As filed with the Securities and Exchange Commission on April 11, 2000.
Registration No. 333-___________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SPARTA SURGICAL CORPORATION
-----------------------------------
(Name of small issuer in its charter)
Delaware 3842 22-2870438
-------- ---------- ----------
(State or jurisdiction Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Identification
or organization) Code Number) Number)
2100 Meridian Park Blvd.
Concord, CA 94520
(925) 825-8151
-----------------------------------------------------------
(Address and telephone number of principal executive offices)
2100 Meridian Park Blvd.
Concord, CA 94520
(925) 825-8151
-----------------------------------------
(Address of principal place of business or
intended principal place of business)
Thomas F. Reiner
Chief Executive Officer
2100 Meridian Park Blvd.
Concord, CA 94520
(925) 825-8151
-------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Gary A. Agron, Esq.
5445 DTC Parkway, Suite 520
Englewood, CO 80111
(303) 770-7254
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Securities Amount to Offering Price Aggregate Registration
to be Registered Be Registere Per Share Offering Price Fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.002 par value 3,974,665 $1.25 $4,968,331 $1,466
- ------------------------------------------------------------------------------------------------------
</TABLE>
This registration statement registers the resale of 3,934,665 shares of
common stock offered by the selling stockholders.
In addition to the number of shares set forth above, the amount to be
registered includes any shares of our common stock issued as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The Proposed Maximum Offering Price Per Share and the Proposed Maximum
Aggregate Offering Price in the table above are estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(c) promulgated under
the Securities Act of 1933. These estimates were calculated based on the average
of the bid and ask prices for our common stock on the NASDAQ Over-the-Counter
Bulletin Board Trading System on April 3, 2000.
We hereby amend this registration statement on such date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the registration statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
ii
<PAGE>
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Dated April 3, 2000
3,974,665 SHARES OF COMMON STOCK
SPARTA SURGICAL CORPORATION
The following stockholders are offering and selling up to 3,974,665 shares
of our common stock:
Coridal, N.V.
Flyn Von Schubert and Associates, s.a.
John Weller
Arne Jensen
Andreas T. Glapiak
Elizabeth Frazier
J. Victor Samuels
Spags Investment Group, N.V.
Royce Walker LLC
Sheldon S. Kabaker
D. Brewer
P.J. Cook
Howard Bronson
William S. Gilmore
Kenneth Robbins
Bruce Havenberg
Frank Coluccino
Stephen Axelrod
IGC of New York
Pepper Frazier
The selling stockholders may offer common stock through public or private
transactions, on the NASDAQ Over-the-Counter Bulletin Board Trading System, at
prevailing market prices or at privately negotiated prices. We will not receive
any proceeds from this offering.
Our common stock is listed on the NASDAQ Over-the-Counter Bulletin Board
Trading System under the symbol "SPSG." On April 3, 2000, the closing sale price
for our common stock, as quoted on the Bulletin Board was $1.25 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 4.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is April 3, 2000.
<PAGE>
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS......................................................1
SUMMARY....................................................................1
RISK FACTORS ..............................................................4
USE OF PROCEEDS............................................................7
MARKET PRICE AND DIVIDEND INFORMATION......................................7
CAPITALIZATION.............................................................8
SELECTED CONSOLIDATED FINANCIAL DATA.......................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................10
BUSINESS..................................................................14
MANAGEMENT................................................................19
EXECUTIVE COMPENSATION....................................................21
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK...........24
SELLING STOCKHOLDERS......................................................25
PLAN OF DISTRIBUTION......................................................26
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS.............................27
DESCRIPTION OF CAPITAL STOCK..............................................29
SHARES ELIGIBLE FOR FUTURE SALE...........................................32
EXPERTS...................................................................33
LEGAL MATTERS.............................................................33
WHERE YOU CAN FIND MORE INFORMATION ......................................33
FINANCIAL STATEMENTS.....................................................F-1
<PAGE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
We furnish our stockholders with annual reports containing consolidated
financial statements audited by an independent accounting firm.
SUMMARY
This summary highlights material information regarding our company and the
offering contained in this prospectus. However, this summary is not complete and
may not contain all of the information that may be important to you. You should
read the entire prospectus carefully, including the financial data and related
notes, before making an investment decision. Unless otherwise specifically
stated, the information in this prospectus assumes that holders of our
securities have not exercised any options or warrants which are currently
outstanding.
Introduction and History
Since 1990, we have developed, manufactured, and marketed surgical and
electrotherapy products for the healthcare industry. Our surgical products
include:
o microsurgical hand-held instruments and accessories;
o electro-surgical products;
o critical care hospital disposable products; and
o oral maxillofacial implant plating systems to repair bone fractures in
the face.
We market over 3,000 medical products. Our surgical products are used in
ophthalmic, ear, nose, throat, plastic, reconstructive, general and oral
maxillofacial surgical procedures. Our electrotherapy products, which are used
for pain management, consist of transcutaneous electrical nerve stimulators, or
TENS, and their related disposable and reusable electrodes and accessories.
We were incorporated in Delaware in 1987 and have continuously been engaged
in the medical products business since that date. Our offices are located at
2100 Meridian Park Blvd. Concord, California 94520 and our telephone number is
(925) 825-8151.
Strategy
We continue to seek growth through internal expansion and acquisition of
companies or products that complement or expand our existing medical product
lines. We prefer to develop or acquire medical products in specialty markets
that are served by relatively few competitors. In order to increase revenue from
existing and new products, we will continue to rely upon our medical products
dealers and independent manufacturing representatives to market our products to
hospitals, physicians and clinics.
1
<PAGE>
Sales and Marketing
We offer our medical products through independent manufacturing
representatives and through medical/surgical and durable medical equipment
distributors located throughout the United States and abroad. The products are
marketed under our name as well as on a private label basis under which the
products are labeled with the name of our customer.
Description of Selling Stockholders
Through this prospectus, we are registering the resale of up to 3,974,665
shares of our common stock by our 20 selling stockholders, all of whom acquired
the shares in a private placement of our securities between March 1999 and March
2000. We currently have 8,217,514 shares of common stock outstanding.
Forward-Looking Statements
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us which are discussed in the Risk Factors
section below as well as throughout this prospectus. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
2
<PAGE>
Summary of Consolidated Financial Data
The following summary of historical and pro forma consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited Consolidated
Financial Statements and related Notes thereto included elsewhere in this
prospectus.
The summary pro forma statement of operations data for the year ended
February 28, 1999 and the nine months ended November 30, 1999, and summary pro
forma balance sheet data as of November 30, 1999 give effect to the acquisition
of Olsen Electrosurgical as if it had occurred on March 1, 1998. The summary pro
forma data does not purport to represent what our results would have been if the
acquisition had occurred at March 1, 1998.
<TABLE>
<CAPTION>
Nine Months Ended
Year ended February 28 November 30, 1999
---------------------- -----------------
1999 Pro Forma
1997 1998 1999 Pro Forma Historical as Adjusted
---- ---- ---- --------- ---------- -----------
Statement of Earnings Data
<S> <C> <C> <C> <C> <C> <C>
Net sales 2,243,000 2,272,000 1,984,000 4,330,000 2,294,000 2,870,000
Operating profit (2,176,000) (705,000) (169,000) (516,000) (101,000) (117,000)
Earnings (loss) before
income taxes (1,905,000) (1,858,000) (344,000) (717,000) (430,000) (451,000)
Net earnings (loss) (1,905,000) (1,858,000) (344,000) (717,000) (430,000) (451,000)
Preferred Stock Dividends (114,000) (42,000) (42,000) (42,000) (21,000) (21,000)
Net Income (loss) applicable
to common stockholders (2,019,000) (1,900,000) (386,000) (759,000) (451,000) (472,000)
Earnings (loss) per share (2.73) (2.27) (0.28) (0.42) (0.20) (0.18)
Weighted average shares outstanding 740,702 836,189 1,395,276 1,795,276 2,258,768 2,658,768
November 30, 1999
-----------------
Pro Forma Pro Forma
Historical Adjustments As Adjusted
---------- --------- -----------
Balance Sheet Data
Working capital 395,000 395,000
Total assets 4,897,000 (21,000) 4,876,000
Total liabilities 4,241,000 4,241,000
Stockholders' equity 656,000 (21,000) 635,000
</TABLE>
3
<PAGE>
RISK FACTORS
The shares of common stock offered by this prospectus involve a high degree
of risk and represent a highly speculative investment. You should not purchase
these shares if you cannot afford the loss of your entire investment. In
addition to the other information contained in this prospectus, you should
carefully consider the following risk factors in evaluating our company, our
business prospects and an investment in our shares of common stock.
Risks Particular to our Company
We have incurred significant operating losses and may not be profitable in
the future. We have reported net losses of $1,858,000 and $344,000 for the years
ended February 28, 1998 and 1999 and a net loss of $430,000 for the nine months
ended November 30, 1999. We cannot assure that we will report profits in the
future.
Our operations continue to be cash flow negative, reducing our working
capital resources. Our future capital requirements will depend on numerous
factors, including the acquisition of new product lines and/or other business
operations and the continued development of existing products, as well as our
distribution and marketing efforts. In order to continue our current level of
operations, it will be necessary for us to obtain additional working capital,
from either debt or equity sources. Our principal working capital needs are to
fund inventory purchases and accounts receivable. There can be no assurance we
will be able to obtain this financing on terms satisfactory to us.
We face intense competition, which could reduce our product prices. The
medical products industry is intensely competitive. We compete in all aspect of
our business with numerous medical products manufacturers and distributors, many
of whom have substantially greater market share and financial and other
resources than we do. Competition with these companies could cause us to reduce
our product prices or the amount of products we sell.
It is costly for us to comply with government regulations. Our operations
are regulated by the Federal Food and Drug Administration and other agencies in
California. Compliance with medical product regulations are costly and time
consuming, and if we do not remain in compliance we may be unable to sell some
or all of our products.
We depend upon others to manufacture many of our products or product
components on a timely and cost-effective basis. From time to time, we have
experienced difficulties in obtaining some products or components, and there can
be no assurance that our suppliers will be able to meet our product needs on a
timely basis. A lack of availability of components or products could cause
production delays, increase our product costs, affect our quality control
efforts and interfere with our ability to maintain production and delivery
schedules.
We depend upon our personnel. Our ability to manufacture and market our
medical products depends upon our ability to attract, hire and retain qualified
personnel. Competition for this personnel is intense, and there can be no
assurance that we will be able to attract and retain such personnel. We are also
dependent upon the services of Thomas F. Reiner, our Chairman, Chief Executive
Officer and President. The loss of Mr. Reiner's services would have a material
adverse effect on our business.
4
<PAGE>
We face risks of reduced revenue and increased administrative expenses
which might result from health care reform. Legislative proposals continue to be
introduced or proposed in Congress and in state legislatures that would effect
major changes in the health care system nationally and on the state level. Among
the proposals are cost controls on hospitals, change in health insurance
coverages, reductions in reimbursement for medical treatments and the creation
of government health insurance plans. It is not clear what effect such proposals
would have on our business. Certain proposals, such as cutbacks in Medicare and
Medicaid programs, containment of health care costs and permitting states
greater flexibility in the administration of Medicaid, could reduce our revenue
or increase our costs. In addition, concern about proposed reform measures and
their potential effects has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of our common stock.
Risks Related to the Offering
Shares of our common stock which are eligible for future sale by our
stockholders may decrease the price of our common stock. As of April 3, 2000 we
had 8,217,514 shares of our common stock outstanding, of which approximately
800,000 shares are free trading, 1,524,348 shares are "restricted" but may be
sold at anytime under Rule 144, 1,902,986 are held in escrow subject to the
escrow agreement, and 3,974,665 shares are restricted but are being registered
by this prospectus. If holders of our securities sell substantial amounts of our
common stock, then the market price of our common stock could decrease.
We have a significant number of stock options, warrants and convertible
securities outstanding, which could significantly depress our common stock
market price if exercised and sold. We currently have outstanding options and
warrants to purchase approximately 4,729,728 shares of our common stock and
other securities convertible into 235,107 shares of common stock. The holders of
these securities may exercise or convert them at any time at exercise or
conversion prices ranging from $.59 per share to $13.50 per share. Although
restrictions under federal securities laws limit the ability of the shares of
our common stock issuable upon exercise or conversion of these securities to be
resold in the public market upon issuance, these restrictions may not apply or
may only apply for a period of one year from the date on which these securities
are exercised or converted. The sale of shares underlying these stock options,
warrants and convertible securities could significantly depress the common stock
market price.
There is no significant trading market for our common stock. Our common
stock is not eligible for trading on any national or regional exchange. Our
common stock is traded on a limited basis on the NASDAQ Over-the-Counter
Bulletin Board Trading System pursuant to Rule 15c2-11 of the Securities
Exchange Act of 1934. This market tends to be highly illiquid, in part because
there is no national quotation system by which potential investors can trace the
market price of shares except through information received or generated by a
limited number of broker-dealers that make a market in that particular stock.
There is a greater chance of market volatility for securities that trade on the
Bulletin Board as opposed to a national exchange or quotation system. This
volatility may be caused by a variety of factors, including:
o the lack of readily available price quotations;
o the absence of consistent administrative supervision of "bid" and
"ask" quotations;
o lower trading volume;
o and market conditions.
5
<PAGE>
In a volatile market, we may experience wide fluctuations in the market
price of our securities. These fluctuations may have an extremely negative
effect on the market price of our securities and may prevent you from obtaining
a market price equal to your purchase price when you attempt to sell our
securities in the open market. In these situations, you may be required to
either sell our securities at a market price which is lower than your purchase
price, or to hold our securities for a longer period of time than you planned.
Because our common stock is classified as "penny stock", trading is
limited, and the common stock price could decline. Because our common stock
falls under the definition of "penny stock," the trading in our common stock is
limited because broker-dealers are required to provide their customers with
disclosure documents prior to allowing them to participate in transactions
involving our common stock. These disclosure requirements are burdensome to
broker-dealers and may discourage them from allowing their customers to
participate in transactions involving our common stock.
"Penny stocks" are equity securities with a market price below $5.00 per
share other than a security that is registered on a national exchange; included
for quotation in the NASDAQ system; or whose issuer has net tangible assets of
more than $2,000,000 and has been in continuous operation for greater than three
years. Issuers who have been in operation less than three years must have net
tangible assets of at least $5,000,000.
Rules promulgated by the Securities and Exchange Commission under Section
15(g) of the Exchange Act require broker-dealers engaging in transactions in
"penny stocks," to first provide to their customers a series of disclosures and
documents, including:
o a standardized risk disclosure document identifying the risks inherent
in investment in "penny stocks;"
o all compensation received by the broker-dealer in connection with the
transaction;
o current quotation prices and other relevant market data; and,
o monthly account statements reflecting the fair market value of the
securities.
In addition, these rules require that a broker-dealer obtain financial and
other information from a customer, determine that transactions in "penny stocks"
are suitable for such customer and deliver a written statement to such customer
setting forth the basis for this determination.
In addition, under the Exchange Act, and the regulations thereunder, any
person engaged in a distribution of shares of our common stock offered by this
prospectus may not simultaneously engage in market making activities with
respect to the common stock during the applicable "cooling off" periods prior to
the commencement of this distribution.
Our preferred stock and status as a Delaware corporation may make a third
party acquisition of our company more difficult. Our certificate of
incorporation authorizes our Board of Directors to issue up to 2,000,000 shares
of preferred stock having such rights as may be designated by our Board of
Directors, without stockholder approval. This issuance of preferred stock could
inhibit a change in control by making it more difficult to acquire the majority
of our voting stock. In addition, the Delaware General Corporation law restricts
certain business combinations with interested stockholders. This statute may
have the effect of inhibiting a non-negotiated merger or other business
combination.
6
<PAGE>
We do not anticipate paying dividends. We have not paid any cash dividends
on our common stock since our inception and we do not anticipate paying cash
dividends in the foreseeable future. Any dividends which we may pay in the
future will be at the discretion of our Board of Directors and will depend on
our future earnings, any applicable regulatory considerations, our financial
requirements and other similarly unpredictable factors. For the foreseeable
future, we anticipate that we will retain any earnings which we may generate
from our operations to finance and develop our growth.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our common
stock being offered by this prospectus.
MARKET PRICE AND DIVIDEND INFORMATION
Our common stock has traded on the Nasdaq Over-the-Counter Bulletin Board
Trading System under the symbol "SPSG " since May 1, 1998. From January 31, 1991
to April 30, 1998 our common stock traded on the Nasdaq SmallCap Market. The
market for our common stock on the Bulletin Board is limited and sporadic with
daily volume averaging 4,000 shares during the quarter ended November 30, 1999.
The following table presents the range of the high and low closing prices,
provided by Nasdaq Trading and Market Services for our common stock for the
periods indicated. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Price
-----
By Quarter Ended: High Low
- ----------------- ---- ---
Fiscal 2001
May 31, 2000 (through April 3, 2000) $3.40 $0.91
Fiscal 2000
May 31, 1999 $2.50 $1.75
August 31, 1999 $2.36 $2.22
November 30, 1999 $1.75 $0.94
February 29, 2000 $1.81 $0.91
Fiscal 1999
May 31, 1998 $1.69 $0.75
August 31, 1998 $1.75 $0.75
November 30, 1998 $1.75 $0.87
February 28, 1999 $1.00 $0.43
Fiscal 1998
May 31, 1997 $4.00 $1.25
August 31, 1997 $2.00 $1.00
November 30, 1997 $2.25 $1.87
February 28, 1998 $1.62 $0.75
As of April 3, 2000, we had approximately 475 stockholders of record.
7
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of November 30, 1999:
November 30, 1999
-----------------
Long term debt (1) $ 1,687,000
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 outstanding 331,000
Series A cumulative preferred stock:
30,000 shares authorized, 28,068 shares
issued and outstanding 112,000
Series AA cumulative preferred stock:
875,000 shares authorized, 39,938 shares
issued and outstanding 160,000
Common Stock, $.002 par value, 8,000,000 shares
authorized 5,740,281 shares issued and outstanding 5,000
Additional paid-in capital 10,291,000
Accumulated Deficit (10,243,000)
Total stockholders' equity 656,000
Total Capitalization 2,343,000
(1) Long term debt consists primarily of a revolving credit facility with a
financial institution. See note 4 to the accompanying financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
Nine Months Ended
Year ended February 28, November 30
----------------------- -----------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
Summary of Operation Data
in thousands except per share data
<S> <C> <C> <C> <C> <C>
Sales 2,243 2,272 1,984 1,673 2,294
Cost of goods sold 1,229 1,066 1,028 878 944
Gross profit (loss) 1,014 1,206 956 795 1,350
Operating Expenses
Selling, general and administrative 2,052 1,679 927 572 1,218
Depreciation and amortization 240 217 198 200 217
Research and development 42 15 -- -- 16
Write-off inventory
Total operating expenses 2,334 1,911 1,125 772 1,451
Income (loss) from operations (1,320) (705) (169) 23 (101)
Interest Expense (388) (629) (623) (258) (341)
Other Income (expense) (197) (524) 448 304 12
Net income (loss) (1,905) (1,858) (344) 69 (430)
Preferred stock dividends (114) (42) (42) (25) (21)
Net income (loss) applicable
to common stockholders (2,019) (1,900) (386) 44 (451)
Historical basic and diluted
income (loss) per share (2.73) (2.27) (0.28) 0.03 (0.20)
Shares used to compute historical
basic and diluted income (loss)
per share 740,702 836,189 1,395,276 1,413,438 2,258,768
As of November 30
-----------------
1998 1999
---- ----
Balance sheet data:
Cash and cash equivalents 1 5
Working capital 1,360 395
Total assets 3,155 4,897
Long term debt 1,837 1,687
Total stockholders' equity 289 656
9
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
This discussion should be read in conjunction with our audited financial
statements and footnotes included elsewhere in this prospectus.
Results of Operations
Nine months ended November 30, 1999 as compared to nine months ended November
30, 1998
Net sales for the nine months ended November 30, 1999 were $2,294,000, a
37% increase from net sales of $1,673,000 for the nine months ended November 30,
1998. The increase in net sales in 1999 was the result of an increase in
surgical device sales and decrease in durable medical equipment sales which have
lower margins. The increase in sales for the surgical devices primarily resulted
from our acquisition of Olsen's electrosurgical business and receipt of various
national group purchasing contracts.
Gross profit was $1,350,000 or 58.8% of net sales for the nine months ended
November 30, 1999 as compared to $795,000 or 47.5% of net sales for the nine
months ended November 30, 1998. The increase in gross profit percentage is
primarily due to the higher margins generated from increased sales volume among
our surgical product lines.
Selling, general and administrative expenses for 1999 were $1,218,000, a
113% increase from expenses of $572,000 for 1998. The increase in these expenses
primarily resulted from nonrecurring legal and accounting fees related to
proposed acquisitions not consummated, lease termination expenses and expenses
incurred in consolidation of Olsen's operations. We also incurred other
nonrecurring expenses including regulatory approvals for our ISO 9001
manufacturing certification, due diligence fees related to the termination of
our acquisition of Western Medical Services, Inc. and ICS of North America, Inc.
Interest expense for the nine months ended November 30, 1999, increased to
$341,000 from $258,000 in the nine months ended November 30, 1998, principally
as a result of bridge financing loans obtained to provide working capital and
funds for expenses related to planned acquisitions.
Other income decreased to $12,000 for the nine months ended November 30,
1999, from $304,000 for the nine months ended November 30, 1998. The decrease
resulted primarily from a reversal of accrued rent in 1998, from successful
settlement of litigation related to a terminated lease agreement, amounting to
approximately $199,000 (net of legal fees).
As a result of the above, our net loss for the nine months ended November
30, 1999 was $430,000, a decrease of $499,000 from our net income of $69,000 for
1998.
Year ended February 28, 1999 as Compared to Year ended February 28, 1998
Net sales for the fiscal year ended February 28, 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 was the result of a $215,000 or 17.3% decrease in
electrotherapy product sales from $1,245,000 to $1,030,000; and a decrease of
$72,000 or 7.1% in surgical product sales from $1,026,000 to $954,000. The
decrease in sales of the electrotherapy product line primarily resulted from the
completion of standing purchase orders in the approximate amount of $650,000
from one of our electrotherapy accounts. The decrease in sales of the surgical
product line primarily resulted from a reduction in the number of our
independent manufacturing sales representatives, and our decision not to attend
certain trade shows.
10
<PAGE>
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
percentage resulted from a decrease in sales of surgical and electrotherapy
products. In general, the electrotherapy product line generates lower gross
profits than the surgical line. Also, in connection with some sales promotions,
we allowed certain price concessions in our surgical product line.
Selling, general and administrative expenses for fiscal 1999 were $927,000,
a $752,000 or 44.8% decrease from expenses of $1,679,000 for fiscal 1998. The
decrease in these expenses primarily resulted from the implementation of our
plan to reduce operating and personnel costs. Depreciation and amortization
expenses for fiscal 1999 were $198,000, a $19,000 or 8.8% decrease from $217,000
for fiscal 1998. The decrease in these expenses was primarily due to a decrease
in the net book value of property and equipment which became fully depreciated.
The decrease in other expenses is primarily the result of 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 above, our net loss for fiscal 1999 was $344,000, a
decrease of $1,514,000, or 81% from our 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 reflects
paid and accrued dividends on our Series A Convertible Preferred Stock paid on
March 31, 1998 and 1999.
Year ended February 28, 1998 as Compared to Year ended February 29, 1997
Net sales for the fiscal year ended February 28, 1998 were $2,272,000, an
increase of 1.3% from net sales of $2,243,000 for fiscal 1997. The increase in
net sales during fiscal 1998 is the result of a $221,000 or 21.6% increase in
electrotherapy product sales from $1,025,000 to $1,246,000; and a decrease of
$192,000 or 15.8% in surgical product sales from $1,218,000 to $1,026,000. The
increase in sales for the electrotherapy product line can be primarily
attributed to the receipt of non-cancelable purchase orders in the approximate
amount of $650,000 from various customers. The decrease in surgical product
sales is primarily due to a reduction in the number of our independent
manufacturing sales representatives, and reduced attendance at trade shows.
Gross profit was $1,206,000 or 53.1% of net sales for fiscal 1998 as
compared to $1,014,000 or 45.2% of net sales for fiscal 1997. The increase in
gross profit percentage is primarily due to the recording of a $275,000 reserve
for slow moving inventory during fiscal 1997 which lowered the gross profit
percentage and was not repeated during fiscal 1998. Gross profit percentage net
of the reserve for slow moving inventory during fiscal 1997 was 57.4%. The
decrease in gross profit percentage during fiscal 1998 is primarily due to the
increase in electrotherapy product sales. In general, the electrotherapy product
line generates lower gross profits than the surgical product line.
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<PAGE>
Selling, general and administrative expenses for fiscal 1998 were
$1,679,000, a 18.1% decrease from expenses of $2,052,000 for fiscal 1997. The
decrease in these expenses for fiscal 1998 is primarily due to legal expenses
incurred during fiscal 1997 which were not repeated during fiscal 1998. In
addition, lower expenses were experienced for fiscal 1998 due to our
implementation in June 1997 of a plan to reduce operating and personnel costs.
Total other expense for fiscal 1998 was $1,153,000, a decrease of
$1,424,000 from total other income of $271,000 for fiscal 1997. The increase in
total other expense is primarily due to the recording of a provision for an
uncollectible note receivable in the amount of $548,000, an increase of $16,000
in interest expense due primarily to higher loan balances and banking expenses
coupled with a one-time gain of $607,000 on the sale of our wound care product
line, which was recognized during fiscal 1997.
As a result of the above, our net loss for fiscal 1998 was $1,858,000, a
decrease of $47,000 from our net loss of $1,905,000 for fiscal 1997.
Basic and diluted loss per share was $2.27 for fiscal 1998 as compared to
$2.73 for fiscal 1997. The basic and diluted loss per share computation reflects
paid and accrued dividends on our Series A Convertible Preferred Stock, paid on
March 31, 1997 and 1998.
Liquidity and Capital Resources
In recent years, we have experienced losses from operations and have
suffered from a deficiency in available working capital. For the fiscal year
ended February 28, 1999, we improved our operating performance, principally as a
result of reductions in operating expenses. However, revenue from existing
product lines have not been sufficient to generate adequate working capital. We
intend to continue to try to improve operations and to pursue capital through
debt and equity securities offerings.
In June 1999 we purchased all of the outstanding capital stock of Olsen
Electrosurgical, Inc. for 400,000 shares of our common stock and payments to the
two Olsen principals aggregating $1,350,000 over five years. We may make
additional acquisitions of companies, divisions of companies or products in the
future. Acquisitions entail numerous risks, including difficulties in
assimilating 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 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. In addition, the failure to finalize and close an
acquisition often results in additional expenses.
At February 28, 1999, we had approximately $7,530,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire from 2007 to 2019.
Additionally, we have approximately $1,680,000 of California state net operating
loss carryforwards for tax reporting purposes which will expire through 2004.
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Our working capital at November 30, 1999 was $395,000 as compared to
$1,313,000 at February 28, 1999. Our working capital position decreased by
$918,000 due to short-term debt we obtained in order to complete our acquisition
of Olsen and to provide Olsen with working capital.
We have a 48-month $2.5 million revolving line of credit provided by Bank
of America comprised of a $1.5 million line of credit for Sparta and a $1
million line of credit for Olsen. We pay the bank interest on the average
outstanding principal amount of the line at a per annum rate of prime plus 3%.
The line is 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
line is personally guaranteed by Thomas F. Reiner, our Chief Executive Officer.
At February 29, 2000, the outstanding balance on the line was $1,216,000 and
approximately $100,000 in credit was available. The line is being used to
provide working capital for current operations.
We also have a $750,000 unsecured line of credit provided by Mr. Reiner, of
which $430,000 was outstanding at February 29, 2000. We pay interest on the line
of credit of 12% per annum and the line is available to us until September 2000.
Between March 1999 and March 2000, we sold an aggregate of 1,177,000 shares
of our common stock to a group of 20 investors for a total of $1,263,125 in cash
and $1,285,000 of debt conversion, or an average of $1.07 per share. All of
these shares are being registered for sale under this prospectus.
