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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 495-8787
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB X
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Registrant's revenues for fiscal year ended December 31, 1997: $14,336,828
At March 18, 1998 (based upon the last reported sales price of $4.375
per share), the aggregate market value of the Common Stock, $.001 par value, of
the registrant held by non-affiliates was approximately $24.2 Million. At
March 18, 1998, there were outstanding 6,899,742 shares of Common Stock, $.001
Par value, of the registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT FORM 10-KSB PART
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<S> <C>
Definitive Proxy Statement for 1998 Annual Meeting Part III, Items 9, 10, 11 and 12
Transitional Small Business Disclosure Format. YES NO X .
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PART I
ITEM 1. BUSINESS
Certain statements contained in this Form 10-KSB, including but not
limited to statements made in this Item 1, "Business" and those made in Item 6,
"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 and Section 21E of the Exchange Act. Specifically, all
statements other than statements of historical facts included in this Form
10-KSB regarding the Company's 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 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, 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 filed on February 7, 1997, and in the
Company's annual, quarterly and other reports filed with the Securities and
Exchange Commission (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.
GENERAL
LifeQuest Medical, Inc. (the "Company") and its subsidiary ValQuest
Medical, Inc. are engaged in the development, manufacture and distribution of
instruments, equipment and surgical supplies used in minimally invasive surgery
("MIS").
MIS, a rapidly growing field, involves surgical procedures,
accomplished without a major incision, through strategically placed punctures
in a patient's body. These procedures generally result in reduced patient
discomfort, reduced risks of infection and greatly shortened hospitalization,
thereby decreasing overall costs. MIS products include a wide variety of
reusable and disposable items such as endoscopes, trocars, trocar
sleeves/cannulas, video systems, mechanical and laser-related cutting devices,
stapling systems, electrocautery systems, suction and irrigation systems,
graspers and dissectors, and hand-operated retractors. The products are used
by surgeons in hospitals and outpatient surgery facilities.
The Company acquired Mishbucha, Inc. d/b/a Medex Surgical, a Texas
corporation ("Medex Surgical"), effective September 1997. Medex Surgical is
located in Dallas, Texas, and distributes instruments, equipment and surgical
supplies used in MIS.
The Company acquired W.H. Bookwalter and Associates, Inc., a Vermont
corporation ("Bookwalter"), in September 1997. Bookwalter is located in
Milford, Massachusetts, and develops, manufactures, distributes and repairs
equipment, instruments and surgical supplies used in MIS.
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In June 1997, the Company acquired Trimedica, Inc., a Colorado
corporation ("Trimedica") located in Colorado Springs, Colorado, which
distributes instruments, equipment and surgical supplies used in MIS.
In December 1996, the Company acquired Val-U-Med, Inc. ("VMI"), and in
November 1996 the Company acquired Klein Medical, Inc. ("KMI"). KMI and VMI
were private companies located in San Antonio, Texas and Atlanta, Georgia,
respectively. Both companies, which are wholly owned subsidiaries of the
Company, distribute instruments, equipment and surgical supplies used in MIS.
In February 1996, the Company completed the merger of GM Engineering,
Inc., ("GME") a private company, with and into LifeQuest Endoscopic
Technologies, Inc. ("LQET"), a wholly owned subsidiary of the Company.
In May 1994, the Company and Valdor Fiber Optics ("Valdor") of San
Jose, California, formed a corporate venture, ValQuest, which is an 82% owned
subsidiary of the Company. ValQuest's patented Impact Mount(TM) technology is
being used to develop proprietary, autoclavable (heat sterilizable) flexible
fiber optic endoscopes which are expected to have broad applications in the MIS
field.
The Company intends to continue to allocate its resources toward
becoming a significant competitor in the MIS market by utilizing the combined
capabilities of its subsidiaries to expand its geographical distribution
coverage in the U.S. and add relevant new products to its existing line through
internal development, licensing and acquisition.
The Company is also a party to manufacturing agreements with various
companies in the medical instrument industry, under which the Company produces
selected MIS products for private labeling. In the future, the Company intends
to introduce a number of additional MIS products for the domestic and
international MIS markets.
The Company was incorporated on December 23, 1988 as a Delaware
corporation and commenced operations on January 1, 1989. In August 1992, the
Company completed its initial public offering of Common Stock which is quoted
on the NASDAQ SmallCap Market. Effective January 1, 1998, the Company merged
each of its wholly-owned subsidiaries, LQET, Klein Medical, Inc. ("Klein") and
Val-U-Med, Inc., ("Val-U-Med") into the Company. The Company's executive
offices are located at 12961 Park Central, Suite 1300, San Antonio, Texas
78216, and its telephone number is (210) 495-8787.
RECENT ACQUISITIONS
Dexterity
In January 1998, the Company acquired 21.5% of the voting common stock
of TFX Holding Co. ("TFX"), a business development subsidiary of Teleflex, Inc.
TFX owns the Dexterity(R) Pneumo Sleeve and the Dexterity(R) Protractor, which
the Company distributes pursuant to a distribution agreement with TFX. The
Company launched distribution of the Dexterity(R) Pneumo Sleeve and
Dexterity(R) Protractor in March 1998 in the United States.
The Pneumo Sleeve is a device that allows the surgeon to insert one
hand into the abdominal cavity while preserving pneumoperitoneum during
laparoscopic surgery. This new surgical modality, called Hand Assisted
Laparoscopic Surgery (HALS), is a hybrid between open and laparoscopic surgery.
This enabling technology is expected to greatly increase the number of advanced
minimal access surgeries as well as the number of surgeons who perform these
procedures. The U.S. market potential for the Dexterity(R) Pneumo Sleeve is
estimated at more than 580,000 procedures annually, including digestive tract
surgery, urinary tract surgery, organ transplants, cancer surgery and vascular
surgery. This translates into an estimated $600 million U.S. market for
Dexterity(R) procedural kits, which include accessory devices such as hand-held
surgical instruments.
In addition to being used with the Dexterity(R) Pneumo Sleeve, the
Dexterity(R) Protractor is used as a stand- alone product for open surgery,
providing atraumatic retraction and wound protection. The market potential for
the Dexterity(R) Protractor is estimated at 2.4 million surgical procedures per
year in the United State, representing a dollar market potential in excess of
$200 million.
The Company believes the potential exists for significant market
penetration by the Dexterity(R) products, and that sales of the Company's
existing product lines should benefit from these product introductions. The
Company expects that these products, along with the surgical clip applier
discussed below, shall become integral components of LifeQuest's Lapro-PAK
surgical procedure kits.
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Canwell Surgical, Inc.
In December 1997 the Company and Canwell Medical, Inc., a Canadian
corporation ("Canwell Medical"), established a joint venture, Canwell Surgical,
Inc. ("Canwell"), owned equally by the Company and Canwell Medical. Canwell
plans to maintain offices in Atlanta, Georgia and Toronto, Ontario, Canada.
Canwell plans to establish a distribution network for selling MIS products
within the People's Republic of China and other Asian countries.
Medex Surgical
Effective September 1997, the Company completed the merger (the "Medex
Merger") of Medex Surgical with and into Klein, a Nevada corporation and wholly
owned subsidiary of the Company, with Klein as the surviving corporation.
Medex Surgical distributes instruments, equipment and supplies used in MIS.
The Medex Merger was consummated under a Plan of Merger and Acquisition
Agreement among the Company, Medex Surgical, Klein, Robert Kraus and Edward
Kraus, as shareholders of Medex Surgical, pursuant to which Robert and Edward
Kraus received an aggregate of 98,246 shares of the Company's Common Stock.
W.H. Bookwalter and Associates, Inc.
In September 1997, the Company completed the merger (the "Bookwalter
Merger") of Bookwalter with and into Val- U-Med, a Nevada corporation and
wholly owned subsidiary of the Company, with Val-U-Med as the surviving
corporation. Bookwalter distributes instruments, equipment and surgical
supplies used in MIS. The Bookwalter Merger was consummated under a Plan of
Merger and Acquisition Agreement among the Company, Bookwalter, Val-U-Med, and
the shareholders of Bookwalter, pursuant to which such shareholders received
an aggregate of 466,473 shares of the Company's Common Stock.
