SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended February 29, 2000 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.)
2100 Meridian Park Blvd.
Concord, California 94520
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (925) 825-8151
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 $3,077,000.
As of June 7, 2000, 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 $8,573,000 based upon closing prices on
NASDAQ's OTC Bulletin Board of $1.125 per share of $.002 Par Value Common Stock
and $.38 per share of $4.00 Par Value Redeemable Convertible Preferred Stock.
As of June 7, 2000, 7,593,296 shares of the Registrant's Common Stock,
82,783 shares of Redeemable Convertible Preferred Stock and 28,068 shares of
Series A Convertible Redeemable Preferred Stock were outstanding.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
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PART 1
Cautionary Note Regarding Forward-Looking Statements
This Form 10-KSB contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning our business,
operations and fiscal condition. All statements, other than statements of
historical facts included in this Form 10-KSB regarding our strategy, future
operations, timetables for product testing, financial position, costs,
prospects, plans and objectives of management are forward-looking statements.
When used in this Form 10-KSB, the words "expect", "anticipate", "intend",
"plan", "believe", "seek", "estimate", and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially from
those expressed or implied by these forward-looking statements for a number of
important reasons, including those discussed under "Factors Affecting Future
Operating Results", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this Form 10-KSB.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. You should be aware that the occurrence of any of
the events described in the risk factors and elsewhere in this Form 10-KSB could
substantially harm our business, results of operations and financial condition
and that upon these occurrence of any of the events, the trading price of our
common stock could decline. We cannot guarantee any future results, levels of
activity, performance or achievements. Except as required by law, we undertake
no obligation to update any of the forward-looking statements in this Form
10-KSB after the date of this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
--------------------------------
Introduction
Sparta Surgical Corporation (the "Company") researches, develops,
manufactures and markets surgical and medical devices, including reusable and
single-use electrosurgical and microsurgical instruments and accessories,
craniofacial implants, critical care hospital disposables and non-invasive
electrotherapy medical equipment and supplies to the healthcare industry
worldwide.
Our business operations began in July 1987 with the acquisition of Sparta
Instrument Corporation. Since that time, our business has been primarily built
and expanded by means of additional acquisitions of companies and products that
compliment or expand our existing product lines. Our principal offices are
located at 2100 Meridian Park Blvd., Concord, California. Our telephone number
is (925) 825-8151 and fax number is (925) 417-2243.
Products
Our products consist of surgical and medical devices and electrotherapy
equipment and supplies:
(i) Reusable and single use electrosurgical instruments and accessories. We
manufacture and market a full line of reusable and single use electrosurgical
instruments, biopolar and monopolor forceps, cables and adaptors, smoke
evacuator tubes, laparoscopic and arthroscopic electrodes, and switch pens used
in connection with tissue cutting and cauterization during various surgical
procedures.
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(ii) Microsurgical hand held instruments and accessories. We manufacture
and market 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.
(iii) Critical care hospital disposable products. We manufacture and market
proprietary and patented critical care 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 and Intravenous Tube sets for IV and Anesthesia
procedures; and (iv) Nasostats(TM), sterile, nasal latex balloons used to
control severe nose bleeding.
(iv) Craniofacial Implant Plating Systems. We market a craniofacial implant
titanium plating system which consists of titanium plates, screws and
instruments to repair bone fractures in the face and head by holding fracture
ends in alignment while bone healing takes place.
(v)Electrotherapy Medical Equipment and accessories. We market patented and
proprietary Transcutaneous Electrical Nerve Stimulators (TENS), reusable and
disposable electrodes and related supplies. The TENS 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. Our pain management TENS units
include the patented Spectrum Max-SD, our most advanced patented unit for acute
and chronic pain management; and Spectrum II, our least expensive TENS unit. We
also market both disposable and reusable electrodes and related accessories. The
electrotherapy medical equipment 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.
Acquisitions, Asset Purchases and Dispositions
Since inception, a principal element of our development has been the
acquisition of companies and product lines that complement the existing business
strategy. Sparta Instrument Corporation, acquired by us 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 us 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 us in 1989,
developed, manufactured and distributed specialty acute and chronic wound care
dressings. David Simmonds Company, Inc., also acquired by us 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 durable medical equipment
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. Olsen
Electrosurgical Inc., a researcher, developer, manufacturer and marketer of
reusable and disposable electrosurgical instruments and accessories, was
purchased in 1999.
In 1995, we sold our 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 us. In addition to
wound care inventory, equipment and other assets, the operations in Hammonton,
New Jersey were included in the sale. We 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.
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Business Strategy
We seek growth through internal expansion and continued acquisitions of
companies or products that complement or expand our existing product lines to
the home health care market. We intend to continue to enter small specialty
niche markets that are served by relatively few competitors. We will also
continue efforts to develop products in collaboration with established medical
device companies on an OEM/private label basis while researching and developing
our own products.
We intend to expand our distribution networks by appointing other specialty
surgical dealers to promote and market our products to hospitals, physicians and
clinics. The expansion of our 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 our electromedical equipment and supplies, we intend to
continue to sell directly to dealers, rather than end users, and to introduce
improved products consistent with the results of its research and development
programs.
Sales and Marketing
We offer our products through a network of surgical and medical, 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
our 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, we market our products under various OEM manufacturing arrangements.
Our 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 our products
that include Baxter Healthcare Corp., Abbey Medical, Inc., General Medical
Corp., Allegiance Healthcare Inc., Genzyme, Inc., Owens and Minor, Inc., DeRoyal
Industries, Inc., Alabama Microsurgical Instruments, Salvin Dental Co., McKesson
General Medical, Dong-Jin International Co., Goodman Medical Supplies and Hoxan
Co. Through our various distributors and representatives, our products are
marketed to private and government hospitals, rehabilitation facilities,
clinics, physicians, and occupational and physical therapists.
Manufacturing and Distribution
We research, design, manufacture and distribute our disposable and reusable
electrosurgical instruments and accessories in its 22,425 sq. ft. FDA registered
medical device facility in Concord, California. Our microsurgical hand held
instruments, oral maxillofacial implant plating systems, critical care hospital
disposables and electromedical equipment and accessories are purchased,
inspected, packaged and distributed from our facility. Microsurgical hand-held
instruments and oral maxillofacial implant plating systems are manufactured in
Germany, Switzerland and the United States to our specifications. The
electrotherapy equipment and accessories are manufactured domestically to our
specifications under various manufacturing arrangements.
We have experienced difficulty from time to time in obtaining some of our
products, and there can be no assurance that our current or alternative sources
will be able to meet our needs on a timely basis. Although some products are
currently available from multiple sources, at present we obtain approximately
50% of the products we sells from single sources. A lack of availability from
current suppliers could cause distribution delays, increased cost to us and a
decrease in levels of sales. In addition, reliance on these suppliers could
adversely affect our quality control efforts and our ability to control delivery
schedules.
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We are required to carry significant amounts of inventory to meet rapid
delivery requirements. These inventory requirements in turn require us to
maintain credit financing sufficient to fund the purchase of inventory. We have
experienced difficulty from time to time in obtaining some of our products due
to the lack of working capital. No assurance can be given that we will be able
to obtain the necessary working capital to fund the purchase of inventory. All
products manufactured for us are subject to demanding specifications and
processes in order to comply with the United States Food and Drug
Administration's ("FDA") guidelines under Good Manufacturing Practices (GMP).
Product Liability
We carry product liability insurance of $1,000,000 per occurrence. Like
most producers of surgical and electrotherapy products, we face the risk of
product liability claims and unfavorable publicity in the event that the use of
our products causes injury. Although we believe this coverage to be adequate,
there can be no assurance that such insurance will be sufficient to protect us
from all risks to which it may be subject or exposed. To date, we have not been
the subject of any product liability claims.