Between March 1999 and January 2000, we borrowed a total of $1,510,000 from
five persons. The loans bore interest ranging from 7% to 12% per annum. A total
of $1,285,000 of these loans were converted to common stock at an average price
of $1.08 per share in February 2000 and $225,000 of the loans was repaid.
Our operations continue to be cash flow negative, reducing our working
capital resources. Our future capital requirements will depend on numerous
factors, including the acquisition of new product lines and/or other business
operations and the continued development of existing products, as well as our
distribution and marketing efforts. In order to continue our current level of
operations, it will be necessary for us to obtain additional working capital,
from either debt or equity sources. Our principal working capital needs are to
fund inventory purchases and accounts receivable.
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BUSINESS
Products
We have developed, manufactured and marketed specialty surgical,
electrosurgical and electrotherapy products since 1990. We offer more than 3,000
medical products comprised of:
o Microsurgical hand held instruments and accessories. We market a line
of microsurgical hand held stainless steel instruments and related
hospital equipment and accessories for use by:
o ophthalmologists in eye surgery procedures such as cataract,
retina and radial keratotomy procedures;
o surgeons in ear, nose, throat, plastic, reconstructive, and oral
maxillofacial procedures; and
o general surgeons in other general surgical applications, such as
ob/gyn and cardiovascular procedures.
o Electrosurgical products. We market a line of electrosurgical products
including disposable and reusable electrosurgical pencils,
electrosurgical instruments, cables, scalpels and laparoscopy
instruments. We also apply non-conductive materials to surgical
instruments as well as repair them. Electrosurgical instruments use
low levels of electricity to assist in cutting and cauterizing the
tissue during surgery. The tissue is actually divided by controlled
electrical sparks from the electrosurgical instrument. At the same
time, the intense heat caused by the electric sparks vaporizes the
tissue and cauterizes it to reduce bleeding.
o Critical care hospital disposable products. We market a line of
proprietary critical care general hospital disposable products such
as:
o surgical and sponge clamps and external tubing;
o surgical and preoperative products;
o anesthesia extension tubes, anesthesia and intravenous tube sets;
and
o sterile, nasal latex balloons used to control nose bleeding.
o Oral Maxillofacial implant plating systems. We market an oral
maxillofacial implant titanium plating system which consists of
plates, screws and instruments to repair bone fractures in the face
and head by holding fracture ends in alignment during bone healing.
o Transcutaneous electrical nerve stimulators, electrodes and related
accessories. We market patented and proprietary nerve stimulators,
known as "TENS" units which deliver low voltage electrical current to
the nerves in the spine in order to temporarily reduce or control
certain types of acute or chronic pain. Our TENS units include the
patented Spectrum Max-SD, our most advanced unit for acute and chronic
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<PAGE>
pain management; Spectrum Plus, which allows therapists to treat less
complicated pain syndromes than the Spectrum Max-SD; and Spectrum II,
our least expensive TENS unit. We also market both disposable and
reusable TENS electrodes and related accessories. The electrotherapy
pain management devices and related accessories are prescribed by a
wide range of professionals including physicians, and physical and
occupational therapists for use in clinics, rehabilitation facilities
and patients' homes.
Strategy
We continue to seek growth through internal expansion and acquisitions of
companies or products that complement or expand our existing medical product
lines. We will continue to enter small specialty markets that are served by
relatively few competitors. We will also continue efforts to develop products in
collaboration with established medical device companies on a private label basis
while researching and developing our own products.
We intend to expand our distribution networks by continuing to appoint
additional specialty surgical dealers and selected independent manufacturing
representatives to promote and market our products to hospitals, physicians and
clinics. The expansion of our product lines also promotes crossover sales by
dealers in each product group.
We will also continue to sell our electrotherapy products to durable
medical equipment dealers, rather than physicians, hospitals, patients and other
end users.
Sales and Marketing
We offer our products through an in-house sales force consisting of two
individuals and through independent manufacturing representatives and
medical/surgical and durable medical equipment distributors located throughout
the United States and abroad. Our customers include hospitals, physicians,
clinics, physical and occupational therapists and rehabilitation facilities.
Support for our internal and external sales forces is provided by advertisements
in medical journals, attendance at trade shows and educational seminars,
distribution of sales brochures and through sales training and telemarketing.
Sales leads developed through advertising, direct mail, trade shows and customer
inquiries are pursued through direct sales contacts. In addition, we market our
products under various private label 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 we use a number of independent health care distributors including
Baxter Healthcare Corp., McKesson General Medical Corp., Alliance Healthcare
Inc., Owens and Minor, Inc., DeRoyal Industries, Inc., Alabama Microsurgical
Instruments, Salvin Dental Co., Enable Instruments, Inc., Goodman Medical
Company, Therapeutic Trends, Inc., and Dong-Jin International Co. Our products
are also marketed to private and public hospitals, rehabilitation facilities,
clinics, physicians, and occupational and physical therapists.
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Manufacturing and Distribution
Our surgical products, oral maxillofacial implant plating systems, critical
care hospital disposables and electrotherapy products are received, inspected,
and packaged at our warehouse facility in Concord, California. Microsurgical
hand-held instruments and oral maxillofacial implant plating systems are
manufactured in Germany, Switzerland and the United States to our
specifications. Critical care hospital disposables and TENS units are
manufactured domestically to our specifications under various manufacturing
arrangements. Parts for electrosurgical products are manufactured for us and
assembled at our Concord facility.
We have experienced difficulty from time to time in obtaining some raw
materials or products, and there can be no assurance that our suppliers 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 our
products from single sources. A lack of availability from current suppliers
could cause distribution delays, increased costs and decreases in sales levels.
We are required to carry significant amounts of inventory to meet rapid
delivery requirements. These inventory requirements in turn require us to
maintain working capital and credit financing sufficient to fund the purchase of
inventory. No assurance can be given that we will be able to generate sufficient
working capital or credit facilities to fund inventory purchases.
Product Liability
We carry product liability insurance of $1 million per occurrence. Like
most producers of surgical and electrotherapy products, we face the risk of
product liability claims and unfavorable publicity if our products cause injury.
Although we believe our insurance coverage to be adequate, there can be no
assurance that this insurance will be sufficient to cover all risks to which we
may be exposed.
Competition
The health care products industry is intensely competitive, and many of our
competitors have financial, marketing and other resources substantially greater
than ours. Some of our larger competitors enjoy an additional competitive
advantage due to their ability to offer product discounts for volume purchases
across product lines. Other competitors have significantly greater resources,
established sales organizations and greater experience in the marketing and
sales of products through direct distribution. Our industry is dominated by
multinational companies such as Johnson and Johnson and Baxter Healthcare
Corporation.
In the surgical specialty market for microsurgical hand held instruments,
we compete with Storz Instrument Company, TFX Pilling Surgical, Katena Products,
Inc. and Stille AB. In the critical care hospital disposable products market, we
compete with Baxter Healthcare Corporation, Johnson & Johnson Patient Care,
Inc., Abbott Laboratories, Inc., and Patterson Dental Co. as well as other
smaller competitors. In the electrosurgical products market, we compete with
Valley Lab, Inc., ConMed Corp. and Weck Electrosurgical, Inc.. In the oral
maxillofacial implant plating market, we compete with Howmedica, Inc., Synthes
U.S.A. and Walter Lorenz Surgical Instruments as well as other smaller
competitors. In the TENS market, we compete with many companies including Empi,
Inc. and RehabiLicare, Inc., the market leaders in the electrotherapy industry.
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The pain management market is a relatively mature and competitive market,
subject to significant fluctuations in profitability caused by foreign
competition, questions of therapeutic efficacy, governmental regulations and
private rates of reimbursement. The rehabilitation portion of the market is
evolving and fragmented with a number of different companies offering competing
treatments without any clear indication of preference among treating clinicians.
Competitive factors for microsurgical hand held instruments,
electrosurgical products, critical care hospital disposables and maxillofacial
products include the depth, quality and price of the product line. We believe
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.
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, which expire in 2002. 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 their expiration. There can be no assurance that our
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.
Government Regulation
We are registered with the FDA as a medical device establishment. 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 require our warehouse and
distribution facility and our suppliers to be registered annually and subject to
regular inspections by the FDA.
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Although applicable government regulations vary in their provisions, they
are stringent and continuing. The cost of compliance with these regulations may
be a significant expense for us in the future. We believe that we have obtained
all applicable government and regulatory approvals for our existing products,
facilities and processes. 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.
Our office, assembly, warehouse and manufacturing facilities in Concord,
California are subject to various state and local regulations such as zoning
requirements, health and fire codes and the like.
Employees
As of February 29, 2000, we had 30 full-time employees. None of our
employees are currently covered by collective bargaining agreements and we
consider our relations with our employees to be satisfactory.
Facilities
We currently lease 22,200 square feet of office, assembly, warehouse and
manufacturing space at 2100 Meridian Park Boulevard, Concord, California 94520
for $25,400 per month under a lease which expires August 2004.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding our executive officers
and directors:
Name Age Office
---- --- ------
Thomas F. Reiner 53 Chairman of the Board of Directors,
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 45 Vice President of Sales
John F. O'Hanlon 43 Chief Financial 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. Our audit committee is composed of Messrs. Granger, Korn and Flig.
Messrs. Granger, Korn and Flig receive $750 for each meeting they attend and are
reimbursed for out-of-pocket expenses.
The following is a summary of the business experience of each of our
executive officers and directors:
Thomas F. Reiner is our co-founder and has been our Chief Executive
Officer, President and a director since we were organized in July 1987 and our
Chairman since January 1994. From 1972 to 1983, Mr. Reiner was employed by
Sparta Instrument Corporation, becoming its President in 1979. Mr. Reiner
co-founded Healthmed in 1983, serving as Vice President of Sales and Marketing
until 1985 and President until 1987. Mr. Reiner earned a B.S. degree in Business
Management and an M.B.A. degree in Finance and General Management from Fairleigh
Dickinson University.
Joseph Barbrie has been our Vice President of Operations since March 1989
and our Vice President of Sales since March 1996. From 1979 to 1989 he was
employed by Superior Healthcare Group, becoming its director of
purchasing/operations in 1984. Mr. Barbrie earned an A.S. degree in Business
Management from Johnson & Wales College.
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John F. O'Hanlon was the Chief Financial Officer of Genmark Automation from
1996 to November 1999 and was an independent financial consultant from 1990 to
May 1996. He was Director of Finance for J.J. Morris from 1984 to 1990. Mr.
O'Hanlon earned a Masters of Business Administration degree from the University
of Texas in San Antonio, and a B.S. degree in Accounting from California State
University in Hayward.
Michael Y. Granger, has been one of our directors since June 1991. He 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, an early-stage
venture capital fund, where he was responsible for identifying, selecting and
managing investments in high technology companies. Earlier, he was a principal
at CIGNA Venture Capital, Inc., an investment subsidiary of CIGNA Investments,
where he was responsible for managing a private equity investment program. 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.
Allan J. Korn has been one of our directors since February 1994. He has
been Vice President of Sales and Marketing for A and Z Pharmaceutical, Inc.
since 1994. From 1993 to 1994 he was Vice President of Marketing for Ohm Labs,
Inc. From March 1985 until 1993 he held various sales and marketing executive
positions with DuPont Multi-Source Products, Inc. Mr. Korn earned a B.A. degree
in Economics from Queens College, Flushing, New York and an M.B.A. degree in
Marketing from Fairleigh Dickinson University. Mr. Korn is also an Adjunct
Professor of Business Administration at Union County College.
Joel Flig, has been one of our directors since March 1998. He has been
President of Financial Solutions Group, Inc., an investment banking company,
specializing in the placement of senior debt to middle market companies since
1987. From 1981 to 1987 he was employed by Union Chelsea National Bank. Mr. Flig
earned a Bachelors of Business Administration from Bernard Baruch College in the
City of New York and an M.B.A. degree in Finance from St. John's University.
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EXECUTIVE COMPENSATION
The following table sets forth compensation for services rendered to us by
our Chief Executive Officer and any other executive officers who received
compensation of more than $100,000 in the fiscal years ended February 28, 1999
and 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Name and Principal ------------------- Other Annual Awards
Position Year Salary Bonus Compensation Options
- ------------------ ---- ------ ------ ------------ -------
<S> <C> <C> <C> <C> <C>
Thomas F. Reiner 1999 $166,254(1) $0 $ 0 $312,500
Chairman, Chief Executive 1998 275,581(1) $0 $7,543(2) 447,000
Officer, Treasurer, Director
Joseph Barbrie 1999 78,790 $0 $ 0 40,000
Vice President of Sales 1998 104,050 $0 $ 0 40,000
Wm. Samuel Veazey 1999 20,971 $0 $ 0 40,000
Vice President of Finance 1998 102,711 $0 $ 0 40,000
</TABLE>
(1) Includes salaries and an automobile and insurance allowance.
(2) Represents an unpaid vacation accrual.
Option Grants in Last Fiscal Year
The following table provides information on option grants during the year
ended February 28, 1999 to Mr. Reiner:
Individual Grants
% of Total Options
Granted to
Options Employees in
Name Granted Fiscal Year Exercise Price Epiration Date
- ---- ------- ----------- -------------- -------------
Thomas F. Reiner 100,000 29.9% $1.47 July 26, 2005
Aggregate Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options at February 28, 1999. No shares of our
common stock were acquired upon exercise of options during the fiscal year ended
February 28, 1999.
Number of Value of Unexercised
Unexercised Options In-The-Money
at Fiscal Year End Options at Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Thomas F. Reiner 797,000 133,335 $1,344,425 $ 0
Joseph Barbrie 30,418 20,000 2,500 2,500
(1) The closing price of our common stock on February 28, 1999 as reported by
the Bulletin Board was $1.62 per share.
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Employment Agreement with Mr. Reiner
In September 1999 we entered into a seven-year employment agreement with
Mr. Reiner, which will automatically be extended for three additional years if
we report net sales in any fiscal year during the term of the employment
agreement of $7 million or more. Under the terms of the employment agreement,
Mr. Reiner is to receive:
o an annual salary of $195,000 in the first year, increasing 15% each
year thereafter;
o cash bonuses ranging from $10,000 to $60,000 annually if our net sales
or common stock price increase from 25% to 300% during any fiscal year
and separate cash bonuses ranging from $10,000 to $60,000 annually if
we report net income ranging from $100,000 to $400,000 during any
fiscal year;
o an increase in Mr. Reiner's annual salary to between $225,000 to
$385,000 for any fiscal year in which we report net sales ranging from
$5 million to $25 million;
o a $1.25 million term and whole life insurance policy and a $12,500 per
month disability insurance policy, both to be owned by Mr. Reiner;
o a $50,000 per year contribution to Mr. Reiner's retirement plan;
o reimbursement for any federal, state or local taxes payable by Mr.
Reiner for any compensation he receives under the employment
agreement, other than his annual base salary;
o 3 1/2% of our annual pre-tax earnings;
o an automobile allowance of $1,395 per month;
o five weeks of paid vacation time.
Stock Option Plan and Stock Option Grants
In 1987, we adopted our 1987 Stock Option Plan, which provides for the
grant to employees, officers, directors and consultants of options to purchase
shares of common stock, consisting of both "incentive stock options" within the
meaning of Section 422A of the United States Internal Revenue Code of 1986 (the
"Code") and "non-qualified" options. Incentive stock options are issuable only
to employees, while non-qualified options may be issued to non-employee
directors, consultants and others, as well as to 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 Plan is administered by the Board of Directors, which determines those
individuals who are to receive options, the time period during which the options
may be partially or fully exercised, the number of shares of common stock that
may be purchased under each option, and the option price.
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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 limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee has
three months after such termination during which he or she can exercise the
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, his or her option remains exercisable for one year
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the Plan must be granted within ten years from the effective
date as amended 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 us 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 become available once again
for issuance. As of February 29, 2000, options to purchase 134,754 shares have
been granted under the Plan including 114,587 options granted to executive
officers and directors at exercise prices ranging from $.59 to $13.50.
Liability and Indemnification of Officers and Directors
Our Amended Certificate of Incorporation provides that our directors will
not be liable for monetary damages for breach of their fiduciary duty as
directors, other than the liability of a director for:
o a breach of the director's duty of loyalty to our company or our
stockholders;
o acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law;
o willful or negligent declaration of an unlawful dividend, stock
purchase or redemption; or
o transactions from which the director derived an improper personal
benefit.
These provisions are consistent with the applicable provisions of Delaware law.
Our Amended and Restated Certificate of Incorporation require us to
indemnify all persons whom we may indemnify pursuant to the Delaware General
Corporation Law to the full extent permitted by Delaware Law.
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In addition, our bylaws require us to indemnify our officers and directors
and other persons against expenses, judgments, fines and amounts incurred or
paid in settlement in connection with civil or criminal claims, actions, suits
or proceedings against such persons by reason of serving or having served as
officers, directors, or in other capacities, if such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to our
best interests and, in a criminal action or proceeding, if he had no reasonable
cause to believe that his/her conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of no contest or its equivalent shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to our best interests or that he or
she had reasonable cause to believe his or her conduct was unlawful.
Indemnification as provided in our bylaws shall be made only as authorized in a
specific case and upon a determination that the person met the applicable
standards of conduct. Insofar as the limitation of, or indemnification for,
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, or persons controlling us pursuant to the foregoing, or
otherwise, we have been advised that, in the opinion of the Securities and
Exchange Commission, such limitation or indemnification is against public policy
as expressed in the Securities Act of 1933 and is therefore, unenforceable.
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK
The following table sets forth information with respect to the beneficial
ownership of our common stock owned, as of February 29, 2000, by:
o the holders of more than 5% of our common stock;
o each of our directors;
o our executive officers; and
o all directors and executive officers of our company as a group.
For purposes of computing the percentages under the table below, it is
assumed that all options and warrants to acquire our common stock which have
been issued to the directors, executive officers and the holders of more than 5%
of our common stock and are fully vested or will become fully vested within 60
days of the date of this prospectus have been exercised by these individuals and
the appropriate number of shares of our common stock have been issued to these
individuals.
In addition, for purposes of determining the percentages under the table,
the 1992 Preferred Stock and the common stock have been treated as one class,
since both classes are entitled to vote on all matters on which the common stock
is entitled to vote. None of our officers or directors own any shares of our
preferred stock. Our Series A and Series AA Preferred Stock have not been
included as they are non-voting. 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. Each
stockholder's address is in care of our company at 2100 Meridian Park Blvd.
Concord, California 94520.
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Number Percent
of Shares of of Class of
Common Common
Name of Beneficial Owner Stock Owned Stock Owned
- ------------------------ ------------ -----------
Thomas F. Reiner (1) 8,253,367 62.04 %
Joseph Barbrie 100,418 .75 %
Joel Flig 10,000 .08 %
Michael Y. Granger 13,334 .10 %
Allan J. Korn 10,834 .08 %
Charles C. Johnston and affiliates 1,791,731 13.47 %
Coridal, N.V. 932,000 7.01 %
Spags Investment Group, N.V. 1,135,000 8.53 %
All officers and directors as a group
(five persons) 8,387,953 63.05 %
(1) Includes:
o 1,780,335 shares issuable under options at prices ranging from $.59 to
$13.50 per share exercisable through various dates until January 15,
2005;
o 4,477,987 shares for which Mr. Reiner acts as voting trustee under
voting trust agreements; and
o 1,902,986 shares contingently issuable to Mr. Reiner pursuant to a
stock escrow agreements which provides Mr. Reiner with voting rights
until their release.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders, the
number of shares of our common stock beneficially owned by the selling
stockholders as of February 29, 2000 and the number of shares of our common
stock which may be offered for sale pursuant to this prospectus by the selling
stockholders.
The following shares may be offered from time to time by the selling
stockholders named below. However, the selling stockholders are under no
obligation to sell all or any portion of these shares of our common stock. In
addition, the selling stockholders are not obligated to sell such shares of our
common stock immediately under this prospectus. Since the selling stockholders
may sell all or part of the shares of common stock offered in this prospectus,
we cannot estimate the number of shares of our common stock that will be held by
the selling stockholders upon termination of this offering.
None of the selling stockholders is an officer or director of our company.
The address of each selling stockholder is in care of our company at 2100
Meridian Park Blvd. Concord, California 94520.
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Number of Shares
Of Common Stock Percentage
Name Before Offering Before Offering
- ---- --------------- ---------------
Coridal, N.V 932,000 11.34 %
Flyn Von Schubert and Associates, s.a 290,000 3.53 %
John Weller 200,000 2.43 %
Arne Jensen 236,666 2.88 %
Andreas T. Glapiak 50,000 .61 %
Elizabeth Frazier 25,000 .31 %
J. Victor Samuels 205,333 .31 %
Spags Investment Group, N.V 1,135,000 13.81 %
Royce Walker LLC 212,000 2.58 %
Sheldon S. Kabaker 300,000 3.65 %
D. Brewer 100,000 1.22 %
P.J. Cook 10,000 .12 %
Howard Bronson 15,000 .18 %
William S. Gilmore 37,000 .45 %
Kenneth Robbins 10,000 .12 %
Bruce Havenberg 60,000 .73 %
Frank Coluccino 50,000 .61 %
Stephen Axelrod 30,000 .37 %
IGC of New York 40,000 .49 %
Pepper Frazier 36,666 .45 %
--------- -------
Total shares 3,974,665 48.37 %
========= =======
PLAN OF DISTRIBUTION
The shares of our common stock which the selling stockholders or their
pledgees, donees, transferees or other successors in interest are offering for
resale will be sold from time to time in one or more of the following
transactions:
o block transactions;
o transactions on the Bulletin Board or on such other market on which
our common stock may from time to time be trading;
o privately negotiated transactions;
o through the writing of options on the shares;
o short sales; or,
o any combination of these transactions
The sale price to the public in these transactions may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o negotiated prices; or,
o such other price as the selling stockholders determine from time to
time.
In the event that we permit or cause this prospectus to lapse, the selling
stockholders may sell shares of our common stock pursuant to Rule 144 under the
Securities Act of 1933. The selling stockholders will have the sole and absolute
discretion not to accept any purchase offer or make any sale of these shares of
our common stock if they deem the purchase price to be unsatisfactory at any
particular time.
The selling stockholders or their pledges, donees, transferees or other
successors in interest, may also sell these shares of our common stock directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of these shares of our common stock for whom such
broker-dealers may act as agents or to whom they sell as principal, or both. As
to a particular broker-dealer, this compensation might be in excess of customary
commissions. Market makers and block purchasers purchasing these shares of our
common stock will do so for their own account and at their own risk. It is
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possible that a selling stockholder will attempt to sell shares of our common
stock in block transactions to market makers or other purchasers at a price per
share which may be below the prevailing market price of our common stock. There
can be no assurance that all or any of these shares of our common stock offered
hereby will be issued to, or sold by, the selling stockholders. Upon effecting
the sale of any of these shares of our common stock offered under this
prospectus, the selling stockholders and any brokers, dealers or agents, hereby,
may be deemed "underwriters" as that term is defined under the Securities Act of
1933 or the Securities Exchange Act of 1934, or the rules and regulations
thereunder.
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a selling
stockholder enters into an agreement or agreements with an underwriter, then the
relevant details will be set forth in a supplement or revision to this
prospectus.
The selling stockholders and any other persons participating in the sale or
distribution of these shares of our common stock will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder including, without limitation, Regulation M. These provisions may
restrict activities of, and limit the timing of purchases and sales of any of
these shares of our common stock by, the selling stockholders. Furthermore,
pursuant to Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and other activities
with respect to the securities for a specified period of time prior to the
commencement of the distributions, subject to specified exceptions or
exemptions. These regulations may affect the marketability of these shares of
our common stock.
We will pay substantially all of the expenses incident to the registration
and offering of our common stock, other than commissions or discounts of
underwriters, broker-dealers or agents.
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS
In July 1998 J&C Resources, Inc., a company owned and controlled by Charles
Johnson, one of our principal stockholders, agreed to convert $751,300 of
indebtedness due to J&C for 1,001,733 shares of our common stock, or $.75 per
share. Subsequently, in February 1999 the CCJ Trust, a trust controlled by Mr.
Johnson, converted $159,750 of indebtedness due to CCJ for 39,938 shares of our
Series AA preferred stock, or $4.00 per share.
Between September and November 1999, we issued a total of 950,000 shares of
our common stock to Thomas F. Reiner, our Chief Executive Officer, in
consideration of Mr. Reiner guaranteeing loans incurred by us in the total
amount of $426,000 and providing us a line of credit under which we can borrow
up to $750,000 from Mr. Reiner on an unsecured basis. We further agreed with Mr.
Reiner that the 950,000 shares would be placed in escrow and not released to Mr.
Reiner unless:
o we fail to repay loans and other indebtedness which Mr. Reiner
guaranteed on our behalf within 12 months from the date of Mr.
Reiner's guarantee; or,
o there is a change in control of our company defined as meaning that
any person who is not currently an owner of 20% of our securities
becomes the owner of 20% of our securities or our current directors
become less than a majority of our board of directors in the future;
or,
o Mr. Reiner's employment with us is terminated for any reason; or,
o we become insolvent or voluntarily file for bankruptcy.
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In September 1999 we entered into a seven-year employment agreement with
Mr. Reiner, which will automatically be extended for three additional years if
we report net sales in any fiscal year during the term of the employment
agreement of $7 million or more. Under the terms of the employment agreement,
Mr. Reiner is to receive:
o an annual salary of $195,000 in the first year, increasing 15% each
year thereafter;
o cash bonuses ranging from $10,000 to $60,000 annually if our net sales
or common stock price increase from 25% to 300% during any fiscal year
and separate cash bonuses ranging from $10,000 to $60,000 annually if
we report net income ranging from $100,000 to $400,000 during any
fiscal year;
o an increase in Mr. Reiner's annual salary to a range of $225,000 to
$385,000 for any fiscal year in which we report net sales ranging from
$5 million to $25 million;
o a $1.25 million term and whole life insurance policy and a $12,500 per
month disability insurance policy, both to be owned by Mr. Reiner;
o reimbursement for any federal, state or local taxes payable by Mr.
Reiner for any compensation he receives under the employment
agreement, other than his annual base salary;
o a $50,000 per year contribution to Mr. Reiner's retirement plan;
o 3 1/2% of our annual pre-tax earnings;
o an automobile allowance of $1,395 per month;
o five weeks of paid vacation time.
Between March 1999 and March 2000, we sold an aggregate of 1,177,000 shares
of our common stock to a group of investors for a total of $1,263,125, or an
average of $1.07 per share. Our subscription agreement with one of these
investors provided that we would increase the number of shares issued to him
from 250,000 shares to 290,000 shares if we failed to complete the registration
by January 2000. Accordingly, the additional shares have been included in this
prospectus for registration.
Between March 1999 and January 2000, we borrowed a total of $835,000 from
Spags Investment Group, N.V. We paid Coridal, N.V., an affiliate of Spags, a
total of 932,000 shares of our common stock as consideration for assisting us in
obtaining the debt financing from Spags. We are registering the 932,000 shares
by this prospectus. In March 2000 Spags converted the $835,000 loan to 835,000
shares of our common stock.
We also granted to Coridal an option to purchase 500,000 shares of our
common stock at $1.00 per share and 500,000 shares at $5.00 per share. Coridal
may exercise the $1.00 option during any ten-day period following its receipt of
due diligence materials in connection with any acquisition we are investigating.
The purpose of limiting Coridal's exercise period to the ten-day period is to
provide us with additional working capital that may be needed should we agree to
complete such an acquisition. The Coridal option expires in September 2000.
In March 1999 we entered into a consulting agreement with IGC of New York
Corporation under which IGC agreed to provide financial consulting services to
us, including assisting us in seeking, negotiating and closing acquisition
targets and obtaining debt and equity financing for us. Under the terms of the
consulting agreement, we issued to IGC warrants to purchase 421,000 shares of
our common stock at $.95 per share and 100,000 shares at $1.70 per share until
March 2002. We also agreed to pay IGC a fee of $8,000 per month through November
2001 and to pay a finder's fee of $154,305 for assisting us in completing the
above-mentioned debt and equity financings.