Trimedica
In June 1997, the Company completed the merger (the "Trimedica
Merger") of Trimedica with and into Klein, with Klein as the surviving
corporation. Trimedica distributes instruments, equipment and surgical
supplies used in MIS. The Trimedica Merger was consummated under a Plan of
Merger and Acquisition Agreement among the Company, Trimedica, Klein, and Mark
Lovejoy, the sole shareholder of Trimedica, pursuant to which Mark Lovejoy
received 57,143 shares of the Company's Common Stock.
Klein Medical
In November 1996, the Company completed the merger (the "Klein
Merger") of KMI with and into Klein, with Klein as the surviving corporation.
The Klein Merger was consummated under a Plan of Merger and Acquisition
Agreement among the Company, Klein, KMI and Richard H. Klein, as sole
shareholder of KMI, pursuant to which Richard H. Klein received an aggregate of
600,000 shares of the Company's Common Stock.
In connection with the acquisition of KMI, the Company obtained the
option to acquire the exclusive U.S. distribution rights to a patented
state-of-the-art clip applier which management believes is superior to
currently available clip appliers. The 5mm clip applier is less invasive than
the 10mm clip appliers which currently dominate the U.S. market. LifeQuest
plans to exercise such option and introduce this product as soon as its
manufacturing assembly line preparations are complete, which the Company
estimates will be in the second quarter of 1998. Clip appliers are crucial
instruments for surgeons working in the abdomen and chest because they provide
the simplest, quickest and most effective means of occluding structures such as
small blood vessels and ducts, thus decreasing total surgical and anesthesia
time.
The Company believes the potential exists for significant market
penetration by both the clip applier and the Dexterity(R) products discussed
above, and that sales of the Company's existing product lines should benefit
from these product introductions. The Company expects that these products
shall become integral components of LifeQuest's Lapro- PAK surgical procedure
kits.
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Val-U-Med
In December 1996, the Company completed the merger (the "Val-U-Med
Merger") of VMI with and into Val-U-Med, with Val-U-Med as the surviving
corporation. The Val-U-Med Merger was consummated under a Plan of Merger and
Acquisition Agreement among the Company, Val-U-Med, VMI and the shareholders of
VMI, pursuant to which such shareholders received an aggregate of 1,200,000
shares of the Company's Common Stock and an aggregate of $400,000.
GM Engineering
In February 1996, the Company completed the merger (the "GM Merger")
of GME with and into LQET. Prior to the GM Merger, GME, a private company
located in La Verne, California, was primarily engaged in the development,
manufacture and marketing of surgical and related instruments used in MIS.
Under the terms of the Plan of Merger and Acquisition Agreement the principal
shareholders of GME received 350,000 shares of the Company's Common Stock.
The ValQuest Venture
In May 1994, the Company and Valdor formed ValQuest as a corporate
venture between the two companies. In accordance with the terms of the venture
agreement, Valdor transferred to ValQuest the exclusive worldwide rights to
develop, manufacture, and market all medical applications of Valdor's patented
Impact Mount(TM) fiber optic connector technology. The Company paid $100,000
to Valdor in connection with the transfer of these rights and contributed
$400,000 to be used as working capital in exchange for a 55% interest in
ValQuest. Subsequent purchases of the stock of ValQuest by the Company have
increased the Company ownership, making ValQuest an 82% owned subsidiary of the
Company.
INDUSTRY BACKGROUND
The health care industry continues to undergo change, led primarily by
market forces which are demanding greater efficiencies and reduced costs.
Government proposed health care mandates in the United States have not
occurred, and it is unclear whether, and to what extent, any future government
mandate will affect the domestic health care market. Industry led changes are
expected to continue irrespective of any governmental efforts toward health
care reform. The scope and timing of any further government sponsored
proposals for health care reform are presently unclear.
The primary trend in the industry is toward cost containment. Payors
and managed care organizations have been able to exercise greater influence
through managed treatment and hospitalization patterns, including a shift from
reimbursement on a retrospective basis to prospective limits for patient
treatment. Hospitals have been severely impacted by the resulting cost
restraints and are competing for business and becoming more sophisticated in
management and marketing. The increasing use of managed care, centralized
purchasing decisions, consolidations among hospitals and hospital groups, and
integration of health care providers, are continuing to affect purchasing
patterns in the health care system. Purchasing decisions are often shared by a
coalition of surgeons, nursing staff, and hospital administrators, with
purchasing decisions taking into account whether a product reduces the cost of
treatment and/or attracts additional patients to a hospital. All of these
factors along with competition, have contributed to continuing reductions in
prices for the Company's products and, in the near term, to slower acceptance
of more advanced surgical procedures in which the Company's products are used,
given hospital and surgeon concerns as to the costs of training and
reimbursement by payors. In addition, the primary care physician is expected
to exercise significant influence on referrals of patients for surgical
procedures under managed care.
The Company could potentially benefit from this focus on cost
containment and on managed care. MIS decreases operating room time including
anesthesia and patient recovery time and is highly cost effective. Doctors,
patients, employers and payors all value decreased patient recovery time. This
could lead to potential increases in volume as minimally invasive procedures
are selected over alternative techniques. However, an undue focus on discrete
costs or similar limits which fail to consider the overall value of these
advanced procedures could adversely impact the Company. Some hospitals may
also lose per night revenues through reduced post-operative care requirements
as to procedures performed by MIS, which could influence their analysis of
acceptance of newer procedures. The Company is adapting itself to this
environment by promoting the cost effectiveness of its products, by striving to
efficiently produce the highest quality products at the lowest cost, and by
assisting hospitals and payors in achieving meaningful cost reductions for the
health care system while retaining the quality of care permitted by the
Company's products.
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MIS refers to surgical procedures which can be accomplished without a
major incision or other traumatization to the patient, in some cases without
general anesthesia. Endoscopy is one of the most important minimally invasive
surgical techniques. In addition to decreasing patient trauma or frequently
avoiding general anesthesia, endoscopy can substantially reduce or eliminate
postoperative hospitalization, thereby decreasing overall costs. The Company
believes that the current pressures for medical cost containment could result
in greater utilization of cost-effective, less invasive procedures. There can
be no assurance, however, that greater utilization of such procedures will
result.
The availability of innovative medical technologies, patient demand
and the motivation of physicians and payors are among the driving forces behind
the movement toward, and the wide acceptance of, minimally invasive surgical
procedures. The Company believes that these minimally invasive techniques are
desired because they benefit all significant participants in the healthcare
system: the patient experiences less pain and trauma and enjoys a more rapid
recovery; surgeons and hospitals or other surgical centers that adopt these
techniques enhance their practices and reputations; and the healthcare payor
incurs lower overall costs. The Company believes that the growing acceptance
of minimally invasive surgical procedures is changing the standards of practice
over a wide range of surgical specialties and that this trend should create
significant business opportunities for manufacturers of minimally invasive
surgical products.
According to a 1995 market research report by Theta Corporation, the
United States MIS market exceeded $2 billion in 1994 and is forecast to grow at
a 17 to 22 percent rate through 1998. MIS instruments include a wide variety
of reusable and disposable items such as trocars, trocar sleeves/cannulas,
video systems, mechanical and laser-related cutting devices, stapling systems,
electrocautery systems, suction and irrigation systems, graspers and
dissectors, hand-operated retractors and insufflation devices.
PRODUCTS
The Company distributes a variety of products used primarily for
minimally invasive surgical procedures, including branded products manufactured
and owned by other companies as well as branded products owned and manufactured
by the Company. The list of companies which utilize LifeQuest to distribute
selected products includes the following: Origin Medsystems, Inc., ConMed
Corporation, Sony Medical Products Division, Fischer Imaging Products, Welch
Allyn Imaging, MicroAire Surgical Instruments, Endo-LTD, Microline, Inc.,
Innerdyne, Inc. and Bionx Implants, Inc.
The Company distributes disposable instruments, durable (reusable)
instruments and capital equipment. The first two categories include the
following: surgical hand instruments such as scissors, forceps, clip appliers,
tackers, and suction irrigators; surgical entry instrumentation such as
trocars, cannulas and dissection balloons; endoscopes; surgical accessories
such as insufflation tubing, Endofog and electrosurgical pens and pads;
electrosurgical instruments; and pneumatic small bone surgical instruments for
driving wire, drilling, and sawing. Capital equipment includes cameras,
electrosurgical generators, pumps, monitors, printers, telemedicine systems and
breast biopsy systems.
