mr. Reiner's daughter, an
employee of the Company, was granted options to purchase 150,000 shares of
common stock in March 1998. These options vest over three years and are
exercisable at $0.75 per share.
NOTE 10 - 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, 1999 and 1998.
F-15
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
NOTE 11 - LITIGATION
In May 1998, the Company settled an action stemming from a 1992
acquisition. As settlement, the Company issued warrants to purchase 75,000
shares of Common Stock at $0.75 per share and 35,000 shares of Common
Stock.
In June 1998, a judicial ruling released the Company from any financial
obligations in connection with the termination of a lease of the Company's
former facilities in New Jersey. As a result of this judicial ruling, the
Company eliminated its accrual for the lease termination, which was
approximately $304,000.
In January 1999, the Company settled a dispute with a former employee. As
settlement, the Company agreed to pay $90,000 to the former employee,
$40,000 of which was paid as of February 28, 1999, and the remainder of
which is included in accounts payable.
NOTE 12 - SUBSEQUENT EVENTS
In March 1999, the Company signed a consulting agreement with a financial
advisor, which provides for the advisor to receive warrants to purchase
300,000 shares of common stock at $0.95 per share.
During the period from March 1999 through May 1999, the Company raised
$350,000 of financing from various individual investors. These individual
loans range from $25,000 to $75,000, with interest rates ranging from 7% to
12%. The proceeds from these loans are designated to be used primarily for
working capital and legal and accounting expenses related to the various
acquisitions that the Company has targeted. In accordance with the terms of
the loans, the principal is to be repaid by the Company at the earlier of
six months from the date of issuance of the loans or the closing of a $25
million second public offering.
In March 1999, the Company entered into a non-binding letter of intent to
acquire all of the outstanding common stock of a company that provides home
care medical equipment, respiratory and related supplies. Also in March
1999, the Company entered into a non-binding letter of intent to purchase
substantially all of the assets of a company that manufactures and markets
intra-oral camera imaging system equipment for the dental industry.
In May 1999, the Company entered into a binding asset purchase agreement to
acquire substantially all of the assets and business operations of Western
Medical Services, Inc., a provider of home health care staffing. The
acquisition, which is subject to certain conditions, is anticipated to be
completed during the second quarter of the fiscal year ended February 28,
2000. The purchase price is $4.5 million and consists of two installment
notes payable of $1,250,000 and $3,250,000, with a 7% annual interest rate.
In June 1999, the Company completed an agreement to purchase all of the
outstanding common stock of Olsen Electrosurgical, Inc. ("Olsen"), a
privately held company that manufactures and markets electrosurgical
devices and accessories. The purchase provides for the Company to issue
400,000 shares of common stock in exchange for all of the outstanding
shares of Olsen's common stock.
F-16
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
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, 1999:
Name Age Office
---- --- ------
Thomas F. Reiner 53 Chairman of the Board of Directors,
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 45 Vice President of Sales
H. Dale Biggs 68 Controller, Chief Financial Officer
(Principal Accounting Officer)
Michael Y. Granger 43 Director
Allan J. Korn 56 Director
Joel Flig 46 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 an audit committee
composed of Messrs. Granger, Korn and Flig. Messrs. Granger, Korn and Flig
receive $750 each per meeting for attending the Board of Directors' meetings and
are reimbursed for out-of-pocket expenses. On April 20, 1998, H. Dale Biggs, the
Company's former Controller/CFO retired and the Company has retained, on a
temporary basis, a Consultant to perform Controllership duties.
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.
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
19
<PAGE>
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.
Joel Flig, a director of the Company since March 1998, has been President
and CEO since November 1987 of Financial Solutions Group, Inc., an investment
banking company, specializing in the placement of senior debt to middle market
companies on a national basis. From 1981, he held the position of First Vice
President for Union Chelsea National Bank. From June 1977, he held the position
of Assistant Treasurer for Republic National Bank. Mr. Flig earned a Bachelors
of Business Administration from Bernard Baruch College of the City of New York
and an M.B.A. degree in Finance from St. John's University.