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DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 8,000,000 shares of common stock, par value
$.002 per share, and 2,000,000 shares of preferred stock, par value $4.00 per
share, although our Board of Directors approved an increase in our authorized
shares of common stock to 25,000,000 shares which, we expect, will be approved
by our stockholders in April 2000. Shares of 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, as are determined by
resolution of our Board of Directors, except that so long as any 1992 Preferred
Stock, Series A Preferred Stock or Series AA Preferred Stock are outstanding, we
may not issue any series of stock having rights senior to these classes of
preferred stock without the approval of holders of at least 50% of the
outstanding shares of such classes. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of our company
without further action by stockholders and could adversely affect the rights and
powers, including voting rights, of the holders of common stock. In certain
circumstances, the issuance of preferred stock could depress the market price of
the common stock.
Common Stock
At April 3, 2000 there were 8,217,514 shares of common stock outstanding.
The holders of common stock are entitled to one vote per share 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 therefore subject to the prior rights
of holders of preferred stock and any contractual restrictions we have against
the payment of dividends on common stock. In the event of our liquidation or
dissolution, holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preferences of any
outstanding shares of preferred stock.
Holders of common stock have no preemptive rights and have no right to
convert their common stock into any other securities. All of the outstanding
shares of common stock are fully paid and nonassessable.
Series A Convertible Preferred Stock
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 a 1994
securities offering. At January 31, 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 fiscal quarter 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 our common stock semiannually and $.125 payable in
cash. 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
our stock books on the record dates 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 the Bulletin Board 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 securities
offering.
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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 has 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 holders of Series A Preferred Stock have the right 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 of our common stock, as quoted on
the Bulletin Board or any other securities exchange, exceeds $14.00 per share
for ten consecutive trading days, then the Series A Preferred Stock will be
automatically converted into common stock at the conversion rate.
Liquidation Preference. In the event of our liquidation, dissolution or
winding up, 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, 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.
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 have no voting
rights.
1992 Redeemable Convertible Preferred Stock
At January 31, 2000 there were 82,783 shares of $4.00 par value 1992
Redeemable Convertible Preferred Stock outstanding convertible into 27,594
shares of common stock which were issued in connection with a 1992 securities
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
the Bulletin Board, and will be registered and free trading securities.
Dividends are non-cumulative and will be payable to holders of record on such
record dates as shall be fixed by 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.
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Redemption. We may, 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.
Conversion Rights. Each share of 1992 Preferred Stock is convertible at the
option of the holder into .333 shares of 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. We do not have a current registration
statement on file with the Commission covering these shares.
Liquidation Preference. Upon our liquidation, dissolution or winding-up,
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 our assets or proceeds available for distribution to
stockholders of $4.00 per share plus all unpaid dividends to the date of such
distribution.
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 1992 Preferred Stock so as to affect them
adversely.
Series AA Convertible Redeemable Preferred Stock
At January 31, 2000 there were 39,938 shares of Series AA Preferred Stock
$4.00 par value outstanding, convertible into 179,721 shares of common stock
which were issued in lieu of $159,750 of indebtedness. A summary of the Series
AA Preferred Stock follows:
Dividend Rights. The holders of Series AA Preferred Stock are entitled to
receive out of our assets 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, payable either in cash, our common
stock or some combination, in our sole discretion. The Series AA Preferred Stock
is junior to our 1992 Preferred Stock and our Series A Preferred Stock.
Conversion Rights. Each two shares of Series AA Preferred Stock is
convertible into nine fully paid and non-assessable shares of common stock, at
the option of the holder at any time or from time to time on or before February
10, 2001 and automatically converts into nine shares of common stock in the
event that the daily bid and ask price of our common stock averages $3.00 per
share or more for thirty consecutive days.
Redemption. The shares of Series AA Preferred Stock are redeemable, in
whole or in part at our option at any time, at a price of $10.00 per share, in
the event the bid and ask price of the common stock averages $2.00 per share or
more for thirty consecutive days or at a price of $8.00 per share, in the event
the bid and ask price of the common stock averages $3.00 per share or more for
thirty consecutive days.
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Liquidation or Dissolution. In the event of our liquidation, dissolution or
winding-up, whether voluntary or involuntary, holders of each outstanding share
of Series AA Preferred Stock are entitled to be paid first out of our assets
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 of our
stock ranking as to dividends or assets junior to the Series AA Preferred Stock.
Voting Rights. The holders of Series AA Preferred Stock have no voting
rights.
Stock Transfer
American Stock Transfer and Trust Company, 40 Wall Street, New York, New
York, is our transfer agent.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 3, 2000 we had 8,217,514 shares of our common stock
outstanding, of which approximately 800,000 shares were free trading, 1,524,348
shares could be sold at any time under Rule 144, 1,902,986 are held in escrow
subject to the escrow agreement, and 3,974,665 shares are restricted shares but
are being registered by this prospectus.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who owns shares that were purchased from us, or any
affiliate, at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three-month period, a number of
shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; or,
o the average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person who is not deemed to have been our affiliate at any time during the 90
days preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us,
or any affiliate, at least two years previously, is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
In addition to the outstanding shares of our common stock described above,
as of the date of this prospectus, we have 3,838,825 shares of common stock
reserved for issuance upon the exercise of outstanding options and warrants and
235,107 shares reserved for issuance upon the conversion of outstanding
preferred stock and promissory notes. All of these securities and the shares of
our common stock underlying these securities are restricted securities. The
transfer of these restricted securities is subject to the requirements of Rule
144, as discussed above.
Future sales of restricted common stock under Rule 144 or otherwise or of
the shares which we are registering under this prospectus could negatively
impact the market price of our common stock. We are unable to estimate the
number of shares that may be sold in the future by our existing stockholders or
the effect, if any, that sales of shares by such stockholders will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock by existing stockholders could adversely
affect prevailing market prices.
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EXPERTS
Our consolidated financial statements as of February 28, 1999 and for each
of the two years ended February 28, 1999, and the financial statements of Olsen
Electrosurgical, Inc. as of and for the years ended December 31, 1998 and 1997,
included in the registration statement and this prospectus have been included in
reliance on the report of Grant Thornton LLP, independent certified public
accountants, given on the authority of Grant Thornton LLP as experts in
accounting and auditing.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us
by the Law Office of Gary A. Agron, Englewood, Colorado.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form SB-2 under the Securities Act of 1933
with respect to our common stock offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement
and the exhibits to the registration statement. For further information with
respect to Sparta Surgical Corporation and our common stock offered hereby,
reference is made to the registration statement and the exhibits filed as part
of the registration statement. We also file periodic reports with the Securities
and Exchange Commission, including quarterly reports, annual reports which
include our audited financial statements and proxy statements. The registration
statement, including exhibits thereto, and all of our periodic reports may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C. and copies of all or any part thereof may be obtained
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain additional information
regarding the operation of the Public Reference Section by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at the address http://www.sec.gov.
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SPARTA SURGICAL CORPORATION
---------------------------
Pro forma Statements of Operations
(Unaudited)
For Year Ended February 28, 1999 and
the Nine Months ended November 30, 1999
The following unaudited pro forma combined condensed statements of
operations assume that the acquisition of all of the outstanding common stock of
Olsen Electrosurgical, Inc., a California corporation, ("Olsen") took place as
of the beginning of the year ended February 28, 1999, and the nine months ended
November 30, 1999, and combines the statements of operations of Sparta Surgical
Corporation, a Delaware corporation, ("Sparta") for the year ended February 28,
1999, and the nine months ended November 30, 1999, with Olsen's statements of
operations for the year ended December 31, 1998, and the three months ended
March 31, 1999, respectively.
The pro forma combined condensed statements of operations are not
necessarily indicative of the operating results which would have been achieved
had the acquisition been consummated as of the beginning of the year ended
February 28, 1999, or the nine months ended November 30, 1999, and should not be
construed as representative of future operations.
F-1
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
PROFORMA STATEMENT OF OPERATIONS
(Unaudited)
Sparta Olsen
For the Year For the Year Total
Ended Ended Pro Forma Pro Forma
February 28, 1999 December 31, 1998 Adjustments Amounts
----------------- ----------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,984,000 $ 2,385,000 $ (39,000)(1) $ 4,330,000
Cost of sales 1,028,000 1,092,000 (39,000)(1) 2,081,000
----------- ----------- ----------- -----------
Gross profit 956,000 1,293,000 -- 2,249,000
Selling, general and administrative expenses 927,000 1,508,000 -- 2,435,000
Depreciation and amortization expenses 198,000 49,000 83,000(2) 330,000
----------- ----------- ----------- -----------
Loss from operations (169,000) (264,000) (83,000) (516,000)
Other income (expense):
Interest expense (623,000) (26,000) -- (649,000)
Other 448,000 -- -- 448,000
----------- ----------- ----------- -----------
(175,000) (26,000) -- (201,000)
----------- ----------- ----------- -----------
Net loss (344,000) (290,000) (83,000) (717,000)
Preferred stock dividend (42,000) -- -- (42,000)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (386,000) $ (290,000) $ (83,000) $ (759,000)
=========== =========== =========== ===========
Net loss per common share - basic and diluted $ (0.28) $ (0.42)
=========== ===========
Shares used in computing per share information 1,395,276 400,000(3) 1,795,276
=========== =========== ===========
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
PROFORMA STATEMENT OF OPERATIONS
(Unaudited)
Sparta Olsen
For the Nine For the Three Total
Months Ended Months Ended Pro Forma Pro Forma
November 30, 1999 March 31, 1999 Adjustments Amounts
----------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,294,000 $ 586,000 $ (10,000)(1) $ 2,870,000
Cost of sales 944,000 323,000 (10,000)(1) 1,257,000
----------- ----------- ----------- -----------
Gross profit 1,350,000 263,000 -- 1,613,000
Selling, general and administrative expenses 1,218,000 246,000 -- 1,464,000
Research and development expenses 16,000 -- -- 16,000
Depreciation and amortization expenses 217,000 12,000 21,000(2) 250,000
----------- ----------- ----------- -----------
Income (loss) from operations (101,000) 5,000 (21,000) (117,000)
Other income (expense):
Interest expense (329,000) (5,000) -- (334,000)
----------- ----------- ----------- -----------
(329,000) (5,000) -- (334,000)
----------- ----------- ----------- -----------
Net loss (430,000) -- (21,000) (451,000)
Preferred stock dividend (21,000) -- -- (21,000)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (451,000) $ -- $ (21,000) $ (472,000)
=========== =========== =========== ===========
Net loss per common share - basic and diluted $ (0.20) $ (0.18)
=========== ===========
Shares used in computing per share information 2,258,768 400,000(3) 2,658,768
=========== =========== ===========
See accompanying notes to financial statements.
F-3
</TABLE>
<PAGE>
Sparta Surgical Corporation
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
Year ended February 28, 1999 and
Nine months ended November 30, 1999
(Unaudited)
On June 8, 1999, Sparta acquired all of the outstanding common stock of
Olsen (collectively the "Company"). Olsen develops, manufactures, distributes
and markets, reusable and disposable electrosurgical devices and accessories for
the healthcare industry. The purchase price was paid in 400,000 shares of
Sparta's common stock with a fair value of $ 850,000. Goodwill and other
intangible assets will be amortized over their estimated useful lives of 15
years.
The accompanying pro forma statements of operations are presented in
accordance with Regulation S-B Item 310(b) Paragraph (d). No pro forma balance
sheet is presented as the assets and liabilities of Olsen and the goodwill
recognized in the acquisition are contained in the August 31, 1999, and the
November 30, 1999, balance sheets of the Company filed on Forms 10-QSB.
The Company's results of operations will include Olsen from June 8, 1999.
The pro forma statements of operations for the year ended February 28, 1999, and
the nine months ended November 30, 1999, include the following adjustments to
reflect consummation of the transaction as if it had occurred at the beginning
of each period presented.
1. To eliminate revenues and cost of revenues between Sparta and Olsen.
2. To record amortization of intangibles.
3. To increase the number of common shares used in the per share
calculation for the common stock issued in the acquisition.
The adjustments do not give effect to any potential benefits that might
have been realized through the combination of operations and are not necessarily
indicative of the results that would have been reported if the acquisition of
Olsen had actually occurred at the beginning of the year ended February 28, 1999
or the nine months ended November 30, 1999.
F-4
<PAGE>
SPARTA SURGICAL CORPORATION
---------------------------
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
February 28, 1998 and 1999
and November 30, 1999 (unaudited)
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Sparta Surgical Corporation
We have audited the accompanying consolidated balance sheet of Sparta Surgical
Corporation (the "Company") as of February 28, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
February 28, 1999, and the consolidated results of its operations and its cash
flows for each of the two years in the period then ended, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
June 10, 1999
F-5
<PAGE>
<TABLE>
<CAPTION>
Sparta Surgical Corporation
CONSOLIDATED BALANCE SHEET
February 28, 1999 and November 30, 1999 (unaudited)
February 28, November 30,
1999 1999
------------ ------------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash $ 1,000 $ 5,000
Accounts receivable, net of allowance for doubtful accounts of $34,000
and $42,000 at February 28, 1999 and November 30, 1999, respectively 162,000 430,000
Inventories 2,026,000 2,414,000
Other 66,000 100,000
------------ ------------
Total current assets 2,255,000 2,949,000
Property and equipment, net 137,000 877,000
Other assets
Intangible assets 461,000 948,000
Other 144,000 123,000
------------ ------------
Total other assets 605,000 1,071,000
------------ ------------
Total assets $ 2,997,000 $ 4,897,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term obligations $ 219,000 $ 1,516,000
Account payable - trade 422,000 621,000
Accrued expenses 301,000 417,000
------------ ------------
Total current liabilites 942,000 2,554,000
Revolving credit facility and long-term obligations 1,833,000 1,687,000
Stockholders' equity:
Preferred stock: $4.00 par value, 2,000,000 shares authorized;
1992 non-cumulative convertible redeemable preferred stock:
165,000 shares authorized, 116,583 and 82,783 shares issued and
outstanding at February 28, 1999 and November 30, 1999, respectively 466,000 331,000
Series A cumulative convertible redeemable preferred stock:
30,000 shares authorized, 28,068 shares issued and outstanding 112,000 112,000
Series AA cumulative convertible redeemable preferred stock:
875,000 shares authorized, 39,938 shares issued and outstanding 160,000 160,000
Common stock: $0.002 par value, 8,000,000 shares authorized, 2,879,607
and 5,740,281 shares issued and outstanding at February 28, 1999 and
November 30, 1999, respectively 4,000 5,000
Additional paid in capital 9,272,000 10,291,000
Accumulated deficit (9,792,000) (10,243,000)
------------ ------------
Total stockholders' equity 222,000 656,000
------------ ------------
Total liabilities and stockholders' equity $ 2,997,000 $ 4,897,000
============ ============
See accompaning notes to consolidated financial statements.
F-6
<PAGE>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended February 28,
1998 and 1999 and for the nine months
ended November 30, 1999 (unaudited)
February 28, February 28, November 30,
1998 1999 1999
------------ ----------- -----------
(unaudited)
Net sales $ 2,272,000 $ 1,984,000 $ 2,294,000
Cost of sales 1,066,000 1,028,000 944,000
----------- ----------- -----------
Gross profit 1,206,000 956,000 1,350,000
Selling, general and administrative expenses 1,679,000 927,000 1,218,000
Depreciation and amortization 217,000 198,000 217,000
Research and development expenses 15,000 0 16,000
----------- ----------- -----------
Loss from operations (705,000) (169,000) (101,000)
Other income (expense):
Interest expense (629,000) (623,000) (341,000)
Litigation settlements 0 214,000 0
Provision for uncollectible note receivable (548,000) 0 0
Gain on settlement of long-term liabilities 0 199,000 0
Other 24,000 35,000 12,000
----------- ----------- -----------
Total other income (expense) (1,153,000) (175,000) (329,000)
----------- ----------- -----------
Net loss (1,858,000) (344,000) (430,000)
Preferred stock dividends (42,000) (42,000) (21,000)
----------- ----------- -----------
Net loss applicable to common stockholders $(1,900,000) $ (386,000) $ (451,000)
=========== =========== ===========
Basic and diluted net loss per common share ($ 2.27) ($ 0.28) ($ 0.20)
=========== =========== ===========
Shares used to calculate basic and diluted net loss per common share 836,189 1,395,276 2,258,768
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Sparta Surgical Corporation
CONSOLIDATED Statement of Stockholders' Equity
Two years ended February 28, 1999 and nine months ended November 30, 1999 (unaudited)
1992 Series A Cumulative Series AA
Redeemable Redeemable Redeemable
Preferred Stock Preferred Stock Preferred Stock
---------------------- -------------------- -------------------
Shares Amount Shares Amount Shares Amount
--------- --------- --------- -------- -------- --------
Balance at March 1, 1997 160,678 $ 643,000 28,068 112,000 -- $ --
Preferred stock dividends paid in common stock -- -- -- -- -- --
Conversion of preferred stock into common stock (38,095) (153,000) -- -- -- --
Issuance of common stock under escrow agreement -- -- -- -- -- --
Issuance of stock and warrants with debt -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Balance at February 28, 1998 122,583 490,000 28,068 112,000 -- --
Preferred stock dividends paid in common stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- -- --
Conversion of preferred stock into common stock (6,000) (24,000) -- -- -- --
Conversion of debt into common and preferred stock -- -- -- -- 39,938 160,000
Issuance of common stock under escrow agreement -- -- -- -- -- --
Issuance of warrants with debt -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Balance at February 28, 1999 116,583 466,000 28,068 112,000 39,938 160,000
Unaudited:
Preferred stock dividends paid in common stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- -- --
Conversion of preferred stock into common stock (33,800) (135,000) -- -- -- --
Issuance of common stock for the purchase of a -- -- -- -- -- --
subsidiary
Issuance of common stock under escrow agreement -- -- -- -- -- --
Issuance of common stock under escrow in connection
with debt financing -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Balance at November 30, 1999 82,783 $ 331,000 28,068 $112,000 39,938 $ 39,958
========= ========= ========= ======== ========= =========
Common Stock Additional
--------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance at March 1, 1997 764,249 $ 1,000 $7,926,000 $(7,506,000) $1,176,000
Preferred stock dividends paid in common stock 23,274 -- 42,000 (42,000) --
Conversion of preferred stock into common stock 12,698 1,000 152,000 -- --
Issuance of common stock under escrow agreement 727,986 -- -- -- --
Issuance of stock and warrants with debt 50,000 -- 137,000 -- 137,000
Net loss -- -- -- (1,858,000) (1,858,000)
--------- --------- ----------- ------------- ----------
Balance at February 28, 1998 1,578,207 2,000 8,257,000 (9,406,000) (545,000)
Preferred stock dividends paid in common stock 32,487 -- 42,000 (42,000) --
Issuance of common stock 40,180 -- -- -- --
Conversion of preferred stock into common stock 2,000 -- 24,000 -- --
Conversion of debt into common and preferred stock 1,001,733 2,000 749,000 -- 911,000
Issuance of common stock under escrow agreement 225,000 -- -- -- --
Issuance of warrants with debt -- -- 200,000 -- 200,000
Net loss -- -- -- (344,000) (344,000)
--------- --------- ----------- ------------ ---------
Balance at February 28, 1999 2,879,607 4,000 9,272,000 (9792,000) 222,000
Unaudited:
Preferred stock dividends paid in common stock 28,908 -- 21,000 (21,000) --
Issuance of common stock 116,500 -- 14,000 -- 14,000
Conversion of preferred stock into common stock 11,266 -- 135,000 -- --
Issuance of common stock for the purchase of a subsidiary 400,000 1,000 849,000 -- 850,000
Issuance of common stock under escrow agreement 980,000 -- -- -- --
Issuance of common stock under escrow in connection
with debt financing 1,324,000 -- -- -- --
Net loss -- -- -- (430,000) (430,000)
--------- --------- ----------- ------------ ---------
Balance at November 30, 1999 5,740,281 $ 5,000 $10,291,000 $(10,243,000) $ 656,000
========= ========= =========== ============ =========
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended February 28,
1998 and 1999 and for the nine months
ended November 30, 1999 (unaudited)
February 28, February 28, November 30,
1998 1999 1999
----------- ----------- ------------
(Unaudited)
Cash flows from operating activities
Net loss $(1,858,000) $ (344,000) $ (430,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 217,000 198,000 180,000
Amortization of debt issuance costs, including warrants 225,000 265,000 37,000
Provision for uncollectible note receivable 548,000 0 0
Gain on disposition of long-term liabilities 0 (199,000) 0
Gain on lease settlement 0 0 (12,000)
Litigation settlements 0 (214,000) 0
Changes in operating assets and liabilities:
Accounts receivable 107,000 53,000 (121,000)
Inventories 95,000 139,000 (99,000)
Other assets 66,000 (97,000) 8,000
Accounts payable and accrued expenses (171,000) 16,000 (370,000)
----------- ----------- -----------
Net cash used in operating activities (771,000) (183,000) (807,000)
Cash flows from investing activities:
Capital expenditures 0 (10,000) (102,000)
Repayment of notes receivable 599,000 0 0
Cash acquired in acquisition of subsidiary 0 0 14,000
----------- ----------- -----------
Net cash provided by (used in) investing activities 599,000 (10,000) (88,000)
Cash flows from financing activities:
Proceeds from borrowings 2,129,000 2,867,000 3,038,000
Principal payments on long-term obligations (1,787,000) (2,657,000) (2,101,000)
Proceeds from issuance of common stock 0 0 14,000
Debt issuance costs incurred (169,000) (17,000) (52,000)
----------- ----------- -----------
Net cash provided by financing activities 173,000 193,000 899,000
----------- ----------- -----------
Net change in cash and cash equivalents 1,000 0 4,000
Cash and cash equivalents at beginning of period 0 1,000 1,000
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,000 $ 1,000 $ 5,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 483,000 $ 308,000 $ 341,000
Income taxes 0 0 0
Supplemental disclosure of non-cash financing activities:
- ---------------------------------------------------------
Conversion of trade payables and accrued interest into long-term debt $ 216,000 $ -- $ --
Conversion of long-term debt and accrued interest into common stock 0 911,000 0
Warrants and common stock issued in connection with long-term debt borrowings 137,000 200,000 0
Assets and liabilities acquired in purchase of subsidiary:
Cash 14,000
Accounts receivable 147,000
Inventories 289,000
Prepaid expenses 21,000
Property and equipment 740,000
Accounts payable (295,000)
Accrued and other liabilities (390,000)
Notes payable (171,000)
Common Stock issued (850,000)
-----------
Goodwill $ (495,000)
===========
See accompanying notes to consolidated financial statements.
F-9
</TABLE>
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
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.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average method.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Basic and Diluted Net Loss Per Share
------------------------------------
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share
is computed using the weighted average number of common and potentially
dilutive shares outstanding during the period. Potentially dilutive
shares consist of the incremental common shares issuable upon conversion
of convertible securities (using the if-converted method) and shares
issuable upon the exercise of stock options and warrants (using the
treasury stock method). Potentially dilutive shares are excluded from the
computation if their effect is anti-dilutive. Contingently issuable
shares are included in diluted earnings per share when the related
conditions are satisfied.
F-10
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
<TABLE>
<CAPTION>
Nine months
Year ended February 28, ended
--------------------------- November 30,
1998 1999 1999
--------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Numerator
Net loss applicable to commons
stockholders (1,900,000) (386,000) (451,000)
Denominator
Average outstanding during
the period 1,789,175 2,348,262 3,705,319
Less: Shares subject to
escrow agreement (Note 9) 952,986 952,986 1,446,551
--------- --------- ---------
Number of shars on which EPS
is calculated 836,189 1,395,276 2,258,768
========= ========= =========
Basic and diluted loss per
common share $ (2.27) $ (0.28) $ (0.20)
========= ========= =========
</TABLE>
Property and Equipment
----------------------
Property and equipment consists primarily of warehouse and office
equipment and automobiles. Depreciation is calculated based on the
following estimated useful lives using the straight-line method.
Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the improvement.
Equipment 3 - 10 years
Automobiles 7 years
Intangible Assets
-----------------
The Company evaluates the realizability of intangibles to determine
potential impairment by comparing the undiscounted cash flows of the
related assets to the carrying value. The Company provides for losses if
an impairment is indicated. Intangible assets are being amortized using
the straight-line method based on the following estimated useful lives.
Debt issuance costs are amortized over the term of the related debt
agreement.
Non-compete agreements 5 years
Goodwill 5 - 10 years
Patents and licensing agreements 10 years
F-11
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation
------------------------
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, compensation cost is recognized
over the vesting period based on the excess of the fair value of the
Company's stock on the measurement date over the amount an employee must
pay to acquire the stock.
Income Taxes
------------
Income taxes are computed using an asset and liability method. Under an
asset and liability method, deferred income tax assets and liabilities
are determined based on the differences between the financial reporting
and tax bases of assets and liabilities and are measured using currently
enacted tax rates and laws.
Fair Value of Financial Instruments
-----------------------------------
The fair value of cash, accounts receivable and trade payables
approximates carrying value due to the short term nature of such
instruments. The fair value of long term obligations from financial
institutions approximates carrying value based on terms available for
similar instruments. The fair value of long term obligations with related
parties and individuals is not determinable.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations
--------------
The Company provides credit, in the normal course of business, to a large
number of distributors and wholesalers, concentrated in the medical
supply industry. Accounts receivable are due from customers located
throughout the United States and various foreign countries. The Company
performs periodic credit evaluations of its customers' financial
condition and generally requires no collateral. The Company maintains
reserves for potential credit losses and such losses have not exceeded
management's expectations. One electrotherapy products customer accounted
for 20% and 22% of net sales for the years ended February 28, 1999 and
1998, respectively. In 1999 and 1998, the Company purchased the products
sold to this customer from a single source vendor. Purchases from this
vendor were 43% and 33% of total cost of sales for the years ended
February 28, 1999 and 1998, respectively. The Company has identified an
alternate supplier for this product; however, no purchases have been made
from this vendor.
F-12
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications
-----------------
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
February 28, November 30,
1999 1999
------------- -------------
(unaudited)
Equipment $ 323,000 $ 1,148,000
Automobiles 94,000 0
Leasehold improvements 20,000 38,000
------------- -------------
437,000 1,186,000
Less accumulated depreciation
and amortization (300,000) (309,000)
------------- --------------
$ 137,000 $ 877,000
============= =============
NOTE 3 - INTANGIBLE ASSETS
Intangible assets consist of the following:
February 28, November 30,
1999 1999
------------- -------------
(unaudited)
Goodwill, net of accumulated
amortization of $618,000
and $675,000, respectively $ 277,000 $ 715,000
Patents, net of accumulated
amortization of $200,000 and
$227,000, respectively 152,000 125,000
Other 32,000 108,000
------------- -------------
Total $ 461,000 $ 948,000
============= =============
F-13
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 4 - REVOLVING CREDIT FACILITIES AND LONG-TERM OBLIGATIONS
Revolving credit facilities and long-term obligations consist of the
following:
<TABLE>
<CAPTION>
February 28, November 30,
1999 1999
------------- ------------
(unaudited)
<S> <C> <C>
The Company has a revolving credit facility
with a financial institution (the "Bank
Line") that bears interest at prime (7.75%
at February 28, 1999) plus 3% and expires
in July 2001. Borrowings under this line of
credit are limited to the lesser of 85% of
eligible accounts receivable and 55% of
eligible inventory or $2,500,000. The line
of credit facility is collateralized by
substantially all assets of the Company and
is guaranteed by Mr. Thomas F. Reiner, the
Company's President, Chief Executive
Officer and Chairman, up to $250,000. At
February 28, 1999, as a result of the
borrowing limits, the Company had no
amounts available under this line. $ 1,340,000 $ 1,170,000
Mr. Reiner has provided the Company with a
$500,000 line of credit (the "Reiner Line")
that bears interest at 12%. Borrowings
under this line of credit are due in June
2000. Mr. Reiner may convert any
outstanding balance into common stock at
100% of the average trading price of the
Company's common stock. 455,000 410,000
Bridge financing loans (see Note 12) - 1,285,000
4.5% installment note due in 2000, variable
principal and interest payments from $4,000
to $10,000 per month. 156,000 126,000
7% unsecured installment note due in 2000,
monthly principal and interest payments of
$3,000. 50,000 21,000
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. - 71,000
F-14
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 4 - REVOLVING CREDIT FACILITIES AND LONG-TERM OBLIGATIONS (continued)
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. - 26,000
Unsecured short-term note payable in
monthly installments of $5,000 bearing
annual interest of 8.25%. The loan is past
due. - 27,000
Obligations under capital leases 51,000 67,000
------------ ------------
2,052,000 3,203,000
Less current portion (219,000) (1,516,000)
------------ ------------
Long-term debt $ 1,833,000 $ 1,687,000
============ ============
</TABLE>
Installments due on debt principal, including the capital leases, are as
follows:
February 28, November 30,
1999 1999
------------- -------------
(unaudited)
Year ending February 28,
2000 $ 219,000 $ 1,436,000
2001 491,000 480,000
2002 1,342,000 1,183,000
2003 - 14,000
2004 - 14,000
Thereafter - 76,000
------------- -------------
$ 2,052,000 $ 3,203,000
============= =============
In 1999, the Company issued warrants to purchase 300,000 shares of common
stock in connection with the issuance of long-term debt. The Company
determined the aggregate fair value of these warrants and shares to be
$200,000 and is amortizing this amount as interest expense over the life
of the related debt. As of February 28, 1999, the Company had 376,634
warrants outstanding which had been issued in connection with long-term
debt.
