<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ____________to _____________
Commission File Number 0-20532
LIFEQUEST MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2559866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9601 McAllister Freeway, Suite 1120
San Antonio, Texas 78216
(Address of principal executive offices)
(Zip Code)
(210) 366-2100
(Registrant's telephone number, including area code)
_______________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
_______________
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
On May 6, 1996, there were outstanding 3,788,030 shares of Common Stock,
$.001 par value, of the registrant.
Page 1 of 12
<PAGE> 2
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
- - ------- ---------------------
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 1995, and March 31, 1996 3
Consolidated Statements of Operations - For the Three Months Ended
March 31, 1995 and 1996 5
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1995 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
- - -------- -----------------
Items 1-6: Other Information 11
SIGNATURES 12
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1995 1996
----------------- ----------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 317,915 $ 370,724
Short-term investments 4,817,221 4,353,498
Accounts receivable 100,395 127,325
Interest receivable 95,655 96,842
Inventories 23,643 69,848
Prepaid and other assets 98,968 41,868
----------------- ----------------
Total current assets 5,453,797 5,060,105
----------------- ----------------
Accounts Receivable From Related Party -- 3,671
----------------- ----------------
Property and Equipment:
Capital leased equipment 521,867 --
Leasehold improvements 65,229 74,700
Machinery and equipment -- 589,842
Furniture and fixtures 206,124 188,242
Less-Accumulated depreciation (565,906) (592,675)
----------------- ----------------
227,314 260,109
----------------- ----------------
Intangible Assets:
Licensed technology rights 427,273 427,273
----------------- ----------------
Total assets $ 6,108,384 $ 5,751,158
================= ===============
</TABLE>
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<PAGE> 4
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (continued)
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, March 31,
LIABILITIES AND STOCKHOLDERS EQUITY 1995 1996
----------------- ----------------
Current Liabilities:
Current portion of:
Long-term debt $ 59,189 $ 755,978
Capital lease obligations 108,364 --
Accounts payable 432,510 230,283
Accrued expenses 32,730 22,451
Due to stockholders 27,599 27,472
----------------- ---------------
Total current liabilities 660,392 1,036,184
Long-term Debt, Less Current Portion 5,509 --
Capital Lease Obligations, Less Current Portion 222,942 --
----------------- ---------------
Total liabilities 888,843 1,036,184
----------------- ---------------
Minority Interest 141,364 130,180
----------------- ---------------
Commitments
Stockholder's Equity:
Common Stock, $.001 par value; 10,000,000 shares authorized;
shares issued and outstanding: 3,754,835 (1995)
and 3,788,030 (1996) 3,754 3,787
Additional paid-in capital 17,640,456 17,669,553
Accumulated deficit (12,566,033) (13,088,546)
----------------- ----------------
Total stockholders equity 5,078,177 4,584,794
----------------- ----------------
Total liabilities and stockholders' equity $ 6,108,384 $ 5,751,158
================= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 5
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------------------
1995 1996
--------------- ---------------
<S> <C> <C>
Revenues:
Net sales $ 211,442 $ 200,269
-------------- --------------
Cost And Expenses:
Cost of sales 137,583 122,953
Research and development 254,740 92,701
Selling, general and administrative 704,429 450,292
Interest 13,195 15,748
Depreciation and amortization 34,020 26,768
-------------- --------------
1,143,967 708,462
-------------- --------------
Loss from operations (932,525) (508,193)
-------------- --------------
Other income (expense):
Investment income 92,746 66,131
Merger and acquisition costs -- (91,637)
-------------- --------------
Net Loss Before Minority Interest and Extraordinary Item (839,779) (533,699)
Minority interest in net loss of
consolidated subsidiary 29,111 11,185
-------------- --------------
Net Loss Before Extraordinary Item (810,668) (522,514)
Extraordinary Item:
Gain on extinguishment of debt 24,686 --
-------------- --------------
Net Loss $ (785,982) $ (522,514)
=============== ==============
Net Loss Per Share of Common Stock $ (.21) $ (.14)
======= =======
Weighted Average Shares Used In
Computing Net Loss Per Share of Common Stock 3,754,835 3,774,019
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE> 6
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------------
1995 1996
------------- ------------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Loss $ (785,982) $ (522,514)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization 34,020 26,678
Marketing agreement expense -- 17,500
Gain on extinguishment of debt (24,686)
Minority interest in net loss of consolidated subsidiary (29,111) (11,185)
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable 127,758 (26,930)
(Increase) decrease in interest receivable (54,165) (1,187)
(Increase) decrease in inventories 39,629 (46,205)
(Increase) decrease in prepaid and other assets 51,176 57,100
(Increase) in accounts receivable from related party (18,647) (3,671)
(Decrease) increase in accounts payable (10,299) (202,227)
(Decrease) increase in accrued expenses 4,565 (10,279)
--------------- ---------------
Net cash used in operating activities (665,742) (722,920)
---------------- ---------------
Cash Flows From Investing Activities:
Additions to property and equipment (17,247) (59,471)
Sale of investments 526,431 463,723
--------------- ---------------
Net cash provided by investing activities 509,184 404,252
--------------- ---------------
Cash Flows From Financing Activities:
Funds advanced by stockholder 31,168 --
Proceeds from issuance of notes payable -- 750,000
Proceeds from exercise of stock options -- 11,630
Payment on due to stockholder (127)
Payment of long-term obligations (54,260) (390,026)
--------------- ---------------
Net cash provided by financing activities (23,092) 371,477
--------------- ---------------
Net Increase (Decrease) In Cash And Cash Equivalents (179,650) 52,809
Cash And Cash Equivalents, beginning of period 698,931 317,915
-------------- --------------
Cash And Cash Equivalents, end of period $ 519,281 $ 370,724
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
1995 1996
------------ -----------
<S> <C> <C>
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for -
Interest $ 13,195 $ 15,748
Income taxes - -
</TABLE>
Noncash Investing And Financing Activities:
The Company issued 350,000 shares of common stock in connection with the
merger discussed in Note 3.