Competition
The health care products industry is intensely competitive, and many of our
competitors have financial, marketing and other resources substantially greater
than we do. Some of our 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 we compete,
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, Baxter Healthcare, Storz, division of Bausch and Lomb,
Valley Lab, Empi, Teleflex Healthcare, Howmedica, Allegiance Healthcare and
ConMed.
In the surgical specialty market for electrosurgical instruments and
accessories products, we compete with Valley Lab and Commed. In the
microsurgical hand held instruments, we compete with Storz Instrument Company,
TFX Surgical and Katena Products, Inc.. In the critical care hospital disposable
products market, our competitors include Baxter Healthcare Corp., Johnson &
Johnson Patient Care, Inc., Abbott Laboratories, Inc., Patterson Dental Co. and
Allegiance Healthcare as well as other smaller competitors. In the
cranio-maxillofacial plating systems market, we compete with Howmedica, Inc.,
Synthes U.S.A. and Walter Lorenz Surgical Instruments as well as other smaller
competitors. In the durable medical equipment and accessories market, we compete
with numerous companies including Empi, Inc. and Rehabicare, Inc., the market
leaders in the medical equipment rehabilitation industry.
The electrotherapy medical equipment 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 we 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 can not be predicted at this time, but if adopted and
implemented, they could have a material adverse effect on our business,
operating results and financial condition.
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Competitive factors for electrosurgical instruments, microsurgical hand
held instruments, critical care hospital disposables and craniofacial 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.
Our market share in each of our product lines is negligible. There can be no
assurance that we will be able to compete effectively.
Patents and Trademarks
We sell our products under a variety of trademarks, some of which we have
registered in the United States and various foreign countries. We currently hold
two patents granted by the United States Patent Office relating to our TENS
units obtained through the acquisition of MDI. Notwithstanding the trademarks
and patents held by us, there can be no assurance that competitors will not
develop similar trademarks outside our trademark protection or functionally
similar products outside our patent protection.
There also can be no assurance that any patents issued to or licensed by us
will not be infringed upon or designed around by others, that others will not
obtain patents that we will need to license or design around, that our patents
will not inadvertently infringe upon the patents of others, or that others will
not use our 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 we
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 we will rely, cannot be predicted with
any certainty.
Government Regulation
We are registered with the FDA as a Class I and Class II (devices invading
the body) medical device establishment. Our office and manufacturing facility in
Concord, California are subject to various state and local regulations such as
zoning requirements, health and fire codes and the like. All of our 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, we are required to file
with the FDA a new device description and obtain FDA approval for any new
medical device which we propose 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 is mandated by 21 CFR Part 820.
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 to us. We believe that we have obtained all applicable government and
regulatory approvals for our existing products, facilities and processes and
expect that all of our current licenses will be renewed on a regular basis.
There can be no assurance that we will continue to be in compliance with all
current regulations or that we will be able to comply with all future
regulations.
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Employees
In addition to our three executive officers, as of June 9, 2000, we had
twenty-seven full-time employees including eighteen employees involved in
manufacturing and distribution; four in sales and marketing; two in engineering
and six administrative. We believe that our relations with our employees are
satisfactory. Our employees are not represented by any organized labor union and
are not covered by any collective bargaining agreements. Our performance is
substantially dependent on the performance of our executive officers and key
employees.
Our ability to provide and market our medical devices, will depend, in
large part, upon our ability to attract, hire and retain qualified personnel.
Competition for such personnel is intense, and there can be no assurance that we
will be able to attract and retain such personnel. In particular, the services
of Thomas F. Reiner our Chairman, President and CEO would be difficult to
replace. We have entered into a long-term 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.
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------
We lease our corporate and manufacturing facility in Concord, California.
We believe the facilities are adequate for our needs in the foreseeable future
and that additional space will be available at reasonable rates when required.
The following table sets forth certain information concerning our facility:
Square Expiration of Monthly
Location Footage Current Lease Rental
-------- ------- ------------- ------
Concord, CA 14,197 07/31/04 $14,197
Concord, CA 4,349 07/31/04 $7,395
Concord, CA 3,879 07/31/04 $3,879
ITEM 3. LEGAL PROCEEDINGS
--------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------
Our Common Stock has traded on the NASDAQ SmallCap Market under the symbol
"SPSG" since January 31, 1991. On May 1, 1998, NASDAQ delisted our securities
from the NASDAQ SmallCap Market. Trading in our securities is currently being
conducted in the NASDAQ OTC Bulletin Board which could substantially reduce the
markets for our securities.
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The following table sets forth for the quarters indicating the range of
high and low closing prices of our Common Stock, as reported by NASDAQ, but such
prices do not include retail markup, markdown or commissions.
Price
---------------------
By Quarter Ended: High Low
---------------- ---- ---
Fiscal 2001
May 31, 2000 $3.00 $1.01
August 31, 2000 1.13 1.01
(through June 7, 2000)
Fiscal 2000
May 31, 1999 2.47 0.91
August 31, 1999 2.38 1.63
November 30, 1999 1.75 0.97
February 29, 2000 1.75 0.91
As of June 7, 2000, we estimate we had approximately 500 shareholders of
record. The trading price of our Common Stock fluctuates substantially in
response to factors such as but not limited to announcements by our competitors
of technological innovations or new products changes in securities, analyst's
recommendations, or other events or factors, many of which are beyond our
control. In addition, the stock market in general has experienced extreme price
and volume fluctuations in recent years and even in recent months that have
particularly affected the market prices of many medical companies such as ours.
In the past, following periods of volatility for a company's securities,
securities class action litigation often has been instituted. Such litigation
could result in substantial costs and a division of management attention and
resources, which could have a material adverse effect on our business, financial
marketer and operating results.
As of June 7, 2000, our authorized capital stock 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, except that so long as any 1992 Preferred
Stock or Series A Preferred Stock is outstanding, we 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 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 7, 2000 there were 7,593,296 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 our contractual
restrictions against the payment of dividends on Common Stock. In the event of
liquidation or dissolution of us, 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.
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A Special Meeting of the Shareholders of our Company will be held on June
16, 2000, or at any adjournment or postponement thereof for the following
purposes: (i) to amend our Company's Certificate of Incorporation in order to
increase its authorized number of shares of our Common Stock from 8,000,000
shares to 25,000,000 shares, (ii) to transact such other business as may
properly come before the meeting. If the proposal to increase the authorized
shares of Common Stock is approved, our Company will have approximately
12,999,366 shares not reserved for any specific use and would be available for
future issuance. We anticipate that additional shares may be needed in
connection with our business needs, opportunities to raise capital and potential
acquisition activities.
Series A Convertible Preferred Stock
We 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, 2000 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 our 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 we do not have at least $500,000 of cash or cash
equivalents indicated on our balance sheet on the last day of any fiscal
quarter, we 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 our option, 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 our stock transfer books. 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.
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 our 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.
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Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the business, 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 our 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 our 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 82,783 shares of 1992 Preferred
Stock (representing $331,132 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 us or any entity controlled by us, which shares shall have no
voting rights.
Redeemable Convertible Preferred Stock
At June 7, 2000 there were 82,783 shares of $4.00 par value Redeemable
Convertible Preferred Stock ("1992 Preferred Stock") outstanding convertible
into 27,594 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 we attain 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 our
fiscal year. The dividends are payable in cash for each fiscal year in which we
have 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 our election. 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 are 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 our Board of Directors. 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. We 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,
February 28, 1998 and February 28, 1999. We do not anticipate we will pay a
dividend for the fiscal year ended February 29, 2000.
Redemption. We 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. We 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 our Common Stock. 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 we have a current
registration statement on file with the Commission covering the underlying
shares at the time of conversion.