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, 1999
and for each of the two fiscal years ended February 28, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term
------------------- 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 1999 $169,254(1) $ 0 $ 0 312,502(3) $ -- (4)
Chairman, Chief Executive 1998 275,581(1) $ 0 $ 7,543(2) 447,000(3) $ -- (4)
Officer, Treasurer, Director
Joseph Barbrie 1999 78,790 $ 0 0 40,000(5) 0
Vice President of Sales 1998 104,050 $ 0 0 40,000(5) 0
Wm. Samuel Veazey (5) 1999 20,971 $ 0 0 0 0
Vice President of Finance 1998 102,711 $ 0 0 40,000(5) 0
and Administration
- ----------
(1) Includes salaries and an automobile and insurance allowance. See "-
Employment Agreements."
(2) Represents an unpaid vacation accrual in Fiscal 1998.
(3) Includes options to purchase an aggregate of 759,502 shares at prices
ranging from $.59 to $13.50 per share exercisable through various dates
until July 26, 2005. See Item 12 "Certain Relationships and Related
Transactions."
20
</TABLE>
<PAGE>
(4) 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.
(5) 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 at $1.25 per share at any time until June
5, 2004.
Option Grants in Last Fiscal Year
The following table provides information on option grants during the year
ended February 28, 1999 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 100,000 38.5% $1.47 July 26, 2005
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, 1999. No shares of
Common Stock were acquired upon exercise of options during the fiscal year ended
February 28, 1999.
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 797,000 133,335 $1,344,425 $ 0
Joseph Barbrie 30,418 20,000 2,500 2,500
(1) The closing price of the Common Stock on February 28, 1999 as reported by
NASDAQ was $1.62.
Employment Agreements
On April 8, 1996, the Company entered into an Employment Agreement through
February 28, 2003 ("Agreement") with Mr. Reiner replacing the April 22, 1994,
and as subsequently amended, employment agreement which replaced the September
29, 1993 employment agreement. The Agreement provides for a base salary of
$239,500 per year, (with annual increases based upon the greater of 4% or the
Producer Price Index for Surgical and Medical Instruments and Apparatus
published by the U.S. Department of Labor), 50% of the Management Bonus,
$500,000 whole life and $1,000,000 term life insurance policies to be owned by
Mr. Reiner, an automobile allowance and significant termination payments to Mr.
Reiner 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 which excludes
Depreciation and Acquisition charges during the term of the Agreement as
follows:
21
<PAGE>
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 Mr. Reiner's April 8, 1996 Employment
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 canceled 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.
On July 17, 1998, the Company amended Mr. Reiner's Employment Agreement. Mr.
Reiner agreed to a temporary reduction of his base salary from $175,000 to
$125,000 per year and Mr. Reiner further agreed to continue to lending sums to
the Company to cover its working capital needs. As a consideration, the Company
agreed to provide additional incentives for Mr. Reiner to continue his
performance , to increase the sales and increase levels of the company and the
share price of the Common Stock by adopting an Option and Bonus Performance Plan
pursuant to which Mr. Reiner's salary would be increased upon the Company's
reaching certain levels of annual net sales, and provide for the extension of
Mr. Reiner's existing Employment Agreement for a period of seven (7) years from
the date hereof, in the event the Company has net sales for any fiscal year in
excess of $10,000,000. See Item 12 "Certain Relationships and Related
Transactions."
Stock Option Plan and Stock Option Grants
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
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.
22
<PAGE>
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 9, 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 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
and to Messrs. Barbrie, Veazey, Granger and Korn options to purchase 20,000,
20,000, 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-cancelable 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 July 27, 1998, Mr. Reiner's provided assistance respecting certain of
the Company's cash flow problems. Mr. Reiner accepted a temporary reduction in
cash payment of his salary and reduced his Employment Agreement by $50,000 per
annum and it may continue until such time as cash flow of the Company improve
and/or Mr. Reiner elects to terminate such arrangement. As a consideration for
Mr. Reiner reducing his salary, the Company issued to Mr. Reiner options to
purchase 100,000 shares of the Common Stock at $1.47 per share at any time until
July 26, 2005.