A stockholder gave a marketing consultant 16,854 equivalent shares of the
Company's stock in exchange for the consultant's services in connection with
the merger discussed in Note 3. The stock had an estimated fair market value
of approximately $18,000.
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE> 8
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of LifeQuest
Medical, Inc. (the "Company"), LifeQuest Endoscopic Technologies, Inc.
("LQET"), a wholly owned subsidiary of the Company (Note 3), and the Company's
74% ownership interest in ValQuest Medical, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. However, all adjustments have been made which are, in
the opinion of the Company, necessary for a fair presentation of the results of
operations for the periods covered. In addition, all such adjustments are of a
normal recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is recommended that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto for the fiscal year ended December 31, 1995,
included in the Company's Form 10-K.
From inception through December 31, 1995, the Company was a development stage
enterprise whose efforts and resources were devoted primarily to research and
development activities related to its initial products.
NOTE 2 -- NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of shares of Common Stock outstanding during the period. Common stock
equivalents are not considered in the computation as their effect is
antidilutive.
NOTE 3 -- MERGER OF GM ENGINEERING, INC.
On February 13, 1996, but effective January 1, 1996, the Company completed the
merger of GM Engineering, Inc., a California corporation ("GME") with and into
LifeQuest Endoscopic Technologies, Inc., a Nevada corporation and newly formed
wholly owned subsidiary of the Company. GME was acquired through the issuance
of 350,000 shares of LifeQuest common stock. The transaction was recorded
using the pooling of interests method of accounting, therefore the assets,
liabilities, and operations of GME are included in the consolidated financial
statements for all periods reported.
For the quarters ended March 31, 1995 and 1996 respectively, the separate
results of the combined entities was a net loss of $596,739 and $348,979 for
the Company and a net loss of $189,243 and $173,535 for LQET.
-8-
<PAGE> 9
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
OVERVIEW
From inception through December 31, 1995, the Company was a
development stage enterprise whose efforts and resources were devoted primarily
to research and development activities related to its initial products. During
this development stage, the Company received minimal operating revenues and,
thus, was unprofitable. As of March 31, 1996, the Company had an accumulated
deficit of approximately $13,089,000. There can be no assurance that the
Company will be able to achieve or sustain profitability.
The Company's future operating results will depend on many factors,
including the Company's ability to manufacture and market its products on a
cost-effective basis, demand for the Company's products and the level of
competition in the market place.
In February 1996, the Company completed the merger of GM Engineering,
Inc., a California corporation ("GM Engineering") with and into LifeQuest
Endoscopic Technologies, Inc., a Nevada corporation ("LQET") and newly formed
wholly owned subsidiary of the Company. GM Engineering was acquired through
the issuance of 350,000 shares of LifeQuest common stock. The transaction was
recorded using the pooling of interests method of accounting, therefore the
assets, liabilities and operations of GM Engineering are included in the
consolidated financial statements for all periods reported. LQET develops,
manufactures, and markets surgical and related instruments used in minimally
invasive surgery and, as GM Engineering, recorded sales of approximately $1
million in fiscal 1995.
In May 1994, the Company and Valdor Fiber Optics ("Valdor") of San
Jose, California, formed a corporate joint venture called ValQuest Medical,
Inc. ("ValQuest"). In accordance with the terms of the joint venture
agreement, Valdor transferred to ValQuest the exclusive worldwide rights to
develop, manufacture, and market all present and future medical applications of
Valdor's patented fiber optic connector technology. The Company paid $100,000
to Valdor in consideration for the transfer of these rights to ValQuest.
Valdor contributed such rights, which had an initial value of $327,273 in the
consolidated financial statements, to ValQuest in exchange for a 45% interest
in ValQuest. The Company contributed $400,000 to be used as working capital in
exchange for a 55% interest in ValQuest. Currently, subsequent purchases of
additional stock have increased the Company's ownership interest in ValQuest to
74%.