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Liquidation Preference. Upon any liquidation, dissolution or winding-up of
the business, whether voluntary or involuntary, the 1992 Preferred Stock has
preference and priority over the Common Stock and any other class or series of
stock ranking junior to the 1992 Preferred Stock for payment out of the assets
of the business 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 our 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.
Series AA Convertible Redeemable Preferred Stock
At June 7, 2000 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 our sole discretion,
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:
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(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").
(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 our option.
(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.
(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 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 $10.00 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 business or a merger or consolidation of
the business, or the sale, mortgage, pledge, exchange, transfer or other
disposition of all or substantially all of our 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.
Stock Transfer and Warrant Agent
We use American Stock Transfer and Trust Company, 40 Wall Street, New York,
New York, as the stock transfer and warrant agent for its securities.
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Dividend Policy
We have never paid cash dividends on our Common Stock and intend to retain
earnings, if any, for use in the operation and expansion of our business. The
amount of future dividends, if any, will be determined by the Board of Directors
based upon our earnings, financial condition, capital requirements and other
conditions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
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 our periodic reports filed with the Securities and Exchange
Commission, including our 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. We disclaim any intent or obligation to update these
forward-looking statements.
We are engaged in the development and manufacturing of electrosurgical and
microsurgical instruments and accessories and electromedical equipment and
supplies, utilizing proprietary technologies to satisfy unmet medical needs
costs effectively. Our results of operations vary significantly from year to
year and from quarter to quarter, and in the past have depended on, among other
factors, developing new products, demand for our products and significantly
depend on availability of materials from our suppliers and dependence on our
customers including hospital, physicians, medical distributors and OEM accounts.
We have incurred net losses past years and can't assure future profitability. At
February 29, 2000 our accumulated deficit was approximately $12,142,000.
Year Ended February 29, 2000 as compared to Year Ended February 28, 1999
Net sales for the year ended February 29, 2000 ("Fiscal 2000") were
$3,077,000, an increase of $1,093,000, or 55.1% from net sales of $1,984,000 for
Fiscal 1999. The increase in net sales during Fiscal 2000 as compared to Fiscal
1999 is the result of (i) the acquisition of the Olsen Electrosurgical business
which offset declines in other product lines (ii) cross channel distribution of
the Sparta surgical and medical devices to a larger distribution network
acquired with the Olsen business, (iii) securing ISO 9001 certification for
Quality Systems Regulations under the FDA's Good Manufacturing Practices (GMP).
We intend to continue to concentrate our efforts on increasing our level of
sales to achieve profitable operations. In addition, we intend to consider
growth through selective strategic acquisitions in complementary lines of
business.
Gross profit was $1,487,000 or 48% of net sales for Fiscal 2000 as compared
to $956,000, also 48% of net sales for Fiscal 1999. The increase in gross profit
is primarily due to higher sales as a result of the acquisition of Olsen
Electrosurgical.
Selling, general and administrative ("SG&A") expenses for Fiscal 2000 were
$1,663,00, a $736,000 increase from SG&A expenses of $927,000 for Fiscal 1999.
The increase in SG&A expenses for Fiscal 2000 as compared to Fiscal 1999 is
primarily due to non-recurring expenses of approximately $405,000, including,
(i) expenses of approximately $150,000 for legal, accounting and consulting fees
incurred in connection with due diligence of acquisition targets which were
abandoned during the fiscal year, (ii) expenses of approximately $120,000 in
connection with the integration of Olsen Electrosurgical business within Sparta,
including consulting fees and expenses paid to the former owners of Olsen
Electrosurgical. (iii) expenses of approximately $85,000 in connection with the
consolidation of the corporate headquarters and lease termination of the
Pleasanton facilities, and in connection with organization restructuring and
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personnel reduction, and (iv) expenses of approximately $50,000, associated with
securing regulatory approval for ISO 9001 Certification and obtaining CE Mark
approval, which is required for certain Electrosurgical products to be sold in
European markets. In addition, there was a non-recurring expense of $120,000
relating to the disposition of liabilities in connection with the purchase of
the Storz oral maxillofacial business in 1994.
Research, Development, and Engineering expenses were $142,000 for Fiscal
2000 versus no expenditures in Fiscal 1999. We refocused our effort in the
development of our products. We completed the development of a Manually
Extendable Electrical Surgical Apparatus, a patented electrosurgical device for
use in cutting tissue and cauterization procedures. The Company has been
appointed by Hemitek, LLC to a 10 year exclusive license to manufacture and
market this device worldwide. We began to develop our business-to-business
website technology, SpartaE*Med.com to further increase our distribution
channels for our surgical and medical devices.
Depreciation and amortization ("D&A") expenses for Fiscal 2000 were
$281,000, an increase of $83,000, or 42% over $198,000 for Fiscal 1999. The
increase in D & A is primarily due to the assets acquired in the Olsen purchase,
including goodwill, non-compete agreements and other fixed assets.
Debt issuance costs for Fiscal 2000 were $1,310,000 versus $217,000 in
Fiscal 1999. In Fiscal 2000, we incurred these debt issuance costs in connection
with certain loans made as part of our private placement, which resulted in
1,380,337 shares of common stock issued to various private investors for making
these loans.
As a result of the foregoing, the net loss for Fiscal 2000 was $2,308,000,
an increase of $1,964,000, from a net loss of $344,000 for Fiscal 1999.
Approximately $405,000 of the net loss is due to the increase in non-recurring
expenses in SG&A and approximately $1,310,000 is due to debt issue costs
relating to the completion of the approximately $2,500,000 private placement.
Basic and diluted loss per share were $0.79 for Fiscal 2000 as compared to
$0.28 for Fiscal 1999. The basic and diluted loss per share computations reflect
$42,000 paid and accrued dividends on the Series A Convertible Preferred Stock
paid on March 31, 1999 and 2000.
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 17.3% 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.
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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 sales
promotions, 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 a net loss of $1,858,000 for Fiscal 1998.
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
dividends on the Series A Convertible Preferred Stock paid on March 31, 1998 and
1999.
Risk Factors Affecting Future Operating Results
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Form 10-KSB, or presented elsewhere by management from time to time. We
wish to caution stockholders and investors that the following important factors,
among others, in some cases have affected, and in the future could affect, our
actual results and could cause our actual results to differ materially from
those expressed in any forward looking statements made by us. The statements
under this caption are intended to serve as cautionary statements within the
scope of the Private Securities Litigation Reformation Act of 1995. The
following information is not intended to limit in any way the characterization
of other statements or information under other captions as cautionary statements
for such purpose. There can be no assurance that our Company (i) can predict the
market acceptance of our products, (ii) will not face intense competition, (iii)
will be able to obtain patent protection for our products and preserve our trade
secrets; (iv) will continue the operations, as we may need additional financing
and such financing may not be available as we are highly leveraged and may be
unable to service our debt; and (v) will be successful because we are subject to
stringent and continuing applicable federal regulations and may be subject to
product liability claims; (vi) will be able to retain or hire key personnel.
We 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 we have encountered with previous
acquisitions. Future acquisitions by us 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 our business, operating results
and financial condition.
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In recent years we have has experienced losses from operations and continue
to suffer from a deficiency in available working capital. In fiscal 2000, we
believe that we substantially improved our sales and gross profits, principally
as a result of the acquisition of the electrosurgical business and the
completion of equity financing of approximately $2.5 million through the
combined conversion of debt to shares of Common Stock and the sale of Common
Stock in the amount of $1,263,125. 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. We may need to
raise additional funds in order to implement the business plan, to find more
aggressive marketing programs or to acquire complementary businesses,
technologies or services. Any required additional funding may be unavailable on
terms satisfactory to us, or at all if we raise additional funds by issuing
equity securities, we may experience significant dilution and such securities
may have rights senior to those of the holders of common stock. In addition, we
provide no assurance if our Common Stock is delisted from trading or is
ineligible for quotation due to changes in NASD listing requirements or if we
fail to comply with any rules and regulations pursuant to NASD Rule 6530.