F-15
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 5 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through February 28, 1999. The
following table sets forth the primary components of deferred tax assets
at February 28, 1999:
Net operating loss and credit carryforwards $ 2,700,000
Non-deductible reserves and expenses 520,000
------------
Gross deferred tax assets 3,220,000
Valuation allowance (3,220,000)
------------
$ -
============
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation
allowance is required. During fiscal 1999 the valuation allowance
increased $220,000. At February 28, 1999, the Company had approximately
$7,530,000 of federal net operating loss carryforwards for tax reporting
purposes available to offset future taxable income; such carryforwards
will expire from 2007 to 2009. Additionally, the Company has
approximately $1,680,000 of state net operating loss carryforwards for
tax reporting purposes which will expire from 1999 to 2004.
NOTE 6 - STOCKHOLDERS' EQUITY
Amendment to Authorized Common and Preferred Stock
--------------------------------------------------
In February 1999, the Company's Board of Directors authorized an
amendment and restatement of the Company's Articles of Incorporation to
increase the number of authorized shares of preferred stock from 750,000
to 2,000,000 shares.
Preferred Stock
---------------
The Preferred Stock may be issued in series from time to time with such
designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of Preferred Stock may
differ with respect to such matters as may be determined by the Board of
Directors, including, without limitation, the rate of dividends, method
and nature of payment of dividends, terms of redemption, amounts payable
on liquidation, sinking fund provisions, conversion rights and voting
rights.
F-16
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
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 option of the
Company at $4.00 per share under certain conditions. The liquidation
preference for the 1992 Preferred Stock is $4.00 per share. Warrants
issued with the 1992 Preferred Stock expired in the year ended February
28, 1998.
Series A Preferred Stock. The Company has authorized 30,000 shares of
Series A Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock"). The holders of the Series A Preferred Stock receive cumulative
dividends at the quarterly rate of $0.375 per share. The holders of the
Series A Preferred Stock have no voting rights except as to matters
affecting the rights of preferred stockholders or as required by law. In
connection with any such vote, each outstanding share of Series A
Preferred Stock has one vote. The Series A Preferred Stock is redeemable
at the option of the Company 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 option
of the Company 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.
F-17
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
Series A Warrants
-----------------
The securities sold in the Company's 1994 public offering (the "Units")
consisted of one share of Series A Preferred Stock and four common stock
purchase warrants (the "Series A Warrants"). As a result of stock splits
since the offering, six Series A Warrants and $18.00 are convertible into
one share of common stock. In connection with the offering, the Company
issued to the underwriter, warrants to purchase 16,500 Units at an
exercise price of $12.00 per Unit (the "Underwriters' Warrants"). The
Series A Warrants and the Underwriters' Warrants expired in July 1999.
Stock Options and Warrants
--------------------------
The 1987 Stock Option Plan (the "Plan") provided for the grant of both
incentive stock options and non-qualified stock options. The Plan expired
in 1997. Options granted under the Plan generally vested within one year
and terminate between five and ten years from the date of grant.
The Company has also granted options and warrants to purchase common
stock outside of the Plan to officers, vendors, directors and
consultants. These instruments generally vest within one year.
Stock option and warrant activity, excluding the Series A Warrants, the
Underwriters' Warrants and warrants issued in connection with long-term
debt, is summarized as follows:
Weighted
Average
Exercise
Shares Price
---------- -------------
Balance at March 1, 1997 256,031 $ 9.88
Granted 647,000 1.26
Exercised - -
Cancelled (44,858) 10.47
---------- -----------
Balance at February 28, 1998 858,173 3.35
Granted 335,000 0.97
Exercised - -
Cancelled (73,751) 3.94
---------- -----------
Balance at February 28, 1999 1,119,422 $ 2.60
========== ===========
F-18
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
The following table summarizes information about stock options and
warrants outstanding as of February 28, 1999:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Term Exercisable Price
- ----------------- --------------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
$0.59 - $1.47 812,000 $1.06 6 years 712,000 $1.10
$1.98 - $3.18 186,002 2.20 5 years 186,002 2.20
$13.50 121,420 13.50 3 years 121,420 13.50
--------- ---------
1,119,422 1,019,422
========= =========
The following table depicts the Company's pro forma results for the years
ending February 28 1999 and 1998, had compensation expense for employee
stock options been determined based on the fair value at the grant dates
as prescribed in SFAS 123:
1998 1999
------------- -------------
Net loss applicable to common stockholders
As reported $ (1,900,000) $ (386,000)
Pro forma (2,618,000) (760,000)
Basic and diluted net loss per share
As reported $(2.27) $(0.28)
Pro forma (3.13) (0.54)
</TABLE>
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 1998 and 1999 was $1.10 and $1.12, respectively.
The following weighted average assumptions were used to perform the
calculations: expected life of 7 years; interest rate of 6%; volatility
of 125%; and no dividend yield. The pro forma disclosures above may not
be representative of pro forma effects on reported financial results for
future years.
NOTE 7 - BUSINESS SEGMENTS
The Company's products are divided into two product groups: Surgical
Specialty Products and Electrotherapy DME Products. The Company's
reportable product group segments are strategic business units that offer
different ranges of products. Surgical Specialty Products consist of
microsurgical hand held instruments and accessories, critical care
hospital disposable products and oral maxillofacial implant plating
systems. Electrotherapy DME Products consist of transcutaneous electrical
nerve stimulators, electrodes and related accessories.
F-19
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 7 - BUSINESS SEGMENTS (continued)
Information by product group segment is set forth below for the years
ended February 28, 1998 and 1999 and for the nine months ended November
30, 1999:
<TABLE>
<CAPTION>
February 28, February 28, November 30,
1998 1999 1999
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Net sales:
Surgical Specialty Products $ 1,027,000 $ 954,000 $ 675,000
Electrotherapy DME Products 1,245,000 1,030,000 1,619,000
------------- ------------- -------------
$ 2,272,000 $ 1,984,000 $ 2,294,000
============= ============= =============
Gross profit:
Surgical Specialty Products $ 671,000 $ 545,000 $ 451,000
Electrotherapy DME Products 535,000 411,000 899,000
------------- ------------- -------------
$ 1,206,000 $ 956,000 $ 1,350,000
============= ============= =============
</TABLE>
Due to the shared and integrated resources in personnel and facilities
for the two product group segments, information on assets, operating
expenses and income from operations is not identifiable for each of the
two business segments.
NOTE 8 - COMMITMENTS
The Company leases equipment and facilities under operating lease
agreements. Rental expense was $160,000 and $145,000 for the years ended
February 28, 1998 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,
------------------------
2000 $ 119,000
2001 118,000
2002 73,000
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has entered into several transactions with Mr. Reiner for the
issuance of shares of common stock or the granting of options to purchase
shares of common stock. As of February 28, 1999, Mr. Reiner has been
granted options to purchase 747,002 shares of common stock. These options
have been granted both from the Plan and from outside the Plan.
F-20
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 9 - RELATED PARTY TRANSACTIONS (continued)
As of February 28, 1999, Mr. Reiner has also been granted 952,986 shares
of common stock for providing the Reiner Line and for guaranteeing
certain debt obligations of the Company (See Note 4). The Company and Mr.
Reiner entered into an escrow agreement whereby the issuance of the
952,986 shares is contingent upon the Company meeting certain performance
goals prior to May 2004. The Company has not satisfied these conditions.
Mr. Reiner has voting authority over these shares and these shares are
considered outstanding as of February 28, 1999, although for purposes of
calculating the net loss per share, these shares are excluded.
Prior to 1998, Mr. Reiner had entered into several note agreements with
the Company. Under the terms of these agreements, Mr. Reiner was
obligated to pay the Company $569,000. During 1998, Mr. Reiner made
repayments in the amount of $21,000. The Company agreed to forgive the
amounts owed under the notes if the performance criteria contained in the
escrow agreement are achieved prior to May 2004. The Company does not
consider collection of the notes to be probable and recorded a charge to
operations of $548,000 during the year ended February 28, 1998.
In total, at February 28, 1999, Mr. Reiner directly holds 52,059 shares
of common stock, has options or warrants to purchase 747,002 shares of
common stock at prices ranging from $0.59 to $13.50 per share and has
voting authority over 1,015,462 shares of common stock. Mr. Reiner also
is the trustee over voting trusts for 692,500 shares of common stock
issuable upon the exercise of outstanding warrants.
Under the terms of an employment agreement, Mr. Reiner's daughter, an
employee of the Company, was granted options to purchase 150,000 shares
of common stock in March 1998. These options vest over three years and
are exercisable at $0.75 per share.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan for employees who are not
covered by any collective bargaining agreement, have attained age 21 and
have completed one year of service. Employee and Company matching
contributions are discretionary. The Company made no matching
contributions for the years ended February 28, 1998 and 1999.
NOTE 11 - LITIGATION
In May 1998, the Company settled an action stemming from a 1992
acquisition. As settlement, the Company issued warrants to purchase
75,000 shares of Common Stock at $0.75 per share and 35,000 shares of
Common Stock.
In June 1998, a judicial ruling released the Company from any financial
obligations in connection with the termination of a lease of the
Company's former facilities in New Jersey. As a result of this judicial
ruling, the Company eliminated its accrual for the lease termination,
which was approximately $304,000.
F-21
<PAGE>
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 11 - LITIGATION (continued)
In January 1999, the Company settled a dispute with a former employee. As
settlement, the Company agreed to pay $90,000 to the former employee,
$40,000 of which was paid as of February 28, 1999, and the remainder of
which is included in accounts payable.
NOTE 12 - SUBSEQUENT EVENTS
In March 1999, the Company signed a consulting agreement with a financial
advisor, which provides for the advisor to receive warrants to purchase
300,000 shares of common stock at $0.95 per share.
During the period from March 1999 through November 1999, the Company
raised $1,510,000 of financing from various individual investors. These
individual loans (the "Bridge Financing Loans") range from $25,000 to
$350,000, with interest rates ranging from 7% to 12%. The proceeds from
the Bridge Financing Loans are designated to be used primarily for
working capital and legal and accounting expenses related to the various
acquisitions that the Company has targeted. In accordance with the terms
of the Bridge Financing Loans, the principal is to be repaid by the
Company at the earlier of six months from the date of issuance of the
loans or the closing of a $25 million second public offering.
In June 1999, the Company completed an agreement to purchase all of the
outstanding common stock of Olsen Electrosurgical, Inc. ("Olsen"), a
privately held company that manufactures and markets electrosurgical
devices and accessories. For the fiscal year ending December 31, 1998,
Olsen recorded approximately $2.4 million in net sales. Under the
purchase agreement, the Company issued 400,000 shares of the Company's
Common Stock, in exchange for all of the outstanding shares of Olsen's
common stock. In addition, the shareholders of Olsen entered into a
five-year non-compete and consulting agreement valued at approximately
$1.3 million.
UNAUDITED
In February and March 2000, the Company converted $1,285,000
of debt into 1,188,332 shares of common stock at an average
of $1.08 per share. In addition, the Company issued
1,342,333 shares in consideration of loans made during 1999.
The Company also completed a private placement selling a
total of 1,177,000 shares of common stock at an average
price of $1.07, a total of $1,263,125 from March 1999 to
March 2000.
The following unaudited pro forma consolidated results of operations
assume that the purchse occurred as of the beginning of each period:
Year Ended Nine Months Ended
February 28, 1999 November 30, 1999
----------------- -----------------
Revenues $4,330,000 $2,870,000
Net loss applicable to shareholders ($ 759,000) ($ 472,000)
Loss per share - bsic and diluted ($0.42) ($0.18)
F-22
<PAGE>
OLSEN ELECTROSURGICAL, INC.
---------------------------
Financial Statements and
Report of Independent Certified Public Accountants
December 31, 1998 and 1997
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Olsen Electrosurgical, Inc.
We have audited the accompanying balance sheets of Olsen Electrosurgical, Inc.
(the "Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity and cash flows for the 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 financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States.
San Jose, California
February 18, 2000
F-23
<PAGE>
<TABLE>
<CAPTION>
Olsen Electrosurgical, Inc
BALANCE SHEETS
December 31 March 31
-------------------------- --------------------------
1998 1997 1999 1998
---------- ---------- ---------- ----------
Unaudited
ASSETS
<S> <C> <C> <C> <C>
Current assets
Cash $ 394 $ 218 $ 319 $ 133
Accounts receivable 156,380 324,251 177,111 250,547
Accounts and advances receivable - related parties 4,400 132,774 6,971 115,547
Inventories 388,673 424,286 304,742 492,932
Other 27,084 33,853 48,166 21,624
---------- ---------- ---------- ----------
Total current assets 576,931 915,382 537,309 880,783
Property and equipment, net 76,641 99,941 69,884 87,625
---------- ---------- ---------- ----------
Total assets $ 653,572 $1,015,323 $ 607,193 $ 968,408
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ -- $ 68,469 $ 4,480 $ 39,342
Current portion of long-term debt 169,223 77,597 67,055 108,925
Line of credit 75,000 72,000 75,000 75,000
Accounts payable 238,992 285,969 277,413 269,190
Accrued expenses 10,745 19,633 1,185 1,620
---------- ---------- ---------- ----------
Total current liabilities 493,960 523,668 425,133 494,077
Long-term debt, less current portion 31,249 72,916 54,134 12,467
Stockholders' equity
Common stock, $1 par value, 100,000 shares authorized, 5,000 5,000 5,000 5,000
5,000 issued and outstanding
Retained earnings 123,363 413,739 122,926 456,864
---------- ---------- ---------- ----------
Total stockholders' equity 128,363 418,739 127,926 461,864
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 653,572 $1,015,323 $ 607,193 $ 968,408
========== ========== ========== ==========
See accompanying notes to financial statements.
F-24
<PAGE>
Olsen Electrosurgical, Inc.
STATEMENTS OF OPERATIONS
Year ended December 31, Three months ended March 31,
------------------------------ ------------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
Unaudited
Net sales $ 2,384,535 $ 3,091,174 $ 585,968 $ 678,873
Cost of sales 1,092,008 1,557,812 322,759 265,557
----------- ----------- ----------- -----------
Gross profit 1,292,527 1,533,362 263,209 413,316
Selling, general and administrative expenses 1,507,631 1,544,514 246,228 350,222
Depreciation and amortization expenses 49,258 51,668 12,250 12,315
----------- ----------- ----------- -----------
Income (loss) from operations (264,362) (62,820) 4,731 50,779
Other income (expense):
Interest expense (26,014) (20,969) (5,168) (7,654)
Other -- 5,399 -- --
----------- ----------- ----------- -----------
Total other income (expense) (26,014) (15,570) (5,168) (7,654)
----------- ----------- ----------- -----------
Net income (loss) $ (290,376) $ (78,390) $ (437) $ 43,125
=========== =========== =========== ===========
See accompanying notes to financial statements.
F-25
<PAGE>
Olsen Electrosurgical, Inc
STATEMENT OF STOCKHOLDERS' EQUITY
For the two years ended December 31, 1998
Common Stock
----------------------------- Retained
Shares Amount Earnings Total
--------- --------- --------- ---------
Balance at January 1, 1997 5,000 $ 5,000 $ 492,129 $ 497,129
Net loss -- -- (78,390) (78,390)
--------- --------- --------- ---------
Balance at December 31, 1997 5,000 5,000 413,739 418,739
Net loss -- -- (290,376) (290,376)
--------- --------- --------- ---------
Balance at December 31, 1998 5,000 $ 5,000 $ 123,363 $ 128,363
========= ========= ========= =========
See accompanying notes to financial statements.
F-26
<PAGE>
Olsen Electrosurgical, Inc
STATEMENTS OF CASH FLOWS
Year ended December 31, Three months ended March 31,
----------------------- ----------------------------
1998 1997 1999 1998
--------- --------- --------- ---------
Unaudited
Cash flows from operating activities:
Net income (loss) $(290,376) $ (78,390) $ (437) $ 43,125
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 49,258 51,668 12,250 12,315
Changes in operating assets and liabilities:
Accounts receivable and employee advances 296,244 (15,073) (23,301) 90,931
Inventories 35,613 (113,385) 83,931 (68,646)
Other assets 6,769 28,737 (21,082) 12,229
Accounts payable and accrued expenses (55,865) 130,597 28,861 (34,792)
--------- --------- --------- ---------
Net cash used in operating activities 41,644 4,154 80,222 55,162
Cash flows from investing activities:
Capital expenditures (25,958) (24,201) (5,493) --
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (25,958) (24,201) (5,493) --
Cash flows from financing activities:
Change in bank overdraft (68,469) (13,984) 4,480 (29,127)
Proceeds from long term debt 131,084 125,000 -- --
Principal payments on long term debt (81,125) (118,023) (79,283) (29,120)
Net borrowings on revolving line of credit 3,000 27,272 -- 3,000
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (15,510) 20,265 (74,803) (55,247)
--------- --------- --------- ---------
Net change in cash and cash equivalents 176 218 (74) (85)
Cash at beginning of year 218 -- 393 218
--------- --------- --------- ---------
Cash at end of year $ 394 $ 218 $ 319 $ 133
========= ========= ========= =========
Supplemental disclosure of cash flow information:
- -------------
Cash paid during the year for:
Interest $ 26,014 $ 20,969 $ -- $ --
Income taxes 800 800 -- --
See accompanying notes to financial statements.
F-27
</TABLE>
<PAGE>
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Olsen Electrosurgical, Inc. (the "Company") was incorporated in California on
March 12, 1973. The Company develops, manufactures, distributes and markets,
reusable and disposable electrosurgical devices and accessories for the
worldwide healthcare industry.
The accompanying financial statements of the company as of March 31, 1999 and
1998 and for the three months then ended have been prepared on the same basis
as the audited financial statements. In the opinion of management such
unaudited information includes all adjustments (consisting only of normal
recurring accruals) necessary for the fair presentation of this interim
information. Operating results and cash flows for interim periods are not
necessarily indicative of results to be expected for the entire year.
Revenue Recognition
-------------------
The Company recognizes revenue when goods are shipped.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first in, first out method. Inventories consisted of the following
at December 31, :
1998 1997
----------- -----------
Raw materials $ 305,216 $ 366,962
Finished goods 83,457 57,324
----------- -----------
$ 388,673 $ 424,286
=========== ===========
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 or double declining balance.
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the improvement.
Equipment 3 - 10 years
Automobiles 7 years
Deferred Income Taxes
---------------------
Deferred income taxes are provided under the asset and liability method for
temporary differences between the bases of assets and liabilities for income
tax and financial reporting purposes. A valuation allowance is established
for any portion of the deferred tax asset for which realization is not
expected to occur.
F-28
<PAGE>
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
-----------------------------------
The fair value of notes receivable, accounts receivable, trade payables and
the line of credit 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 readily determinable.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Segments/Reporting
------------------
Statement of Financial Accounting Standards 131, "Disclosures about Segments
of an Enterprise and Related Information", established standards for
reporting information about operating segments. The Company operates in one
segment.
NOTE 2 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the following
at December 31,: 1998 1997
----------- -----------
<S> <C> <C>
Warehouse equipment $ 383,036 $ 366,078
Automobiles 9,000 -
Office equipment 393,928 393,928
Leasehold improvements 245,358 245,358
----------- -----------
1,031,322 1,005,364
Less accumulated depreciation and amortization 954,681 905,423
----------- -----------
$ 76,641 $ 99,941
=========== ===========
</TABLE>
F-29
<PAGE>
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 3 - LINE OF CREDIT
At December 31, 1998 and 1997, borrowings of $75,000 and $72,000,
respectively, were outstanding under the Company's revolving credit
agreement against a maximum of $75,000. The line of credit is
collateralized by various assets of the Company. Interest is payable
monthly based on the prime rate (7.75% at December 31, 1998) plus 5.5%. The
maturity date of the current agreement is July 2004.
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31,:
1998 1997
----------- -----------
<S> <C> <C>
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 (7.75% at
December 31, 1998) plus 5%. The loan is collateralized by a security interest
in certain assets of the Company. $ 64,551 $ 114,583
Unsecured short-term note payable bearing an annual interest rate of 13% with
no stated maturity date. 21,656 12,635
Unsecured short-term note payable in monthly installments of $5,000 bearing
annual interest of 8.25%. The loan is past due. 10,181 23,295
Unsecured, non-interest bearing notes, issued to members of management for cash
received, with no stated maturity date. 104,084 -
----------- -----------
200,472 150,513
Less current maturities: 169,223 77,597
----------- -----------
$ 31,249 $ 72,916
=========== ===========
</TABLE>
Future maturities of long-term debt at December 31, 1998 are as follows:
1999 $ 169,223
2000 31,249
--------------
$ 200,472
==============
F-30
<PAGE>
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 5 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses during December 31, 1997 and 1998.
The following table sets forth the primary components of deferred tax assets
at December 31,:
1998 1997
------------- -------------
Net operating loss carryforwards $ 66,100 $ 11,600
Other (4,100) 2,700
-------------- -------------
Gross deferred tax assets 62,000 14,300
Valuation allowance 62,000 14,300
------------- -------------
$ - $ -
============= =============
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance
is required. During fiscal 1998, the valuation allowance increased $47,700.
At December 31, 1998, the Company had approximately $340,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire from 2010 to 2018.
Additionally, the Company has approximately $170,000 of state net operating
loss carryforwards for tax reporting purposes which will expire from 2007 to
2008.
NOTE 6 - COMMITMENTS
The Company leases its manufacturing and administrative facility under an
operating lease agreement. Rental expense was $350,400 and $346,875 for the
years ended December 31, 1998 and 1997, respectively. The Company is
committed to paying $72,000 under a non-cancelable lease agreement expiring
in 1999.
F-31
<PAGE>
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 7 - RELATED PARTY TRANSACTIONS
Accounts receivable represent borrowings by an officer/stockholder of the
Company. These borrowings bear no interest and have no stated maturity or
payment schedule. Reductions on the receivable occurred periodically
throughout the year through direct payments to the Company and the offset of
business-related expenses incurred on the Company's behalf and borne by the
officer/stockholder. The balance outstanding on the receivable was $4,400 and
$98,294 at December 31, 1998 and 1997, respectively. Subsequent to year end,
as a provision of the sale agreement referred to in Note 10, the outstanding
balance on this accounts receivable was forgiven.
During 1997 and part of 1998, the Company leased its facility through an
agreement with the owners. Total rent paid to the owners for 1998 and 1997
was $336,000 and $346,875, respectively. The owners sold the facility during
1998.
The Company had cash advances receivable from an officer/stockholder at
December 31, 1997, in the amount of $34,480. There was no balance outstanding
at December 31, 1998.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan for eligible employees. The
Company currently matches 25% of the participants' 401(k) contributions up to
3% of employee compensation. The Company may also elect to make additional,
discretionary matching contributions to the plan. Employees vest in the
Company's matching contributions over a six year period. Matching
contributions for the years ended December 31, 1998 and 1997, were $8,268 and
$6,118, respectively.
NOTE 9 - 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 had 2 suppliers that accounted for 54% and 47%, respectively, of
purchases during December 31, 1998 and 1997. Although management believes
that other suppliers could provide functionally similar products, it believes
a change in suppliers could adversely affect operating results by causing a
delay in manufacturing resulting in possible loss of sales.
F-32
<PAGE>
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 10 - SUBSEQUENT EVENTS
On June 8, 1999, Sparta Surgical Corporation ("Sparta") purchased 100% of the
outstanding common stock of the company for 400,000 shares of Sparta common
stock.
F-33
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, file number 33-71888 (April 7, 1994).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
SEC Registration Fees............................................ $ 1,466
Blue Sky Filing Fees............................................. $ 5,000
Blue Sky Legal Fees.............................................. $ 10,000
Printing Expenses................................................ $ 5,000
Legal Fees and Expenses.......................................... $ 50,000
Accounting Fees.................................................. $ 10,000
Transfer Agent Fees.............................................. $ 1,000
Miscellaneous Expenses........................................... $ 17,543
--------
Total....................................................... $100,000
========
(1) All expenses, except the SEC registration fee are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant sold the following securities
which were not registered under the Securities Act, as amended.
(i) In March 1997 the Registrant issued 10,417 shares of Arbora, N.V.,
for $.50 per share.
(ii) In August 1998 the Registrant issued 1,001,733 shares to J&C
Resources for the conversion of a $751,300 loan advanced to the Registrant. In
February 1999, the CCJ Trust, affiliated with J&C, converted a $159,750 loan
advanced to the Registrant for 39,938 shares of Series AA preferred stock.
(iii) Between March 1999 and January2000, the Registrant borrowed the
following amounts from the persons indicated, issuing promissory notes to such
persons:
II-1
<PAGE>
Name Amount Borrowed
---- ---------------
Sheldon S. Kabaker, Trustee $475,000
J. Victor Samuels $100,000
Arne Jensen $ 75,000
Pepper Frazier $ 25,000
Spags Investment Group, N.V. $835,000
(iv) In March 1999 the Registrant issued options to purchase up to
421,000 shares at $.95 per share and 100,000 shares at $1.70 per share to IGC of
New York Corporation.
(v) Between March 1999 and March 2000 the Registrant sold the
following shares at approximately $1.10 per share to the following individuals:
Name Number of Shares
---- ----------------
John Weller 200,000
Flyn, von Schubert and Associates, s.a. 250,000
J. Victor Samuels 25,000
Andreas T. Glapiak 50,000
Arne Jensen 100,000
Elizabeth Frazier 25,000
Bruce Havenberg 60,000
Kenneth Robbins 10,000
Frank Colaccino 50,000
William Gilmore 37,000
Stephen Axelrod 30,000
Spags Investment Group, N.V. 300,000
II-2
<PAGE>
(vi) In September and November 1999, the Registrant issued 950,000
shares to its Chief Executive Officer, Thomas F. Reiner, in exchange for loan
guarantees and providing the Registrant with a $750,000 unsecured line of
credit.
(vii) In June 1999, the Registrant issued to Maria Mursell and Eugene
W. Olsen, the principals of Olsen Electrosurgical, Inc., 400,000 shares valued
at $2.00 per share in connection with the Registrant's acquisition of Olsen.
(viii) In July and November 1999, the Registrant issued 98,000 shares
to Royce Walker & Co., for consulting services valued at $ 1.69 per share.
(ix) In July and November 1999, the Registrant issued 932,000 shares
to Coridal, N.V, for consulting services, valued at $ 1.69 per share.
(x) In October 1999 the Registrant issued 200,000 shares to Sheldon
Kabaker as consideration for loans advanced by Mr. Kabaker to the Registrant
aggregating $475,000.
(xi) In December 1999 the Registrant issued 15,000 shares to Howard
Bronson for consulting services.
(xii) In February 2000 the Registrant issued 835,000 shares to Spags
Investment Group, N.V. at $1.00 per share in exchange for the conversion of an
$835,000 loan advanced to the Registrant.
With respect to the above securities issuances, the Registrant relied on
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act")
and Rule 506 promulgated thereunder. No advertising or general solicitation was
employed in offering the securities. The securities were offered to a limited
number of persons all of whom were business associates of the Registrant or its
executive officers and directors, and the transfer accredited investors as that
term is defined in Rule 501 of Regulation D under the Securities Act and were
capable of analyzing the merits and risks of their investment and who
acknowledged in writing that they were acquiring the securities for investment
and not with a view toward distribution or resale and understood the speculative
nature of their investment.
EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
5.01 Opinion of Gary A. Agron regarding legality
10.01 Stock Escrow Agreement (Reiner)
10.02 Stock Escrow Agreement (Reiner)
10.03 Stock Escrow Agreement (Coridal)
10.04 Promissory Note (Spags Investment Group, N.V.)
10.05 Agreement with Coridal
10.06 Consulting Agreement with IGC of New York Corporation
10.07 Registration Rights Agreement
10.08 Certificate of Designations-Series AA Preferred Stock
10.09 Agreement with Royce Walker & Co.
10.10 Employment Agreement with Mr. Reiner
23.01 Consent of Gary A. Agron (see 5.01, above)
23.02 Consent of Grant Thornton LLP
27.01 Financial Data Statement
II-3
<PAGE>
ITEM 28 UNDERTAKINGS
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registration of expenses incurred or paid by a director, officer
or controlling person to the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the
applicable forms, rules and regulations of the Commission in effect at the time
such post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(1) To include any prospectus required by section 10(a)(3) of
the Securities Act;
(2) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof), which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(3) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(e) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the Offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Concord, California, on April 7, 2000.
SPARTA SURGICAL CORPORATION
By: /s/ Thomas F. Reiner
--------------------------------------
Thomas F. Reiner, President
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons on the
dates indicated.
Signature Title Date
/s/ Thomas F. Reiner Chairman of the Board of Directors, April 10, 2000
- ------------------------ Chief Executive Officer, and
Thomas F. Reiner President
/s/ John F. O'Hanlon Chief Financial Officer April 10, 2000
- ------------------------ (Principal Accounting Officer)
John F. O'Hanlon
/s/ Joseph Barbrie Vice President of Sales April 10, 2000
- ------------------------
Joseph Barbrie
/s/ Michael Y. Granger Director April 10, 2000
- ------------------------
Michael Y. Granger
Director
- ------------------------
Allan J. Korn
/s/ Joel Flig Director April 10, 2000
- ------------------------
Joel Flig
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
5.01 Opinion of Gary A. Agron regarding legality
10.01 Stock Escrow Agreement (Reiner)
10.02 Stock Escrow Agreement (Reiner)
10.03 Stock Escrow Agreement (Coridal)
10.04 Promissory Note Spags Investment Group, N.V.
10.05 Agreement with Coridal
10.06 Consulting Agreement with IGC of New York corporation
10.07 Registration Rights Agreement
10.08 Certificate of Designations-Series AA Preferred Stock
10.09 Agreement with Royce Walker & Co.
10.10 Employment Agreement with Mr. Reiner
23.01 Consent of Gary A. Agron (see 5.01, above)
23.02 Consent of Grant Thornton LLP
27.01 Financial Data Statement
Exhibit 5.01
April 4, 2000
Sparta Surgical Corporation
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We are counsel for Sparta Surgical Corporation, a Delaware corporation (the
"Company") in connection with its proposed public offering under the Securities
Act of 1933, as amended of its $.002 par value common stock ("Common Stock")
through a Registration Statement on Form SB-2 ("Registration Statement") as to
which this opinion is a part, to be filed with the Securities and Exchange
Commission (the "Commission").
In connection with rendering our opinion as set forth below, we have
reviewed and examined originals or copies identified to our satisfaction of the
following:
(1) Certificate of Incorporation, and amendments thereto, of the Company
as filed with the Secretary of State of the State of Delaware.
(2) Corporate minutes containing the written deliberations and resolutions
of the Board of Directors and shareholders of the Company.
(3) The Registration Statement and the Preliminary Prospectus contained
within the Registration Statement.
(4) The other exhibits to the Registration Statement.
We have examined such other documents and records, instruments and
certificates of public officials, officers and representatives of the Company,
and have made such other investigations as we have deemed necessary or
apapropriate under the circumstances.
Based upon the foregoing and in reliance thereon, it is our opinion that
the Common Stock offered under the Registration Statement has been validly
issued and will, upon the purchase, receipt of full payment, issuance and
delivery in accordance with the terms of the offering described in the
Registration Statement remain fully and validly authorized, legally issued,
fully paid and non-asessable.
We herby consent to the use of this opinion, as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus constituting a part thereof.
Very truly yours,
Gary A. Agron
Exhibit 10.01
STOCK ESCROW AGREEMENT
----------------------
THIS ESCROW AGREEMENT, dated as of this 2nd day of September, 1999, between
and among Thomas F. Reiner, in his capacity as President and Chief Executive
Officer (the "Escrow Agent") of Sparta Surgical Corporation, a Delaware
corporation ("Sparta"), and Thomas F. Reiner ("Reiner").
WITNESSETH THAT:
WHEREAS, Reiner has agreed to provide certain personal guaranty on behalf
of Sparta Olsen Electrosurgical, Inc. ("Sparta Olsen") obligations pursuant to
attached Board Resolution dated September 2, 1999. As a result, the Board of
Directors desire to compensation Reiner for providing said guaranties of the
Company obligations which are benefiting the Company, shareholders and its
overall business and operations.
WHEREAS, Sparta is issuing to Reiner on or about the date hereof, 550,000
shares of Common Stock, which shares are being issued for the consideration set
forth of the Board Resolution hereto, and which shares are to be held by the
Escrow Agent for the benefit of Sparta until the expiration of this Agreement,
or until the occurrence of an earlier condition of release to Reiner, all upon
the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual undertakings contained
herein and in consideration for Reiner's providing guaranty on behalf of the
Company before issuance, and each party's entering into this Agreement, the
parties hereto, intending to be legally bound, agree as follows:
1. Reiner and Sparta hereby appoint Thomas F. Reiner as the Escrow Agent
for the purposes herein.
2. This Agreement shall be effective for a period of one (1) year from the
date hereof (the "Term").
3. The securities being placed in escrow subject to this Agreement shall
include: (a) the 550,000 shares of Common Stock being issued to Reiner (to be
held in his name and as to which Reiner shall be considered the owner for
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
November 16, 1999
Page 2 of 6
purposes of Rule 144 under the Securities Act of 1933) on or about the date
hereof, (b) any stock or cash dividends that may be paid thereon during the term
of this Agreement, (c) any additional securities issued through, or by reason of
stock split or reverse split (for the sole purpose of keeping the Escrowed
Securities from becoming diluted by such issuances), and (d) any other dividends
or distributions of any kind with respect to the securities being held subject
to escrow under this Agreement. All of the foregoing shall be collectively
referred to herein as the "Escrowed Securities".
Any dividends or distributions of any kind with respect to the Escrowed
Securities that may be paid during the terms of this Agreement shall be paid to
the Escrow Agent and held pursuant to the terms hereof. Such dividends or
distributions of any kind with respect to the Escrowed Securities shall be
available for distribution in accordance with the provisions of Paragraph 5
hereof.
4. Upon issuance the certificates evidencing the Escrowed Securities shall
be delivered to the Escrow Agent for deposit pursuant to the terms hereof.
5. The Escrowed Securities shall be held in escrow hereunder until the end
of the Term, in which case they shall be released and assigned over to Reiner
upon the occurrence of any of the following conditions:
(a) 100% of the Escrowed Securities in the event that Sparta has not
paid within one (1) year all of it's obligations pursuant to the
attached Board Resolution and upon Reiner's providing the Escrow
Agent with written notice of his intention that such event be
grounds for the release of the Escrowed Shares from escrow (which
notice may be given at any time, in the sole discretion of
Reiner, during the Term);
(b) Upon any "change in control" of Sparta. A "change in control"
occurs upon the occurrence of one of the following events, but
only if Reiner notifies Sparta in writing of his intention that
such event be treated as a change in control (which notice may be
given at any time, in the sole discretion of Reiner, during the
Term): (i) An event that would be required to be reported in
2
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
November 16, 1999
Page 3 of 6
response to Item 5(f) of Schedule 14A of regulation 14A
promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act"), or any successor thereof, assuming that Sparta
was a reporting company or was otherwise required to file reports
under the Exchange Act, (ii) Any "person" (as such term in
defined in Sections 13 (d) and 14 (d) (2) of the Exchange Act)
who is not currently an owner of the securities of Sparta, is or
becomes the beneficial owner, directly or indirectly, of
securities of Sparta representing 20% or more of the combined
voting power of Sparta's then outstanding securities pursuant to
a tender offer or otherwise, or (iii) During any period of two
consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of Sparta cease for any
reason to constitute at lease a majority thereof unless the
election of each director, who was not a director at the
beginning of the period, was approved by a vote of at least
two-thirds of the directors then still in office who were
directors at the beginning of the period;
(c) Upon the termination of Reiner's employment with Sparta for any
reason (including his resignation), or Reiner's being terminated
as President, Chief Executive Officer or Chairman of Sparta, upon
Reiner's providing the Escrow Agent with written notice of his
intention that such event be grounds for the release of the
Escrowed Shares from escrow (which notice may be given at any
time, in the sole discretion of Reiner, during the Term); and
(d) If (i) an order is entered for relief against Sparta, or
declaring that Sparta is insolvent, or resulting in a finding
that Sparta is insolvent, or if Sparta voluntarily files for
bankruptcy, or if similar relief is granted with respect to
Sparta, under any law now or hereafter in effect relating to
bankruptcy, insolvency, relief of debtors, protection of
creditors; (ii) a receiver, trustee, custodian, liquidator,
assignee, sequestrator or other similar official is appointed for
such Sparta or for all or any substantial part of Sparta's
property; or (iii) if a proceeding is brought under the federal
bankruptcy code, Sparta fails to file a proper answer thereto
(including a request that the petitioner post adequate bond under
Section 303(e) of said code) within thirty days of receipt of
notice of said proceeding, upon Reiner's providing the Escrow
Agent with written notice of this intention that such event be
grounds for the release of the Escrowed Shares from escrow (which
notice may be given at any time, in the sole discretion of
Reiner, during the Term).
3
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
November 16, 1999
Page 4 of 6
The parties agree and acknowledge that in the event Reiner fails to provide
any of the written notices specified in subparagraphs (a) through (h), that the
condition shall not be considered to have occurred and that the Escrowed
Securities shall remain in escrow pursuant to this Agreement. Upon receipt by
the Escrow Agent of the required written notice by Reiner which states that one
of the conditions referred to in subparagraphs (a) through (d) of this Paragraph
5 have occurred (which absent any actual knowledge on the part of the Escrow
Agent to the contrary shall be accepted as absolute grounds for release
hereunder), the Escrowed securities shall be released by the Escrow Agent to
Reiner. Following the release of Escrowed Securities hereunder, this Agreement
shall terminate and the Escrow Agent shall be relieved of all responsibility
hereunder.
6. During the existence of this Agreement, the parties agree that the
Escrowed securities may not in any way be offered for sale, sold, transferred,
assigned or in any other manner disposed of, except in this Agreement.
7. During the Term of until such time as all of the released to Reiner,
Reiner shall retain full voting power over 550,000 shares.
8. This Agreement shall inure to the benefit of and be binding upon Sparta,
and its successors and assigns, and Reiner and his heirs, personal
representatives or assigns.
9. A legend in substantially the following form has been or will be placed
upon any certificate or other document evidencing the Escrowed Securities:
The securities evidenced by this certificate are subject to restrictions on
their sale, pledge, or other transfer as set forth in a certain Stock
Escrow Agreement dated September 2, 1999 by and among Sparta Surgical
Corporation ("Sparta"), Thomas F. Reiner and the Escrow Agent (as defined
thereunder). Sparta will furnish to the record owner of this certificate a
4
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
November 16, 1999
Page 5 of 6
copy of said Agreement without charge upon written request to Sparta at its
principal place of business. The rights of the holder of this certificate
are subject to all of the terms and conditions of such Agreement, by which
the holder, by the acceptance of this certificate, agrees to be bound.
Stop transfer instructions to Sparta's transfer agent have been or will be
placed with respect to the Escrowed Securities so as to restrict their sale,
pledge or other transfer. The foregoing legend and stop transfer instruction
will be placed with respect to any new certificate or document issued upon the
presentment of any original certificates or other documents evidencing the
Escrowed Securities. Upon the release of any of the Escrowed Securities from the
escrow hereunder, the Escrow Agent and/or Sparta shall be required to notify
Sparta's transfer agent to remove the legend set forth on the share certificates
evidencing those of the Escrowed Securities being released and the transfer
agent shall be entitled to rely upon such notification in so doing.
10. Sparta agrees to indemnify and hold harmless the Escrow Agent and
Reiner from any costs, damage~, expenses, losses or claims, including attorneys
fees, which the Escrow Agent or Reiner may incur or sustain as a result of or
arising out of this Agreement or the Escrow Agent's or Reiner's duties relating
thereto, and agrees to pay such costs, damages, expenses, losses or claims to
the Escrow Agent on demand.
5
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
November 16, 1999
Page 6 of 6
IN WITNESS WHEREOF, Sparta, Reiner and the Escrow Agent have caused this
Escrow Agreement to be executed by their respective authorized agents.
ESCROW AGENT SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner /s/ Allen J. Korn
- ------------------------ ---------------------------------------------
Thomas F. Reiner Allan J. Korn, Director, duly authorized
SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner /s/ Michael Y. Granger
- ------------------------------ ---------------------------------------------
Thomas F. Reiner, Individually Michael Y. Granger, Director, duly authorized
SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner /s/ Joel Flig
- ------------------------------ ---------------------------------------------
Thomas F. Reiner, Individually Joel Flig, Director, duly authorized
6
Exhibit 10.02
STOCK ESCROW AGREEMENT
----------------------
THIS ESCROW AGREEMENT, dated as of this 5th day of November , 1999, between
and among Thomas F. Reiner, in his capacity as President and Chief Executive
Officer (the "Escrow Agent") of Sparta Surgical Corporation, a Delaware
corporation ("Sparta"), Sparta Olsen Electrosurgical, Inc. ("Sparta Olsen") and
Thomas F. Reiner ("Reiner").
WITNESSETH THAT:
WHEREAS, Reiner has agreed to provide certain personal guaranty on behalf
of Sparta Olsen as attached on Schedule A hereto (and the generated benefits the
Company, shareholders and its overall business and operations), which provides
Reiner to guaranty a loan facility in the amount of $250,000 to Bank of America
(even though he is not required to do so) pursuant to attached Board Resolution
dated November 5, 1999.
WHEREAS, Sparta and Sparta Olsen are issuing to Reiner on or about the date
hereof, 400,000 shares of Common Stock, which shares are being issued for the
consideration set forth on Schedule A hereto, and which shares are to be held by
the Escrow Agent for the benefit of Sparta and Sparta Olsen until the expiration
of this Agreement, in which case such shares shall be released back to Sparta
and Sparta Olsen, or until the occurrence of an earlier condition of release to
Reiner, all upon the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual undertakings contained
herein and in consideration for Reiner's agreement to provide the personal
guaranty on behalf of Sparta and Sparta Olsen, and each party's entering into
this Agreement, the parties hereto, intending to be legally bound, agree as
follows:
1. Reiner, Sparta and Sparta Olsen hereby appoint Thomas F. Reiner as the
Escrow Agent for the purposes herein.
2. This Agreement shall be effective for a period of three (3) years from
the date hereof (the "Term").
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
_________________ 1999
Page 2 of 6
3. The securities being placed in escrow subject to this Agreement shall
include: (a) the 400,000 shares of Common Stock being issued to Reiner (to be
held in his name and as to which Reiner shall be considered the owner for
purposes of Rule 144 under the Securities Act of 1933) on or about the date
hereof, (b) any stock or cash dividends that may be paid thereon during the term
of this Agreement, (c) any additional securities issued through, or by reason of
stock split or reverse split (for the sole purpose of keeping the Escrowed
Securities from becoming diluted by such issuances), and (d) any other dividends
or distributions of any kind with respect to the securities being held subject
to escrow under this Agreement. All of the foregoing shall be collectively
referred to herein as the "Escrowed Securities".
Any dividends or distributions of any kind with respect to the Escrowed
Securities that may be paid during the terms of this Agreement shall be paid to
the Escrow Agent and held pursuant to the terms hereof. Such dividends or
distributions of any kind with respect to the Escrowed Securities shall be
available for distribution in accordance with the provisions of Paragraph 5
hereof.
4. Upon issuance the certificates evidencing the Escrowed Securities shall
be delivered to the Escrow Agent for deposit pursuant to the terms hereof.
5. The Escrowed Securities shall be held in escrow hereunder until the end
of the Term, in which case they shall be released and assigned over to Reiner
upon the occurrence of any of the following conditions:
(a) Up to 100% of the Escrowed Securities in the event that Sparta
has not repaid its loan facility of $250,000 to Bank of America
or any other lender by November 5, 2002, then upon Reiner's
providing the Escrow Agent with written notice of his intention
that such event be grounds for the release of the Escrowed Shares
from escrow (which notice may be given at any time, in the sole
discretion of Reiner, during the Term);
(b) Upon any "change in control" of Sparta. A "change in control"
occurs upon the occurrence of one of the following events, but
2
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
_________________ 1999
Page 3 of 6
only if Reiner notifies Sparta in writing of his intention that
such event be treated as a change in control (which notice may be
given at any time, in the sole discretion of Reiner, during the
Term): (i) An event that would be required to be reported in
response to Item 5(f) of Schedule 14A of regulation 14A
promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act"), or any successor thereof, assuming that Sparta
was a reporting company or was otherwise required to file reports
under the Exchange Act, (ii) Any "person" (as such term in
defined in Sections 13 (d) and 14 (d) (2) of the Exchange Act)
who is not currently an owner of the securities of Sparta, is or
becomes the beneficial owner, directly or indirectly, of
securities of Sparta representing 20% or more of the combined
voting power of Sparta's then outstanding securities pursuant to
a tender offer or otherwise, or (iii) During any period of two
consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of Sparta cease for any
reason to constitute at lease a majority thereof unless the
election of each director, who was not a director at the
beginning of the period, was approved by a vote of at least
two-thirds of the directors then still in office who were
directors at the beginning of the period;
(c) Upon the termination of Reiner's employment with Sparta for any
reason (including his resignation), or Reiner's being terminated
as President, Chief Executive Officer or Chairman of Sparta, upon
Reiner's providing the Escrow Agent with written notice of his
intention that such event be grounds for the release of the
Escrowed Shares from escrow (which notice may be given at any
time, in the sole discretion of Reiner, during the Term); and
(d) If (i) an order is entered for relief against Sparta, or
declaring that Sparta is insolvent, or resulting in a finding
that Sparta is insolvent, or if Sparta voluntarily files for
bankruptcy, or if similar relief is granted with respect to
Sparta, under any law now or hereafter in effect relating to
bankruptcy, insolvency, relief of debtors, protection of
creditors; (ii) a receiver, trustee, custodian, liquidator,
assignee, sequestrator or other similar official is appointed for
such Sparta or for all or any substantial part of Sparta's
property or (iii) if a proceeding is brought under the federal
bankruptcy code, Sparta fails to file a proper answer thereto
(including a request that the petitioner post adequate bond under
Section 303(e) of said code) within thirty days of receipt of
notice of said proceeding, upon Reiner's providing the Escrow
Agent with written notice of this intention that such event be
3
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
_________________ 1999
Page 4 of 6
grounds for the release of the Escrowed Shares from escrow (which
notice may be given at any time, in the sole discretion of
Reiner, during the Term).
The parties agree and acknowledge that in the event Reiner fails to provide
any of the written notices specified in subparagraphs (a) through (d), that the
condition shall not be considered to have occurred and that the Escrowed
Securities shall remain in escrow pursuant to this Agreement. Upon receipt by
the Escrow Agent of the required written notice by Reiner which states that one
of the conditions referred to in subparagraphs (a) through (d) of this Paragraph
5 have occurred (which absent any actual knowledge on the part of the Escrow
Agent to the contrary shall be accepted as absolute grounds for release
hereunder), the Escrowed securities shall be released by the Escrow Agent to
Reiner. Following the release of Escrowed Securities. hereunder, this Agreement
shall terminate and the Escrow Agent shall be relieved of all responsibility
hereunder.
6. During the existence of this Agreement, the parties securities may not
in any way be offered for sale, sold, transferred, assigned or in any other
manner disposed of, except in this Agreement.
7. During the Term of until such time as all of the released to Reiner,
Reiner shall retain full voting power over 400,000 shares.
8. This Agreement shall inure to the benefit of and be Sparta Olsen, and
its successors and assigns, and Reiner representatives or assigns. agree that
the Escrowed pledged, hypothecated, as expressly provided for
9. A legend in substantially the following form has been or will be
placed upon any certificate or other document evidencing the Escrowed
Securities:
4
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
_________________ 1999
Page 5 of 6
The securities evidenced by this certificate are subject to
restrictions on their sale, pledge, or other transfer as set forth in
a certain Stock Escrow Agreement dated November 5, 1999 by and among
Sparta Surgical Corporation ("Sparta") and Sparta Olsen
Electrosurgical, Inc. ("Sparta Olsen"), Thomas F. Reiner and the
Escrow Agent (as defined thereunder). Sparta and Sparta Olsen will
furnish to the record owner of this certificate a copy of said
Agreement without charge upon written request to Sparta and Sparta
Olsen at its principal place of business. The rights of the holder of
this certificate are subject to all of the terms and conditions of
such Agreement, by which the holder, by the acceptance of this
certificate, agrees to be bound.
Stop transfer instructions to Sparta's transfer agent have been or will be
placed with respect to the Escrowed Securities so as to restrict their sale,
pledge or other transfer. The foregoing legend and stop transfer instruction
will be placed with respect to any new certificate or document issued upon the
presentment of any original certificates or other documents evidencing the
Escrowed Securities. Upon the release Securities from the escrow hereunder, the
Escrow Agent and/or to notify Sparta's transfer agent to remove the legend set
forth evidencing those of the Escrowed Securities being released and the
transfer agent shall be entitled to rely upon such notification in so doing.
10. Sparta agrees to indemnify and hold harmless the Escrow Agent and
Reiner from any costs, damages, expenses, losses or claims, including attorneys
fees, which the Escrow Agent or Reiner may incur or sustain as a result of or
arising out of this Agreement or the Escrow Agent's or Reiner's duties relating
thereto, and agrees to pay such costs, damages, expenses, losses or claims to
the Escrow Agent on demand.
5
<PAGE>
Thomas F. Reiner
Stock Escrow Agreement
_________________ 1999
Page 6 of 6
IN WITNESS WHEREOF, Sparta, Reiner and the Escrow Agent have caused this
Escrow Agreement to be executed by their respective authorized agents.
ESCROW AGENT SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner /s/ Allen J. Korn
- ------------------------- ---------------------------------------------
Thomas F. Reiner Allan J. Korn, Director, duly authorized
SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner /s/ Michael Y. Granger
- ------------------------------ ---------------------------------------------
Thomas F. Reiner, Individually Michael Y. Granger, Director, duly authorized
SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner /s/ Joel Flig
- ------------------------------ ---------------------------------------------
Thomas F. Reiner, Individually Joel Flig, Director, duly authorized
Exhibit 10.03
AGREEMENT
---------
THIS AGREEMENT, dated as of the 3rd day of January, 2000, between and among
Ofir Doetch, in his capacity as Escrow Agent ("Escrow Agent"); Sparta Surgical
Corporation, a Delaware corporation ("Sparta"); and Coridal, N.Y. ("Coridal").
WITHESSETH THAT:
WHEREAS, Sparta has previously issued to Coridal a total of 932,000 shares
of common stock of Sparta (the "Shares"), which Shares have been issued as
consideration for certain financial consulting services provided to Sparta by
Coridal, including, hut not limited to, Coridal's assistance in the (i) securing
of certain financing, and (ii) development and marketing of Sparta's product
line in countries outside the United States;
WHEREAS, the Shares have been and are presently being held by Escrow Agent
for the benefit of Coridal; and
WHEREAS, the parties now desire to clarify and confirm in writing their
understanding as to the release of the Shares by Escrow Agent to Coridal.
NOW, THEREFORE, in consideration of the mutual undertakings contained
herein and previously performed, including those financial consulting services
referrcd to above, the parties hereto, intending to he legally bound, agree as
follows:
1. Escrow Agent acknowledges having possession of the Shares, and that the
Shares are being held in escrow on Coridal's behalf.
2. The Shares shall continue to he held in escrow until such time as any
one (1) or more of the following conditions (each such condition being
hereinafter referred to as a "Condition," and such conditions being collectively
referred to as "Conditions") shall occur:
<PAGE>
Ofir Doetch / Coridal / Sparta
Agreement
January 3, 2000
Page 2 of 5
(a) The Shares have achieved a fair market value of $7.00 per share;
(b) If (i) an order is entered for relief against Sparta, or
declaring that Sparta is insolvent, or resulting in a finding
that Sparta is insolvent, or if Sparta voluntarily files for
bankruptcy, or if similar relief is granted with respect to
Sparta, under any Jaw now or hereafter in effect relating to
bankruptcy, insolvency, relief of debtors, protection of
creditors; (ii) a receiver, trustee, custodian, liquidator,
assignee, sequestrator or other similar official is appointed for
Sparta or for all or any substantial part of Sparta's property;
or (iii) if a proceeding is brought under the federal bankruptcy
code. Sparta fails to file a proper answer thereto (including a
request that the petitioner post adequate bond under Section
303(c) of said code) within thirty days of receipt of notice of
said proceeding;
(c) Sparta performs a formal registration of all or a portion of its
stock on or after May 1, 2000, in which event the Shares shall
automatically be "piggybacked" with Sparta's shares for
registration purposes; or
(d) None of the foregoing Conditions have occurred by September 7,
2000.
3. Upon receipt by the Escrow Agent of written notice by Coridal or Sparta
stating that one of the Conditions referred to in subparagraphs (a) through (d)
of Paragraph 2 of this Agreement have occurred (which absent any actual
knowledge on the part of the Escrow Agent to the contrary shall be accepted as
absolute grounds for release hereunder), the Shares shall he released by the
Escrow Agent to Coridal. Following the release of the Shares hereunder, this
Agreement shall terminate and the Escrow Agent shall he relieved of all
responsibility hereunder.
4. The parties agree that the Shares may not in any way he offered for
sale, sold, pledged, hypothecated, transferred, assigned or in any other manner
disposed of, except as expressly provided for in this Agreement. Stop transfer
instructions to Sparta's transfer agent have been or will he placed with respect
2
<PAGE>
Ofir Doetch / Coridal / Sparta
Agreement
January 3, 2000
Page 3 of 5
to the Shares so as to restrict their sale, pledge or other transfer. Upon the
release of the Shares from escrow hereunder, Sparta shall notify Sparta's
transfer agent to remove the stop transfer instructions, accordingly.
5. Sparta agrees to indemnify and hold harmless Escrow Agent and Coridal
from any costs, damages, expenses, losses or claims, including attorneys fees,
which Escrow Agent or Coridal may incur or sustain as a result of or arising
out of this Agreement or Escrow Agent's duties relating thereto.
6. Escrow Agent shall have no duties or responsibilities other than those
expressly set forth herein. In its capacity as Escrow Agent, Escrow Agent
shall not he responsible For the genuineness or validity or any security,
instrument, document or item deposited with it and shall have no responsibility
other than to faithfully follow the instructions contained herein. Escrow
Agent shall not be liable to the other parties hereto or to anyone else for any
action taken or omitted by it, or any action suffered by it to he taken or
omitted, in good faith and in the exercise of reasonable judgment, except for
the acts of willful misconduct or gross negligence.
7. This Agreement shall be governed by and construed in accordance with the
laws of the Netherlands and the competent courts in the Netherlands shall have
the exclusive jurisdiction, to the exclusion of any other courts, over any
dispute between the parties arising out of or in connection with this Agreement.
8. No waiver of any rights by any party hereto shall he construed as a
waiver of the same or any other right at any prior or subsequent time.