In addition to manufacturing selected products and components for
distribution, LifeQuest also operates as an Original Equipment Manufacturer
("OEM") of MIS products such as trocars, cannulas, etc. for several U.S.
medical device companies.
BIOMEDICAL AND TECHNICAL SERVICES
The Company employs qualified technicians who provide its customers
with testing, repair and maintenance service for a wide variety of instruments,
endoscopes and capital equipment items such as generators and cameras.
SALES AND MARKETING
The Company began commercial sales of its first MIS access product in
the first quarter of 1996 following the GM Merger, and, therefore, has limited
sales, marketing and distribution experience. In 1997, the Company completed
the Trimedica Merger, the Bookwalter Merger and the Medex Surgical Merger.
These acquisitions, along with the Klein Merger, the Val-U-Med Merger and the
GM Merger, allow LifeQuest to specialize in the sales and marketing and
distribution of MIS devices. The Company is marketing its MIS access products
as well as the MIS products of other manufacturers, to hospitals, purchasing
groups and surgeons throughout the United States by demonstrating the economic
efficiencies of the Company's products and by assisting hospital management in
realizing the benefits associated with MIS. In the United States, the Company
markets MIS products primarily through direct representatives
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who are employed by the Company within selected geographical areas and
independent sales representatives who typically sell other complementary MIS
products to the same customer base. If the need arises, the Company may expand
its sales force, which will require recruiting and training additional
personnel. There can be no assurance that the Company will be able to recruit
and train such additional personnel in a timely fashion. Loss of a significant
number of the Company's current sales personnel or independent sales
representatives, or failure to attract additional personnel, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
BUSINESS STRATEGY
The Company plans to utilize the combined capabilities of Trimedica,
Bookwalter and Medex Surgical to expand its geographical coverage in the U.S.
and add significant new products to its existing line through internal
development, licensing and acquisition. In 1997, the combined distribution
coverage of the Company included 32 U.S. states and one Canadian province.
Management intends to add a significant number of direct sales representatives
in 1998 to achieve national distribution coverage. Additionally, the Company
plans to continually increase the volume of products which it manufactures and
to continue to be a party to manufacturing agreements with various companies in
the medical instrument industry under which the Company produces selected MIS
products for private labeling.
The Company also intends to capitalize on its in-house technical
expertise by significantly increasing the size and scope of its service and
repair site. Management believes that these operations are synergistic with
the Company's distribution business.
COMPETITION
The primary industry in which the Company competes, minimally
invasive surgery, is highly competitive and in the current healthcare
environment, cost containment has become a significant factor in purchasing
decisions by hospitals. The MIS market is dominated by two large,
well-positioned entities that are intensely competitive and frequently offer
substantial discounts as a competitive tactic. The United States Surgical
Corporation ("U.S. Surgical") is primarily engaged in developing,
manufacturing and marketing surgical wound management products, and has
historically been the firm most responsible for providing products that have
led to the growth of the industry. U.S. Surgical supplies a broad line of
products to the MIS industry, including products which facilitate access,
assessment and treatment. Ethicon Endo-Surgery ("Ethicon"), a Johnson &
Johnson company, has made a major investment in the MIS field in recent years
and is one of the leading suppliers of hospital products in the world.
Furthermore, U.S. Surgical and Ethicon each utilize purchasing contracts that
link discounts on the purchase of one product to purchases of other products in
their broad product lines. Substantially all of the hospitals in the United
States have purchasing contracts with one or both of these entities.
Accordingly, customers may be dissuaded from purchasing access products from
the Company rather than U.S. Surgical or Ethicon to the extent it would cause
them to lose discounts on products that they regularly purchase from U.S.
Surgical or Ethicon.
The Company believes that the primary competitive factors affecting
its business are the safety and effectiveness of the products offered, ease of
product use, product reliability, price, physician familiarity with the
manufacturer and its products, distribution channels and third party
reimbursement policies. For certain of the Company's potential products, an
important factor in competition may be the timing of market introduction of its
or its competitors' products. Accordingly, the relative speed with which the
Company can develop products and complete approval or clearance processes and
supply commercial quantities of the products to the market are important
competitive factors. The Company believes that its competitive success will be
based on its ability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain scientific personnel, obtain
patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market its products.
Many of the Company's competitors and potential competitors have
substantially greater resources, including easy access to capital, research and
development personnel, extensive manufacturing and marketing capabilities,
broad and well established product lines as well as ancillary services, such as
training programs. Some of the Company's competitors have long-term or
preferential supply arrangements with hospitals. Such arrangements may act as
a barrier to market entry. In addition, it is possible that other large
healthcare companies may enter the MIS device market in the future. Competing
companies may succeed in developing products that are more efficacious or less
costly than any that may be developed or distributed by the Company and such
companies also may be more successful than the Company in production and
marketing. Rapid technological development by others may result in the
Company's products becoming obsolete before the Company recovers a significant
portion of the development and commercialization expenses incurred with respect
to those products.
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The impact of competition will likely have a continuing effect on
sales volumes and on prices charged by the Company. The Company faces a
formidable task in successfully gaining significant revenues within the MIS
market. In order to succeed, management believes that the Company will need to
objectively demonstrate substantial product benefits, and its sales effort must
be able to effectively present such benefits to both clinicians and health care
administrators. The MIS market is dominated by U.S. Surgical and Ethicon.
Both entities introduced new access devices, trocars with added features,
during the past two years. A number of other entities participate in various
segments of the MIS market.
There can be no assurance that the Company will be able to
successfully compete in the MIS market, and failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCTS SUPPLY: DEPENDENCE ON KEY SUPPLIERS
The ability of the Company to obtain particular products or product
lines in the required quantities to fulfill customer orders for MIS devices on
a timely basis is critical to the Company's success. In most cases, the
Company has no guaranteed price or delivery agreements with its MIS device
suppliers. As a result, the Company may experience short-term inventory
shortages. In addition, manufacturers of MIS devices who currently distribute
their products through the Company may decide to distribute, or to
substantially increase their existing distribution through other distributors,
their own dealer networks, or directly to resellers. There can be no assurance
that suppliers will be able to maintain an adequate supply of products to
fulfill the Company's customer orders on a timely basis or that the Company
will be able to obtain particular products or that a product line currently
offered by suppliers will continue to be available. Failure of the Company to
obtain particular products or product lines in the required quantities or to
fulfill customer orders on a timely basis could have a material adverse effect
on its business, financial condition or results of operation.
The Company's ability to achieve increases in net sales or to sustain
current net sales levels depends in part on the ability and willingness of the
Company's suppliers to provide products in the quantities the Company requires.
Although the Company has written distribution agreements with many of its
suppliers, these agreements in certain instances provide for non-exclusive
distribution rights and often include territorial restrictions that limit the
geographical area in which the Company is permitted to distribute the products.
The agreements are also generally short-term, subject to periodic renewal and
often contain provisions permitting termination by either party without cause
upon relatively short notice. The termination of an agreement may have a
material adverse impact on the Company's business, financial condition or
result of operations.
DEPENDENCE UPON INDEPENDENT SHIPPING COMPANIES
The Company relies heavily on arrangements with independent shipping
companies for the delivery of its products. In order to meet customer demand,
products are shipped from suppliers through independent shipping companies.
Currently, United Parcel Service delivers the substantial majority of the
Company's products to its customers. The termination of the Company's
relationship with United Parcel Service, or the failure of one or more other
independent shipping companies to deliver products from suppliers to the
Company or products from the Company to its customers could have a material
adverse effect on the Company's business, financial condition or results of
operations. For instance, an employee work stoppage or slow-down at one or
more of these independent shipping companies could materially impair the
shipping company's ability to perform the services required by the Company.
There can be no assurance that the services of these independent shipping
companies will continue to be available to the Company on terms as favorable as
those currently available or that these companies will choose or be able to
perform the required shipping services for the Company.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be largely dependent on the efforts of
a number of key management and technical personnel. The loss of the services
of one or more key employees could have an adverse effect on the Company. The
Company believes that its future success will depend in large part upon its
ability to hire and retain suitable operating, marketing, financial and
technical personnel. The competition for qualified personnel in the medical
device industry is intense and, accordingly, there can be no assurance that the
Company will be able to hire or retain necessary personnel.
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Herbert H. Spoon resigned from his positions as President, Chief
Executive Officer and Director of the Company effective March 9, 1998. Randall
K. Boatright, Vice President and Chief Financial Officer of the Company since
1992, has been appointed as Interim President and Chief Executive Officer. A
search committee comprised of certain members of the Company's Board of
Directors has been formed to find a new President and Chief Executive Officer.