Our ability to meet our planned growth will require substantial cash
resources. The timing and amount of future capital requirements may vary
significantly depending on numerous factors including regulatory, technical,
competitive and other development in the healthcare industry. The planned
expansion of our operations will place a significant strain on management,
financial controls, operating system, personnel and other resources. The success
of our products depends on several uncertain events and factors, including: the
effectiveness of our marketing strategy and efforts, our product and service
differentiation and quality, the extent of our network coverage, our ability to
provide timely, effective customer support, our distribution and pricing
strategies, as compared to our competitors, our failure to adequately protect
our proprietary rights may harm our competitive position, our industry
reputation and general economic conditions such as downturns in the healthcare
markets.
Liquidity and Capital Resources
Since inception, our primary sources of working capital have been revenues
from operations, bank and private party loans and proceeds from the sale of
securities. As of February 29, 2000, we had federal and state net operating loss
carry forwards of approximately $10,200,000. Our net operating loss carry
forwards, if not utilized, will expire at various dates through the year 2019.
Our working capital at February 29, 2000 was $1,633,000 as compared to
$1,313,000 at February 29, 1999, an increase of $320,000 due to the higher level
of sales, receivable and inventory activity.
Mr. Reiner has provided us a Working Capital Credit Facility of up to
$750,000, bearing 12% interest per annum. The advances and accrued interest made
under the Working Capital Credit Facility are due the earlier of (i) June 2001;
(ii) upon the closing of a minimum of $1,000,000 equity or debt financing by us;
or (iii) upon default. In addition, Mr. Reiner has the option to convert all
amounts under the Working Capital Credit Facility into our 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, 2000, the amount due to Mr.
Reiner under the Working Capital Credit Facility was approximately $488,800. See
Item 12 "Certain Relationships and Related Transactions."
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On March 20, 2000, Banc of America Commercial provided us with a 24-month
Revolving Line of Credit of up to $2,500,000 (the "Loan"). We agreed to pay Banc
of America Commercial interest on the average outstanding principal amount of
the Loan at a per annum rate of prime plus 3%. The Loan is advanced to us based
on a percentage of eligible assets and is secured by a first position security
interest on all of our assets. In addition, $250,000 of the Loan is personally
guaranteed by Mr. Reiner. As of June 7, 2000, the outstanding balance on the
Loan was $1,590,000 and approximately $100,000 in credit was available. The Loan
is being used to provide working capital for current operations. In connection
with the financing, we issued Banc of America Commercial a warrant to purchase
up to 10,000 shares of our Common Stock exercisable at $1.90 per share at any
time until March 20, 2003.
From March 1999 through April 2000, we have significantly improved our
balance sheet by adding approximately $2,630,000 of equity through the combined
conversion of $1,285,000 of debt into shares of Common Stock and the purchase of
Common Stock in the amount of $1,263,125 under the private placement memorandum,
and $181,000 through employee stock option exercises. We incurred expenses of
approximately $365,000 for finder's and consultant fees, and legal and
accounting fees in connection with registration of securities issued under the
private placement memorandum and stock option exercises. This registration
statement registered 3,974,665 shares of Common Stock, was declared effective on
April 21, 2000, and such shares were immediately eligible for sale into the open
market.
On March 4, 1999, we entered into a Consulting Agreement that was
subsequently amended on September 21, 1999. We appointed IGC of New York, Inc.
("IGC") as our financial advisor. In its role as a financial advisor, IGC shall
provide us assistance in connection with securing debt and equity financing,
render advice on mergers and acquisitions and coordinate various meetings with
our market makers and brokers. For providing these services, IGC has been
retained for a monthly consulting fee of $8,000 for 24 months plus a percentage
of the amount raised for senior secured debt, subordinated debt and private
equity in the event IGC has acted as the introducing party to the transaction.
In its role as a financial advisor, we also issued warrants to purchase 400,000
shares of our common stock, $0.002 par value, exercisable at $0.95 per share at
any time until March 3, 2002, and such warrants shall have piggyback
registration rights. In addition, upon the closing and funding of private
placement financing in the gross amount of $7,000,000, IGC shall receive
additional warrants to purchase 500,000 shares of our common stock at an
exercisable price ranging from $0.95 to $1.70 per share. In the event we
complete a secondary public stock offering and IGC was the introducing party
which results in our raising gross proceeds in the amount of $7,000,000, IGC
shall be (i) paid $150,000 at the closing, (ii) issued warrants to purchase
500,000 shares of our common stock at an exercie price of $0.95 per share, (iii)
paid $192,000, payable $8,000 over the twenty-four (24) month period following
the secondary public offering.
On February 12, 1999, CCJ Trust ("CCJ") agreed to convert the amount of
indebtedness owing to it from us 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 our option. The Series AA Preferred Stock features
redemption and conversion rights during the two year period following the
increase of shares.
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
See page F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
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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 our
executive officers and directors for the fiscal year ended February 29, 2000:
Name Age Office
---- --- ------
Thomas F. Reiner 54 Chairman of the Board of Directors,
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 45 Vice President of Sales
John O'Hanlon 43 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 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 and compensation committee composed
of Messrs. Reiner, Granger, Korn and Flig. Messrs. Granger, Korn and Flig, who
are not employees of our company, are paid $750 per meeting attended in person
and $500 per meeting attended by phone as compensation for their services on the
Board of Directors. Our members of the Board of Directors are eligible for
reimbursement of expenses incurred in connection with their services on the
Board. On April 17, 2000, Messrs. Granger, Korn and Flig each were granted
options to purchases 25,000 shares of our Common Stock at an exercise price of
$1.25 expiring April 17, 2004.
The following is a summary of the business experience of each officer and
director:
Thomas F. Reiner Co-founded our company and has 28 years in the healthcare
industry. He has been Chief Executive Officer, President and a director of our
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 holds an MBA 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 brings to our company over 21 years of healthcare industry
expertise and is responsible for our worldwide sales as well as growing our
company's strategic partnerships, direct sales and customer supportfunction.
Mr. Barbrie earned an A.S. degree in Business Management from Johnson & Wales
College.
John F. O'Hanlon, CPA, comes to our company with extensive experience as a
senior finance officer and has been Chief Financial Officer since March 2000. He
was Chief Financial Officer at Genmark Automation from 1996 to 1999, an
Independent Financial Consultant from 1990 to 1996, and Director of Finance for
J. J. Morris from 1984 to 1990. Mr. O'Hanlon earned a MBA degree in 1994 at the
University of Texas in San Antonio, and a B.S. degree in Accounting from
California State University at Hayward.
Michael Y. Granger, a director of our company since June 1991, has been
President of Ark Capital Management, Inc., an independent management consulting
firm since April 1991. From March 1990 to April 1991, he was Vice President and
Portfolio Manager for LINC Capital Management, a large independent health-care
financial services company, where his responsibilities included providing
financing for private health-care companies. Prior to joining LINC, Mr. Granger
was an Investment Manager with Xerox Venture Capital, a $100 million early-stage
venture capital fund, where he was responsible for identifying, selecting and
18
<PAGE>
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 our company since February 1994, is an Adjunct
Professor in the School of Business Administration at Union County College. From
1994 to 1997, he was Vice President of Sales and Marketing with A and Z
Pharmaceutical, 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.