9. If any term, provision or covenant of this Agreement is held by a court
of competent jurisdiction or other authority to be invalid, void, unenforceable
or against regulatory or public policy, the remainder of the terms, provisions
and covenants of this Agreement shall remain in full force and effect and shall
3
<PAGE>
Ofir Doetch / Coridal / Sparta
Agreement
January 3, 2000
Page 4 of 5
in no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the parties hereto that they would have executed
the remaining terms, provisions and covenants without including any of such
which may he hereafter declared invalid, void or unenforceable.
10. This Agreement supersedes any other agreements, understandings and
communications between the Parties in connection with the subject matter
thereof.
11. Any notices to he given pursuant to this Agreement shall be in writing
and shall be deemed to have been given at the time when (i) delivered in person,
against appropriate receipt, or (ii) five (5) business days after being mailed
via federal express or other overnight delivery service, or (iii) one business
day after sent by facsimile and confirmed by receipt, provided the notice is
addressed to the addresses stated below or any other address of which either
party shall advise the other parties in writing in the same fashion:
To Sparta: 7068 Koll Center Parkway, Ste. 425
Pleasanton, CA 94566
Attn: Thomas F. Reiner
Facsimile No, :(925) 417-2243
To Coridal: c/o Joel Ratner, a representative
11586 Pierson Road
Wellington, Florida 33414
Facsimile No.: (561) 333-1995
To Escrow Agent: Ofir Doetch
Rokch SR
Ramat-Gan
Israel
Facsimile No.: 011-972-3-575-6069
4
<PAGE>
Ofir Doetch / Coridal I Sparta
Agreement
January 3, 2000
Page 5 of 5
IN WITNESS WHEREOF, Sparta, Coridal and Escrow Agent have caused this
Escrow Agreement to he executed by their respective authorized agents.
ESCROW AGENT SPARTA SURGICAL CORPORATION
/s/ Ofir Doetch /s/ Thomas F. Reiner
- ---------------------------------- ---------------------------------------
Ofir Doetch Thomas F. Reiner, Chairman of the Board
President and CEO
CORIDAL., N.V.
/s/
---------------------------------------
5
Exhibit 10.04
PROMISSORY NOTE
ANY U.S. PERSON WHO HOLDS THIS OBLIGATION WILL BE
SUBJECT TO LIMITATIONS UNDER THE U.S. INCOME TAX LAWS,
INCLUDING THE LIMITATIONS PROVIDED IN ss.165(j) AND 1287(a) OF
THE INTERNAL REVENUE CODE
Payee: Spags Investment Group, N.Y.
Address: Neptunesweg 30
Curacao, Netherlands Antilles
November 3, 1999
Principal Amount: $350,000
THREE HUNDRED FIFTY ThOUSAND DOLLARS
FOR VALUE RECEIVED, the undersigned, (the "Maker") hereby promises to pay
the order of Spags Investment Group, N.Y. (the "Payee") at it's address set
forth above, or such other place outside the United States or its possession as
the holder hereof shall designate from time to time, the principal sum of THREE
HUNDRED FIFTY THOUSAND ($350,000) DOLLARS on May 3, 2000 together with interest
on the unpaid principal balance outstanding from the date hereof until paid in
full at the rate of seven (7%) percent per annum. Interest shall be computed
monthly and shall be payable in arrears in full on May 3, 2000. All past due
amounts and accrued interest thereon shall bear interest at the maximum amount
allowable by law per annex, compounded annually, until paid. Interest shall be
paid in Europe or any where in the world, except that Interest shall not be paid
within the United States of America and its possessions and territories under
the principals of portfolio investment.
IT IS EXPRESSLY AGREED THAT:
1. In the event that the Maker shall default in the payment of principal
when due, shall default in the payment of interest when due, is adjudicated
insolvent or bankrupt, files a petition in bankruptcy, makes an assignment for
the benefit of creditors, petitions or applies for the appointment of any
receiver, conservator, trustee or other custodian or supervisor for itself or
any substantial part of its property, commences any action or proceeding for
relief under any reorganization, arrangement, readjustment of debt, composition,
dissolution or liquidation law or statute, is the subject of any such action or
proceeding instituted against it which remains undismissed for a period of
thirty (30) days, by an act, consents to, approves of or acquiesces in any such
action or proceeding or the appointment of any receiver, conservator, fiscal
agent, trust or other custodian or supervisor for itself or any substantial part
of its property or suffers any such appointment to continue undischarged for a
period of thirty (30) days; or otherwise takes advantage of any insolvency law
or commits any act of bankruptcy; then, upon the occurrence of any and every
such event, this Note shall become immediately due and payable, both as to
principal and interest, without any action by Payee and without presentments,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived and while in default, this Note shall bear interest at the
highest legal rate per annum permissible under the laws of the State of New
York.
<PAGE>
Promissory Note
November 3, 1999
Page 2 of 2
2. Further, the rights, powers, privileges and remedies of the holder of
this Note are cumulative and not exclusive of any rights, powers, remedies and
privileges which the holder might have under any law of other agreement now in
effect or hereafter entered into between it and Maker. No failure or delay on
the part of the holder hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.
3. Maker shall pay the costs of collection and attorneys' fees in case
default is made in the payment of this Note. Maker expressly waives diligence,
presentment for payment, demand, protest or notice of any kind whatsoever.
4. This Note shall be in all respects governed by and construed and applied
in accordance with the laws of the State of New York. In the event of a default,
Maker consents to the jurisdiction of the New York Courts over Maker for the
purpose of obtaining payment on this Note. Separate judgments may be entered for
(i) principal and interest, and (ii) costs of collection and attorneys' fees.
5. This Note shall not be terminated or modified orally.
6. This note shall be binding and shall inure to the benefit of Maker,
Payee and their respective successors assigned and personal representatives.
However, this Note may not be assigned or negotiated to any person or entity
deemed a "U.S. Person" as same as defined under the U.S. Internal Revenue Code,
as amended. Any such assignment shall be null and void.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note,
the day and year above written.
SPARTA SURGICAL CORPORATION
/s/ Thomas F. Reiner
- ----------------------------
Thomas F. Reiner
Chairman of the Board
President and CEO
Exhibit 10.05
AGREEMENT
Sparta Surgical Corporation ("Sparta") and Cordial, N.V. ("Coridal") agree to
the following:
1. In consideration of Corida1's services to Sparta, including, but not
limited to, consult and financial services performed, Sparta shall issue to
Coridal, 350,000 shares Common Stock, par value $0.002, of Sparta Surgical
Corporation on or before November 25, 1999. All shares shall have piggyback
registration rights and Sparta shall register the 350,000 shares issued
pursuant to this Agreement, and (ii) the 582,000 shares previously issued
to Coridal by Sparta, all no later than March 1, 2000. It is agreed that
none of Coridal's Common Stock in Sparta will participate in a Voting
Trust.
2. Sparta agrees to set up a segregated account for the $350,000 loan and
further agrees that it shall use the funds pursuant to the attached Use of
Proceeds. Prior to Spar withdrawal of funds, Coridal's representative shall
be notified as funds are about to withdrawn from the segregated account and
the representative will acknowledge writing approval of same.
3. It is agreed that Coridal shall have an irrevocable option (the "Option")
to purchase additional 500,000 shares of Common Stock of Sparta Surgical
Corporation, at a price of $1.00 per share, exercisable within ten days
from submission of due diligence material Coridal for Sparta's targeted
acquisition of Home Med-Equip, Inc. or a comparable acquisition. The Option
supercedes all previous options given to Coridal by Sparta purchase Sparta
Common Stock.
4. Joel S. Ratner will be recommended and nominated by Thomas F. Reiner to the
Boar Directors of Sparta.
5. In the event that Coridal exercises the Option and purchases the 500,000
shares of Sparta as set forth in paragraph 3 above, Coridal agrees to
convert the indebtedness evidenced by that certain promissory note dated
November 3, 1999 into 350,000 shares.
This Agreement shall be in all respects governed by and construed and applied in
accordance with laws of the State of New York. The parties to this Agreement
consent to the jurisdiction the New York Courts. Arty modification of this
Agreement must be in writing signed by Parties hereto.
AGREED AND ACCEPTED THIS 3rd DAY OF NOVEMBER, 1999
By: /s/ Thomas F. Reiner
-------------------------------- -----------------------------------
Coridal, N.V. Thomas F. Reiner, Chairman
President, CEO
Sparta Surgical Corporation
<PAGE>
AGREEMENT
---------
In consideration of Spags Investment Group, N.V. ("Spags") making a $350,000
loan to Sparta Surgical Corporation ("Sparta") it is agreed to by the above
parties as to the following:
1. Sparta will repay the $350,000 on March 3, 2000 at 7% annual interest
as evidence by an executed promissory note (the "Note").
2. The moneys when due will be paid by Sparta outside the United States.
Sparta will pay Spags by wiring funds to the account from which the
funds were originally sent to Sparta.
3. Any modification of this Agreement will be in writing. This Agreement
shall be in all respects governed and construed and applied in
accordance with the laws of the State of New York. The parties to this
Agreement consent to the jurisdiction of the New York Courts.
4. Sparta and Spags agree that if Coridal, N.Y. purchases 500,000 shares
of Sparta Common Stock, par value $0.002, at $1.00 per share ("Common
Stock"), then Coridal will also convert its Note of $350,000 into
350,000 shares of Sparta Common Stock at $1.00 per share.
AGREED THIS 3rd DAY OF NOVEMBER, 1999
/s/ Thomas F. Reiner
- ------------------------------- ------------------------------
Spags Investment Group, N.V. Sparta Surgical Corporation
By Thomas F. Reiner, Chairman
of the Board President and CEO
<PAGE>
OPTION
In consideration of Coridal, N.Y. ("Coridal") securing a loan from Spags
Investment Group, N.Y. ("Spags") for Sparta Surgical Corporation ("Sparta"),
Sparta and Coridal agree to the following:
1. In consideration of services performed, Sparta shall issue to Coridal,
350,000 shares of Common Stock, par value $0.002, of Sparta Surgical
Corporation on or before November 25, 1999. All shares shall have
piggyback registration rights and Sparta shall, if requested by
Coridal, register Coridal's 350,000 shares, Coridal's 240,000 shares
and Coridal's 342,000 shares of Common Stock no later than March 1,
2000. It is agreed that none of Coridal's Common Stock in Sparta will
participate in a Voting Trust.
2. Sparta agrees to set up a segregated account for the $350,000 loan and
further agrees that it shall use the funds pursuant to the attached
Use of Proceeds. Coridal's representative shall be notified as funds
are about to be withdrawn from the segregated account and the
representative will acknowledge in writing approval of same.
3. It is agreed that Coridal shall have an irrevocable option ("Option")
to purchase 500,000 shares of Common Stock, par value $0.002, of
Sparta Surgical Corporation exercisable on the following terms:
(a) That within ten days from submission of due diligence material to
Coridal for Sparta's targeted acquisition of Home Med-Equip, Inc.
or a comparable acquisition, Coridal can purchase 500,000 shares
of the above referred to Common Stock for $500,000.
4. Joel S. Ratner will be recommended and nominated by Thomas F. Reiner
to the Board of Directors of Sparta.
This Agreement, which supercedes the Agreement of August 30, 1999, shall be in
all respects governed by and construed and applied in accordance with laws of
the State of New York. The parties to this Agreement consent to the jurisdiction
of the New York Courts. Any modification of this Agreement will be in writing.
AGREED AND ACCEPTED THIS 3RD DAY OF NOVEMBER, 1999
By: /s/ Thomas F. Reiner
------------------------------- ------------------------------------
Spags Investment Group, N.V. Thomas F. Reiner, Chairman
President, CEO
Sparta Surgical Corporation
Exhibit 10.06
CONSULTING AGREEMENT
CONSULTING AGREEMENT made this 11th day of March 1999 (this "Agreement"),
by and between
Sparta Surgical Corporation, a Delaware corporation (the "Company") with
offices at Bernal Corporate Park, 7068 Koll Center Parkway - Suite 425,
Pleasanton, California 94566
and
IGC of New York Corporation, or its assigns ("the Consultant").
WITNESSETH:
Whereas, the Company and the Consultant (or an entity related to or under
common control with the Consultant) have entered into various agreements
which pertain to consulting services similar to those identified in this
Agreement, including but not limited to those dated December 1, 1998,
December 3, 1998, February 23, 1999 and March 4, 1999,
Whereas, this agreement is intended to supersede and replace all of these
prior agreements, together with any amendments thereto and any other
agreements which may exist, whether written or oral, regarding the
Consultant's (which shall include Howard Schuster or any entity with which
Howard Schuster has any affiliation) performing consulting services on
behalf of the Company,
Whereas, the Company desires to retain the services of the Consultant as a
consultant on a non-exclusive basis to render financial advise and
assistance to the Company in connection with the Company's seeking,
negotiating and choosing merger and acquisition candidates, an din
connection with the Company's seeking financing, which financing shall be
subject to the approval in all respects by the Company in its sole
discretion, all upon the terms and conditions set forth in this agreement,
and
Whereas, the Consultant desires to accept said retention.
Now, therefore, in consideration of the premises and mutual covenants
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties do hereby agree as
follows:
Section 1. Term of Consultancy. The term of the consultancy with the
Consultant (the "Term") shall commence on the date hereof (the "Effective Date")
and continuing for a period of two (2) years unless otherwise terminated
pursuant to Section 3 of this Agreement. This Agreement shall be non-exclusive.
<PAGE>
Section 2. Fees. During the Term, the Company shall pay to the Consultant
(or a party designated by the Consultant) the following fees, which amounts
shall be payable solely with respect to any transactions or financings as to
which the Consultant has acted as the introducing party to the Company:
a. Upon the execution of this Agreement, the Company shall issue to the
Consultant 300,00C warrants to purchase one share of the Company's common
stock, $0.002 par value ("Common Stock") at a price of $0.95 per share. The
warrants shall expire if not exercised within three (3) years and shall
have piggyback registration rights with respect to any shares issued upon
their exercise.
b. In the event the Consultant introduces the Company to a source of private
placement financing, upon the closing and funding of such financing the
Consultant shall be paid an amount equal to the following:
Percentage of amount raised Type of Financing
--------------------------- -----------------
4% Senior Secured Debt
6% Mezzanine/Subordinate Debt
8% Private Equity
In addition, the Consultant shall, upon the closing and funding of a
private placement financing in the amount of $10,000,000, receive 500,000
warrants to purchase one share of the Company's Common Stock at a price of
$0.95 per share in the event the Consultant introduces a source of such
private placement. Consultant shall receive a lesser amount of warrants in
the event a lesser amount of private placement funding is located, closed
and financed, which amount shall be determined on a pro rata basis (for
example, in the event $1,000,000 in private placement financing were
located by the Consultant, which financing closes and is funded, the
Consultant would be entitled to receive 50,000 warrants), provided however
that a total of not more than 500,000 warrants shall be issued pursuant to
this section. The warrants shall expire if not exercised within three (3)
years of their issuance and shall have piggyback registration rights with
respect to any shares issued upon their exercise.
c. In the event the Consultant introduces the Company to a source of senior
secured debt, mezzanine/subordinated debt or private equity bridge
financing in an amount of at least $500,000, which financing closes and is
funded on or before March 30, 1999, upon the closing and funding of such
financing, in addition to the amounts owing under subparagraph b of this
Section 2, the Consultant shall be paid $8,000 per month, in the form of
equal monthly installments over the following twenty-four (24) month
period, provided, however, that in the event a secondary public offering
has not been completed and funded, through an underwriter introduced by the
Consultant to the Company, resulting in net proceeds to the Company in an
amount of not less than $10,000,000 (the "Secondary Offering"), on or
before August 31, 1999, the Company's obligation to make such monthly
payment shall cease on such date.
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<PAGE>
In the event the Consultant introduces the Company to a target for any
mergers or acquisitions which mergers or acquisitions are completed by the
Company and which result in the Company's completing a Secondary Offering
which results in the Company's receiving net proceeds in the amount of at
least $10,000,000 the Consultant shall thereafter be retained, on a
non-exclusive basis, as a consultant to assist the Company in locating and
evaluating additional merger and acquisition opportunities for a period of
twenty four months thereafter (the "Post-Offering Consulting Period"). In
the event the Consultant is retained to act as a non-exclusive consultant
during the Post-Offering Consulting Period pursuant to this subsection, the
Consultant shall receive the following compensation for such services: (i)
$100,000 at the time the Post-Offering Consulting Period commences; (ii)
500,000 warrants to purchase one share of the Company's Common Stock at a
price of $0.95 per share (which warrants shall expire if not exercised
within three (3) years of their issuance and shall have piggyback
registration rights with respect to any shares issued upon their exercise)
(iii) $12,500 per month in the form of equal monthly installments over the
twenty-four (24) month period comprising the Post-Offering Consulting
Period.
Section 3. Termination. This Agreement may be terminated under the
following circumstances:
a. This Agreement may be terminated by the Consultant at any time upon ten
days' written notice.
b. The Company may terminate the agreement at any time for Cause following ten
days' prior written notice. For purpose of this Agreement, "Cause" shall
mean: (1) negligence of the Consultant in the performance of the duties
hereunder, or (2) the commission of any felony by the Consultant.
Section 4. Confidential Information. The Consultant expressly covenants and
agrees that it will not at any time, during or after the Term, directly or
indirectly, use or permit the use of any confidential information of or relating
to the Company and will not divulge such confidential information to any person,
firm, corporation, or other entity whatsoever except as is necessary for the
performance of duties as consultant to the Company under the terms of this
Agreement. In the event the Consultant is required by the court to divulge
information about the Company (or is requested to do so in any legal
proceeding), the Consultant hereby agrees to provide the Company with prompt
written notice of such request or requirement in order to enable the Company to
seek an appropriate protective order or other remedy, and to otherwise consult
with the Company with respect to taking steps to resist or narrow the scope of
such request or legal process. Any information which (i) is or becomes known to
the public without breach by the Consultant of any of the terms hereof or of the
common law duties of the Consultant, (ii) is developed independently by the
Consultant without reference to any confidential information, or (iii) is or
3
<PAGE>
becomes available to the Consultant from sources outside the Company, is
not bound by a confidentiality agreement with the Company prohibiting such
disclosure, and shall not be deemed to be confidential information.
Section 5. General.
a. Applicable law. This Agreement shall, in all respects, be governed by the
laws of the State of California, without giving effect to conflicts of law
principles. The parties consent to the jurisdiction of a court of proper
jurisdiction located in Alameda County, State of California for resolution
of all disputes relating to or arising under this Agreement.
b. Survival. Except as provided herein, the parties hereto agree that the
covenants in Section 5 hereof shall survive the termination of this
Agreement.
c. Indemnification. The Company hereby agrees to indemnify and hold the
Consultant harmless from and against any and all costs, expenses (including
attorney's fees), liabilities, losses, damages, fines, penalties,
judgements and amounts paid in settlement ("Losses"), that are incurred or
suffered by the Consultant which arise from the Consultant's services to
the Company or services performed at the request of the Company.
Notwithstanding the foregoing, the Company shall not be required to
indemnify the Consultant in respect of losses or damages arising from
negligence or willful misconduct of the Consultant.
d. Modifications or Amendments. No amendment, change or modification of this
document shall be valid unless in writing and signed by all parties hereto.
e. Waiver. No reliance upon or waiver on one or more provisions of this
Agreement shall constitute a waiver of any other provisions hereof
f. Successors and Assigns. All of the terms and provisions contained herein
shall insure to the benefit of and shall be binding upon the parties hereto
and their successors and assigns.
g. Separate Counterparts. This document may be executed in one or more
separate counterparts, each of which, when so executed, shall be deemed to
be an original. Such counterparts shall together constitute and shall be
one and the same instrument.
h. Headings. The caption appearing at the commencement of the sections hereof
are descriptive only and are for convenience of reference. Should there be
any conflict between any such caption and the section at the head of which
it appears, the substantive provisions of such section and not such
captions shall control and govern in the construction of this document.
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<PAGE>
i. Entire Agreement. This Agreement constitutes the entire understanding and
agreement of the parties with respect to the subject matter of this
Agreement, and any all prior agreements, understandings or representations
are hereby terminated and canceled in their entirety.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
SPARTA SURGICAL CORPORATION IGC OF NEW YORK CORPORATION
- ------------------------------------- -----------------------------
Thomas F. Reiner, President, Chairman Howard Schuster, President (1)
and Chief Executive Officer
- -------------
(1) In addition, Mr. Schuster is executing this document in such capacity
as may be required on behalf of any other entity with which he is affiliated
which may have an agreement with the Company which is being terminated by this
agreement.
5
<PAGE>
i. Entire Agreement. This Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of
this Agreement, and any all prior agreements, understandings or
representations are hereby terminated and canceled in their entirety.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
SPARTA SURG1CAL CORPORATION IGC OF NEW YORK CORPORATION
/s/ Thomas F. Reiner /s/ Howard Schuster
- ------------------------------------- -----------------------------
Thomas F. Reiner, President, Chairman Howard Schuster, President(1)
and Chief Executive Officer
- ----------------
(1) In addition, Mr. Schuster is executing this document in such capacity
as may be required on behalf of any other entity with which he is affiliated
which may have an agreement with the Company which is being terminated by this
agreement.
5
<PAGE>
SPARTA SURGICAL CORPORATION
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED TO ANY PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF SPARTA SURGICAL
CORPORATION OR IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES LAWS.
COMMON STOCK PURCHASE WARRANT
-----------------------------
WARRANT dated as of the 4th day of March, 1999, issued by Sparta Surgical
Corporation ("Sparta"), a Delaware corporation with offices at Bernal Corporate
Park, 7068 Koll Center Parkway, Pleasanton, California 94566 to IGC of New York
Corporation, a corporation organized under the laws of New York ("IGC")..
This Warrant entitles IGC or its permitted assigns, to purchase from
Sparta, at any time, or from time to time, up until 5:00 p.m., United States
Eastern Standard Time on the three (3) year anniversary of the date hereof,
300,000 of Sparta's fully paid and nonassessable shares of Common Stock, $0.002
par value (the "Common Stock"), at a price of $0.95 per share (the "Exercise
Price"), subject to adjustment as provided for herein, upon the holder's
presentation and surrender of this Warrant at the corporate offices of Sparta,
and upon its payment of the Exercise Price and any applicable taxes paid either
in cash, or by certified or official bank check, payable in lawful money of the
United States of America to the order of Sparta. Notwithstanding the foregoing,
this Warrant may not be exercised! during the so-called "quiet period" following
any filing made with the United States Securities and Exchange Commission
respecting any public offering of Sparta's securities.
1. Exercise. The purchase rights represented by this Warrant are
exercisable, at the option of the holder, in whole at any time, or in part from
time to time. In the case of the purchase of less than all of the shares
purchasable under this Warrant, Sparta shall cancel this Warrant upon the
surrender hereof and shall execute and deliver a new Warrant of like tenor for
the balance of the shares purchasable hereunder.
2. Registration Rights. The holder of this Warrant shall have such
registration rights respecting the Common Stock for which this Warrant is
exercisable as are set forth in a Registration Rights Agreement by and between
IGC and Sparta of even date herewith (the "Registration Rights Agreement"). The
holder of this Warrant shall be subject to an Irrevocable Voting Trust Agreement
appointing Thomas F. Reiner as Trustee with full voting rights over such common
shares. Any subsequent holder of this Warrant shall be deemed to have consented
to the provisions of the Registration Rights Agreement and the Irrevocable
Voting Trust Agreement and shall be bound by the terms and conditions thereof
3. Investment Representations. By its execution of this Warrant, IGC hereby
represents and certifies as follows:
(i) IGC of New York Corporation is purchasing this Warrant for the
investment of itself and its principals only, and not with a view to
the further resale or distribution thereof
<PAGE>
SPARTA SURGICAL CORPORATION
(ii) IGC of New York Corporation understands that this Warrant does
not provide the holder with voting rights, representation on Sparta's
Board of Directors, preemptive rights, nor any share of dividends,
spinoffs or distributions, while this Warrant remains unexercised.
(iii) IGC of New York Corporation has had adequate opportunity to
investigate Sparta, and to meet with its principals and ascertain the
nature and value of its business, purposes and prospects.
4. Transfer Restrictions. The holder shall not transfer, assign or
otherwise dispose, directly or indirectly, of its rights or interests in the
Warrant (or in any Common Stock or other securities which may be received upon
its being exercised) in the absence of there being a registration statement in
effect with respect to these Warrants under the United States Securities Act of
1933, as amended, or applicable state law. Any purported transfer, assignment or
other purported disposition in contravention of the terms of this Warrant shall
be void and of no effect. Any certificate for shares of Common Stock issued upon
the exercise of this Warrant shall bear a legend setting forth such restrictions
on transfer.
5. Adjustments. The number and kind of securities or other property
purchasable upon exercise of this Warrant shall be subject to adjustment from
time to time upon the occurrence, after the date hereof, of any of the following
events.
(a) In case Sparta shall (i) pay a dividend in, or make a distribution
of, shares of Common Stock or of capital stock convertible into Common
Stock on its outstanding Common Stock, (ii) subdivide its outstanding
shares of Common stock into a greater number of such shares or (iii)
combine its outstanding shares of Common Stock into a smaller number
of such shares, the total number of shares of Common Stock purchasable
upon the exercise of this Warrant outstanding immediately prior
thereto shall be adjusted so that the holder shall be entitled to
receive at the same aggregate Exercise Price the number of shares of
Common Stock which such holder would have owned or have been entitled
to receive immediately following the happening of any of the events
described above had such Warrant been exercised in full immediately
prior to the happening of such event. Any adjustment made pursuant to
this subsection shall, in the case of a stock dividend or
distribution, become effective as of the record date therefor and, in
the case of a subdivision or combination, be made as of the effective
date thereof If, as a result of an adjustment made pursuant to this
subsection, the holder of any Warrant thereafter surrendered for
exercise shall become entitled to receive shares of two or more
classes of capital stock of Sparta, the Board of Directors of Sparta
(whose determination shall be conclusive) shall determine the
allocation of the adjusted Exercise Price between or among shares of
such classes of capital stock.
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SPARTA SURGICAL CORPORATION
(b) In the event of any adjustment of the total number of shares of
Common Stock purchasable upon the exercise of Warrants pursuant to
subsection (a) above, the Exercise Price of each such Warrant shall
remain unchanged, but the number of shares of capital stock obtainable
on exercise of each such Warrant shall be adjusted as provided in
subsection (a) above.
(c) In the event of a capital reorganization or a reclassification of
the Common Stock (except as provided in subsection (a) above or
subsection (d) below), any holder, upon exercise of Warrants, shall be
entitled to receive, in substitution for the Common Stock to which
such holder would have become entitled upon exercise immediately prior
to such reorganization or reclassification, the shares (of any class
or classes) or other securities or property of Sparta (or cash) that
such holder would have been entitled to receive at the same aggregate
Exercise Price upon such reorganization or reclassification if such
Warrants had been exercised immediately prior thereto; in any such
case, appropriate provision (as determined by the Board of Directors
of Sparta) shall be made for the application of this Section 5 with
respect to the rights and interests thereafter of the holders
(including but not limited to the allocation of the Exercise Price
between or among shares of classes of capital stock), to the end that
this Section 5 (including the adjustments of the number of shares of
Common Stock or other securities purchasable and the Exercise Price
thereof) shall thereafter be reflected, as nearly as reasonably
practicable, in all subsequent exercises of the Warrants for any
shares or securities or other property (or cash) thereafter
deliverable upon the exercise of the Warrants.
(d) In case of any consolidation of Sparta with, or merger of Sparta
into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding
Common Stock), or in case of any sale or conveyance to another
corporation of the property of Sparta as an entirety or substantially
as an entirety, the corporation formed by such consolidation or merger
or the corporation which shall have acquired such assets, as the case
may be, shall execute and deliver to the holder a supplemental
agreement providing that the holder of each Warrant then outstanding
shall have the right thereafter (until the expiration of such Warrant)
to receive, upon exercise of such Warrant, solely the kind and amount
of shares of stock and other securities and property (or cash)
receivable upon which consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock of Sparta for which
such Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental agreement
shall provide for adjustment which shall be as nearly equivalent as
may action in respect of which indemnity may be sought against Sparta,
IGC or such underwriter or such controlling person, as the case me be,
will notify Sparta in writing of the commencement thereof, and,
subject to the provisions hereinafter stated, Sparta shall assume the
defense of such action (including the employment of counsel, who
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<PAGE>
SPARTA SURGICAL CORPORATION
shall be counsel satisfactory to IGC or such underwriter or
controlling person, as the case may be, and the payment of all
expenses) insofar as such action shall relate to any alleged liability
in respect of which indemnity may be sought against Sparta. IGC or any
underwriter or any such controlling person shall have the right to
employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at
IGC's sole expense. Sparta shall not be liable to indemnify any person
for any settlement of any such action effected without Sparta's
consent.
