<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
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.)
12961 Park Central, Suite 1300
San Antonio, Texas 78216
(Address of principal executive offices)
(Zip Code)
(210) 495-8787
(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 November 10, 1998, there were outstanding 7,212,742 shares of Common
Stock, $.001 par value, of the registrant.
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements - (Unaudited)
Consolidated Balance Sheets - December 31, 1997, and September 30, 1998 3
Consolidated Statements of Operations - For the Three Months and Nine Months
Ended September 30, 1997 and 1998 4
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1997 and 1998 5
Notes to Consolidated Financial Statements 9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,236,307 $ 1,013,626
Short-term investments 144,682 1,114,757
Accounts receivable (net of allowance for doubtful accounts of
$256,362 in 1997 and $208,883 in 1998) 2,292,235 2,561,891
Accounts receivable from related party 17,710 40,371
Interest receivable 5,318 6,580
Inventories, net 1,745,523 1,124,690
Prepaid and other assets 172,209 12,092
------------ ------------
Total current assets 7,613,984 5,874,007
------------ ------------
Property, Plant and Equipment 1,541,376 1,526,542
Less-accumulated depreciation (922,437) (996,024)
------------ ------------
Net property, plant and equipment 618,939 530,518
Investments, at cost -- 2,202,500
Intangible Assets:
Deferred finance charges 180,996 161,604
Licensed technology rights 441,358 427,273
Goodwill, net 1,882,839 1,726,171
------------ ------------
Total assets $ 10,738,116 $ 10,922,073
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,605,366 $ 1,729,111
Accrued expenses 826,695 637,285
Current portion of long-term debt and
capital lease obligations 6,838 --
------------ ------------
Total current liabilities 3,438,899 2,366,396
------------ ------------
Convertible Debentures 3,000,000 3,000,000
------------ ------------
Minority Interest 108,802 107,164
------------ ------------
Commitments and Contingencies (Note 7)
Stockholders' Equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized;
1,170 shares issued and outstanding (1998) -- 1
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued and outstanding: 6,653,883 (1997)
and 7,212,742 (1998) 6,654 7,213
Additional paid-in capital 21,576,854 24,095,314
Deferred compensation (40,055) (17,807)
Accumulated deficit (17,353,038) (18,636,208)
------------ ------------
Total stockholders' equity 4,190,415 5,448,513
------------ ------------
Total liabilities and stockholders' equity $ 10,738,116 $ 10,922,073
============ ============
</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 OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales
Product sales $ 3,718,765 $ 4,594,231 $ 10,079,602 $ 13,012,510
Commissions earned 200,099 364,945 559,226 959,409
------------ ------------ ------------ ------------
3,918,864 4,959,176 10,638,828 13,971,919
------------ ------------ ------------ ------------
Cost And Expenses:
Cost of sales 2,335,591 2,872,591 6,289,871 8,001,679
Selling, general and administrative 2,079,127 2,437,286 5,509,312 7,146,249
Depreciation and amortization 96,822 104,930 297,341 302,728
------------ ------------ ------------ ------------
4,511,540 5,414,807 12,096,524 15,450,656
------------ ------------ ------------ ------------
Loss From Operations (592,676) (455,631) (1,457,696) (1,478,737)
Other Income (Expense):
Gain (loss) on sale of assets -- (18,792) -- 395,169
Investment income 17,687 17,620 85,012 36,019
Interest expense (30,194) (76,773) (59,365) (225,002)
Other (29,425) -- (500) --
------------ ------------ ------------ ------------
Net Loss Before Minority Interest (634,608) (533,576) (1,432,549) (1,272,551)
Minority Interest in Net Loss of
Consolidated Subsidiary 1,674 342 4,215 2,637
------------ ------------ ------------ ------------
Net Loss (632,934) (533,234) (1,428,334) (1,269,914)
Less dividend requirement on
cumulative preferred stock -- (13,256) -- (13,256)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (632,934) $ (546,490) $ (1,428,334) $ (1,283,170)
============ ============ ============ ============
Basic and Diluted Loss Per Share of
Common Stock $ (.10) $ (.08) $ (.23) $ (.19)
============ ============ ============ ============
Weighted Average Shares Used In
Computing Basic and Diluted Loss
Per Share of Common Stock 6,353,883 7,212,742 6,267,337 6,921,910
============ ============ ============ ============
</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 CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(1,428,334) $(1,269,914)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities -
Depreciation and amortization 297,341 302,728
Amortization of deferred finance charges -- 19,392
Deferred compensation -- 22,248
Loss on disposal of fixed assets -- 23,187
Disposal of intangible assets -- 11,066
Minority interest in net loss of consolidated subsidiary (4,215) (2,637)
Changes in operating assets and liabilities-
Increase in accounts receivable, net (446,891) (269,656)
Increase in accounts receivable from related party (4,947) (22,661)
Decrease in interest receivable 57,557 (1,262)
Decrease (increase) in inventories, net (42,972) 620,833
Decrease in prepaid and other assets 57,569 52,835
Increase (decrease) in accounts payable 429,195 (876,255)
Decrease in accrued expenses (173,987) (189,410)
----------- -----------
Net cash provided by (used in) operating activities (1,259,684) (1,579,506)
----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (304,872) (76,806)
Investment in affiliate -- (1,000,000)
Purchases of investments (2,248,153) (1,261,160)
Investment maturities 4,469,095 291,085
Acquisitions, net of cash required (70,462) --
----------- -----------
Net cash provided by (used in) investing activities 1,845,608 (2,046,881)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of notes payable 263,076 --
Proceeds from exercise of stock options 132,426 253,800
Payments on long-term debt and capital lease obligations (274,606) (6,838)
Issuance of preferred stock -- 1,170,000
Payments to stockholder (34,844) (13,256)
----------- -----------
Net cash provided by financing activities 86,052 1,403,706
----------- -----------
Net increase (decrease) in cash and cash equivalents 671,976 (2,222,681)