Joel Flig, a director of our 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
our Company in all capacities awarded to, earned by, or paid to the Chief
Executive Officer. No other executive officer received compensation of more than
$100,000 in the fiscal year ended February 29, 2000 or in the fiscal year ended
February 28, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- -------------------------
Other Annual Awards All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
--------------------------- ---- ------ ----- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Reiner 2000 $158,311(1) $20,000 $23,625(2) 850,000(3) $ --
Chairman, Chief Executive 1999 275,581(1) $ 0 $ 7,543(2) 312,500(3) $ --
Officer, Treasurer, Director
</TABLE>
(1) Includes salaries, automobile and insurance allowance. See "- Employment
Agreements."
(2) Represents an unpaid vacation accrual in Fiscal 2000 and 1999.
(3) Includes options to purchase an aggregate of 850,000 shares at prices
ranging from $1.10 to $2.35 per share exercisable through various dates
until February 2, 2007. See Item 12 "Certain Relationships and Related
Transactions."
19
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information on option grants during the year
ended February 29, 2000 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 350,000 31.4% $2.35 June 14, 2006
Thomas F. Reiner 500,000 44.8% $1.10 February 2, 2007
Aggregate Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options at February 29, 2000. No shares of
Common Stock were acquired upon exercise of options during the fiscal year ended
February 29, 2000.
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 1,530,335 0 $56,050 $0
(1) The closing price of the Common Stock on February 29, 2000 as reported by
NASDAQ was $0.906
Employment Agreements
On September 2, 1999, we entered into an Employment Agreement ("Agreement")
through September 2, 2006, and subsequently amended such Agreement on March 2,
2000 with Thomas F. Reiner, our Chairman, President and CEO, which replaced an
April 1996 Agreement with Mr. Reiner. The Agreement provides for a base salary
of $245,000 per year, (with annual increases of 15% of the base salary), 50% of
the Management Bonus, whole life, term life and disability insurance to be owned
by Mr. Reiner, an automobile allowance, reimbursement of accrued interest,
accrued salaries, benefits/tax reimbursement and participation in an options and
bonus performance plan and significant termination payments to Mr. Reiner in the
event the Agreement is canceled for any reason other than cause.
The options and bonus performance plan includes the following:
I. Sales and Share Price Bonus
---------------------------
Base Amounts:
-------------
Net Sales $2.5 Million
Share Price: $1.00
20
<PAGE>
Minimum Net Sales
and Share Price
(as % Increase over Stock Options
Base Amount) Cash Bonus Bonus
------------ ---------- --------------
25% $10,000 100,000 shares
50% $20,000 200,000 shares
75% $30,000 300,000 shares
100% $40,000 400,000 shares
200% $50,000 500,000 shares
300% $60,000 600,000 shares
II. Net Income Bonus
----------------
Minimum Stock Options
Net Income Cash Bonus Bonus
---------- ---------- --------------
$100,000 $10,000 100,000 shares
$200,000 $20,000 200,000 shares
$250,000 $30,000 300,000 shares
$300,000 $40,000 400,000 shares
$350,000 $50,000 500,000 shares
$400,000 $60,000 600,000 shares
Stock Option Plan and Stock Option Grants
In 1987, we adopted our 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 our employees, while non-qualified options may be issued to
non-employee directors, consultants and others, as well as to our employees. In
January 1994, our 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 and subsequently was extended to July 1,
2007. The Plan is 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 our stock 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 provision.
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.
21
<PAGE>
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 our 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 our Company become
available once again for issuance. As of May 30, 2000, options to purchase
250,000 shares have been granted under the Plan. On April 24, 2000, under the
1987 Employee Stock Option Plan, a total of 220,000 options were exercised
having a total exercise value of $180,750.
Compensation Committee
During the fiscal year 2000, our Compensation Committee ("Committee") was
comprised of Mr. Reiner, Granger, Mr. Flig and Mr. Korn. The Committee is
responsible for setting and conducting our company's policies governing annual
executive salaries, bonuses (if any) and stock ownership programs. The Committee
evaluates the performance of management and determines the compensation of the
CEO and other executive officers based on achievement of sales, operational and
financial targets. Our executive officers and key management compensation
program consists of base salary, bonus, and long-term compensation in the form
of stock options. The compensation program is designed to achieve the following
objectives:
o Attract, retain and motivate quality executives who possess the
necessary leadership and management skills.
o Provide a stock-based compensation to provide longer-term motivation
in order to maximize shareholder value.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------
Our officers and directors may be able to control the outcome of most
corporate actions requiring stockholder approval. Our directors and officers
control approximately 55% of our outstanding common stock. Due to this
concentration of direct ownership and the shares held in an irrevocable voting
trust, we may be able to prevail on all matters requiring a stockholder vote,
including: (i) the election of directors, (ii) the amendment of our
organizational documents, or (iii) the approval of mergers, sales of assets or
other major corporate transactions.
The following table sets forth certain information concerning stock
ownership of our $.002 par value Common Stock by all persons known to us 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 9, 2000. 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.
We know 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 our address at 2100 Meridian Park Blvd., Concord, California 94520. 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.
22
<PAGE>
<TABLE>
<CAPTION>
Number of Percent of
Shares of Class of
Common Common
Name Stock Owned Stock Owned
---- ----------- -----------
<S> <C> <C>
Thomas F. Reiner (1) 9,370,188 81.40%
Joseph Barbrie (2) 100,418 .87%
Joel Flig (3) 35,000 .30%
John O'Hanlon 125,000 1.09%
Michael Y. Granger (4) 38,834 .34%
Allan J. Korn (4) 35,834 .31%
Charles C. Johnston and Affiliates (5) 1,791,731 15.56%
All officers and directors as a group (six persons) (6) 9,705,274 84.31%
</TABLE>
(1) Includes shares and (i) 1,630,335 shares issuable upon exercise of options
at prices ranging from $.59 to $13.50 per share through various dates until
June 10, 2007; (ii) 4,991,356 shares and 1,635,452 options to purchase
shares for which Mr. Reiner acts as trustee under a voting trust agreement;
(iii) 295,167 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.
(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: and 50,000
shares issuable upon exercise of options at $1.00 per share until September
17, 2004.
(3) Includes 10,000 shares of common stock issuable upon exercise of options at
$1.00 until July 25, 2000: and includes 25,000 shares of common stock
issuable upon exercise of options until April 17, 2004.
(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; and includes
25,000 shares of common stock issuable upon exercise of options at $1.25
per share until April 17, 2004.
(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 4,143,873 shares of Common Stock issuable upon
exercise of currently exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
Management is of the opinion that each transaction described below between
us and our officers, directors or stockholders was on terms at least as fair to
us as had the transaction been concluded with an unaffiliated party. All
material transactions between us and our officers, directors or principal
stockholders are subject to approval by a majority of our directors not having
an interest in the transaction. There are currently three outside directors. Mr.
Reiner is our Chairman, Chief Executive Officer and President.
Since inception, we have been undercapitalized and have experienced
financial difficulties. Our 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 of our
other obligations have required personal guarantees from Mr. Reiner for which he
has been compensated by us. In addition, from time to time, Mr. Reiner has
provided us with the working capital in order to continue to operate our
business.
23
<PAGE>
On June 11, 1998, subject to the terms and conditions of the May 31, 1997
Working Capital Credit Facility ("WCCF"), Mr. Reiner agreed to increase the WCCF
up to $500,000 and subsequently on June 3, 1999, Mr. Reiner increased the WCCF
to $750,000. As of February 29, 2000, the amount due to Mr. Reiner under the
WCCF was approximately $475,607plus accrued interest of $12,605. Interest during
the Fiscal 2000 under the WCCF totaled approximately $54,417.
In addition, from March 1999 through May 2000, we issued to Mr. Reiner
1,100,000 options, at exercise prices ranging from $0.59 to $2.35 in
consideration of the substantial efforts undertaken by Mr. Reiner, including
increasing sales by 55% from prior fiscal year, completing a private placement
of $2.5 million of equity, his providing personal guarantees to our senior
lender, capital equipment leases and loan guarantees in connection with the
Olsen acquisition, and obtaining ISO 9001 and CE Mark certification for the
electrosurgical products which will permit us to expand our distribution network
into the European market.