The Company anticipates it will find a qualified and suitable President and
Chief Executive Officer, however, there can be no assurance that the Company
will be able to hire or retain such an individual.
PRODUCT DEVELOPMENT AND MANUFACTURING
Working from an idea, sketch, or rough model, the Company can take a
project through all the steps of product development, engineering, and
industrial design, culminating in an exact working prototype. The Company's
mold design, tooling, assembly, packaging and regulatory staff can develop
necessary plans to transform the prototype into a market ready, versatile,
medical device. The Company utilizes the latest in design hardware and
software, as well as a complete machine shop.
The Company's manufacturing strategy has four primary goals: (i) to
provide its customers with high quality products and services; (ii) to improve
the performance of its products over time through design and manufacturing
innovation; (iii) to continuously improve manufacturing efficiency and lower
costs; and (iv) to improve product quality. The Company's manufacturing
operations include machining of various components, assembly, testing,
inspection and packaging. Most operations are conducted by the Company at its
principal offices in San Antonio, Texas. Sterilization of certain products is
performed by a subcontractor.
The Company meets the required Food and Drug Administration ("FDA")
manufacturing requirements. These requirements include the need for lot
traceability, clean environment and institution of the FDA's Good Manufacturing
Practices ("GMP") in assembly and manufacturing procedures. FDA requirements
consists of four functions: documentation, quality engineering, inspection and
regulatory affairs. The Company has personnel dedicated to maintaining
compliance with each of these areas.
The Company utilizes steel, aluminum and other raw materials in its
manufacturing process. All raw materials are sourced from several different
suppliers and the Company has rarely experienced a significant manufacturing
delay as a result of a disruption of its sources for raw materials or other
product components. The Company currently maintains small finished goods
inventories. Most products are produced and shipped in direct response to
customer product requests on a "Just in Time" basis.
During the last two fiscal years, the Company has continued to
decrease its engagement in company sponsored research and development, and in
fiscal 1997, eliminated virtually all expenditures in this area. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company holds all rights to medical applications of the patented
Impact Mount(TM) technology owned by ValQuest.
The Company's success will depend in part on its ability to obtain
patent protection for products and processes, to preserve its trade secrets and
to operate without infringing the proprietary rights of third parties. While the
Company has obtained exclusive rights to certain patents and to various
applications for additional United States and foreign patents covering certain
aspects of its technology, no assurance can be given that any additional patents
will be issued, that the scope of any patent protection will exclude competitors
or that any of the Company's patents will be held valid if subsequently
challenged. The validity and breadth of claims covered in the medical
technology patents involve complex legal and factual questions and, therefore,
may be highly uncertain. Whether or not the Company's patents are issued,
others may receive patents which contain claims having a scope that covers
products developed by the Company.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation, which
would result in substantial cost to and diversion of effort by the Company, may
be necessary to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company or to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. Adverse determinations in litigation could
subject the Company to significant liabilities to third parties, could require
the Company to seek licenses from third parties and could prevent the Company
from manufacturing, selling or using its products, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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The Company may decide for business reasons to retain certain
knowledge that it considers proprietary as trade secrets. In that event, or if
patent protection is unattainable, then the Company must rely upon trade
secrets, know-how and continuing technological innovation to maintain its
competitive position. Employees and consultants of the Company who have access
to proprietary information have signed confidentiality agreements with the
Company. There can be no assurance that these agreements will provide
meaningful protection for the Company's trade secrets in the event of
unauthorized use or disclosure of such information. The Company intends to
require any new employees to sign similar confidentiality agreements.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques, or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to its unpatented trade
secrets.
GOVERNMENT REGULATION
As a manufacturer of medical devices, the Company is subject to
regulation by, among other governmental entities, the FDA and the corresponding
agencies of states and foreign countries in which the Company sells its
products. These regulations govern the introduction of new medical devices,
the observance of certain standards with respect to the manufacture and
labeling of such devices, the maintenance of certain records and the reporting
of potential product defects and other matters. Failure to comply with such
regulations may have a material adverse effect on the Company.
Manufacturers of medical devices marketed in the United States are
required to adhere to applicable regulations setting forth detailed GMP
requirements, which include testing, control and documentation requirements.
Manufacturers also must comply with Medical Device Reporting ("MDR")
requirements which require that a firm report to the FDA certain adverse events
associated with the Company's devices. The Company is subject to routine
inspection by the FDA and certain state agencies for compliance with GMP
requirements, MDR requirements and other applicable regulations. The FDA is
using its statutory authority more vigorously during inspections of companies
and in other enforcement matters. The FDA has promulgated new GMP regulations
and MDR regulations, both of which will likely increase the cost of compliance
with GMP and MDR requirements. The Company also is subject to numerous
federal, state and local laws relating to matters such as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. Changes
in existing requirements or adoption of new requirements could have a material
adverse effect on the Company's business, financial condition or results of
operations. Although the Company believes that it is in compliance with all
applicable regulations of the FDA and the states in which it operates, current
regulations depend heavily on administrative interpretation and there can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that laws and regulations will not have a
material adverse effect upon the Company's business, financial condition or
results of operations. In addition, the potential effects on the Company of
heightened enforcement of federal and state regulations cannot be predicted.
With the enactment of the Medical Device Amendments in May 1976 to the
Federal Food, Drug and Cosmetic Act (the "FDC Act"), the FDA classified medical
devices in commercial distribution into three classes, Class I, II or III.
This classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of the medical device. Class I devices are those
devices whose safety and effectiveness can reasonably be ensured through
general controls such as adequate labeling, premarket notification and
adherence to GMP regulations. Some Class I devices are further exempted from
some of the general controls. Class II devices are those devices whose safety
and effectiveness can reasonably be ensured through the use of special controls
such as performance standards, post-market surveillance, patient registries and
FDA guidelines. Class III devices are devices which must receive premarket
approval by the FDA pursuant to a Premarket Approval ("PMA") application to
ensure their safety and effectiveness. Generally, Class III devices are
limited to life-sustaining, life-supporting or implantable devices.
Most medical instruments introduced to the United States market are
required by the FDA, as a condition of marketing, to secure either clearance of
a premarket notification pursuant to Section 510(k) of the FDC Act (a "510(k)
Notification") or an approved PMA. Obtaining PMA can take several years. In
contrast, the process of obtaining a 510(k) Notification clearance requires the
submission of substantially less data and generally involves a shorter review
period.
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In general, clearance of a 510(k) Notification may be obtained if a
manufacturer or distributor of medical devices can establish that a new device
is "substantially equivalent" to a legally marketed medical device. The 510(k)
Notification and the claim of substantial equivalence may have to be supported
by various types of information indicating that the device is as safe and
effective for its intended use as a legally marketed predicate device. In
addition to requiring clearance for new products, FDA rules typically require a
filing and a waiting period prior to marketing modified versions of existing
products. The Company anticipates that most of its products will be eligible
for the 510(k) Notification procedure. At this time, the FDA typically
responds to a submission of a 510(k) Notification within 180 to 360 days.
Market clearance may take three to 12 months or longer. In the event that the
shorter 510(k) Notification procedure is not available, the Company will be
required to file a PMA.
Under the Safe Medical Devices Act of 1990 ("SMDA"), the FDA is
directed to adopt new 510(k) Notification regulations which could potentially
make the approval process for the Company's products more time-consuming,
difficult and expensive. The SMDA includes new provisions relating to
post-market surveillance requirements for certain types of devices and
authorizes the FDA to adopt new controls to be applied to certain devices such
as some currently being developed by the Company, including the promulgation of
a performance standard, requirements for patient registries, distributor and
purchaser reporting and imposition of guidelines.
The process of obtaining necessary government approvals can be
time-consuming and expensive. There can be no assurance that the necessary
approvals will be obtained by the Company or, if they are obtained, that they
will be obtained on a timely basis. Furthermore, the Company or the FDA may
suspend clinical trials at any time upon a determination that the subjects or
patients are being exposed to an unacceptable health risk. The FDA may also
require post-approval testing and surveillance programs to monitor the effects
of the Company's products and the products it distributes as a condition of
approval. Approvals that have been or may be granted are subject to continual
review and surveillance programs required by regulatory agencies, and later
discovery of previously unknown problems may result in product labeling
restrictions or withdrawal of products from marketing.