Cash and cash equivalents, beginning of period 294,143 3,236,307
----------- -----------
Cash and cash equivalents, end of period $ 966,119 $ 1,013,626
=========== ===========
</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 (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for -
Interest $ 59,365 $ 201,586
Income taxes -- --
Noncash investing and financing activities -
Issuance of common stock for ownership interest in cost
method investee $ -- $1,202,500
Cancellation of options issued under consulting
arrangement -- 107,282
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE> 7
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of LifeQuest Medical,
Inc. (the "Company"), its four operating divisions, the Company's 82% ownership
interest in ValQuest Medical, Inc., and Canwell Surgical, Inc., a corporate
joint venture. All significant intercompany accounts and transactions have been
eliminated in consolidation. In January 1998, the Company paid $1,000,000 to
acquire 19.3 percent of the stock of Dexterity, Incorporated ("Dexterity") (old
name: TFX Holding Co.). Dexterity, an affiliate of Teleflex, Inc., is a newly
formed entity. In March 1998, the Company launched distribution of certain
patented devices owned by Dexterity. The Company accounts for its investment in
Dexterity under the cost method of accounting as it is unable to exercise
significant influence over the operating and financial policies of Dexterity. In
June 1998, the Company issued 370,000 shares of common stock at a per share
price of $3.25 with an aggregate value of $1,202,500 in exchange for
approximately four percent (4%) of the ownership interests of Ana-Tech, L.L.C.
(Ana-Tech) pursuant to a subscription agreement dated June 9, 1998. At the same
time, Ana-Tech, L.L.C. sold ownership interests for cash to third parties at the
same unit price. The Company accounts for the investment in Ana-Tech using the
cost method of accounting. The Company also has entered into an Assignment
Agreement dated June 30, 1998 with Ana-Tech, L.L.C., pursuant to which the
Company assigned all of its rights, duties and obligations under its
Osteoport(R) device patent license agreement. As consideration for such
assignment, the Company received $600,000 cash and will receive a five percent
(5%) royalty on future gross sales of the Osteoport(R) device. The assignment
resulted in a gain of $411,000. 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, 1997, included in the Company's
Form 10-KSB/A. Certain reclassifications have been made in the prior period
financial statements to conform with the current period presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product sales are recognized upon the shipment of products to customers.
Commissions earned are recognized when customer orders are placed with product
suppliers. Customers may return products in the event of product defect or
inaccurate order fulfillment. The Company maintains an allowance for sales
returns based upon an historical analysis of returns. The retail values of
product and commission sales for the three months ended September 30, 1997 and
1998 were approximately $4.8 million and $6.8 million, respectively. The retail
values of product and commission sales for the nine months ended September 30,
1997 and 1998 were approximately $13.3 million and $18.0 million, respectively.
These include product sales as well as the gross sales value of products for
which the Company receives commissions.
NOTE 3 - BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. As the Company had a net loss for
the three months and the nine
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months ended September 30, 1997 and 1998, Diluted
EPS equals Basic EPS as potentially dilutive common stock equivalents are
antidilutive in loss periods.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
-------------- --------------
<S> <C> <C>
Raw materials $ 328,375 $ 35,537
Work-in-process 18,557 376,112
Finished Goods 1,579,551 994,001
Allowances (180,960) (280,960)
------------- -------------
$ 1,745,523 $ 1,124,690
============= =============
</TABLE>
NOTE 5 - ACQUISITIONS
Effective June 1997, Trimedica, Inc. ("Trimedica") was acquired by the Company
for an aggregate of 57,143 shares of common stock. The transaction was accounted
for using the pooling-of-interests accounting method. The net sales and net
income of Trimedica prior to the date of acquisition that have been included in
the consolidated statement of operations for the nine months ended September 30,
1997 were $148,464 and $49,230 respectively.
Effective September 1997, W. H. Bookwalter and Associates, Inc. ("Bookwalter")
was acquired by the Company for an aggregate of 466,473 shares of common stock.
The transaction was accounted for using the pooling-of-interests accounting
method. The net sales and net income of Bookwalter prior to the date of
acquisition that have been included in the consolidated statement of operations
for the three months ended September 30, 1997 were $554,001 and $501
respectively. The net sales and net (loss) of Bookwalter prior to the date of
acquisition that have been included in the consolidated statement of operations
for the nine months ended September 30, 1997 were $1,790,572 and ($89,839)
respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In June 1998, a case was filed in the State Court of Fulton County, Georgia,
alleging that the Company breached a distribution agreement with the plaintiff.
The plaintiff, Endo-Tech Ltd., Inc., asserts damages of approximately $400,000,
plus unspecified "consequential" damages. The Company is contesting the
plaintiff's claims and intends to defend itself vigorously. The Company has
filed a counterclaim against the plaintiff and removed the case to the United
States District Court for the Northern District of Georgia, Atlanta Division.
The Company is also a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party,
including the case described above, would have a material adverse effect on the
Company's financial statements; however, due to the inherent uncertainty of
litigation, the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that the resolution
of any particular claim or proceeding would not have an adverse effect on the
Company's results of operations for the interim period in which such resolution
occurred.