On July 30, 1998, J & C Resources ("J & C") agreed to convert the amount of
indebtedness owing to it from us 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 our common stock.
On February 12, 1999, CCJ Trust ("CCJ") agreed to convert the amount of
indebtedness owing to it from us 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 our option. The Series AA Preferred Stock features
redemption and conversion rights during the two year period following the
issuance of shares.
On June 8, 1999, we acquired all of the outstanding common stock of Olsen
Electrosurgical, Inc. ("Olsen"), and subsequently, Mr. Reiner was asked to
personally guarantee certain obligations, including certain lease contracts for
computers, telephones and for an unsecured working capital line of credit with
Wells Fargo Bank. Mr. Reiner agreed to provide his guarantee on behalf of Olsen.
For providing the guarantee of the Olsen obligations and, as the guarantee is
beneficial to our shareholders and overall business and operations, on September
2, 1999, Mr. Reiner was issued 550,000 restricted shares of our Common Stock,
par value $0.002, which shares are to be held in escrow until our obligations
are fully paid, or unless extended. In addition, Mr. Reiner was further asked to
personally guarantee certain obligations, including certain lease contracts for
computers and telephone, and a $125,000 unsecured working capital line of credit
with Wells Fargo Bank. Upon release of the shares from escrow, assuming use of
the fair market value for Sparta's common stock on June 8, 2000, the charge to
earnings would be approximately $495,000.
On April 21, 2000 under the 1987 Employee Stock Option Plan, Mr. Reiner
exercised 50,000 shares of our common stock at $0.59. In addition, certain key
employees also exercised options of 170,000 options at an exercise price ranging
from $0.75 to $1.00 per share.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-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)
24
<PAGE>
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 Banc of America Commercial Corporation. (8)
10.93 Stock Option Agreement dated July 25, 1998 with
Mr. Thomas F. Reiner. (8)
10.94 Stock Escrow Agreement dated May 8, 1998 between the
Registrant and Mr. Reiner.
10.95 Agreement Regarding Indebtedness dated May 8, 1998 between
the Registrant and Mr. Reiner.
16.1 Letter from Angell & Deering agreeing to the statements
made in the Form 8-K regarding the dismissal of
independent accountant. (9)
23.1 Consent of Grant Thornton LLP, Independent Auditors
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.
25
<PAGE>
(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) Previously filed as a part of the Registrant's Registration Statement, File
No. 333-34528, declared effective April 20, 2000.
(11) Previously filed as a part of the Registrant's Registration S8 1986Employee
Stock Option Plan
b. Reports on Form 8-K:
The Registrant filed a Form 8-K dated May 27, 1999 disclosing that the
company signed a letter of intent to acquire all of the assets of
Western Medical Services, Inc.
The Registrant filed a Form 8-K dated June 23, 1999 disclosing that
its wholly owned subsidiary Sparta Olsen Electrosurgical, Inc acquired
all of the outstanding common stock of Olsen Electrosurgical, Inc.
The Registrant filed a Form 8-K dated July 19, 1999 disclosing that it
has borrowed $200,000 from Spags, N.V.
The Registrant filed a Form 8-K dated September 8, 1999 disclosing
that it has borrowed $485,000 from Spags, N.V.
The Registrant filed a Form 8-K dated November 23, 1999 disclosing
that it has borrowed $350,000 from Spags, N.V. and the registrant also
repaid a loan to Sheldon S. Kabaker, M.D.
The Registrant filed a Form 8-K dated December 3, 1999 disclosing that
had signed a non-binding letter of intent to acquire all of the assets
of Home Med-Equip Co.
The Registrant filed a Form 8-K dated January 14, 2000 indicating that
Flynn Von Shurbert and Associates, s.a. purchased 250,000 shares of
Common stock for $210,875.
26
<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 Concord, California, on June 9, 2000.
SPARTA SURGICAL CORPORATION
By: /s/ Thomas F. Reiner
--------------------
Thomas F. Reiner
Chairman of the Board
President & CEO
By: /s/ John F. O'Hanlon
--------------------
John F. O'Hanlon
Chief Financial Officer
(Principal Accounting Officer)
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, 2000
----------------------- Board of Directors ------------
Thomas F. Reiner Chief Executive Officer,
President, Treasurer,
and Director
/s/ John O'Hanlon Chief Financial Officer June 9, 2000
----------------------- ------------
John O'Hanlon
/s/ Michael Y. Granger Director June 9, 2000
----------------------- ------------
Michael Y. Granger
/s/ Allan J. Korn Director, Secretary June 9, 2000
----------------------- ------------
Allan J. Korn
/s/ Joel Flig Director June 9, 2000
----------------------- ------------
Joel Flig
27
<PAGE>
SPARTA SURGICAL CORPORATION
---------------------------
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
February 29, 2000 and February 28, 1999
F-1
<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 29, 2000, 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 auditing standards generally accepted
in the United States. 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 29, 2000, and the consolidated results of its operations and its cash
flows for each of the two years then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ GRANT THORNTON LLP
----------------------
GRANT THORNTON LLP
San Jose, California
May 19, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED BALANCE SHEET
February 29, 2000
ASSETS
<S> <C>
Current assets
Cash $ 61,000
Accounts receivable, net of allowance for doubtful accounts of $44,000 405,000
Other receivables 300,000
Inventories 2,650,000
Other 56,000
------------
Total current assets 3,472,000
Property and equipment, net 788,000
Other assets
Intangible assets 1,090,000
Other 68,000
------------
Total other assets 1,158,000
------------
Total assets $ 5,418,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term obligations $ 390,000
Accounts payable - trade 1,025,000
Accrued expenses 424,000
------------
Total current liabilities 1,839,000
Revolving credit facilities and long-term obligations 1,810,000
Stockholders' equity
Preferred stock: $4.00 par value, 2,000,000 shares authorized;
1992 non-cumulative convertible redeemable preferred stock: 165,000 shares
authorized, 82,783 shares issued and outstanding respectively 331,000
Series A cumulative convertible redeemable 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, 7,707,928
shares issued and outstanding 12,000
Additional paid in capital 13,296,000
Accumulated deficit (12,142,000)
------------
Total stockholders' equity 1,769,000
------------
Total liabilities and stockholders' equity $ 5,418,000
============
See accompanying notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended February 29, 2000 and February 28, 1999
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 3,077,000 $ 1,984,000
Cost of sales 1,590,000 1,028,000
----------- -----------
Gross profit 1,487,000 956,000
Selling, general and administrative expenses 1,663,000 927,000
Depreciation and amortization expenses 281,000 198,000
Research, development and engineering expenses 142,000 --
----------- -----------
Loss from operations (599,000) (169,000)
Other income (expense):
Interest expense (356,000) (358,000)
Cost of debt issuance (1,310,000) (265,000)
Litigation settlements -- 214,000
Gain (loss) on disposition of long-term liabilities (120,000) 199,000
Expense of disposition of long-term liabilities
Other 77,000 35,000
----------- -----------
Total other income (expense) (1,709,000) (175,000)
----------- -----------
Net loss (2,308,000) (344,000)
Preferred stock dividends (42,000) (42,000)
----------- -----------
Net loss applicable to common stockholders $(2,350,000) $ (386,000)
=========== ===========
Basic and diluted net loss per common share $ (0.79) $ (0.28)
=========== ===========
Shares used to calculate basic and diluted net loss per common share 2,969,744 1,395,276
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Two years ended February 29, 2000
1992 Series A Cumulative 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 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
============ ============ ============ ============ ============ ============
Preferred stock dividends paid
in common stock -- -- -- -- -- --
Issuance of common stock in
Private Placement -- -- -- -- -- --
Conversion of preferred stock
into common stock (33,800) (135,000) -- -- -- --
Issuance of common stock in
connection with debt and equity
financing -- -- -- -- -- --
Conversion of debt into
common stock -- -- -- -- -- --
Issuance of common stock
under escrow agreement -- -- -- -- -- --
Issuance for purchase of Olsen
Electrosurgical -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at February 29, 2000 82,783 $ 331,000 28,068 $ 112,000 39,938 $ 160,000
============ ============ ============ ============ ============ ============
Table continues on following page.