International sales of medical devices are subject to the regulatory
agency requirements of each country, and more recently in Europe, the
regulations of the European Economic Community. The regulatory review process
varies from country to country. In addition, international sales of medical
devices not cleared by the FDA for distribution in the United States may be
subject to FDA export requirements, which require the Company to document that
the sale of the device is not in violation of that country's medical device
laws. This documentation is then submitted to the FDA with a request for a
permit for export to that country. The Company intends to apply for regulatory
approval, import approval and export approval for its products for sales in
countries comprising the major foreign market.
The Company is also required to register and list its products with
the FDA as a device manufacturer or distributor. As such, the Company is
subject to inspection on a routine basis for compliance with the FDA's GMP
requirements and other applicable regulations. Further, the Company is
required to comply with various FDA requirements for labeling. The Medical
Device Reporting regulation requires that the Company provide information to
the FDA on death or serious injuries alleged to have been associated with the
use of its product, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to recur.
Special reports and routine annual reports are required to be submitted to the
FDA by a company after a PMA for a device has been approved. These reports
assure that the official FDA file for the PMA is kept current and reflects
actual manufacturing, labeling, marketing, and use practices and experience
once the product is marketed. In addition, the FDA prohibits an approved
device from being promoted for unapproved applications.
In addition to the statutes and regulations enforced by the FDA, the
Company is also subject to regulation under the Occupational Safety and Health
Act, the Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other present and potential future
federal, state and local statutes, regulations and ordinances, including those
promulgated by the Environmental Protection Act and the Department of Labor.
Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such
changes might have on its business.
THIRD-PARTY REIMBURSEMENT
In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices, such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of the
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procedure in which the medical device is being used. In addition, certain
health care providers are moving toward a managed care system in which such
providers contract to provide comprehensive health care for a fixed cost per
person. Managed care providers are attempting to control the cost of health
care by authorizing fewer elective surgical procedures. The Company is unable
to predict what changes will be made in the reimbursement methods utilized by
third- party health care payors. Furthermore, the Company could be adversely
affected by changes in reimbursement policies of governmental or private health
care payors, particularly to the extent any such changes affect reimbursement
for procedures in which the Company's products are used. Failure by
physicians, hospitals and other users of products sold by the Company to obtain
sufficient reimbursement from health care payors for procedures in which the
Company's products are used or adverse changes in governmental and private
third-party payors' policies toward reimbursement for such procedures would
have a material adverse effect on the Company's business, financial condition
or results of operations.
If the Company obtains the necessary foreign regulatory approvals,
market acceptance of the products sold by the Company in international markets
would be dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include
both government-sponsored health care and private insurance. The Company
intends to seek international reimbursement approvals, although there can be no
assurance that any such approvals will be obtained in a timely manner, if at
all, and no assurance can be given regarding the effect on market acceptance of
the Company's products in the international markets in which such approvals are
sought.
Hospitals, medical clinics and physicians' offices that purchase
medical devices generally rely on third-party payors, such as Medicare,
Medicaid and private health insurance plans, to pay for some or all of the
costs of the screening, diagnostic and therapeutic procedures performed with
these devices. Whether a particular procedure qualifies for third-party
reimbursement depends upon such factors as the safety and effectiveness of the
procedure; and reimbursement may be denied if the medical device is
experimental or was used for a non-approved indication. The Company believes
that third-party reimbursement will be available for most procedures using its
products.
In April 1983, Congress enacted the Social Security Act Amendments of
1983 which mandated a system of Medicare reimbursement for in-patient hospital
services based primarily upon diagnostic- related groups known as "DRGs."
Under this system, hospitals are generally paid only a fixed amount per patient
plus additional amounts for certain specific hospital costs. The amount
payable under DRGs for a particular patient depends on many factors, including
the principal diagnosis of the patient, but it usually does not depend upon the
hospital's actual current cost of treating the patient. The prospective
payment system and other cost control measures adopted by third-party payors in
recent years, including reductions in Medicare payments for hospital outpatient
services and capital costs, have had and may continue to have significant
effect on the purchasing practices of many providers, generally causing them to
be more selective in the purchase of medical devices.
Third-party payors use a variety of mechanisms to determine
reimbursement fees for surgical procedures. In some cases, reimbursement
amounts are based on the provider's costs associated with the procedure,
including materials costs. In such a situation, the cost of a device used in
the procedure would likely be covered by the reimbursement payment.
While third-party payors generally make their own decisions regarding
which items and services to cover, Medicaid and other third-party payors often
apply standards similar to Medicare's in determining whether to provide
coverage for a particular medical procedure. The Medicare statute prohibits
payment for any items or services that are not reasonable and necessary for the
diagnosis or treatment of illness or injury or to improve the functioning of a
malformed body member, and the Health Care Financing Administration ("HCFA"),
an agency within the Federal Department of Health and Human Services
responsible for administering the Medicare program, has interpreted this
provision to prohibit Medicare coverage of procedures or devices that, among
other things, are determined to be medically unnecessary, inappropriate, not
cost-effective, unsafe, ineffective, experimental or used for non-approved
indication. For medical devices, FDA clearance for marketing is required but
is not determinative of whether those prerequisites for Medicare coverage have
been met. In particular, although the FDA may grant approval to market a
medical device, the HCFA, a state health care agency or a third-party payor
could independently determine not to approve coverage for the use of a
particular medical device.
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While a limited number of national coverage decisions are made by
HCFA, in general, the determination of whether a procedure or device satisfies
these standards is made by the Medicare carrier or intermediary which processes
claims for reimbursement within that carrier's or intermediary's jurisdiction.
The unavailability of third-party coverage or the inadequacy of the
reimbursement for medical procedures using the Company's products, including
any future product that the Company may develop or acquire, would adversely
affect the Company's business, financial condition and results of operations.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, may be enacted or adopted in the future relating to the
Company's business or the health care industry, including third-party coverage
and reimbursement, or what effect any such legislation or regulation may have
on the Company.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of MIS products by the Company
entails the risk of product liability claims, involving both potential
financial exposure and associated adverse publicity. The Company's current
product liability insurance coverage limits are $1,000,000 per occurrence and
$2,000,000 in the aggregate, and there can be no assurance that such coverage
limits are adequate to protect the Company from any liabilities it might incur
in connection with the development, manufacture and sale of its current and
potential products. In addition, the insurance is expensive and may not be
available in the future on acceptable terms, or at all. In addition, if such
insurance is available, there can be no assurance that the limits of coverage
of such policies will be adequate. A successful product liability claim in
excess of the Company's insurance coverage could have a material adverse effect
on the Company's business, financial condition or results of operations.
The Company's business exposes it to potential product liability risks
which are inherent in the design, manufacture and marketing of medical devices.
The Company has not experienced any product liability claims to date. The
Company currently maintains product liability insurance coverage in the
aggregate annual amount of $2,000,000. There can be no assurance that product
liability claims will not exceed such insurance coverage limits, which could
have a material adverse effect on the Company. Product liability claims or
product recalls in the future, regardless of their ultimate outcome, could have
a material adverse effect on the Company's business and reputation and on its
ability to attract and retain customers for its products.
ADDITIONAL BUSINESS RISKS
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. The Company has
experienced operating losses since its inception on January 1, 1989. At
December 31, 1997, the Company had an accumulated deficit of approximately
$17.35 million. Prior to the acquisitions of GME, KMI and VMI, the Company was
a development stage company focused primarily on obtaining FDA approval of two
medical devices. However, the Company has determined not to initiate any
further work on obtaining FDA approval of the devices unless an appropriate
corporate partner can be identified. Primarily as a result of its acquisitions
in 1996 and 1997, the Company generated revenues of approximately $14.3 million
during the year ended December 31, 1997.