NOTE 7 - PURCHASE BUSINESS COMBINATION ENTRIES
During the second quarter of 1997, the Company determined that approximately
$700,000 of accrued liabilities that had been recorded in connection with the
Val-U-Med acquisition in December 1996 were not required and the liabilities and
selling, general and administrative expenses were reduced by a corresponding
amount during the three months ended June 30, 1997. Under purchase business
combination accounting, liabilities which were established on the date of
acquisition that are ultimately deemed unnecessary should result in a reduction
of the liability with a corresponding reduction in goodwill. During the fourth
quarter of 1997, the Company recognized approximately $700,000 in selling,
general and administrative expenses with a corresponding reduction in goodwill
to reflect the appropriate accounting treatment related to these
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liabilities. The accompanying interim consolidated results of operations have
been revised for the nine months ended September 30, 1997 to reflect the
accounting treatment reflected in the 1997 year-end financial statements.
NOTE 8 - CONVERTIBLE DEBENTURES
In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9 % Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make an equity
investment in Dexterity, and for working capital purposes. The Debentures are
secured by substantially all of the assets of the Company and require monthly
payments of interest beginning in February 1998 and, unless sooner paid,
redeemed or converted, require monthly principal payments commencing in December
2000 of $10 per $1000 of the then remaining principal amount. The remaining
principal balance will mature in December 2004. The Debentures require the
Company to comply with the following financial covenants (all as defined in the
Debentures): (i) a Debt to Net Worth Ratio of no greater than .85:1; (ii) an
Interest Coverage Ratio of at least 5:1; (iii) a Debt Coverage Ratio of at least
.10:1; and (iv) a Current Ratio of at least 1.8:1. The Company is currently not
in compliance with and has obtained a waiver from Renaissance to suspend the
Interest Coverage Ratio and Debt Coverage Ratio covenants through December 31,
1998. The holders of the Debentures have the option to convert at any time all
or a portion of the Debentures into shares of Common Stock at an initial price
of $4 per share of Common Stock. On the date the Company closed such private
placement, December 19, 1997, the closing per share price of the Company's
Common Stock on the NASDAQ SmallCap Market was $4.063. The conversion price is
subject to downward revision if the Company sells shares of its Common Stock, or
securities convertible into Common Stock, at a price less than $4 per share of
Common Stock, subject to certain allowed exceptions, during the term of the
Debentures. Accordingly, the conversion price for the Debentures was reduced to
$2 per share of Common Stock in connection with the August 1998 private
placement discussed above. In the event of the issuance of Common Stock, or
securities convertible into Common Stock, for consideration other than cash, the
amount of the consideration received therefore shall be deemed to be the fair
market value of the property received as consideration for the issuance of such
shares of Common Stock. The Debentures are also subject to a one-time adjustment
to the conversion price whereby the price will be reduced if (i) the Company
does not have pre-tax income, excluding extraordinary gains, of at least
$4,400,000 in 1998 (ii) the volume-weighted average closing bid price of the
Common Stock, as determined by Bloomberg Financial Markets and Commodities News,
for the twenty-one consecutive trading days following the Company's public
release of its 1998 financial results (the "1998 Conversion Price Adjustment"),
is less than $2 per share. Upon the occurrence of (i) and (ii) above, the
conversion price of the Debentures will be adjusted downward to an amount equal
to the 1998 Conversion Price Adjustment. The Company does not foresee having
pre-tax income of at least $4,400,000 for 1998. The Debentures are currently
convertible for an aggregate of 1,500,000 shares of Common Stock; however, since
the conversion price is subject to downward adjustment as described above, and
there is no minimum conversion price, the maximum number of shares of Common
Stock which may be issued pursuant to conversion of the Debentures is
undeterminable. Such uncertainty creates downward pressure on the public market
price of the Common Stock. The provisions of the Debentures provide that the
holders of the Debentures have an option to redeem the Debentures, in an amount
equal to an 18 percent annual yield on the principal balance, upon the
occurrence of certain events, including the delisting of Common Stock from the
NASDAQ SmallCap Market and certain "change of control" provisions, as defined in
the Debentures, as they relate to the Company. The Company may redeem the
Debentures at its option subject to certain share price and market activity
levels being obtained. The Company's right of redemption is subject to the
holder's prior right of conversion of the Debenture.