F-5
<PAGE>
Sparta Surgical Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (continued)
Two years ended February 29, 2000
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
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
============ ============ ============ ============ ============
Preferred stock dividends paid
in common stock 31,717 -- 42,000 (42,000) --
Issuance of common stock in
Private Placement 990,000 2,000 608,000 -- 610,000
Conversion of preferred stock
into common stock 11,267 -- 135,000 -- --
Issuance of common stock in
connection with debt and equity
financing 1,380,337 3,000 1,307,000 -- 1,310,000
Conversion of debt into
common stock 1,035,000 2,000 1,083,000 -- 1,085,000
Issuance of common stock
under escrow agreement 980,000 -- -- -- --
Issuance for purchase of Olsen
Electrosurgical 400,000 1,000 849,000 -- 850,000
Net loss -- -- -- (2,308,000) (2,308,000)
------------ ------------ ------------ ------------ ------------
Balance at February 29, 2000 7,707,928 $ 12,000 $ 13,296,000 $(12,142,000) $ 1,769,000
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended February 29, 2000 and February 28, 1999
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,308,000) $ (344,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 265,000 198,000
Amortization of debt issuance costs, including warrants 1,339,000 265,000
Loss on disposals of property and equipment 32,000 --
Loss on recovery (gain on disposition) of long-term liabilities 120,000 (199,000)
Litigation settlements -- (214,000)
Changes in operating assets and liabilities:
Accounts receivable (396,000) 53,000
Inventories (373,000) 139,000
Other assets 107,000 (97,000)
Accounts payable and accrued expenses (77,000) 16,000
----------- -----------
Net cash used in operating activities (1,291,000) (183,000)
Cash flows from investing activities:
Capital expenditures (35,000) (10,000)
Payments made for covenant not to compete (228,000) --
Cash acquired in acquisition of subsidiary 14,000 --
----------- -----------
Net cash used in investing activities (249,000) (10,000)
Cash flows from financing activities:
Sale of common stock 610,000 --
Borrowings (repayments) on lines of credit, net (92,000) 181,000
Proceeds from borrowings on long-term debt 1,577,000 150,000
Principal payments on long-term debt (495,000) (121,000)
Debt issuance costs incurred -- (17,000)
----------- -----------
Net cash provided by financing activities 1,600,000 193,000
----------- -----------
Net change in cash and cash equivalents 60,000 --
Cash and cash equivalents at beginning of year 1,000 1,000
----------- -----------
Cash and cash equivalents at end of year $ 61,000 $ 1,000
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 317,000 $ 308,000
Income taxes -- --
Supplemental disclosure of non-cash investing and financing activities:
-----------------------------------------------------------------------
In 2000 and 1999, the Company converted $1,085,000 and $911,000,
respectively, of long-term debt and accrued interest into Company stock. The
Company also issued stock and warrants of $1,310,000 and $200,000 in
connection with obtaining long-term debt and equity financing in 2000 and
1999, respectively. During 2000 the Company aquired $72,000 of property and
equipment through capital lease obligations.
See accompanying notes to consolidated financial statements.
F-7
</TABLE>
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 2000 and February 28, 1999
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 subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Revenue Recognition
-------------------
The Company recognizes revenue when goods are shipped. Goods are generally
warranted for 30 days for most products, and one year for electrosurgical
products.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average method. The Company reserves for inventory
obsolescence and shrinkage on a specific identification basis.
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 shares and
potentially dilutive securities outstanding during the period. Potentially
dilutive securities 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). Potentially dilutive securities 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.
Year Ended
--------------------------
February 29, February 28,
2000 1999
--------- ----------
Numerator:
Net Loss applicable to common stockholders (2,350,000) (386,000)
Denominator
Average outstanding during the year 4,325,735 2,348,262
Less: Shares subject to Escrow agreement 1,355,991 952,986
---------- ----------
Number of shares on which EPS shares is calculated 2,969,744 1,395,276
========== ==========
Basic and diluted loss per common share $ (0.79) $ (0.28)
F-8
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
----------------------
Property and equipment consists primarily of warehouse and office
equipment and automobiles. Depreciation is calculated based on the
following estimated useful lives using the straight-line method. Leasehold
improvements are amortized over the shorter of the lease term or the
estimated useful life of the improvement.
Equipment 3 - 10 years
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 - 15 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
interpretations, and complies with the disclosure provisions of Statement
of Financial Accounting Standards ("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. A valuation allowance is provided when
deferred tax assets are not expected to be realized.
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 due to the terms of the debt
and no comparable market for such debt.
F-9
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company's management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentrations
--------------
The Company provides credit, in the normal course of business, to a large
number of distributors and wholesalers, concentrated in the medical supply
industry. Accounts receivable are due from customers located throughout
the United States and various foreign countries. The Company performs
periodic credit evaluations of its customers' financial condition and
generally requires no collateral. The Company maintains reserves for
potential credit losses and such losses have not exceeded management's
expectations. One customer accounted for 20% of net sales for the year
ended February 28 1999, but no customer accounted for more than 10% of the
sales activity during the year ended February 29, 2000. In 2000 and 1999,
the Company purchased products from several vendors who were single
sources for the product. Purchases from one certain vendor were 10% and
43% of total cost of sales for the years ended February 29, 2000 and
February 28, 1999, 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 1999 financial statements
to conform to the 2000 presentation.
NOTE 2 - INVENTORY
Inventory consists of the following categories:
Raw Material $ 363,000
Finished Goods 2,287,000
----------
$2,650,000
==========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Equipment $ 1,091,000
Leasehold improvements 17,000
-----------
1,108,000
Less accumulated depreciation and amortization (320,000)
-----------
$ 788,000
===========
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consists of the following:
Goodwill, net of accumulated amortization of $558,000 $ 768,000
Patents, net of accumulated amortization of $235,000 116,000
Non compete agreement, net of accumulated amortization of $32,000 206,000
----------
Total $1,090,000
==========
F-10
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 5 - 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 (8.75% at February 29, 2000) 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 29, 2000, as a
result of the borrowing limits, the Company had no amounts
available under this line. This credit facility was replaced
in March 2000. See note 15. $ 1,228,000
Mr. Reiner has provided the Company with a $750,000 line of
credit (the "Reiner Line") that bears interest at 12%.
Borrowings under this line of credit are due in June 2001.
Mr. Reiner may convert any outstanding balance into common
stock at 100% of the average trading price of the Company's
common stock. 475,000
4.5% installment note due in 2001, variable principal and
interest payments from $4,000 to $10,000 per month. 117,000
7% unsecured installment note due in 2000, monthly
principal and interest payments of $3,000. 11,000
Installment loan with a bank, payable in thirty-five
consecutive monthly principal payments of $3,422 plus
interest through August 15, 2000, with balance due
September 15, 2000. The loan accrues interest at a variable
rate which is determined monthly and is equal to the
lender's prime rate plus 5%. The loan is collateralized by
a security interest in certain assets of the Company. 16,000
Unsecured short-term note payable in monthly installments
of $5,000 bearing annual interest of 8.25%. 17,000
Revolving credit facility for $75,000 with a financial
institution that bears interest at prime plus 5.5%. The
line of credit is collateralized by various assets of the
Company and expires in July 2004. - 67,000
Bridge financing loans outstanding at February 29, 2000.