6. Settlement of Underwriter. In the event that IGC proposes to offer any
of the Registrable Shares to or through an underwriter, IGC shall use such
underwriter, if any, as Sparta has identified as its principal investment
banker.
7. Adjustment. If there shall be any change in the shares of Sparta through
reorganization, recapitalization, stock dividend, stock split, combination,
amalgamation or exchange of shares, or the like, all of the terms and provisions
of this Warrant shall apply to any new, additional or different shares of
investments issued with respect to the Registrable Shares as a result of such
event, and such shares or investments shall be deemed to constitute "Registrable
Shares" hereunder.
8. Successors and Assigns. This Warrant shall be binding on and inure to
the benefit of Sparta's successors and assigns, and shall inure to the benefit
of, and be binding of, and be binding on, transferees and assignees of the
Warrants, but not transferees or assignees or Registrable Shares; and shall not
be otherwise assignable by IGC. Upon any proper transfer or exercise of the
benefits hereof, the transferee or person exercising such rights, as the case
may be, shall also be bound by the transferor's obligations hereunder, except as
otherwise expressly provided herein.
9. Notices. Notices hereunder shall be given as follows:
In the case of notice to IGC, to:
IGC of New York Corporation
40 E. 94th Street
New York, NY 10128
and in the case of notice to Sparta, to:
Sparta Surgical Corporation
Bernal Corporate Park
7068 Koll Center Parkway, Suite, 425
Pleasanton, California 94566
Attn: Mr. Thomas F. Reiner
4
<PAGE>
SPARTA SURGICAL CORPORATION
with a copy to:
Mr. John Kostrubanic
Pepe & Hazard, LLP
150 Federal Street, 28th Floor
Boston, Massachusetts 02110
or to such other addresses as to which the parties may subsequently notify each
other in writing. All notices hereunder shall be in writing, and shall be deemed
to have been given at the date of actual receipt, or when actual delivery to
such address has been confirmed in writing by an unaffiliated delivery service.
The party responsible for giving notice under any provision of this Warrant
shall bear all expenses and fees incurred in connection therewith.
10. Governing Law. This Warrant shall be construed in accordance with the
laws of the State of California.
11. Amendments; Waivers. Changes, amendments or modification in or
additions to of any provisions under or of this Warrant may be made only by a
written instrument executed by the parties thereto. Waivers must be by written
instrument executed by the party to be bound thereby.
12. Captions. Captions are for convenience only and shall not be deemed to
be a part of this Warrant, nor shall be taken into any consideration in the
interpretation hereof.
13. Counterparts. This Warrant may be executed in any number of
counterparts, each of which shall constitute an original, but which taken
together shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have caused this Warrant to be executed
as of the day and year first above written.
SPARTA SURGICAL CORPORATION
By: /s/ Thomas F. Reiner
-------------------------------
Thomas F. Reiner, President, CEO
and Chairman of the Board
By:
-------------------------------
Howard Schuster
IGC of New York Corporation
5
REGISTRATION RIGHTS AGREEMENT
AGREEMENT, dated as of this _____ day of January 2000, by and between
Sparta Surgical Corporation, a Delaware corporation ("the "Company"), and
("INVESTOR").
WHEREAS, the undersigned hereby subscribes for and agrees to
purchase________ shares of the common stock of the Company at a price of $1.00
per share (the "Purchased Shares"), and agrees to pay therefore the total sum of
$___________ in cash (the "Purchase Price"). In the event the Purchased Shares
have an aggregate market value of less than 1.667 times the Purchase Price on
the date immediately preceding the effective date of the registration statement
which has been filed with respect to such shares hereafter, the Purchaser shall
be issued an additional amount of shares of Common Stock in such amount as is
sufficient to result in the total amount of shares of Common Stock issued to the
Purchaser pursuant to the terms of this Agreement having a market value of 1.667
times the Purchase Price on such date; and
WHEREAS, the parties desire that following the date hereof that the Company
shall use its best efforts to register the Registration Shares;
NOW, THEREFORE, in order to induce INVESTOR to enter into the Stock
Purchase Agreement and to early out the transactions contemplated thereunder,
and for other and further valuable consideration, the receipt and sufficiency of
which hereby are acknowledged, the parties hereto, intending to be legally
bound, do hereby covenant and agree as follows:
1. Commitment to Register the Registrable Shares. The Company hereby agrees
to use its best efforts to register, on Form SB-2 (or the appropriate form) the
Registrable Shares and to commence such process immediately following the
Closing Date (as such term is defined in the Stock Purchase Agreement).
2. Expenses. All expenses of registration and offering shall be borne by
the Company, except for the fees of any special counsel retained by INVESTOR.
3. Provision of Information. Notwithstanding any other provision of this
Agreement, the Company shall not be required to make, file for or cause to
become effective any Registration pursuant to this Agreement unless and until
INVESTOR shall have provided the Company with all material facts concerning
INVESTOR required pursuant to applicable securities law and regulations to be
stated in said Registration statement or in any prospectus, offering circular
or other disclosure document required by law to be filed, distributed or
otherwise used in connection therewith (the "Registration Statement") and
requested by the Company or its legal counsel.
4. Indemnification of Company. In the event that the Company registers any
of the Registrable Shares, INVESTOR will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement, each underwriter, and each person, if any, who controls
the Company or such underwriter, from and against any and all losses, claims,
damages, expenses or liabilities, joint or several, to which they or any of them
<PAGE>
REGISTRATION RIGHTS AGREEMENT
may become subject under applicable securities law, and, except as hereinafter
provided, will reimburse the Company and each such director, officer,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions, whether or not resulting in any liability, insofar as such losses,
claims, damages, expenses, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement, (or the Registration Statement as from time to time
amended or supplemented) or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished to the Company by INVESTOR expressly for
use therein, and confirmed in writing by INVESTOR or the Company or any agent or
attorney thereof. Promptly after receipt of notice of the commencement of any
action in respect of which indemnity may be sought against INVESTOR, the party
seeking indemnification hereunder will notify INVESTOR in writing of the
commencement thereof, and INVESTOR shall, subject to the provisions hereinafter
stated, assume the defense of such action (including the employment of counsel,
who shall be counsel satisfactory to the Company) and the payment of expenses
insofar as such action shall relate to the alleged liability in respect of which
indemnity may be sought against INVESTOR. The Company and each such director,
officer, underwriter or controlling person shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the Company's sole
expenses. INVESTOR shall not be liable to indemnify any person for any
settlement of any such action effected without its consent.
5. Indemnification of INVESTOR. In the event that the Company Registers any
of the Registrable Shares, the Company shall indemnify and hold harmless
INVESTOR, its officers and directors, and each underwriter of such of the
Registrable Shares (including any broker or dealer through whom such of the
shares may be sold) and each person, if any, who controls INVESTOR, from and
against any and all losses, claims, damages, expenses or liabilities, joint or
several, to which they or any of them become subject under applicable securities
law, and, except as hereinafter provided, will reimburse INVESTOR and each of
the underwriters and each such controlling person, if any, for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or the
Registration Statement as from time to time amended or supplement) or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, unless such untrue statement or omission was
made in such Registration Statement (or a supplemented or amended version
thereof) in reliance upon and in conformity with information furnished in
connection therewith by INVESTOR or any underwriter expressly for use therein.
Promptly after receipt by INVESTOR or any person controlling any of them of
notice of the commencement of any action in respect of which indemnity may be
sought against the Company, INVESTOR or such underwriter or such controlling
person, as the case may be, will notify the Company in writing of the
commencement thereof, and, subject to the provisions hereinafter stated, the
Company shall assume the defense of such action (including the employment of
counsel, who shall be counsel satisfactory to INVESTOR or such underwriter or
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
controlling person, as the case may be, and the payment of all expenses) insofar
as such action shall relate to any alleged liability in respect of which
indemnity may be sought against the Company. INVESTOR or any underwriter or any
such controlling person shall have the right to employ separate counsel in any
such action and to participate in the defense thereof but the fees and expenses
of such counsel shall be at INVESTOR's sole expense. The Company shall not be
liable to indemnify any person for any settlement of any such action effected
without the Company's consent.
6. Notices. Notices hereunder shall be given as follows:
In the case of notice to INVESTOR, to:
Mr. _________________, Title
Company
Address 1
Address 2
with a copy to:
and in the case of notice to the Company, to:
Thomas F. Reiner, President
Sparta Surgical Corporation
2100 Meridian Park Boulevard
Concord, California 94520
with a copy to:
John A. Kostrubanic, Esq.
Peabody & Arnold, LLP
50 Rowes Wharf
Boston, MA 02110
or to such other addresses as to which the parties may subsequently notify each
other in writing. All notices hereunder shall be in writing, and shall be deemed
to have been given at the date of actual receipt, or when actual delivery to
such address has been confirmed in writing by an unaffiliated delivery service.
The party responsible for giving notice under any provision of this Agreement
shall bear all expenses and fees incurred in connection therewith.
7. Governing Law. This Agreement shall be construed in accordance with the
laws of the State of Delaware.
3
<PAGE>
REGISTRATION RIGHTS AGREEMENT
8. Amendments; Waivers. Changes, amendments or modification in or
additions to of any provision under or of this Agreement may be made only by a
written instrument executed by the parties thereto. Waivers must be by written
instrument executed by the party to be bound thereby.
9. Captions. Captions are for convenience only and shall not be deemed to
be a part of this Agreement, nor shall be taken into any consideration in the
interpretation hereof.
10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original, but which taken
together shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
SPARTA SURGICAL CORPORATION
By:
-----------------------------------------
Thomas F. Reiner, Chairman of the Board
President and CEO
By:
-----------------------------------------
Signature
4
Exhibit 10.08
RESTATED CERTIFICATE OF DESIGNATIONS
AND THE TERMS AND CONDITIONS
AND RELATIVE RIGHTS AND PREFERENCES
OF SERIES AA PREFERRED STOCK
of
SPARTA SURGICAL CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, Thomas F. Reiner, President and Chairman of the Board of Sparta Surgical
Corporation, a Delaware corporation (the "Corporation"), in accordance with
Section 103 of the General Corporation Law of the State of Delaware, do hereby
certify that pursuant to authority conferred upon the Corporation's Board of
Directors by the Restated Certificate of Incorporation, as filed in the office
of the Secretary of State of Delaware and recorded in the office of the Recorder
for the County of New Castle, Delaware, the Corporation's Board of Directors, by
unanimous written consent dated February 11th, 1999, adopted the following
resolution to restate the Certificate of Designations and the Terms and
Conditions and Relative Rights and Preferences of the series of preferred stock
designated as Series AA Preferred Stock:
RESOLVED, that under the authority vested in the Corporation's Board of
Directors pursuant to the Restated Certificate of Incorporation of the
Corporation, that the Certificate of Designations and the Terms and Conditions
and Relative Rights and Preferences respecting the series of preferred stock
designated as Series AA Preferred Stock, $4.00 par value per share, shall be
restated such that the powers, preferences and relative, participating,
optional, redemption and other special rights, and the qualifications,
limitations and restrictions of the shares of such series of preferred stock are
as follows:
(1) Designation and Stated Value. 875,000 shares of Preferred Stock, par
value $4.00 per share, of the Corporation are hereby constituted as a series
designated as "Series AA Preferred Stock" (hereinafter called "Series AA
Preferred Stock").
(2) Definitions. Terms used herein which are capitalized or otherwise
defined shall have the meanings given to them herein, unless the context clearly
requires otherwise.
<PAGE>
(3)Dividends.
(a) The holders of Series AA Preferred Stock, in preference to any of the
holders of any stock that is Junior and subordinate to any of the holders of any
stock that is Senior (as such terms are hereinafter defined) to such series of
Preferred Stock as to dividends, shall be entitled to receive out of the assets
of the Corporation which are by law available for the payment of dividends, when
and as declared by the Board of Directors, cumulative dividends at the per
annum rate of $0.28 per share, and no more, payable either in the form of cash,
common stock or some combination thereof, in the sole discretion of the Company,
semi-annually in arrears on November 30th and May 31st of each year, which
dividends shall be payable on the last day of the month following such period,
except that if any such date is a Saturday, Sunday or legal holiday, then such
dividend shall be payable on the next day that is not a Saturday, Sunday or
legal holiday (each of such periods being hereinafter called a "Dividend
Period") and which dividends shall pro rated for any partial Dividend Period.
(b) Dividends on shares of Series AA Preferred Stock shall be non-cumulative.
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.
(c) 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.
(d) The foregoing provisions of this Section 3 shall not apply to a dividend or
distribution payable in shares of stock which is Junior to the Series AA
Preferred Stock as to dividends and liquidation solely in shares of stock which
are Junior to the Series AA Preferred Stock, or to the acquisition of shares of
stock upon the conversion thereof into or in exchange solely for shares of such
Junior stock.
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<PAGE>
(4)Conversion.
(a) Subject to the limitations set forth in the preceding Section 3 and this
Section 4, each two shares of Series AA Preferred Stock (a "Unit") then
outstanding:
(i) shall be convertible, in whole or in part, into nine (9) fully paid and
non-assessable shares of the Corporation's common stock, $0.002 par value (the
"Common Stock") at the option of the holder of such Unit, at any time or from
time to time on or before February 10, 2001 (with such period being referred to
hereinafter as the "Conversion Period"), upon notice duly given as provided in
this Section 4.
(ii) shall automatically convert into nine (9) shares of Common Stock in the
event that during the "Conversion Period" the daily average bid and ask price of
the Common Stock averages $3.00 per share or more over a thirty consecutive day
period.
(b) If the Common Stock issuable upon the conversion of the Series AA Preferred
Stock shall be changed into the same or different number of shares of any class
or classes of stock, whether by capital reorganization, reclassification,
exchange of shares, or otherwise (other than an Extraordinary Common Stock
Event, or a reorganization, merger, consolidation or sale of assets provided for
elsewhere in this Section 4), then and in each such event each holder of shares
of Series AA Preferred Stock shall have the right thereafter to convert such
shares into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification or other change,
by holders of the number of shares of Common Stock into which such shares of
Series AA Preferred Stock might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein.
(c) In each case of an adjustment or readjustment of the conversion rate as
provided for in Section 4 (b), the Company will furnish each holder of Series AA
Preferred Stock with a certificate, prepared by independent public accountants
of recognized standing, showing such adjustment or adjustment, and stating in
detail the facts upon which such adjustment or readjustment is based.
(d) To exercise the conversion privilege provided for in Section 4 (a)(i), a
holder of Series AA Preferred Stock shall surrender the certificate or
certificates representing the shares being converted to the Corporation at its
principal office, and shall give written notice to the Corporation at that
office that such holder elects to convert such shares. Such notice shall also
state the name or names (with address or addresses) in which the certificate or
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<PAGE>
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of Series AA Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof to
the Corporation or in blank. The date when such written notice is received by
the Corporation together with the certificate or certificates representing the
shares of Series AA Preferred Stock being converted, shall be the "Conversion
Date". As promptly as practicable after the Conversion Date, the Corporation
shall issue and shall deliver to the holder of the shares of Series AA Preferred
Stock being converted a certificate or certificates as such holder may request
for the number of full shares of Common Stock issuable upon the conversion of
such shares of Series AA Preferred Stock in accordance with the provisions of
this Section 4 and cash, as provided in Section 4 (e), in respect of any
fraction of a share of Common Stock issuable upon such conversion. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the Conversion Date, and at such time the rights of the holder as
holder of the converted shares of Series AA Preferred Stock shall cease and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares of Common Stock
represented thereby.
(e) No fractional shares of Common Stock or scrip representing fractional shares
shall be issued upon conversion of Series AA Preferred Stock. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of Series AA Preferred Stock, the Corporation shall pay to the holder
of the shares of Series AA Preferred Stock which were converted a cash
adjustment in respect of such fraction in an amount equal to the reported last
sale price for the shares of Common Stock on any national securities exchange or
automated interdealer quotation system on the trading day prior to the date of
the conversion or, if the Common Stock is not listed on any national securities
exchange or automated interdealer quotation system, at the fair market value
(as determined in a manner prescribed by the Board of Directors) at the close of
business on the Conversion Date.
(f) In the event that some but not all of the shares of Series AA Preferred
Stock represented by a certificate or certificates surrendered by a holder are
converted, the Corporation shall execute and deliver to or on the order of the
holder, at the expense of the Corporation, a new certificate representing the
number of shares of Series AA Preferred Stock which were not converted.
(g) The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series AA Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
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<PAGE>
effect the conversion of all outstanding shares of the Series AA Preferred
Stock, and if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of the Series AA Preferred Stock, the Corporation shall take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
(h) "Extraordinary Common Stock Event" shall mean (i) the issue of additional
shares of the Common Stock as a dividend or other distribution on outstanding
Common Stock, (ii) subdivision of outstanding shares of Common Stock into a
greater number of shares of the Common Stock, or (iii) combination of
outstanding shares of the Common Stock into a smaller number of shares of the
Common Stock.
(i) The Corporation shall pay all documentary, stamp, transfer or other
transactional taxes attributable to the issuance or delivery of shares of Common
Stock upon the conversion of any shares of Series AA Preferred Stock; provided
that the Corporation shall not be required to pay any taxes which may be payable
in respect of any transfer involved in the issuance or delivery of any
certificate for such shares in a name other than that of the holder of such
shares of Series AA Preferred Stock in respect of which such shares are being
issued.
(5) Redemption.
(a) Subject to the limitations set forth in the preceding Section 3, the shares
of Series AA Preferred Stock then outstanding shall be redeemable, in whole or
in part at the option of the Corporation expressed by resolution of the
Corporation's Board of Directors:
(i) at any time or from time to time following the expiration of the Conversion
Period, upon notice duly given as provided in this Section 4, 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 this Section 4, 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.
(b) In case of a redemption of a part only of the shares of the Series AA
Preferred Stock at the time outstanding, the redemption may be either pro rata
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<PAGE>
or by lot or in such other fair and equitable manner as may be prescribed by the
Corporation's Board of Directors.
(c) Notice of every redemption of shares of Series AA Preferred Stock, in the
form approved by the Corporation's Board of Directors, shall be given by mailing
such notice, by first class mail, postage prepaid, not less than 30 days nor
more than 60 days prior to the applicable redemption date, to each holder of
shares so to be redeemed at tie address of such holder as the same shall appear
on the books of the Corporation. Each such notice shall specify the applicable
redemption date and the place where payment of the applicable redemption price
is to be made upon surrender for cancellation of the certificates representing
shares called for redemption, if applicable, the deposit made or to be made
pursuant to paragraph (d) below, and the effect thereof, the current conversion
price and the number of shares of Common Stock of the Corporation issuable upon
conversion of each share of Series AA Preferred Stock and the date upon which
such conversion rights will terminate, and such other matters as the Corporation
deems appropriate. No failure to mail such notice or any defect therein or in
the mailing thereof shall affect the validity of the proceedings for such
redemption except as to the holder to whom the Corporation has failed to mail
such notice or except as to the holder whose mailed notice was defective. Any
notice mailed in the manner herein provided shall be conclusively presumed to
have been duly given whether or not the holder receives the notice.
(d) At any time before the applicable redemption date, but not prior to the date
on which the notice of redemption shall be mailed, the Corporation may (but need
not) deposit in trust, for the account of the holders of the shares to be
redeemed, the moneys necessary for such redemption with a bank or other agent to
be designated in the notice of such redemption. The making of such deposit with
any such bank or other agent will not relieve the Corporation of liability for
payment of the moneys necessary for such redemption. Except as otherwise
required by law, any funds so deposited by the Corporation which are not
required for such redemption because of the exercise of the right of conversion
shall be returned to the Corporation. Any funds so deposited by the Corporation
which are unclaimed by the holders of the redeemed shares at the end of two
years after the applicable redemption date shall be repaid to the Corporation,
after which the holders of the shares entitled thereto shall look only to the
Corporation for payment thereof. Any interest accrued on moneys so deposited
shall belong to the Corporation and shall be paid to it from time to time.
(e) If notice of redemption shall have been duly given as hereinabove provided,
then on and after the applicable redemption date or, if the Corporation shall
have made the deposit referred to in paragraph (d) above on or before the date
specified therefor in the notice, then on and after the date of deposit or on
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<PAGE>
the date of any conversion, all shares so called for redemption (unless the
Corporation shall default in providing moneys for the payment of the applicable
redemption price) or converted in any conversion, shall be deemed to be no
longer outstanding for any purpose, and all rights with respect to such shares,
including but not limited to the right to receive dividends thereon, shall cease
and terminate. The holder of any certificate for such shares so called for
redemption shall have no interest in or claim against the Corporation, except
the right to receive the applicable redemption price as hereinafter provided and
any conversion rights not theretofore expired.
(f) At any time on or after the applicable redemption date or, if the
Corporation shall elect to deposit the moneys for such redemption as provided in
paragraph (d) above, then at any time on or after the date of deposit and
without awaiting the applicable redemption date, the respective holders of
record of the shares of Series AA Preferred Stock to be redeemed shall be
entitled to receive the applicable redemption price upon actual delivery to the
Corporation, or, in the event of such deposit, to the bank or agent with which
such deposit shall be made, of certificates for the shares to be redeemed, such
certificates, if required, to be properly stamped for transfer and duly endorsed
in blank or accompanied by proper instruments of assignment and transfer thereof
duly executed in blank.
(6) Liquidation or Dissolution.
(a) 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 any other series
of or class of the Corporation's stock hereafter issued that ranks Senior as to
liquidation rights to the Series AA Preferred Stock (including the Existing
Preferred Stock, which has a liquidation preference of $4.00 per share) has been
paid in full. The holders of the Series AA Preferred Stock and all series or
classes of the Corporation's stock now or hereafter issued that ranks on a
Parity as to liquidation rights with the Series AA Preferred Stock shall be
entitled to share ratably, in accordance with the respective preferential
amounts payable on such stock, in any distribution (after payment of the
liquidation preference of the Senior liquidation stock) which is not sufficient
to pay in full the aggregate of the amounts payable thereon. If, upon any
liquidation, dissolution, or winding up of the Corporation, the assets to be
7
<PAGE>
distributed to the holders of the Series AA Preferred Stock (and any stock on a
Parity therewith) shall be insufficient to permit payment to such shareholders
of the full preferential amounts aforesaid, then all of the assets of the
Corporation available for distribution to shareholders shall be distributed to
the holders of Series AA Preferred Stock and any stock on a Parity as to
liquidation. Each holder of the Series AA Preferred Stock shall be entitled to
receive that portion of the assets available for distribution as the number of
shares of Series AA Preferred Stock held by such holder bears to the total
number of shares of Series AA Preferred Stock and any stock on a Parity as to
liquidation then outstanding. Such payment shall constitute payment in full to
the holders of the Series AA Preferred Stock upon the liquidation, dissolution,
or winding up of the Corporation. After such payment shall have been made in
full, or funds necessary for such payment shall have been set aside by the
Corporation in trust for the account of the Series AA Preferred Stockholders, so
as to be available for such payment, such Series AA Preferred Stockholders shall
be entitled to no further participation in the distribution of the assets of the
Corporation.
(b) A consolidation or merger of the Corporation (except into or with a
subsidiary corporation) or a sale, lease, mortgage, pledge, exchange, transfer
or other disposition of all or substantially all of the assets of the
Corporation or any reclassification of the stock of the Corporation (other than
a change in par value or from no par to par, or from par to no par or as result
of an Extraordinary Common Stock Event, as hereinabove defined), shall be
regarded as a liquidation, dissolution or winding up of the affairs of the
Corporation within the meaning of this Section 6. In no event shall the issuance
of new classes of stock, whether Senior, Junior or on a Parity with the Series
AA Preferred Stock, be deemed a "reclassification" under, or otherwise limited
by the terms hereof.
(c) Each holder of the Series AA Preferred Stock shall have the right to elect
the benefits of Section 4 hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the Corporation pursuant to this Section 6. 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 given at least 45 days' prior written notice of the
date fixed and place designated for their making an election for conversion
pursuant to this subsection. Such notice shall be sent by first class mail,
postage prepaid, or shall be hand delivered, to each holder of record of the
Series AA Preferred Stock at such holder's address as shown in the records of
the Corporation. On or before the date so fixed, the holders of the Series AA
Preferred Stock may elect the benefits of Section 4 hereof by notifying the
Corporation of such holder's election in writing and surrendering the
certificates representing such shares at the place designated in such notice.
Thereupon, there shall be issued and delivered to such holder, in his name as
shown on such surrendered certificate or certificates, a certificate or
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<PAGE>
certificates for the number of shares of Common Stock to which such holder is
entitled; provided, however, that the Corporation shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless certificates evidencing such shares of the Series AA Preferred
Stock being converted are either delivered as hereinabove provided, or the
holder notifies the Corporation or any transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection therewith.
(d) In the event of a liquidation, dissolution or winding up of the Corporation
resulting in the availability of assets other than cash for distribution to the
holders of the Series AA Preferred Stock, the holders of the Series AA Preferred
Stock shall be entitled to a distribution of cash and/or assets equal in value
to the liquidation preference stated in Section 6 (a), which valuation shall be
made by the Board of Directors, and provided that such board was acting in good
faith, shall be conclusive.
(e) After the payment or distribution to the holders of the Series AA Preferred
Stock of the full preferential amounts aforesaid, the holders of the Common
Stock then outstanding (excluding Common Stock held by the Corporation as
treasury stock) shall be entitled to receive ratably all of the remaining assets
of the Corporation.
(7) Voting Rights.
(a) 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 in Section 7 (b) the holder of each share
of Series AA Preferred Stock shall be entitled to one vote per share.
(b) 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
the 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 :he Series AA Preferred Stock as set forth
herein; (ii) authorize or issue, or increase the authorized amount of, any
additional class or series of stock, or any security convertible into stock of
such class or series, ranking senior to the Series AA Preferred Stock as to
dividends or upon liquidation dissolution or winding up of the Corporation;
(iii) effect any reclassification of the Series AA Preferred Stock; or (iv)
effect a capital reorganization of the Company or a merger or consolidation of
the Company, or the sale, mortgage, pledge, exchange, transfer or other
disposition of all or substantially all of the Company's properties and
9
<PAGE>
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.
(8) Required Notices. As long as any shares of the Series AA Preferred
Stock remain outstanding, the Corporation shall not, without notifying the
holders of the Series AA Preferred Stock (i) grant to the holders of the
Corporation's Common Stock rights to purchase any shares of capital stock or any
other rights; or (ii) reclassify the Common Stock, or enter into an Event of
Merger or Sale (other than an Event of Merger or Sale that does not result in
any reclassification, conversion, exchange or cancellation of outstanding shares
of Common Stock).
(9) Severability. If any right, preference or limitation of the Series AA
Preferred Stock set forth herein is invalid, unlawful or incapable of being
enforced by reason of any rule, law or public policy, all other rights,
preferences and limitations set forth herein which can be given effect without
the invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right preference or
limitation herein shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
IN WITNESS WHEREOF, Sparta Surgical Corporation has caused this certificate
to be executed by Thomas F. Reiner, its President and Chairman of the Board, and
Allan J. Korn, its Secretary, this 11tg day of February, 1999.
Attest:
/s/ Allan J. Korn /s/ Thomas F. Reiner
- ------------------------ --------------------------------
Allan J. Korn, Secretary Thomas F. Reiner, President
and Chairman of the Board
10
Exhibit 10.09
AGREEMENT
---------
THIS AGREEMENT, dated as of the 3rd day of January, 2OO0~ between and among
Joel S. Ratner, in his capacity as Escrow Agent ("Escrow Agent"); Sparta
Surgical Corporation, a Delaware corporation ("Sparta"); and Royce Walker & Co.
("RWC").