NOTE 9 - PREFERRED STOCK PLACEMENT
In August 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, such affiliates referred to herein as "Renaissance") and two
individuals, including one who is an officer and director of the Company, an
aggregate of 1,170 shares of 8% Series A Cumulative Preferred Stock, $.001 par
value ("Series A Preferred Stock), for aggregate proceeds of $1,170,000. The
Company intends to use such proceeds for working capital. Annual dividends on
the Series A Preferred Stock are cumulative at a rate of $80 per share. The
Series A Preferred Stock is initially convertible into shares of Common Stock at
a conversion price of $2 per share, for an aggregate of 585,000 shares of Common
Stock. On the date the Company closed such private placement, August 11, 1998,
the closing per share price of Common Stock on the NASDAQ SmallCap Market was
$1.75. Since the conversion price is subject to downward adjustment as described
below, and there is no minimum conversion price, the maximum number of shares of
Common Stock which may be issued pursuant to the conversion of the preferred
stock is undeterminable. Such uncertainty
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<PAGE> 10
creates downward pressure on the public market price of the Common Stock. In the
event the conversion price for the Series A Preferred Stock is adjusted downward
to the extent that the number of shares of Common Stock issuable upon the
conversion of the Series A Preferred Stock is in excess of 1,442,548 shares, the
NASDAQ Stock Market rules require that the Company obtain stockholder approval
prior to such issuance. There can be no assurance that such stockholder approval
will be obtained. The failure of the Company to obtain such stockholder approval
may have a material adverse effect upon the Company's business, financial
condition and results of operations. The conversion price for the Series A
Preferred Stock is subject to downward adjustment in the event the Company sells
shares of Common Stock, or securities convertible into shares of Common Stock,
at a per share price less than $2. In the event of the issuance of Common Stock,
or securities convertible into Common Stock, for consideration other than cash,
the amount of the consideration received therefore shall be deemed to be the
fair market value of the property received as consideration for the issuance of
such shares of Common Stock. The conversion price for the Series A Preferred
Stock is also subject to a one-time downward adjustment if the Company does not
have pre-tax income, excluding extraordinary gains, of at least $4,400,000 in
1998 and (ii) the volume-weighted average closing bid price of the Common Stock,
as determined by Bloomberg Financial Markets and Commodities News, for the
twenty-one consecutive trading days following the Company's public release of
its 1998 financial results (the "1998 Conversion Price Adjustment"), is less
than $2 per share. Upon the occurrence of (i) and (ii) above, the conversion
price of the Series A Preferred Stock will be adjusted downward to an amount
equal to the 1998 Conversion Price Adjustment. The Company does not foresee
having pre-tax income of at least $4,400,000 for 1998. The provisions of the
Company's Certificate of Incorporation provide that the holders of the Series A
Preferred Stock have an option to redeem the Series A Preferred Stock at a
redemption price per share equal to par. The holders of Series A Preferred Stock
are entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66% of
the votes entitled to be cast by the holders of the Series A Preferred Stock is
required in order to amend the Company's Certificate of Incorporation or Bylaws
to materially affect the rights of the holders of Series A Preferred Stock,
including authorizing and creating a class of stock having rights prior to or
senior to the Series A Preferred Stock. In the event two quarterly dividends
payable on the Series A Preferred Stock are in arrears, the holders of Series A
Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Certain statements contained in this Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as
amended. Specifically, all statements other than statements of historical fact
included in this Item 2 regarding LifeQuest Medical, Inc. and its subsidiaries'
and affiliates' (collectively, the "Company") financial position, business
strategy and plans and objectives of management of the Company for future
operations are forward-looking statements. These forward-looking statements are
based on the beliefs of the Company's management, as well as assumptions made by
and information currently available to the Company's management. When used in
this report, the words "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar import, as they relate to the Company
or Company's management are intended to identify forward-looking statements.
Such statements reflect the current view of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions related
to certain factors including, without limitation, the Company's ability to
manufacture, market and distribute safe and effective products on a
cost-effective basis, demand for and acceptance of the Company's products, the
level of competition in the marketplace, the ability of the Company's customers
to be reimbursed by third-party payors, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, product introductions and
acceptance, technological change, changes in industry practices, one-time events
and other factors described herein, in the Company's Registration Statement on
Form S-3 (File No. 333-58849) filed with the Security and Exchange Commission
("SEC") on October 30, 1998, and in the Company's annual, quarterly and other
reports filed with the SEC (collectively, "cautionary statements"). Although the
Company believes that its expectations are reasonable, it can give no assurance
that such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements. The Company
does not intend to update these forward-looking statements.
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
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<PAGE> 11
development stage, the Company generated minimal operating revenues. As of
September 30, 1998, the Company had an accumulated deficit of approximately
$18.6 million. There can be no assurance that the Company will not continue to
incur losses, that the Company will be able to raise cash as necessary to fund
operations or that the Company will ever achieve profitability.
Effective January 1, 1998, the Company merged all of its wholly owned
subsidiaries with and into the Company. In conjunction with this upward merger,
the Company created four new operating divisions: Endo-Surgery, Surgical
Systems, Med-Service, and Technologies.
In December 1997, the Company entered into an agreement to acquire
approximately 20 percent of the stock of Dexterity, Incorporated ("Dexterity")
(previously knows as TFX Holding Co. Inc.) for $1,000,000. Dexterity owns the
patented Dexterity(R) Pneumo Sleeve and Dexterity(R) Protractor products. The
Company recognized no revenues or expenses associated with Dexterity through
September 30, 1998.
In December 1997, the Company and Canwell Medical, Inc. formed Canwell
Surgical, Inc. ("Canwell") for the purpose of selling minimally invasive
surgical products in China and other Asian countries. The Company and Canwell
Medical, Inc. each own 50% of the ownership interests of Canwell. Through
September 30, 1998, the Company has loaned approximately $115,000 to Canwell for
working capital requirements. The loan is unsecured and bears interest at 9
percent per annum with the principal maturing in January 2000. The Company is
currently in the process of terminating Canwell as part of the Company's central
focus on the U.S. markets.
Effective September 1997, Mishbucha, Inc. d/b/a Medex Surgical ("Medex
Surgical") was acquired by the Company and merged into Klein Medical, Inc., a
wholly owned subsidiary of the Company ("Klein"). Medex Surgical was purchased
for an aggregate of 98,246 shares of common stock, $.001 par value, of the
Company ("Common Stock"). Medex Surgical was formed during 1997 and the
transaction was accounted for using the pooling-of-interests accounting method.
Medex Surgical business activity has allowed the Company to further expand its
geographical area.
Effective September 1997, W. H. Bookwalter and Associates, Inc.
("Bookwalter") was acquired by the Company and merged into Val-U-Med, Inc. a
wholly owned subsidiary of the Company. Bookwalter was purchased for an
aggregate of 466,473 shares of Common Stock. The transaction was accounted for
using the pooling-of-interests accounting method, therefore, the assets,
liabilities, and operations of Bookwalter prior to the merger are included in
the consolidated financial statements for all periods reported herein.