During the period March 1999 through February 2000, the
Company borrowed $1,510,000 of financing from various
individual investors. These individual loans range from
$25,000 to $485,000, 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. Of the total of $1,510,00 total,
$225,000 was repaid, $1,085,000 was converted intro equity
prior to February 29, 2000, and $200,000 was converted to
equity in March 2000. 200,000
Obligations under capital leases 69,000
-----------
F-11
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 5 - REVOLVING CREDIT FACILITIES AND LONG-TERM OBLIGATIONS (continued)
2,200,000
Less current portion (390,000)
-----------
Long-term debt $ 1,810,000
===========
Installments due on debt principal, including the capital leases, are as
follows:
Year ending February 28,
------------------------
2001 $ 390,000
2002 501,000
2003 1,259,000
2004 31,000
2005 19,000
-----------
$ 2,200,000
===========
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 29, 2000, the Company had 209,000 warrants
outstanding, which had been issued in connection with long-term debt.
NOTE 6 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through February 29, 2000. The
following table sets forth the primary components of deferred tax assets at
February 29, 2000:
Net operating loss and credit carryforwards $ 3,000,000
Non-deductible reserves and expenses 520,000
-----------
Gross deferred tax assets 3,520,000
Valuation allowance (3,520,000)
===========
$ --
-----------
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation
allowance is required. During fiscal 2000 the valuation allowance
increased $300,000. At February 29, 2000, the Company had approximately
$8,210,000 of federal net operating loss carryforwards for tax reporting
purposes available to offset future taxable income; such carryforwards
will expire from 2007 to 2020. Additionally, the Company has approximately
$1,945,000 of state net operating loss carryforwards for tax reporting
purposes which will expire from 2000 to 2005.
NOTE 7 - STOCKHOLDERS' EQUITY
Amendment to Authorized Common
------------------------------
The Company has a shareholder vote scheduled for June 16, 2000 regarding a
proposal by management to increase the number of authorized shares from
8,000,000 to 25,000,000.
F-12
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
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 the Company's option 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-13
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 7 - 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
at the Company's option, 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 thirty 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 at the Company's
option, 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.
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. In April
2000, the Company extended the 1987 Stock Option Plan for an additional
ten-year period, until October 1, 2007.
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-14
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 7 - STOCKHOLDERS' EQUITY (continued)
Stock option and warrant activity, and warrants issued in connection with
long-term debt, is summarized as follows:
Weighted
Average
Exercise
Shares Price
--------- ---------
Balance at March 1, 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
---------- --------
Granted 2,133,070 2.23
Exercised 0 0
Cancelled (351,167) 3.45
---------- --------
Balance at February 29, 2000 2,901,325 $ 2.20
---------- --------
The following table summarizes information about stock options and
warrants outstanding as of February 29, 2000:
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Term in Years Exercisable Price
----- ----------- ----- ------------- ----------- -----
$0.59 - $1.75 320,000 $0.70 4 270,000 $0.69
$0.95 - $1.38 1,240,570 $1.12 5 1,067,237 $1.13
$1.47 - $1.98 290,000 $1.71 4 290,000 $1.71
$2.35 - $3.18 496,002 $2.12 6 496,002 $2.12
$5.00 500,000 $5.00 1 500,000 $5.00
$13.50 54,753 $13.50 4 54,753 $13.50
--------- ---------
2,901,325 2,677,992
========= =========
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:
2000 1999
----------- -------------
Net loss applicable to common stockholders
As reported $(2,350,000) $ (386,000)
Pro forma $(3,575,000 (760,000)
Basic and diluted net loss per share
As reported $ (0.79) $ (.28)
Pro forma $ (1.20) $ (.54)
F-15
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 7 - 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 2000 and 1999 was $0.59 and $1.12 , respectively. The following
weighted average assumptions were used to perform the calculations for
2000 and 1999 respectively: expected life of 5 and 7 years; interest rate
of 6%; volatility of 115% and 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 8 - 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, electrosurgical
devices 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 years
ended:
February 29, February 28,
2000 1999
---------- ----------
Net sales:
Surgical Specialty Products $2,520,000 $ 954,000
Electrotherapy DME Products 557,000 1,030,000
---------- ----------
$3,077,000 $1,984,000
========== ==========
Gross profit:
Surgical Specialty Products $1,285,000 $ 545,000
Electrotherapy DME Products 202,000 411,000
---------- ----------
$1,487,000 $ 956,000
========== ==========
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 9 - COMMITMENTS
The Company leases equipment and facilities under operating lease
agreements. Rental expense was $117,000 and $145,000 for the years ended
February 29, 2000 and 1999, 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,
------------------------
2001 $ 303,000
2002 307,000
2003 307,000
2004 129,000
F-16
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 10 - 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 29, 2000, Mr. Reiner has been
granted options to purchase 1,530,335 shares of common stock. These
options have been granted both from the Plan and from outside the Plan.
Mr. Reiner has also been granted 1,932,986 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 1,932,986 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
29, 2000, although for purposes of calculating the net loss per share,
these shares are excluded.
In total, at February 29, 2000, Mr. Reiner directly holds 92,059 shares of
common stock, has options or warrants to purchase 1,530,335 shares of
common stock at prices ranging from $0.59 to $13.50 per share and has
voting authority over 4,991,356 additional shares of common stock. Mr.
Reiner also is the trustee over voting trusts for 1,151,785 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 11 - 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 29, 2000 and February 28, 1999.
F-17
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 29, 2000 and February 28, 1999
NOTE 12 - LITIGATION
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,
$20,500 of which is outstanding and included in accounts payable.
NOTE 13 - ACQUISITION OF OLSEN ELECTROSURGICAL, INC.
----------------------------------------------------
On June 8, 1999, the Company purchased all of the outstanding common stock
of Olsen Electrosurgical, Inc. ("Olsen"), in exchange for 400,000 shares
of the Company's common stock, valued at approximately $850,000. In
addition, the shareholders of Olsen entered into non-compete and
consulting agreements with the Company for approximately $1.3 million.
Olsen designs, develops, manufactures and markets electrosurgical devices
and accessories. The excess of the total acquisition cost over the fair
value of net assets acquired in the amount of $592,000 is being amortized
on a straight-line basis over fifteen years.
The following unaudited pro forma consolidated results of operations
assume that the purchase occurred on March 1, 1998:
Year ended February 28,
-----------------------
2000 1999
---- ----
Revenues $ 3,662,968 $ 2,662,273
Net earnings (loss) (2,355,168) (393,654)
Net earnings (loss) per share $ (0.79) $ (0.28)
NOTE 14 - LIQUIDITY AND CAPITAL RESOURCES
In recent years the Company has experienced losses from operations and
suffers from a deficiency in available working capital. Revenues from
existing product lines have historically 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 also
intends to continue to pursue viable acquisition candidates. Management
believes its actions will be sufficient to fund operations through
February 28, 2001; however, there can be no assurance that the Company
will be able to complete planned debt or equity offerings or targeted
acquisitions.
NOTE 15 - SUBSEQUENT EVENTS
On March 20, 2000, Banc of America Commercial provided the Company with a
24-month Revolving Line of Credit of up to $2,500,000 (the "Loan"). The
Company agreed to pay Banc of America Commercial 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 assets.
In addition, $250,000 of the Loan is personally guaranteed by Mr. Reiner.
As of June 7, 2000, the outstanding balance on the Loan was $1,590,000 and
approximately $100,000 in credit was available. The Loan is being used to
provide working capital for current operations. In connection with the
financing, the Company issued Banc of America Commercial a warrant to
purchase up to 10,000 shares of our Common Stock exercisable at $1.90 per
share at any time until March 20, 2003. See Note 5.
F-18