In the future, the Company expects to have increased cash outflow
requirements as a result of expenditures related to the expansion of sales and
marketing activity, expansion of manufacturing capacity, compliance with
regulatory requirements, and possible investment in or acquisition of
additional complementary products, technologies or businesses. The cash needs
of the Company have changed significantly as a result of the acquisitions
completed during the last two years and the support requirements of the added
business focus areas. 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.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL
WILL BE AVAILABLE. The Company's capital requirements will depend on numerous
factors, including market acceptance and demand for its products; the resources
the Company devotes to the development, manufacture and marketing of its
products; the progress of the Company's product development programs; the
receipt of, and the time required to obtain, regulatory clearances and
approvals; the resources required to protect the Company's intellectual
property; the resources expended, if any, to acquire complementary businesses,
products and technologies; and other factors. The timing and amount of such
capital requirements cannot be accurately predicted. Funds may also be used
for the acquisition of businesses, products and technologies that are
complementary to those marketed by the Company. Consequently, although the
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Company believes that its revenues and other sources of liquidity will provide
adequate funding for its capital requirements through at least 1998, the
Company may be required to raise additional funds through public or private
financings, collaborative relationships or other arrangements. 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 attractive to the
Company or at all. Any additional equity financings may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants.
ACQUISITION INTEGRATION. The Company's growth in recent years has
resulted from acquisitions, which involve certain operational and financial
risks. Although many of the acquired companies had significant operating
histories, the Company has limited experience owning and operating them on a
consolidated basis. Operational risks associated with an acquisition include
the possibility that an acquisition does not ultimately provide the benefits
originally anticipated by the Company's management, while the Company continues
to incur operating expenses to provide the services formerly provided by the
acquired company. Financial risks involve the incurrence of indebtedness as a
result of the acquisition and the consequent need to service that indebtedness.
In addition, the issuance of stock in connection with acquisitions dilutes the
voting power and may dilute the economic interests of existing stockholders.
As part of the Company's growth strategy, the Company will continue to review
acquisition opportunities in the future. In carrying out its acquisition
strategy, the Company attempts to minimize the risk of unexpected liabilities
and contingencies associated with acquired businesses through planning,
investigation and negotiation, but there is no assurance that it will be
successful in doing so. There can be no assurance that recent or future
acquisitions can be readily assimilated into the Company's operating structure.
Inability to efficiently integrate acquired companies could have a material
adverse effect on the Company's financial condition and results of operations.
The Company does not currently have any commitments or agreements with respect
to any material acquisitions.
MANAGEMENT OF GROWTH. The rapid growth of the Company's business has
required the Company to make significant additions in personnel and has
significantly increased the Company's working capital requirements. Although
the Company has experienced significant sales growth in 1996 and 1997, such
growth should not be considered indicative of future sales growth. Such growth
has resulted in new and increased responsibilities for management personnel and
has placed and continues to place a significant strain upon the Company's
management, operating and financial systems, and other resources. There can be
no assurance that the strain placed upon the Company's management, operating
and financial systems, and other resources will not have a material adverse
effect on the Company's business, financial condition, and results of
operations, nor can there be any assurance that the Company will be able to
attract or retain sufficient personnel to continue the expansion of its
operations. Also crucial to the Company's success in managing its growth will
be its ability to achieve additional economies of scale. There can be no
assurance that the Company will be able to achieve such economies of scale, and
the failure to do so could have a material adverse effect on the Company's
business, financial condition, and results of operations.
To manage the expansion of its operations, the Company must
continuously evaluate the adequacy of its management structure and its existing
systems and procedures, including, among others, its data processing,
financial, and internal control systems. When entering new geographic markets,
the Company will be required, on a timely and cost- effective basis, to hire
personnel, establish suitable distribution centers, and adapt the Company's
distribution systems and procedures to these new markets. There can be no
assurance that management will adequately anticipate all of the changing
demands that growth could impose on the Company's systems, procedures, and
structure. In addition, the Company will be required to react to changes in
the MIS distribution industry, and there can be no assurance that it will be
able to do so successfully. Any failure to adequately anticipate and respond
to such changing demands may have a material adverse effect on the Company's
business, financial condition, or results of operations.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF
LOW PRICED STOCKS. If the Company fails to maintain the qualification for its
Common Stock to trade on the Nasdaq SmallCap Market, its securities could be
subject to delisting. The Nasdaq Stock Market recently announced increases in
the quantitative standards for maintenance of listings on The Nasdaq SmallCap
Market. The revised standards for continued listing, which became effective in
February 1998, include maintenance of any of (x) $2,000,000 of net tangible
assets, (y) $35,000,000 of market capitalization or (z) $500,000 of net income
for two of the last three years and a minimum bid price per share of $1.00.
Although the Company is currently in compliance with the new Nasdaq SmallCap
Market continued listing requirements, no assurances can be given that the
Company will be able to maintain such compliance in the future. In the event
the Company is unable to satisfy the continued listing requirements, trading,
if any, in the Common Stock would thereafter be conducted in the
over-the-counter markets in the so-called "pink sheets" or the National
Association of Securities Dealer's
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"Electronic Bulletin Board." Consequently, the liquidity of the Company's
Common Stock would likely be impaired, not only in the number of shares which
could be bought and sold, but also through delays in the timing of the
transactions, reduction in security analysts' and the news media's coverage, if
any, of the Company and lower prices for the Company's securities than might
otherwise prevail.
In addition, if the Common Stock were to become delisted from trading
on the Nasdaq SmallCap Market and the trading price of the Common Stock were
below $5.00 per share, trading in the Common Stock would also be subject to the
requirements of certain rules promulgated under the Exchange Act, which require
additional disclosures by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors (which are generally institutions). For these types
of transactions, the broker-dealer must make a special suitability
determination for the purchase and have received the purchaser's written
consent to the transaction prior to the sale. The additional burdens imposed
upon broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in the Common Stock which could severely limit the
market liquidity of Common Stock and the ability of purchasers in this offering
to sell their shares of Common Stock in the secondary market.
RELIANCE ON FUTURE PRODUCTS AND NEW APPLICATIONS; UNCERTAINTY OF
TECHNOLOGY CHANGES. The markets for the Company's products are characterized
by rapid, unpredictable and significant technological change. Competition in
the Company's industry is intense. Many of the Company's competitors have
greater financial resources, research and development capabilities and more
experience in obtaining regulatory approvals, manufacturing and marketing than
the Company. Accordingly, these competitors may succeed in developing,
obtaining regulatory approval for and some have commercialized their products
more rapidly than the Company. There can be no assurance that developments by
the Company's competitors or potential competitors will not render the
Company's MIS products non-competitive, uneconomical or obsolete. There can be
no assurance that the Company will be able to successfully obtain new MIS
products or technologies, manufacture products in commercial volumes or gain
market acceptance of its products or the products of others. Delays in
development, manufacturing or market acceptance of new or enhanced products
could have a material adverse effect on the Company's business, financial
condition and results of operations. The future success of the Company will
also depend upon, among other factors, its ability to obtain and distribute new
and enhanced versions of products in a timely fashion.
STOCK PRICE VOLATILITY. The stock market in general, and stocks of
medical device companies in particular, have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These broad market fluctuations have in
the past and may continue in the future to adversely affect the market price of
the Company's Common Stock. In addition, the market price of the Common Stock
has been and is likely to continue to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, the FDA and
international regulatory actions, actions with respect to reimbursement
matters, developments with respect to patents of proprietary rights, public
concern as to the safety of products developed or marketed by the Company or
others, changes in health care policy in the United States and internationally,
changes in stock market analyst recommendations regarding the Company, or the
medical device industry generally or general market conditions may have a
significant effect on the market price of the Company's Common Stock.
RIGHTS AGREEMENT. On June 21, 1995, the Board of Directors of the
Company declared a dividend of one Common Stock purchase right (a "Right") for
each share of Common Stock outstanding. Each Right entitles the holder to
purchase one share of the Company's Common Stock at an initial exercise price
of $7.00 per share, subject to adjustment, upon the terms and subject to the
conditions set forth in a Rights Agreement dated as of June 20, 1995, between
the Company and American Stock Transfer & Trust Company, as the Rights Agent.
The Rights trade with the Common Stock and will not detach from the Common
Stock or become exercisable until the earlier of (i) ten business days after a
public announcement that a person or group of affiliated or associate persons
("Acquiring Person") has acquired beneficial ownership of 15% or more of the
Company's Common Stock (a "Shares Acquisition Date") and (ii) ten business days
after the commencement of, or the first public announcement of an intention to
make, a tender offer or exchange offer for the Common Stock, the consummation
of which would result in beneficial ownership by a person or group.
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If any person or group which acquires beneficial ownership of 15% or
more of the outstanding shares of the Company's Common Stock, each Right (other
than the Rights held by the Acquiring Person, which shall be void), will
entitle its holder to purchase at the exercise price an additional number of
shares of Common Stock equal to the amount determined by dividing the exercise
price by 50% of the then current market price of the Common Stock.