23
<PAGE>
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, 1999. Excluding Charles C. Johnston and
Affiliates, none of the named individuals or any other executive officers own
any shares of 1992 Preferred Stock or Series A Preferred Stock nor does any
person own beneficially 5% or more of the outstanding shares of 1992 or Series A
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 Series A 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 425, Pleasanton,
California 94566. The table reflects all shares of Common Stock which each
individual has the right to acquire within 60 days from the date hereof upon
exercise of options, warrants, rights or other conversion privileges or similar
obligations.
Number Percent
of Shares of of Class of
Common Common
Name Stock Owned Stock Owned
---- ----------- -----------
Thomas F. Reiner (1) 2,704,964 56.9%
Joseph Barbrie (2) 50,418 2.6%
Joel Flig (3) 10,000 0.4%
Michael Y. Granger (4) 13,334 0.7%
Allan J. Korn (4) 12,501 0.7%
Charles C. Johnston and Affiliates (5) 1,432,289 6.7%
All officers and directors as a group
(five persons) (6) 2,791,217 61.3%
(1)Includes shares and (i) 759,502 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) 652,917 shares and
options to purchase shares currently owned by Mr. Reiner's daughter; (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; and (v) 250,000 shares of common stock issuable upon
exercising of options at $1.10 per share at any time until March 9, 2006. 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.
(3) Includes 10,000 shares of common stock issuable upon exercise of options to
Messr. Flig.
(4) 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.
(5) 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, 39,938 Preferred shares, (or converted as 179,721 common shares)
and 150,000 shares at $0.75 at any time until August 3, 2001.
(6) Includes an aggregate of 2,791,217 shares of Common Stock issuable upon
exercise of currently exercisable options.
24
<PAGE>
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 three
outside directors. Mr. Reiner is the Company's Chairman, Chief Executive Officer
and President.
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.
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 canceled 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; (iv) the Company's net sales
exceeding $2.5 million during any fiscal year through May 2004; or (v) options
and bonus performance.
On March 19, 1997, the Company repaid $575,000 against the amount of
$740,000 in principal and accrued interest owing under the $600,000 promissory
note issued to Halstead. This amount was required to be paid by the Company upon
the Company's negotiated settlement with Tecnol, the settlement resulted in
Tecnol paying the Company $575,000. On that same date, the Company issued
Halstead a promissory note in the principal amount of $165,000 bearing 12%
interest per annum due December 1997. The $165,000 promissory note represents
the remaining principal amount owed of $25,000 plus the $140,000 in accrued
interest under the $600,000 note. Subsequently, Halstead converted the debt into
Series AA Preferred Stock.
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. Subsequently, J & C
Resources converted the debt into Series AA Preferred Stock.
25
<PAGE>
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 May 31, 1997, Mr. Reiner, provided the Company with a Working Capital
Credit Facility of up to $200,000 (which was subsequently amended 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 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 January 15, 1998, in consideration for Mr. Reiner's efforts in
successfully negotiating long-term non-cancelable 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 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
canceled 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
26
<PAGE>
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.
On June 11, 1998, subject to the terms and conditions of May 31, 1997
Working Capital Credit Facility ("WCCF"), Mr. Reiner agreed to increase the WCCF
up to $500,000 and on June 3, 1999, Mr. Reiner increased the credit facility to
$750,000. As of June 9, 1999, the amount due to Mr. Reiner under the WCCF was
approximately $509,000.
On July 30, 1998, J & C Resources ("J & C") agreed to convert the amount of
indebtedness owing to it from the company in the amount of $751,300 into shares
of common stock, $0.02 par value, at a conversion price of $0.75 per share. The
conversion resulted in J & C being issued 1,001,733 shares of the Company's
common stock.
On February 12, 1999, CCJ Trust ("CCJ") agreed to convert the amount of
indebtedness owing to it from the Company in the amount of $159,750 (which
consists of principal and accrued interest) into 39,938 shares of Series AA
Preferred Stock. The Series AA Preferred Stock yields a 7% per annum
non-cumulative dividend payable semi-annually in the form of additional shares
of common stock, $0.02 par value, or cash at the Company's option. The Series AA
Preferred Stock features redemption and conversion rights during the two year
period following the increase of shares.