Bookwalter business activity has provided the Company with distribution coverage
in the northeastern region of the United States.
Effective June 1997, Trimedica, Inc. ("Trimedica") was acquired by the
Company and merged into Klein. Trimedica was purchased for an aggregate of
57,143 shares of Common Stock. The transaction was accounted for using the
pooling-of-interests accounting method, therefore, the assets, liabilities, and
operations of Trimedica prior to the merger are included in the consolidated
financial statements for all periods reported herein. Trimedica business
activity constitutes the orthopedic sales force of Klein.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had current assets of $5,874,000 and
current liabilities of $2,366,000 resulting in working capital of $3,508,000.
This compares to a working capital position of $4,175,000 at December 31, 1997.
The decline in working capital is primarily due to the Company's net loss and
its $1,000,000 investment in the common stock of Dexterity, offset by $1,170,000
in proceeds from an August 1998 preferred stock placement discussed below.
In August 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, such affiliates referred to herein as "Renaissance") and two
individuals, including one who is an officer and director of the Company, an
aggregate of 1,170 shares of 8% Series A Cumulative Preferred Stock, $.001 par
value ("Series A Preferred Stock), for aggregate proceeds of $1,170,000. The
Company intends to use such proceeds for working capital. Annual dividends on
the Series A Preferred Stock are cumulative at a rate of $80 per share. The
Series A Preferred Stock is initially convertible into shares of Common Stock at
a conversion price of $2 per share, for an aggregate of 585,000 shares of Common
Stock. On the date the Company closed such private placement, August 11, 1998,
the closing per share price of Common Stock on the NASDAQ SmallCap Market was
$1.75. Since the conversion price is subject to downward adjustment as described
below, and there is no minimum conversion price, the maximum number of shares of
-11-
<PAGE> 12
Common Stock which may be issued pursuant to the conversion of the preferred
stock is undeterminable. Such uncertainty creates downward pressure on the
public market price of the Common Stock. In the event the conversion price for
the Series A Preferred Stock is adjusted downward to the extent that the number
of shares of Common Stock issuable upon the conversion of the Series A Preferred
Stock is in excess of 1,442,548 shares, the NASDAQ Stock Market rules require
that the Company obtain stockholder approval prior to such issuance. There can
be no assurance that such stockholder approval will be obtained. The failure of
the Company to obtain such stockholder approval may have a material adverse
effect upon the Company's business, financial condition and results of
operations. The conversion price for the Series A Preferred Stock is subject to
downward adjustment in the event the Company sells shares of Common Stock, or
securities convertible into shares of Common Stock, at a per share price less
than $2. In the event of the issuance of Common Stock, or securities convertible
into Common Stock, for consideration other than cash, the amount of the
consideration received therefore shall be deemed to be the fair market value of
the property received as consideration for the issuance of such shares of Common
Stock. The conversion price for the Series A Preferred Stock is also subject to
a one-time downward adjustment if the Company does not have pre-tax income,
excluding extraordinary gains, of at least $4,400,000 in 1998 and (ii) the
volume-weighted average closing bid price of the Common Stock, as determined by
Bloomberg Financial Markets and Commodities News, for the twenty-one consecutive
trading days following the Company's public release of its 1998 financial
results (the "1998 Conversion Price Adjustment"), is less than $2 per share.
Upon the occurrence of (i) and (ii) above, the conversion price of the Series A
Preferred Stock will be adjusted downward to an amount equal to the 1998
Conversion Price Adjustment. The Company does not foresee having pre-tax income
of at least $4,400,000 for 1998. The provisions of the Company's Certificate of
Incorporation provide that the holders of the Series A Preferred Stock have an
option to redeem the Series A Preferred Stock at a redemption price per share
equal to par. The holders of Series A Preferred Stock are entitled to one vote
per share on all matters submitted to a vote of the stockholders of the Company,
and the affirmative vote of the holders of 66-2/3% of the votes entitled to be
cast by the holders of the Series A Preferred Stock is required in order to
amend the Company's Certificate of Incorporation or Bylaws to materially affect
the rights of the holders of Series A Preferred Stock, including authorizing and
creating a class of stock having rights prior to or senior to the Series A
Preferred Stock. In the event two quarterly dividends payable on the Series A
Preferred Stock are in arrears, the holders of Series A Preferred Stock, by a
majority vote, shall be entitled to designate two additional directors to serve
on the Company's Board of Directors.