The Company submitted its PMA application to the Food and Drug
Administration (FDA) for the Osteoport(R) device on July 19, 1993. On May 9,
1995, the FDA informed the Company that additional information will be required
to enable completion of the Osteoport(R) PMA application review. Required
information may include clarifications and further analysis of existing data
and/or additional patient studies. However, the Company does not plan to
initiate any further work on the Osteoport(R) device unless an appropriate
corporate partner can be identified. This decision stems from management's
current concern about the likelihood of incurring prohibitively high costs in
clarifying and addressing FDA's requests for additional information since the
July 1993 PMA submission.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had cash, cash equivalents and
investments of approximately $4,724,000 and working capital of $4,024,000. The
Company believes these funds will be sufficient to complete the development
and, subject to obtaining required regulatory approvals, commercialization of
its current products. However, there can be no assurance that the available
cash will prove to be sufficient to complete any of these activities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Net loss for the three months ended March 31, 1996 was $523,000, a
decrease of 34 percent from the $786,000 net loss for the comparable period of
1995. The decline was primarily due to a reduction in expenses as detailed
hereinafter.
Sales for the three months ended March 31, 1996 and 1995 were $200,000
and $211,000 respectively. The decline in sales was related to the distraction
and disruption caused by the acquisition of GM Engineering by the Company. As
part of the acquisition due diligence, a portion of production had been
earmarked for product testing and, therefore, was not available to sell.
-9-
<PAGE> 10
Research and development expenses decreased 64 percent to $93,000 from
$255,000. The increased costs in 1995 were primarily due to expenses incurred
in conjunction with development of the First-Med system. The Company
anticipates the research and development focus for 1996 will be enhancement of
LQET's current products and development of future products. Therefore,
research and development costs should increase slightly during 1996.
Selling, general and administrative expenses, which consist primarily
of salaries and other costs necessary to support the Company's infrastructure,
decreased 36 percent to $450,000 in 1996 from $704,000 in 1995. This
comparative decline is a result of management's continuing efforts to reduce
expenses.
The minority interest in net loss of consolidated subsidiary of
$11,185 reflects the minority ownership share of the ValQuest net loss for the
three months ended March 31, 1996. The Company is in the process of moving the
ValQuest assembly operations from San Jose, California, to the LQET facilities
in La Verne, California. Management believes this move will eliminate
duplication of overheads and improve efficiencies.
Investment income represents interest earned on proceeds from private
and public sales of the Company's equity securities and gains on sales of
marketable securities.
Merger and acquisition costs include legal, accounting and testing
expenses incurred during the acquisition of GM Engineering.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Management does not believe, based
on current circumstances, Statement 121 will have a material effect on the
carrying amount of the Company's long-lived assets.
As of March 31, 1996, the Company had net operating loss carryforwards
of approximately $10,386,000 for federal income tax purposes which are
available to reduce future taxable income and will expire in 2006 through 2011
if not utilized and $12,441,000 for financial reporting purposes. For federal
income tax purposes the Company deferred for future amortization certain
acquisition and research and development costs in the amount of $2,453,000.
Such costs, which have been expensed for financial reporting purposes, will be
amortized for tax purposes over future years when commercial operations
commence. The Company received IRS approval of its request for a change of tax
accounting method to expense research and development costs for expenditures
incurred in 1992 and future years.
The Company's ability to use its NOL carryforwards to offset future
taxable income is subject to restrictions enacted in the United States Internal
Revenue Code of 1986 as amended (the "Code"). These restrictions provide for
limitations on the Company's utilization of its NOL carryforwards following
certain ownership changes described in the Code. As a result of ownership
changes in 1996, the Company's existing NOL carryforwards are subject to the
limitation. The amount subject to limitation at March 31, 1996, is
approximately $506,000.
- 10 -
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
(1) Form 8-K dated February 13, 1996, described the merger of GM
Engineering, Inc., a California corporation with and into
LifeQuest Endoscopic Technologies, Inc., a Nevada
corporation and newly formed wholly owned subsidiary of
LifeQuest Medical, Inc.
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<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFEQUEST MEDICAL, INC. (Registrant)
Dated: May 10, 1996 By /s/ HERBERT H. SPOON
------------------------------------------
Herbert H. Spoon
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 10, 1996 By /s/ RANDALL K. BOATRIGHT
------------------------------------------
Randall K. Boatright
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
-12-
<PAGE> 13
INDEX TO EXHIBITS
27 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 370,724
<SECURITIES> 4,353,498
<RECEIVABLES> 127,325
<ALLOWANCES> 0
<INVENTORY> 69,848
<CURRENT-ASSETS> 5,060,105
<PP&E> 852,784
<DEPRECIATION> 592,675
<TOTAL-ASSETS> 5,751,158
<CURRENT-LIABILITIES> 1,036,184
<BONDS> 0
<COMMON> 3,787
0
0
<OTHER-SE> 4,581,007
<TOTAL-LIABILITY-AND-EQUITY> 5,741,158
<SALES> 200,269
<TOTAL-REVENUES> 266,400
<CGS> 122,953
<TOTAL-COSTS> 692,714
<OTHER-EXPENSES> 91,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,748
<INCOME-PRETAX> (522,514)
<INCOME-TAX> 0
<INCOME-CONTINUING> (522,514)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (522,514)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