In addition, if following the Shares Acquisition Date, the Company is
acquired in a merger or other business- combination transaction, or sells more
than 50% of its assets or earning power to any person, each Right (other than
those beneficially held by an Acquiring Person) will entitle its holder to
purchase at the existing exercise price a number of shares of common stock of
the acquiring company having twice the value of the exercise price.
The Company may redeem the Rights at $.02 per Right at any time on or
prior to the tenth business day following the first public announcement of the
acquisition by a person of 15% or more of its Common Stock or the commencement
of a tender offer or exchange offer for such 15% ownership.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group who attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being
acquired. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors of the Company since the Board
of Directors may, at its option, at any time prior to the close of business on
the tenth business day after the Shares Acquisition Date, redeem all the then
outstanding Rights at a price of $.02 per Right.
AUTHORIZATION OF PREFERRED STOCK. The Company's Certificate of
Incorporation authorizes the issuance of preferred stock with designations,
rights and preferences determined from time to time by its Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting or
other rights that could adversely affect the voting power or other rights of
the holders of the Common Stock. In the event of issuance, the preferred stock
could be used, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. Although the
Company has no present intention to issue any additional shares of its
preferred stock, there can be no assurance that it will not do so in the
future.
NONPAYMENT OF DIVIDENDS. The Company has never declared or paid
dividends on Common Stock and does not anticipate paying dividends on Common
Stock at any time in the foreseeable future. The terms of certain of the
Company's loan agreements restrict the payment of dividends.
EMPLOYEES
As of March 16, 1998, the Company employed approximately 91 persons.
None of the Company's employees are represented by a union for collective
bargaining purposes. The Company considers its relations with its employees to
be satisfactory.
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<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company and their names, ages,
positions and tenure with the Company are as follows:
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
---- --- -------- -----
<S> <C> <C> <C>
Randall K. Boatright 49 Interim President and Chief Executive 1992
Officer, Chief Financial Officer and
Secretary
Richard H. Klein 45 Vice President 1996
K.C. Fadem 39 Vice President 1996
Robert Fadem 36 Vice President 1996
William H. Bookwalter 32 Vice President 1997
</TABLE>
K.C. Fadem and Robert Fadem are brothers. There are no other family
relationships among the officers listed. In connection with the Klein Merger,
Richard H. Klein was made a Vice President of the Company. In connection with
the Val-U-Med Merger, K.C. Fadem and Robert Fadem were made Vice Presidents of
the Company. In connection with the Bookwalter Merger, William H. Bookwalter
was made a Vice President of the Company. There are no other arrangements or
understandings pursuant to which any of the other officers listed were elected
as officers. Officers are elected annually by the Board of Directors at its
first meeting following the Annual Meeting of Stockholders, each to hold office
until the corresponding meeting of the Board in the next year or until his
successor shall have been elected or shall have been qualified.
ITEM 2. PROPERTIES
The Company currently leases corporate headquarters and distribution
facilities in San Antonio, Texas, under a lease expiring in May 2002. The
Company currently leases office and distribution facilities in Atlanta,
Georgia, under a lease expiring in March 2002, and office and distribution
facilities in Milford, Massachusetts under a lease expiring in March 2002.
During 1997 the Company paid aggregate rentals of approximately $249,000.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock, $.001 par value ("Common Stock"), of the Company
trades on the Nasdaq SmallCap Market under the symbol "LQMD" and commenced
trading in August 1992. The following table presents the range of high and low
sales prices for the Common Stock as reported by the Nasdaq Stock Market for
the periods indicated. The quotations represent prices in the over-the-counter
market between dealers in securities, do not include retail markup, markdown or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
Fiscal 1997:
-----------
Fourth Quarter $5 3/8 $3 5/8
Third Quarter 5 1/4 4 1/8
Second Quarter 5 1/8 4 1/8
First Quarter 5 1/2 2 7/8
Fiscal 1996:
-----------
Fourth Quarter $3 3/4 $1 7/8
Third Quarter 2 1/2 1 3/8
Second Quarter 3 5/8 2
First Quarter 4 1/8 2 1/4
</TABLE>
At March 18, 1998, there were approximately 200 record holders of
Common Stock and approximately 1,560 beneficial holders of Common Stock.
The Company has not in the past declared any cash dividends on the
Common Stock, and does not anticipate paying dividends on the Common Stock at
any time in the foreseeable future.
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<PAGE> 19
ITEM 6. 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 generated minimal operating revenues and,
thus, was unprofitable. As of December 31, 1997, the Company had an
accumulated deficit of approximately $17,353,000. 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.
The Company's future operating results will depend on many factors,
including 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 to create, obtain and maintain scientifically advanced technology,
the ability of the Company's customers to be reimbursed by third-party payors
and other factors described in this Annual Report on Form 10-KSB.
Effective September 1997, W. H. Bookwalter and Associates, Inc., a
Vermont corporation ("Bookwalter"), was acquired by the Company and merged into
Val-U-Med, Inc., a Nevada corporation and a wholly-owned subsidiary of the
Company ("Val-U-Med"), in consideration 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 are included in the consolidated financial statements contained
herein for all periods reported therein. Bookwalter business activity will
provide the Company with distribution coverage in the northeastern region of
the United States.
Effective September 1997, Mishbucha, Inc., a Texas corporation d/b/a
Medex Surgical ("Medex Surgical"), was acquired by the Company and merged into
Klein Medical, Inc., a Nevada corporation and a wholly-owned subsidiary of the
Company ("Klein"), in consideration for an aggregate of 98,246 shares of Common
Stock. Medex Surgical was formed during 1997 and the transaction was accounted
for using the pooling-of-interests accounting method; therefore, the assets,
liabilities, and operations of Medex Surgical are included in the consolidated
financial statements contained herein for 1997. Medex Surgical business
activity will allow the Company to further expand its geographical area.
Effective June 1997, Trimedica, Inc., a Colorado corporation
("Trimedica"), was acquired by the Company and merged into Klein in
consideration 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 are included in
the consolidated financial statements contained herein for all periods reported
therein. Trimedica business activity provides the Company with distribution
coverage in the Rocky Mountain region, and is managed by the Company's
Orthopedic Sales Division.
In December 1996, Val-U-Med, Inc., a Georgia corporation ("VMI"), was
acquired by the Company and merged into Val-U-Med in consideration for an
aggregate of 1,200,000 shares of Common Stock and an aggregate of $400,000.
The transaction was accounted for using the purchase method of accounting;
therefore, the assets, liabilities and operations of VMI prior its acquisition
by the Company are not included in the consolidated financial statements
contained herein.
In November 1996, Klein Medical, Inc., a Texas corporation ("KMI"),
was acquired by the Company and merged into Klein in consideration for an
aggregate of 600,000 shares of Common Stock. The transaction was accounted for
using the pooling-of-interests accounting method; therefore, the assets,
liabilities, and operations of KMI are included in the consolidated financial
statements contained herein for all periods reported therein.
In February 1996, the Company completed the merger of GM Engineering,
Inc., a California corporation ("GME"), with and into LifeQuest Endoscopic
Technologies, Inc., ("LQET") a Nevada corporation and wholly owned subsidiary
of the Company, in consideration for 350,000 shares of 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 contained herein for all periods reported
therein.
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<PAGE> 20
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 percent
interest in ValQuest. The Company contributed $400,000 to be used as working
capital in exchange for a 55 percent interest in ValQuest. Subsequent
purchases of stock have increased the Company's current ownership interest in
ValQuest to 82 percent.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had current assets of $7,614,000 and
current liabilities of $3,439,000 resulting in working capital of $4,175,000.
This compares to a working capital position of $3,000,000 at December 31, 1996.
The increase in working capital is primarily due to a $4,000,000 private
placement of shares of Common Stock and 9% convertible debentures with two
affiliates of Renaissance Capital Group, Inc. ("Renaissance") in December 1997.
Pursuant to the terms of the private placement, the Company issued to
two affiliates of Renaissance an aggregate of (i) 250,000 shares of Common
Stock at a per share purchase price of $4.00, and (ii) 9% convertible
debentures in an aggregate amount of $3,000,000. The debentures mature in
December 2004 and are convertible at any time prior to maturity into shares of
Common Stock at a conversion price not to exceed $4.00. Unless the debentures
are earlier converted, the Company shall make interest payments on the
debentures for three years, and then payments of principal and interest until
maturity.