In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make an equity
investment in Dexterity, and for working capital purposes. The Debentures are
secured by substantially all of the assets of the Company and require monthly
payments of interest beginning in February 1998 and, unless sooner paid,
redeemed or converted, require monthly principal payments commencing in December
2000 of $10 per $1000 of the then remaining principal amount. The remaining
principal balance will mature in December 2004. The Debentures require the
Company to comply with the following financial covenants (all as defined in the
Debentures): (i) a Debt to Net Worth Ratio of no greater than .85:1; (ii) an
Interest Coverage Ratio of at least 5:1; (iii) a Debt Coverage Ratio of at least
.10:1; and (iv) a Current Ratio of at least 1.8:1. The Company is currently not
in compliance with and has obtained a waiver from Renaissance to suspend the
Interest Coverage Ratio and Debt Coverage Ratio covenants through December 31,
1998. The holders of the Debentures have the option to convert at any time all
or a portion of the Debentures into shares of Common Stock at an initial price
of $4 per share of Common Stock. On the date the Company closed such private
placement, December 19, 1997, the closing per share price of the Company's
Common Stock on the NASDAQ SmallCap Market was $4.063. The conversion price is
subject to downward revision if the Company sells shares of its Common Stock, or
securities convertible into Common Stock, at a price less than $4 per share of
Common Stock, subject to certain allowed exceptions, during the term of the
Debentures. Accordingly, the conversion price for the Debentures was reduced to
$2 per share of Common Stock in connection with the August 1998 private
placement discussed above. In the event of the issuance of Common Stock, or
securities convertible into Common Stock, for consideration other than cash, the
amount of the consideration received therefore shall be deemed to be the fair
market value of the property received as consideration for the issuance of such
shares of Common Stock. The Debentures are also subject to a one-time adjustment
to the conversion price whereby the price will be reduced if (i) the Company
does not have pre-tax income, excluding extraordinary gains, of at least
$4,400,000 in 1998 (ii) the volume-weighted average closing bid price of the
Common Stock, as determined by Bloomberg Financial Markets and Commodities News,
for the twenty-one consecutive trading days following the Company's public
release of its 1998 financial results (the "1998 Conversion Price Adjustment"),
is less than $2 per share. Upon the occurrence of (i) and (ii) above, the
conversion price of the Debentures will be adjusted downward to an amount equal
to the 1998 Conversion Price Adjustment. The Company does not foresee having
pre-tax income of at least $4,400,000 for 1998. The Debentures are currently
convertible for an aggregate of 1,500,000 shares of Common Stock; however, since
the conversion price is subject to downward adjustment as described above, and
there is no minimum
-12-
<PAGE> 13
conversion price, the maximum number of shares of Common Stock which may be
issued pursuant to conversion of the Debentures is undeterminable. Such
uncertainty creates downward pressure on the public market price of the Common
Stock. The provisions of the Debentures provide that the holders of the
Debentures have an option to redeem the Debentures, in an amount equal to an 18
percent annual yield on the principal balance, upon the occurrence of certain
events, including the delisting of Common Stock from the NASDAQ SmallCap Market
and certain "change of control" provisions, as defined in the Debentures, as
they relate to the Company. The Company may redeem the Debentures at its option
subject to certain share price and market activity levels being obtained. The
Company's right of redemption is subject to the holder's prior right of
conversion of the Debenture.
Pursuant to a Subscription Agreement dated June 9, 1998, the Company
issued 370,000 shares of the Company's Common Stock, at a per share price of
$3.25, with an aggregate value of $1,202,500 in exchange for approximately four
percent (4%) of the ownership interests of Ana-Tech, L.L.C. At the same time,
Ana-Tech, L.L.C. sold ownership interests for cash to third parties at the same
unit price. The Company also has entered into an Assignment Agreement dated June
30, 1998 with Ana-Tech, L.L.C., pursuant to which the Company assigned all of
its rights, duties and obligations under its Osteoport(R) device patent license
agreement. As consideration for such assignment, the Company received $600,000
cash and will receive a five percent (5%) royalty on future gross sales of the
Osteoport(R) device. The assignment resulted in a gain of $411,000.
On February 2, 1996, the Company borrowed $750,000 from a commercial
bank pledging a like amount of short-term investments as collateral. The loan
proceeds were used to replace more expensive debt, mainly capital equipment
leases, acquired with the acquisition of GM Engineering, Inc. ("GME"). On
September 3, 1997, the loan was converted to a line of credit maturing September
1998 whereby all inventories, accounts receivable and intangibles of the Company
are pledged as collateral. The line of credit was paid in full in December 1997
with proceeds from the December 1997 private placement described above. The line
of credit expired September 3, 1998.
Capital expenditures were $77,000 during the first nine months of 1998.
The Company anticipates further capital expenditures to support the additional
infrastructure required as the Company's geographical expansion continues.
For the nine months ended September 30, 1998, operating activities
utilized $1,580,000 of cash primarily from the net loss
for the period. For the nine months ended September 30, 1997, operating
activities utilized $1,260,000 of cash primarily from the net loss for the
period. Investment activities during the first nine months of 1998 consumed
$2,047,000 primarily due to the investment in Dexterity and the purchase of
short-term investments. For the same nine month period of 1997, investment
activities provided cash of $1,846,000 from investment maturities net of
additional investment purchases. Total cash provided from financing activities
for the nine months through September 30, 1998 was $1,404,000. The Company sold
convertible preferred stock during this period realizing net proceeds of
$1,170,000.
Based upon the current level of operations, the Company believes that
projected cash flow from operations plus the Company's cash from the realization
of its current assets will be adequate to meet its anticipated requirements for
working capital and capital expenditures through 1998. However, additional
capital may be required in order for the Company to take advantage of any
potential acquisition opportunities or to participate in future alliances or
joint ventures. There can be no assurance that the Company will not require
additional funding or that such additional funding, if needed, will be available
on terms beneficial to the Company or at all.
RESULTS OF OPERATIONS
For the three months ended September 30, 1998, the Company reported a
net loss applicable to common stock of $546,000 or $.08 per share. This compares
with a net loss applicable to common stock of $633,000 or $.10 per share for the
three months ended September 30, 1997. For the nine months ended September 30,
1998, the Company reported a net loss applicable to common stock of $1,283,000
or $.19 per share versus a net loss applicable to common stock of $1,428,000 or
$.23 per share for the comparable period of 1997. The improvement in reported
results for 1998 was primarily due to an increase in net sales and gross profit
margins. The net loss for the nine months ended September 30, 1998 included an
approximate $400,000 gain on the sale of the Osteoport(R) device as previously
discussed.