On March 8, 1999, the Company signed a non-binding letter of intent to
purchase all of the outstanding common stock of a company which provides home
care medical equipment, respiratory and related supplies. Based in Stockton,
California, the home medical equipment company is privately held which for its
most recent fiscal year ended October 31, 1998, recorded net sales of
approximately $31 million. The letter of intent provides for a purchase price of
approximately $24 million consisting of cash, note and stock and also calls for
Sparta to issue earn-out shares to the principals on meeting certain net sales
and EBITDA goals. The non-binding letter of intent is subject to several
conditions, including approval by Sparta's Board of Directors, the determination
by Sparta, satisfactory results of its due diligence investigation of the
business and assets, and completion of financing.
On March 4, 1999, the Company signed a non-binding letter of intent to
purchase all or substantially all of the assets of ICS of North America, Inc.
The letter of intent provides for a combination of cash, note and stocks in the
approximate amount of $5,000,000. The Closing of the acquisition is subject to
several conditions including approval by Sparta's Board of Directors, the
determination by Sparta that the results of its due diligence investigation of
ICS's business are satisfactory and Sparta's financing. ICS recorded $5.0
million in revenue sales in 1998. ICS manufactures and markets a full line of
intra-oral camera imaging system equipment for the dental market.
On March 10, 1999, in connection with the acquisition of Western Medical
Services, Inc. and locating a company substantially higher in levels of sales
($50 million), the Company has issued Mr. Reiner options to purchase 250,000
shares of its common stock at $1.10 per share until March 9, 2006 and a cash
bonus of $75,000 in the event the Company completes its acquisition of Western
Medical Services, Inc. On May 15, 1999, Sparta Western Medical, Inc., a wholly
subsidiary of Sparta Surgical Corporation, signed a binding Asset Purchase
Agreement to acquire substantially all of the tangible assets, goodwill and
business operations of Western Medical Services, Inc., a home health care
staffing provider for its most recent fiscal year ended 1998 recorded revenues
in excess of $50 million. Subject to certain conditions, the Company anticipates
the transaction will be completed in the beginning of the second quarter of the
fiscal year ending August 30, 1999. The purchase price is $4.5 million, which
consists of (i) $3,250,000, payable under an installment note at an interest
rate of 7% per annum, (ii) $1,250,000 payable in the form of a 3 year note.
27
<PAGE>
On June 8, 1999, the Company purchased all of the outstanding common stock
of Olsen Electrosurgical, Inc., a privately held company that manufactures and
markets electrosurgical devices and accessories. The agreement provides for
Sparta to issue four hundred thousand (400,000) shares of common stock $0.02 par
value in exchange for all of the Olsen's outstanding shares of common stock.
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.
28
<PAGE>
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.
(10) Incorporated by reference to the Registrant's Form 8-K dated February 25,
1998.
b. Reports on Form 8-K:
The Registrant filed a Form 8-K dated July 30, 1998 whereby J & C Resources
agreed to convert certain indebtedness owing to it from the Company's into
common stock.
The Registrant filed a Form 8-K agreed to covert certain indebtedness owing
to it from the Company into Series AA Preferred Stock which features
registration and conversion rights following the issuance of shares.
The Registrant filed a Form 8-K regarding the execution of a Definitive
Agreement (subject to certain conditions) to acquire substantially all of
the assets of Western Medical Services, Inc.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Pleasanton, California, on June 9, 1999.
SPARTA SURGICAL CORPORATION
By: /s/ Thomas F. Reiner
--------------------
Thomas F. Reiner
Chairman of the Board
President & CEO
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
--------- ----- ----
/s/ Thomas F. Reiner Chairman of the June 9, 1999
- ------------------------------ Board of Directors,
Thomas F. Reiner Chief Executive Officer,
President, Treasurer,
(Principal Executive/Finance
and Accounting Officer),
and Director
/s/ Joseph Barbrie Vice President of June 9, 1999
- ------------------------------ Sales
Joseph Barbrie
/s/ Michael Y. Granger Director June 9, 1999
- ------------------------------
Michael Y. Granger
/s/ Allan J. Korn Director June 9, 1999
- ------------------------------
Allan J. Korn
/s/ Joel Flig Director June 9, 1999
- ------------------------------
Joel Flig
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<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
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<SECURITIES> 0
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