WITNESSETH THAT:
WHEREAS, Sparta has previously issued to RWC a total of 98,500 shares of
common stock of Sparta (the "Shares"), which Shares have been issued as
consideration for certain financial consulting services provided to Sparta by
RWC, including, but not limited to, RWC's assistance in the (i) securing of
certain) financing, and (ii) development and marketing of Sparta's product line
in countries outside the United States;
WHEREAS, the Shares have been and are presently being held by Escrow Agent
for the benefit of RWC; and
WHEREAS, the parties now desire to clarify and confirm in writing their
understanding as to the release of the Shares by Escrow Agent to RWC.
NOW, THEREFORE, in consideration of the mutual undertakings contained
herein and previously performed, including those financial consulting services
referred to above, the parties hereto, intending to he legally bound, agree as
follows:
1. Escrow Agent acknowledges having possession of the Shares, and that the
Shares arc being held in escrow on RWC's behalf.
2. The Shares shall continue to be held in escrow until such time as any
one (1) or more of the following conditions (each such condition being
hereinafter referred to as a "Condition," and such conditions being collectively
referred to as "Conditions") shall occur:
(a) The Shares have achieved a fair market value of $7.00 per share;
(b) if (1) an order is entered for relief against Sparta, or
declaring that Sparta is insolvent, or resulting in a finding
that Sparta is insolvent, or if Sparta voluntarily files for
<PAGE>
bankruptcy, or if similar relief is granted with respect to
Sparta, under any law now or hereafter in effect relating to
bankruptcy, insolvency, relief of debtors, protection of
creditors; (ii) a receiver, trustee, custodian, liquidator,
assignee, sequestrator or other similar official is appointed for
Sparta or for all or any substantial pall of Sparta's property;
or (iii) if a proceeding is brought under the federal bankruptcy
code. Sparta fails to file a proper answer thereto (including a
request that the petitioner post adequate bond under Section
303(e) of said code) wIthin thirty days of receipt of notice of
said proceeding;
(c) Sparta performs a formal registration of all or a portion of its
stock on or after May 1, 2000, in which event the Shares shall
automatically be "piggybacked" with Sparta's shares for
registration purposes; or
(d) None of the foregoing Conditions have occurred by September 7,
2000.
3. Upon receipt by the Escrow Agent of written notice by RWC or Sparta
stating that one of the Conditions referred to in subparagraphs (a) through (d)
of Paragraph 2 of this Agreement have occurred (which absent any actual
knowledge on the part of the Escrow Agent to the contrary shall be accepted as
absolute grounds for release hereunder), the Shares shall be released by the
Escrow Agent to RWC. Following the release of the Shares hereunder, this
Agreement shall terminate and the Escrow Agent shall be relieved of all
responsibility hereunder.
4. The parties agree that the Shares may not in any way be offered for
sale, sold. pledged, hypothecated, transferred, assigned or in any other manner
disposed of, except as expressly provided for in this Agreement. Stop transfer
instructions to Sparta's transfer agent have been or will be placed with respect
to the Shares so as to restrict their sale, pledge or other transfer. Upon the
release of the Shares from escrow hereunder, Sparta shall notify Sparta's
transfer agent to remove the stop transfer instructions, accordingly.
5. Sparta agrees to indemnify and hold harmless Escrow Agent and RWC from
any costs, damages, expenses, losses or claims, including attorneys fees, which
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<PAGE>
Escrow Agent or RWC may incur or sustain as a result of or arising out of this
Agreement or Escrow Agent's duties relating thereto.
6. Escrow Agent shall have no duties or responsibilities other than those
expressly set forth herein, in its capacity as Escrow Agent, Escrow Agent shall
not be responsible for the genuineness or validity or any security, instrument,
document or item deposited with it and shall have no responsibility other than
to faithfully follow the instructions contained herein. Escrow Agent shall not
he liable to the other parties hereto or to anyone else for any action taken or
omitted by it, or any action suffered by it to he taken or omitted, in good
faith and in the exercise of reasonable judgment, except for the acts of willful
misconduct or gross negligence.
7. This Agreement shall be governed by and construed in accordance with the
laws of the Netherlands and the competent courts in the Netherlands shall have
the exclusive jurisdiction, to the exclusion of any other courts, over any
dispute between the parties arising out or in connection with this Agreement.
8. No waiver of any rights by any party hereto shall he construed as a
waiver of the same or any other right at any prior or subsequent time.
9. If any term, provision or covenant of this Agreement is held by a court
of competent jurisdiction or other authority to be invalid, void, unenforceable
or against regulatory or public policy, the remainder of the terms, provisions
and covenants of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. it is hereby stipulated and
declared to be the intention of the parties hereto that they would have executed
the remaining terms, provisions and covenants without including any of such
which may be hereafter declared invalid, void or unenforceable.
10. This Agreement supersedes any other agreements, understandings and
communications between the Parties in connection with the subject matter
thereof.
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<PAGE>
11. Any notices to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been given at the time when (i) delivered in
person, against appropriate receipt, or (ii) five (5) business days after being
mailed via federal express or other overnight delivery service, or (iii) one
business day after sent by facsimile and confirmed by receipt, provided the
notice is addressed to the addresses stated below or any other address of which
either party shall advise the other parties in writing in the same fashion:
To Sparta: 7068 Koll Center Parkway, Ste: 425
Pleasanton, CA 94566
Attn: Thomas F. Reiner
Facsimile No.:(925) 417-2243
To Royce Walker & Co. Ltd:
P.O. Box N.4875
Devonshire House,
Queen Street
Nassau, BAHAMAS
To Escrow Agent: Joel S. Rainer
11586 Pierson Road
Wellington, Florida 33414
Facsimile No.: 561-333-1995
IN WITNESS WHEREOF, Sparta, RWC and Escrow Agent have caused this Escrow
Agreement to be executed by their respective authorized agents.
ESCROW AGENT SPARTA SURGICAL CORPORATION
/s/ Joel S. Ratner /s/ Thomas F. Reiner
- -------------------------- -----------------------------------------
Joel S. Ratner Thomas F. Reiner, Chairman of the Board
President and CEO
Royce Walker & Co. Ltd.
/s/
-----------------------------------------
4
Exhibit 10.10
EMPLOYMENT AGREEMENT
--------------------
This Agreement, which supersedes all prior written or oral agreements, is
made this 2nd day of September, 1999, by and between Sparta Surgical
Corporation, a Delaware Corporation, and its wholly owned subsidiary, Sparta
Olsen Electrosurgical, Inc., a Delaware Corporation (collectively referred to as
the "Employer"), having its principal offices at 2100 Meridian Park Blvd.,
Concord, California 94520, and Thomas F. Reiner, Sr. (the "Employee").
WHEREAS, the Employer and Employee are desirous of entering into a
comprehensive agreement to replace and cancel all prior and existing agreements
and all amendments, whereby the Employer shall have the right to have the
Employee perform senior management and other services on behalf of the Employer;
and
WHEREAS, the Employer and the Employee are desirous of setting forth their
respective rights and obligations in respect to the Employee's employment with
the Employer;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Employer and the
Employee agree as follows:
1. Employment. The Employer hereby agrees to employ the Employee, and the
Employee hereby accepts employment, all upon the terms, conditions and covenants
set forth in this Agreement.
2. Duties. The Employer hereby employs the Employee to serve as its
President, Chief Executive Officer and Chairman of the Board and such other
offices as Employee may be elected to hold from time to time, with all powers
and duties customarily associated with such titles. During the term of this
Agreement, the Employee shall serve also, without additional compensation, as a
Director of the Employer, if and when so elected by the shareholders of the
Employer. The Employee shall be required to devote an average of 40 hours per
week to his duties hereunder. Nothing contained herein shall be deemed to
prohibit the Employee from devoting any of his time, attention, and energies to
other business interest, however, provided that such other interests are not
directly competitive with the business of the Employer; and further provided
that such other interests shall not materially detract from such efforts which,
in Employee's reasonable judgment, are necessary in order to promote the
interests of the Employer. The Employee's duties hereunder will be performed
primarily within the State of California, and, until otherwise changed by mutual
agreement, his work location shall be Contra Costa County, California.
3. Term. Subject to Section 11, the term of this Agreement shall begin on
September 2, 1999 and, unless terminated sooner to Section 11, shall continue
until September 2, 2006 (the "Term"), providing in the event the Employer has
net sales for any fiscal year in excess of Seven Million Dollars ($7,000,000)
(the "Employment Agreement Term Extension"), then the term of this Agreement
shall be extended for an additional period of three (3) years.
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 2 of 9
4. Compensation, Benefits and Indebtedness.
(a) In each year of this Agreement the Employer shall pay to the
Employee an annual base salary for each year of the Term in the amount of One
Hundred Ninety-Five Thousand Dollars ($195,000) in the first year hereof, and in
each subsequent year 115% of the base salary is payable in the immediate
preceding year. The payment of the annual salary shall be made in accordance
with the Employer's general payroll policies and shall be prorated for any
partial years of employment hereunder. The Board of Directors shall have the
right to increase, but not decrease, the annual salary from year to year, and,
in its discretion, to pay bonuses to the Employee for exemplary performance when
and as it deems appropriate.
(b) In each year of this Agreement, the Employee shall be provided with
additional incentives to continue his performance and to increase the sales and
income levels of the Company and the share price of the Common Stock by the
previous adoption of an Option and Bonus Performance Plan pursuant to the
previous Action by Unanimous Written Consent of the Board of Directors of Sparta
Surgical Corporation dated July 17, 1998 which shall be further incorporated
into this Employment Agreement as set forth in the Exhibit A attached hereto
(the "Plan"), pursuant to 'which additional cash and non-cash compensation would
be provided to Reiner in the event the Company reach certain sales, income and
share price thresholds and to which Reiner's base salary would be increased upon
the Company's reaching certain levels of annual net sales.
(c) The Employee shall be entitled to participate (to the extent that he
is eligible) in all other employee benefits, if any, provided by the Employer
for its employees, including participation in any qualified pension or profit
sharing plan, eligibility for participation in any group life, health (including
family dependent coverage), dental and eye care benefits. If a "change in
control" occurs (as defined in Section 13), the Employee may choose, within one
year following the event giving rise to the change in control, to receive
instead of any regularly- provided employee benefit or other benefit provided
for hereunder, the similar benefit provided by the Employer prior to such event,
for the balance of the Term hereunder. If there is no benefit then provided
which is similar to a previously-provided employee benefit, or if the benefit
elected by the Employee cannot be provided by the Employer, then the Employer
(or its successor) shall pay the Employee, no less than monthly, as additional
compensation, a cash amount equal to the value of the benefit to the Employee.
This provision shall survive any termination of this Agreement.
(d) The Employer shall provide or reimburse the Employee for disability
insurance coverage in the minimum amount of $12,500 per month, and whole life
insurance coverage in the minimum amount of $1,000,000 during the Term and to
further provide the Employee with a Retirement Plan to be funded pursuant to the
attached Exhibit B Life Insurance Bonus Plan, with Retired Income, which policy
shall be in the name of the Employee and payable to such beneficiaries as
designated by Employee.
2
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 3 of 9
(e) The Employer shall reimburse the Employee, as additional
compensation if so required, an amount equal to all amounts paid by or billed to
the Employee or any member of the immediate family of Employee for any dental,
eye care, disability coverage, medical or hospital expenses not covered by the
insurance, if any, maintained by the Employer, regardless of whether the
procedure is or could be covered under the policy provided or any other policy.
Such payments shall be made as provided for reimbursed expenses under Section 7.
(f) The Employer shall pay to the Employee, upon demand by the Employee
and as additional compensation, the amount of (i) any federal, state and local
excise taxes or other non-income tax the Employee must pay as a result of any
payments made or benefits provided to the Employee to this Agreement; (ii) any
federal, state and local excise taxes or income tax on taxable income recognized
as a result of any payments made or benefits provided to Sections 4 (b), (c),
(d) and (e) and Sections 8 and 9 hereof; and (iii) an additional sum of money,
in compensation for any federal, state and local income or excise taxes payable
upon payments made to this Section 4 (f) including any such taxes upon payments
to this subsection 4 (1) (iii), the intention being that payments to this
Section 4 (f) will entirely repay any cost to Employee for any such taxes.
Payment amounts to this Section 4 (f) shall be calculated at the highest
marginal rate to which the Employee might be subject for the year in which the
income is recognized, regardless of the Employee's actual marginal rates.
(g) In addition to all benefits, Employee shall also be entitled to 50%
of all pooled management bonuses to be shared among the Employer's management
during the Term, which pooled management bonuses shall be equal to 7% of the
Employer's pre-tax earnings for each fiscal year. For purposes hereof, pre-tax
earnings will be determined before reduction for any bonus accrual for
management or other similar bonus arrangements in accordance with generally
accepted accounting principles consistently applied. Such bonus will be paid no
later than 10 days following public release of annual financial statements for
said year.
(h) It is acknowledged and agreed hereto, by the Employer, as of August
16, 1999, the Employer Is indebted to the Employee (with no right of offsets of
any kind by the Employer) and agrees to reimburse and/or pay in full to the
Employee during the next twelve (12) months from the date herein, for accrued
salaries in the amount of $86,161, accrued vacation in the amount of $15,505,
benefits/tax reimbursement in the amount of $60,495 and $464,698.27 for various
loans (principal and accrued interest) advanced by the Employee to the Employer
under the May 1997 Working Capital Credit Facility during the period of 9/25/97
through 8/16/99. (See attached Exhibits C, D and E.)
5. Sick Pay and Disability Income. Salary, employee benefits, vacation
accruals, automobile allowance and all other benefits set forth herein shall be
paid to the Employee for any temporary periods of illness during which the
Employee is unable to work and through the period of any disability (as defined
hereinafter).
6. Vacation and Conventions. The Employee shall be entitled each year to
five (5) weeks of paid vacation, prorated for any partial year. Unused vacation
3
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 4 of 9
time (including time accumulated prior to the date hereof) shall accumulate from
year to year and the Employee will be compensated for any unused vacation
accumulated upon demand at any time following its accrual. In addition, the
Employee will be entitled to leaves of absence, at full pay, for attendance at
conventions, seminars or as otherwise reasonably determined by the Employee. In
the event any vacation time shall not be taken by the Employee during any given
year, Employee shall be entitled to carry over such time into any subsequent
year or years during the Term. In the Event that Employee has any unused
vacation time accrued under this Agreement upon the termination of Employee's
employment or at the conclusion of the Term, Employee shall be entitled to be
compensated for such unused vacation time.
7. Reimbursement for Expenses. At the end of each month during the Term,
the Employer shall reimburse the Employee for items of travel, entertainment and
miscellaneous expenses incurred or paid by the Employee in the performance of
his duties under this Agreement (including conventions and seminars), upon
presentation by the Employee of such expense statements, vouchers or other
supporting information as the Employer may reasonably require.
8. Automobile. The Employer will provide the Employee with either an
automobile allowance of a minimum of $1,395.00 per month (increased at the
beginning of each year, only, by the Consumer Price Index as determined by the
United States Department of Commerce, or any replacement index), or, if Employee
so elects, with free use of any automobile of Employee's choice. In addition,
the Employer will either pay directly or reimburse the Employee for all expenses
incurred in connection with such automobile, including without limitation,
insurance, fuel, maintenance and repairs. Reimbursement shall be made only
against a signed itemized list of such expenses. The value of any benefits given
to or of any amounts paid to the Employee under this Section 8 in excess of
Employee's actual costs and expenses incurred in the performance of services for
Employer shall be deemed additional compensation under this Agreement and not
subject to reimbursement to the Employer.
9. Office. The Employer shall provide the Employee with an office,
secretarial and administrative assistance, office equipment and supplies and
such other facilities and services as are suitable to the Employee's position
and adequate for the performance of his duties. In addition, the Employer shall
reimburse the Employee for any expenses incurred by the Employee for use of his
home for business purposes.
10. Withholding. The Employer shall withhold or deduct from the Employee's
compensation any amounts required by law to be so withheld or deducted.
11. Termination. This Agreement shall be terminated (except for those
obligations of the Employer which by their terms survive termination) by the
occurrence of any of the following:
(a) The Employee's death.
4
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 5 of 9
(b) The action by the Board of Directors following the Employee's
"disability". For this purpose, "disability" means a physical or mental illness
or other incapacity which renders the Employee unable to perform substantially
all of his duties for a period of 48 months. For the purposes of this Agreement,
disability shall be deemed a continuation of any prior disability if the
disability is related to the prior disability and commences within 12 months of
the termination of the prior disability. Disability, and any relation to any
prior disability, shall be determined by a physician mutually acceptable to the
parties to this Agreement or appointed by a court having personal jurisdiction
over the Employee.
(c) Action of the Board of Directors of the Employer for Cause. "Cause"
is defined as the occurrence of any of the following events: (i) Employee's
willful breach of this Agreement, repeated after written notice of such breach
has been given to Employee, and having a material adverse effect upon the
Employer's business or financial circumstances; (ii) Employee's refusal or
intentional failure to carry out the reasonable directives of the Board of
Directors, repeated after written notice of such refusal or failure has been
given to Employee, and having a material adverse effect upon the Employer's
business or financial circumstances; (iii) Employee's habitual gross neglect of
a substantial portion of his duties hereunder, which has not been cured by the
Employee within 30 days after prior written notice thereof is given by the
Employer to the Employee; and (iv) the Employee's conviction of a felony
involving fraud, theft, or embezzlement. In no event shall "cause" be deemed to
mean the Board of Director's mere disagreement, after the fact, with any lawful
action undertaken by the Employee in the good faith exercise of his business
judgment.
(d) Upon the election of the Employee by written notice to the Employer
not less than: (i) 120 days prior to the effective date of termination, or (ii)
after a change in control (as defined in Section 13), 30 days prior to the
effective date of termination.
(e) Upon the election of the Employee with "good reason". "Good reason"
is defined as a material breach of this Agreement by the Employer and includes,
but is not limited to, any decrease in the salary or benefits provided to the
Employee, relegating the Employee to duties which are unrelated to or at a lower
level of responsibility than those currently performed by Employee, having
Employee report to any other officer rather than directly to the Board of
Directors, altering Employee's title as Chairman, President or Chief Executive
Officer, or relocating the Employee to a location unreasonably distant from his
work location.
12. Damages for Breach by Employer.
(a) The employment provisions in this Agreement are a material
inducement to the Employee in continuing to render services to the Employer
during the Term and thereafter. The parties acknowledge that if the Employer
should breach such provisions, the Employee may be required to bring legal
action for damages and that questions of mitigation of damages would be
presented which could be very difficult to resolve prior to expiration of the
Term. For the sake of certainty and to avoid the costs, difficulty and delay of
5
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 6 of 9
proving damages in such circumstances, both parties agree that the Employee
shall be entitled to the amount of liquidated damages as set forth in Section 12
(c) in the event of the Employer's breach.
(b) If (i) the Employee terminates this Agreement for "good reason", or
(ii) If during the Term hereof, the Employer (or any successor) terminates the
Employee's employment for any reason other than "cause", as defined herein,
then, in either such case, the Employer shall pay to the Employee, not later
than ten days after the date of such termination, the amount of damages as set
forth in Section 12 (c).
(c) In the event of the termination of this Agreement to Sections 12 (a)
or (b), Employee shall be entitled to an amount of damages equal to: (i) 100% of
the Employee's base salary (including any required increases) for the remainder
of the Term, but in no event for less than five (5) years from the date of
termination, plus (ii) an additional 50% of such base salary, paid in a lump
sum, 1:0 compensate for the loss of fringe benefits, plus (iii) the average
annual bonus paid by the Employer to the Employee for the three (3) full fiscal
years of the Employer prior to the fraction thereof in the period described in
subsection (i) hereof, provided however, that Employer shall not be required to
pay the Employee in excess of $4,000,000 to this Section 12 (c). The Employee
shall not be required to mitigate the amount of any payment provided for in this
Section 12 (C:) by seeking other employment or otherwise, nor shall the
Employee's income from any source after such termination be deducted for any
reason from the sum computed under this Section 12 (c).
(d) If the Employer refuses to pay the Employee any amount due the
Employee under this Agreement, including salary, benefits or the amount provided
in Sections 12 (a) or (b), and the Employee disputes the Employer's legal right
to do so, and whether or not such refusal is occasioned by a termination or
purported termination of this Agreement, then, regardless of whether the
Employee has a right to do so, the Employer shall pay to the Employee the
amounts due (including all futUre amounts) in a timely manner until the dispute
is settled or adjudicated. The Employer shall also reimburse the Employee (in
the manner described in Section 7) for any fees or expenses related to the
dispute. If the Employer prevails in resolution of such dispute, the Employee
shall repay the Employer all sums received under this Section 12 (d) (including
fees and expenses), without interest. The parties acknowledge that if the
Employer should fail to honor its obligations under this Section 12 (d), the
Employee could be irreparably injured by, among other things, not being able to
support himself and also support the enforcement of his rights under this
Agreement and accordingly the eventual award of damages would under the
circumstances not be an adequate remedy.
(e) The provisions of this Section 12 shall survive any termination of
this Agreement.
13. Change in Control Defined. A "change in control" occurs upon the
occurrence of one of the following events, but only if the Employee elects,
within five years thereafter, to have such event treated as a change in control:
6
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 7 of 9
(a) An event that would be required to be reported in response to the
Item 5 (f) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act'~), or any successor thereof, assuming
the Employer was a reporting company or was otherwise required to file reports
under the Exchange Act.
(b) Any "person" (as such term is defined in Sections 13 (d) and 14 (d)
(2) of the Exchange Act) who is not currently an owner of securities of the
Employer, is or becomes the beneficial owner, directly or indirectly, of
securities of the Employer representing 20% or more of the combined voting power
of the Employer's then outstanding securities to a tender offer or otherwise.
(c) During any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Employer cease
for any reason to constitute at least a majority thereof unless the. election of
each director, who was not a director at the beginning of the period, was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period.
14. Notice: Any notices required to be given pursuant to the provisions of
this Agreement shall be in writing and delivered by hand delivery, express
delivery service or by certified mail return receipt requested to the parties at
the following addresses:
Employer: Sparta Surgical Corporation and Sparta Olsen
Electrosurgical, Inc.
2100 Meridian Park Blvd.
Concord, California 94520
Employee: Thomas F. Reiner, Sr.
4478 Fleetwood Road
Danville, California 94506
15. Successors: Binding Effect.
(a) The Employer shall require any successor (whether direct or indirect
by purchase of assets, purchase or exchange of stock, merger, consolidation or
otherwise) to all or substantially all of the business and / or assets of the
Employer, by agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Employer would be required to perform it if no such
succession had taken place. Failure of the Employer to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement. As used in this Agreement, "Employer" shall mean Sparta Surgical
Corporation and any successor to the business and / or assets of Sparta Surgical
Corporation which executes and delivers the agreement provided for in this
Section 15 (a) or which otherwise becomes bound by all of the terms and
provisions of this Agreement by operation of law.
7
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 8 of 9
(b) This Agreement and all rights of the Employee hereunder shall inure
to the benefit of and be enforceable by the administrators, successors, heirs,
distributees, devisees and legatees of the Employee. If the Employee should die
prior to the payment to him of any amounts due him hereunder, all such payments
shall be made in accordance with this Section 15 (b).
16. Arbitration. At the election of the Employee, any dispute respecting
this Agreement, whether commenced by the Employer or Employee may be resolved by
arbitration before a three-person panel of independent arbitrators to the
Commercial Rules of the American Arbitration Association ("AAA"). Any
arbitration compelled to this section shall be held at the AAA office nearest to
Employee's residence at the time such action is commenced. Employee shall be
entitled to a stay of any legal proceeding instituted against by the Employer in
the event that an election to arbitrate pursuant to this Section is made.
17. Attorney's Fees and Litigation. In any litigation or arbitration
relating to this Agreement, including litigation or arbitration with respect to
any instrument, document or other agreement made under or in connection with
this Agreement, the Employer shall bear all costs and attorney's fees of both
parties.
18. Authority. Each party represents that its undersigned representative or
corporate officer has all requisite power and authority to enter into this
agreement and to execute any and all instruments and documents on its behalf
necessary to and in performance of their respective obligations hereunder.
19. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed original, but all of which together
shall constitute one and the same instrument.
20. Severability. If any provisions of this Agreement shall be held to be
invalid or unenforceable to any extent or in any application, then the remainder
of this Agreement and such term and condition, except to such extent or in such
application, shall not be affected thereby, and each and every term and
condition of this Agreement shall be valid and enforced to the fullest extent
and in the broadest application permitted by law.
21. Heading. The paragraph headings contained herein are for convenience
and reference only, and shall be given no effect in the interpretation of any
term or condition of this Agreement.
22. Miscellaneous. This Agreement is entered into and shall be construed
under the laws of the State of California applicable to contracts made and to be
entirely performed which that State. In the event that, notwithstanding Section
16 hereof, any litigation relating to this Agreement is held to be permissible,
the venue thereof shall be in the appropriate court with jurisdiction over the
matter in dispute for the county in which the Employee resides at the time of
the filing of the lawsuit in question. This Agreement shall be amended, modified
8
<PAGE>
Thomas F. Reiner, Sr.
Employment Agreement
September 2, 1999
Page 9 of 9
or terminated only by an instrument in writing, signed by the party or parties
to be charged. This Agreement shall inure to the benefits of the parties and
their successors in interest. This Agreement is the entire agreement of the
parties relating to the employment of the Employee by the Employer and
supersedes all previous written or oral agreements.
IN WITNESS WHEREOF the parties have executed this Agreement under seal the
day and year first above written.
SPARTA SURGICAL CORPORATION
Employer By: /s/ Allan Korn 9/3/99
----------------------------------------
Allan Korn, Secretary, Director Date
By: /s/ Joel Flig 9/8/99
----------------------------------------
Joel Flig, Director Date
By: /s/ Michael Granger 9/8/99
----------------------------------------
Michael Granger Date
Employee: By: /s/ Thomas F. Reiner 9/2/99
----------------------------------------
Thomas F. Reiner, Sr. Date
9
<PAGE>
Exhibit A
OPTION AND BONUS PERFORMANCE PLAN ("PLAN")
I. Sales and Share Price Bonus
---------------------------
Base Amounts:
-------------
Net Sales: $2.5 Million
Share Price: $1.00
Minimum Net Sales
and Share Price
(as % Increase over
Base Amount) Cash Bonus Stock Options 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
Net Income Cash Bonus Stock Options 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
All of the foregoing stock options (under I and II) shall be cumulative and
issued immediately at such time as the Company obtains the requisite thresholds
during any fiscal year and not at the end of each fiscal year. All of the
foregoing options will be exercisable at a price of $1.00 per share and remain
exercisable for a period of seven (7) years following their vesting.
III. Base Salary Increase on Sales
-----------------------------
At any such time, as any of the following Minimum Annual Net Sales
Thresholds are met (even if during the middle of any fiscal year), Reiner's
annual base salary shall automatically be increased as follows:
Minimum Annual Net Sales Annual Base Salary
------------------------ ------------------
$ 5,000,000 $225,000
$10,000,000 $255,000
$15,000,000 $285,000
$20,000,000 $325,000
$25,000,000 $385,000
Exhibit 23.02
Consent of Independent Certified Public Accountants
We have issued our reports dated June 10, 1999 and February 18, 2000,
respectively, on the consolidated financial statements of Sparta Surgical
Corporation and the financial statements of Olsen Electrosurgical, Inc.,
contained in the Registration Statement and Prospectus. We consent to the use of
the aforementioned reports in the Registration Statement and Prospectus, and to
the use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
San Jose, California
April 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> NOV-30-1999
<CASH> 5,000
<SECURITIES> 0
<RECEIVABLES> 472,000
<ALLOWANCES> 42,000
<INVENTORY> 2,414,000
<CURRENT-ASSETS> 100,000
<PP&E> 1,186,000
<DEPRECIATION> 309,000
<TOTAL-ASSETS> 4,897,000
<CURRENT-LIABILITIES> 2,554,000
<BONDS> 0
0
603,000
<COMMON> 10,291,000
<OTHER-SE> (10,243,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,897,000
<SALES> 2,294,000
<TOTAL-REVENUES> 2,306,000
<CGS> 944,000
<TOTAL-COSTS> 1,451,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 341,000
<INCOME-PRETAX> (430,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (430,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (451,000)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