Product sales increased 24% in the third quarter 1998 and 29% in the
first nine months of 1998 as compared with the same periods in 1997. Product
sales were $4,594,000 for the third quarter of 1998 and $3,719,000 for the third
quarter of 1997. Product sales for the first nine months of 1998 and 1997 were
$13,013,000 and $10,080,000 respectively. These
-13-
<PAGE> 14
increases were due to continued sales growth throughout the Company within
existing product lines and sales generated by the Dexterity(R) product line
which was added in March 1998.
Commission sales increased 82% in the third quarter 1998 and 72% in the
first nine months of 1998 as compared with the same periods in 1997. Commission
sales were $365,000 in the third quarter of 1998 and $200,000 in the third
quarter of 1997. Commission sales for the first nine months of 1998 and 1997
were $959,000 and $559,000 respectively. The increase in commission sales
reflects the continuing acquisition of new product representations and new sales
territories within existing product lines.
Gross profit from product sales in the third quarter was $1,722,000 in
1998 versus $1,383,000 in 1997. The corresponding gross profit margins were 37%
in both 1998 and 1997. For the nine months ended September 30, gross profit was
$5,011,000 or 39% in 1998 and $3,790,000 or 38% in 1997. The increase in margins
is a result of the realization of the efficiencies incurred through expanding
volumes and economies of scale.
For the third quarter, selling, general and administrative expenses,
which consist primarily of sales commissions, salaries and other costs necessary
to support the Company's infrastructure, increased 17% to $2,437,000 in 1998
from $2,079,000 in 1997. For the first nine months of 1998, these expenses
increased 28% from $5,509,000 to $7,146,000. These increased costs primarily
reflect higher sales commissions due to the increased level of sales. However,
as a percentage of net sales, selling, general and administrative expenses have
decreased: 49% for the 1998 quarter versus 53% for the 1997 quarter and 51% for
the nine months ended September 30, 1998 versus 52% for the same period in 1997.
In order to maximize financial and managerial resources, the Company is
continually monitoring non-profitable divisions and non-performing assets.
Accordingly, effective September 30, 1998, the Company closed the Med-Service
division and sold its customer base for a 15% royalty on gross sales generated
from the customer base for a period of three years. The loss on sale of assets
for the quarter ended September 30, 1998, primarily represents the sale of
surplus Med-Service equipment and fixtures. The gain on sale of assets for the
nine months ended September 30, 1998 includes the gain on the sale of the
Osteoport(R) device as previously discussed.
Investment income represents interest earned on the Company's
short-term investments. Investment income for nine months declined from $85,000
in 1997 to $36,000 in 1998 as the level of short-term investments declined from
year to year.
YEAR 2000 ISSUE
The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has been
evaluating its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with customers, and
services supplied by vendors to coordinate year 2000 compliance and conversion.
The year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information for
the year 2000 and beyond. Unless modified prior to December 31, 1999, such
systems may not properly recognize date-sensitive information and could generate
erroneous data or cause a system to fail to operate properly. Based on current
information, the Company expects to attain year 2000 compliance and institute
appropriate testing of its modifications and replacements in a timely fashion
and in advance of the year 2000 date change. It is anticipated that modification
or replacement of the Company's Programs and Systems will be performed in-house
by company personnel.
The Company believes that, with modifications to existing software and
conversions to new software, the year 2000 problem will not pose a significant
operational problem for the Company. However, because most computer systems are,
by their very nature, interdependent, it is possible that non-compliant third
party computers may not interface properly with the Company's computer systems.
The Company could be adversely affected by the year 2000 problem if it or
unrelated parties fail to successfully address this issue. Management of the
Company currently anticipates that the expenses and capital expenditures
associated with its year 2000 compliance project, including costs associated
with modifying the Programs and Systems as well as the cost of purchasing or
leasing certain hardware and software, will not have a material effect on its
business, financial condition or results of operations and are expenses and
capital expenditures the Company anticipated incurring in the ordinary course of
business regardless of the year 2000 problem. Purchased hardware and software
has been
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<PAGE> 15
and will continue to be capitalized in accordance with normal policy. Personnel
and other costs related to this process are being expensed as incurred.
The costs of year 2000 compliance and the expected completion dates are
the best estimates of Company management and are believed to be reasonably
accurate. In the event the Company's plan to address the year 2000 problem is
not successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.
In the event the Company determines, following the year 2000 date
change, that its Programs and Systems are not year 2000 compliant, the Company
will likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is year 2000 compliant, and until such hardware and/or software
can be obtained, the Company will plan to use non-computer systems for its
business, including information management services and financial reporting, as
well as its various administrative functions.
Year 2000 Information and Readiness Disclosure Act
To the maximum extent permitted by applicable law, the above
information is being designated as "Year 2000 Readiness Disclosure" pursuant to
the "Year 2000 Information and Readiness Disclosure Act" which was signed into
law on October 19, 1998.
-15-
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1998, a case was filed in the State Court of Fulton County,
Georgia, alleging that the Company breached a distribution agreement
with the plaintiff. The plaintiff, Endo-Tech Ltd., Inc., asserts
damages of approximately $400,000, plus unspecified "consequential"
damages. The Company is contesting the plaintiff's claims and intends
to defend itself vigorously. The Company has filed a counterclaim
against the plaintiff and removed the case to the United States
District Court for the Northern District of Georgia, Atlanta
Division.
The Company is also a party to claims and legal proceedings arising
in the ordinary course of business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings
to which the Company is a party, including the case described above,
would have a material adverse effect on the Company's financial
statements; however, due to the inherent uncertainty of litigation,
the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that the
resolution of any particular claim or proceeding would not have an
adverse effect on the Company's results of operations for the interim
period in which such resolution occurred.
Item 2. Changes in Securities
On August 11, 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
and certain individuals, including an Officer of the Company, an
aggregate of 1,170 shares of 8% Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred") at a per share purchase
price of $1,000. The Series A Preferred is convertible into an
aggregate of 585,000 shares of Common Stock (subject to adjustment)
at a conversion price not to exceed $2.00. Dividends cumulatively
accrue on the Series A Preferred at a rate of $80 per annum per
share. So long as any accrued dividends on Series A Stock are unpaid,
no dividends may be declared on Common Stock. The holders of Series A
Stock shall be entitled, upon a liquidation of the Company, to
receive $1,000 per share of Series A Stock, plus all accrued and
unpaid dividends. The holders of the Series A Stock have the right to
one vote per share of Series A Stock on all matters submitted to a
vote of the stockholders of the Company. The affirmative vote of
66-2/3% of the shares of Series A Stock then outstanding is required
to materially amend the Certificate of Incorporation or Bylaws of the
Company. In the event two quarterly dividends on the Series A Stock
shall be in arrears, the holders of the Series A Stock have the right
to elect or designate two directors of the Company.
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11* Computation of Earnings (Loss) Per Share
Exhibit 27.1* Financial Data Schedule for the nine months
ended September 30, 1998
Exhibit 27.2* Restated Financial Data Schedule for the
nine months ended September 30, 1997
(b) Reports on Form 8-K - Not applicable
*Filed herewith
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<PAGE> 17
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: November ___, 1998 By /s/ RICHARD A. WOODFIELD
------------------------------
Richard A. Woodfield
President and Chief
Executive Officer (Principal
Executive Officer)
Dated: November ___, 1998 By /s/ RANDALL K. BOATRIGHT
------------------------------
Randall K. Boatright
Executive Vice President and
Chief Financial Officer
(Principal Accounting
Officer)
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<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
-------------- -----------------------------------------
<S> <C>
Exhibit 11* Computation of Earnings (Loss) Per Share
Exhibit 27.1* Financial Data Schedule for the nine months ended
September 30, 1998
Exhibit 27.2* Restated Financial Data Schedule for the nine months ended September 30, 1997
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 11
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE:
Net loss $ (632,934) $ (533,234) $(1,428,334) $(1,269,914)
Preferred Stock Dividends $ -- $ (13,256) $ -- $ (13,256)
----------- =========== =========== ===========
Net loss available for common stock shareholders $ (632,934) $ (546,490) $(1,428,334) $(1,283,170)
WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING USED FOR COMPUTATION 6,353,883 7,212,742 6,267,337 6,921,910
=========== =========== =========== ===========
BASIC LOSS PER COMMON SHARE $ (0.10) $ (0.08) $ (0.23) $ (0.19)
=========== =========== =========== ===========
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss $ (632,934) $ (533,234) $(1,428,334) $(1,269,914)
Preferred Stock Dividends $ -- $ (13,256) $ -- $ (13,256)
Interest on Convertible Debentures $ -- $ 68,055 $ -- $ 201,945
----------- ----------- ----------- -----------
Net loss used for computation $ (632,934) $ (478,435) $(1,428,334) $(1,081,225)
=========== =========== =========== ===========
Weighted average shares of common stock outstanding 6,353,883 7,212,742 6,267,337 6,921,910
Weighted average incremental shares outstanding upon assumed
conversion of options and other dilutive securities 517,233 136,583 508,692 179,870
Weighted average incremental shares outstanding upon assumed
conversion of Convertible Debentures and Preferred Stock -- 1,824,293 -- 1,609,286
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS OUTSTANDING
USED FOR COMPUTATION 6,871,116 9,173,618 6,776,029 8,711,066
=========== =========== =========== ===========
DILUTED LOSS PER COMMON SHARE AND COMMON
SHARE EQUIVALENTS (a) $ (0.09) $ (0.05) (0.21) (0.12)
=========== =========== =========== ===========
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-B although it is not required by SFAS No. 128 because it is
antidilutive. As a result, it is not the amount reflected on the
statements of operations.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,013,626
<SECURITIES> 1,114,757
<RECEIVABLES> 2,770,774
<ALLOWANCES> 208,883
<INVENTORY> 1,124,690
<CURRENT-ASSETS> 5,874,007
<PP&E> 1,526,542
<DEPRECIATION> 996,024
<TOTAL-ASSETS> 10,922,073
<CURRENT-LIABILITIES> 2,366,396
<BONDS> 3,000,000
0
1
<COMMON> 7,213
<OTHER-SE> 5,441,299
<TOTAL-LIABILITY-AND-EQUITY> 10,922,073
<SALES> 13,971,919
<TOTAL-REVENUES> 14,403,107
<CGS> 8,001,679
<TOTAL-COSTS> 15,400,656
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 225,002
<INCOME-PRETAX> (1,283,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,283,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,283,170)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND THE YEAR TO DATE
CONSOLIDATED STATEMENTS OF OPERATIONS FINANCIAL STATEMENTS FOR THE PERIOD THEN
ENDED.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 966,119
<SECURITIES> 243,801
<RECEIVABLES> 1,876,662
<ALLOWANCES> 86,891
<INVENTORY> 1,671,885
<CURRENT-ASSETS> 4,711,028
<PP&E> 1,556,413
<DEPRECIATION> 879,855
<TOTAL-ASSETS> 7,664,901
<CURRENT-LIABILITIES> 3,191,002
<BONDS> 13,895
0
0
<COMMON> 6,354
<OTHER-SE> 4,337,485
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</TABLE>