On February 26, 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 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 private placement described above. There was no outstanding balance
on the line of credit at December 31, 1997.
Capital expenditures, including purchase business combinations, were
$450,000 during 1997. The Company anticipates further capital expenditures as
the Company's geographical expansion continues.
In December 1997, the Company entered into an agreement to acquire
approximately 20 percent of the stock of TFX Holding Co. ("TFX") for
$1,000,000, which was paid in January 1998. The Company recognized no revenues
or expenses associated with TFX during 1997.
In December 1997, the Company and Canwell Medical, Inc. formed Canwell
Surgical, Inc. ("Canwell"). Canwell is 50 percent owned by the Company and
Canwell Medical, Inc. and was formed for the purpose of selling minimally
invasive surgical products in China and other Asian countries. The Company
recognized no revenues or expenses associated with Canwell during 1997. In
January 1998, the Company loaned $100,000 to Canwell for initial working
capital requirements. The loan is unsecured and bears interest at 9 percent
with the principal maturing in January 2000.
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 during 1998.
However, additional capital may be required in order for the Company to take
advantage of any additional attractive 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 attractive to the Company or at
all.
RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 1997
For the year ended December 31, 1997, the Company reported a net loss
of $2,997,000 or $.48 per basic and diluted share. This compares with a net
loss of $1,958,000, or $.40 per basic and diluted share for the year ended
December 31, 1996. The increase in the net loss for the year was primarily
caused by costs associated with the Company's acceleration of the geographic
expansion of
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<PAGE> 21
its business activity and sales force and distribution and sales support
infrastructure and due to expenses incurred during the development of the
Company's own SST brand of trocars and cannulas. During the year ended December
31, 1997, the Company's sales force grew in excess of 200% and its distribution
coverage expanded to include 32 states and one Canadian province. The sales
force expansion was necessary to prepare for two major product introductions the
Company has planned for 1998, which significantly increased selling, general and
administrative expenses as discussed below.
In March 1998 the Company launched distribution of the patented
Dexterity(R) Pneumo Sleeve and Dexterity(R) Protractor in the United States.
The Dexterity(R) devices are owned by TFX Holding Company, a business
development subsidiary of Teleflex, Inc. (NYSE:TFX). The Company owns
approximately 20% of the voting common stock of TFX Holding Company.
The Pneumo Sleeve is a device that allows the surgeon to insert one
hand into the abdominal cavity while preserving pneumoperitoneum during
laparoscopic surgery. This new surgical modality, called Hand Assisted
Laparoscopic Surgery (HALS), is a hybrid between open and laparoscopic surgery.
This enabling technology is expected to greatly increase the number of advanced
minimal access surgeries as well as the number of surgeons who perform these
procedures. The U.S. market potential for the Dexterity(R) Pneumo Sleeve is
estimated at more than 580,000 procedures annually, including digestive tract
surgery, urinary tract surgery, organ transplants, cancer surgery and vascular
surgery. This translates into an estimated $600 million U.S. market for
Dexterity(R) procedural kits, which include accessory devices such as hand-held
surgical instruments.
In addition to being used with the Dexterity(R) Pneumo Sleeve, the
Dexterity(R) Protractor is used as a stand- alone product for open surgery,
providing atraumatic retraction and wound protection. The market potential for
the Dexterity(R) Protractor is estimated at 2.4 million surgical procedures per
year in the United State, representing a dollar market potential in excess of
$200 million.
The Company has the option to acquire the exclusive U.S. distribution
rights to a patented state-of-the-art clip applier which management believes is
superior to currently available clip appliers. The 5mm clip applier is less
invasive than the 10mm clip appliers which currently dominate the U.S. market.
LifeQuest plans to exercise such option and introduce this product as soon as
its manufacturing assembly line preparations are complete, which the Company
estimates will be in the second quarter of 1998. Clip appliers are crucial
instruments for surgeons working in the abdomen and chest because they provide
the simplest, quickest and most effective means of occluding structures such as
small blood vessels and ducts, thus decreasing total surgical and anesthesia
time.
The Company believes the potential exists for significant market
penetration by both of these products, and that sales of the Company's existing
product lines should benefit from these product introductions. The Company
expects that both products shall become integral components of LifeQuest's
Lapro-PAK surgical procedure kits.
Product sales increased 140% in 1997 as compared with 1996. Product
sales were $13,428,000 for 1997 and $5,595,000 for 1996. The increase was due
to continued sales growth throughout the Company and the inclusion in 1997 of
companies acquired by the Company in 1997 and 1996.
Gross profit from product sales was $4,727,000 in 1997 versus
$2,099,000 in 1996. The corresponding gross profit margins were 35% in 1997 and
38% in 1996. The decrease in margins for 1997 was a result of certain inventory
adjustments relative to discontinued product lines as well as inventory consumed
as demonstration units in the sales function. On July 18, 1997, the Company
completed its previously announced relocation which combined its corporate
offices, San Antonio warehouse and distribution center, repair and service
center, and manufacturing facility in one new San Antonio location. The Company
believes this move and the related February 1997 move of Val-U-Med and the
Atlanta distribution center into a new larger facility prepares the Company for
continued growth and positions the Company to capture further operating
efficiencies.
Research and development expenses for 1997 were $32,000, as compared
to $398,000 for 1996. The decrease is due to the Company's decision to
severely curtail research activity and to concentrate its resources on sales
growth through geographical and product line expansion.
In 1997, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Company's infrastructure, increased to $8,188,000 in 1997 from $3,933,000
in 1996. The increased costs reflect higher sales commissions
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<PAGE> 22
due to the growth in Company sales, increased costs related to developing and
supporting an infrastructure necessary to integrate the Company's acquisitions
during 1996 and 1997 and costs associated with development of a new customized
line of trocars and cannulas.
The minority interest in net loss of consolidated subsidiary reflects
the minority ownership share of ValQuest's operations.
Investment income represents interest earned on the Company's
short-term investments. Therefore, investment income declined in 1997 to
$83,000 from $209,000 in 1996, due to a commensurate decline in the level of
short-term investments of the Company from 1997 to 1996.
RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 1996
Net loss for the year ended December 31, 1996 was $1,958,000, a
decrease of 12 percent from the $2,215,000 net loss for the year ended December
31, 1995. The decline was primarily due to a reduction in expenses and an
increase in gross profit margins as detailed hereinafter.
Gross profit from sales was $2,100,000 in 1996 versus $1,419,000 in
1995. The corresponding gross profit margins were 37 percent in 1996 and 28
percent in 1995. The improvement in margins was primarily due to the upgrading
of facilities and increased employee training which both contribute to better
efficiencies.
Research and development expenses decreased 45 percent in 1996 from
1995. This decline was due to the Company's decision to severely curtail
research activity and to concentrate its resources on sales growth through
geographical and product line expansion.
Selling, general and administrative expenses, which consist primarily
of sales commissions, salaries and other costs necessary to support the
Company's infrastructure, increased 23 percent to $3,933,000 in 1996 from
$3,191,000 in 1995. This comparative increase was primarily a result of the
Company's expanded sales force.
The minority interest in net loss of consolidated subsidiary of
$21,000 in 1996 reflects the minority ownership share of the ValQuest net loss.
This interest in ValQuest net loss was down 85 percent from 1995 which reflects
the smaller loss from ValQuest.
Investment income represents interest earned on the Company's short
term investments. Investment income declined from $347,000 in 1995 to $209,000
in 1996 as the level of short term investments declined from year to year.
Merger and acquisition costs of $254,000 in 1996 include legal,
accounting and testing expenses incurred during the acquisitions of GME, Klein
and Val-U-Med.
INCOME TAX
As of December 31, 1997, the Company had net operating loss (NOL)
carryforwards of approximately $14,300,000 for federal income tax purposes that
are available to reduce future taxable income and will expire in 2006 through
2012 if not utilized. 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 and if associated 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 also has research and development credit
carryforwards available to offset future income taxes and expire in 2005
through 2010.
As there is no assurance of future income, a 100% valuation reserve in
1996 and 1997 has been established against the Company's deferred tax assets.
The Company will continue to evaluate the necessity for such valuation reserve
in the future.
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, the
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<PAGE> 23
Company's existing NOL carryforwards are subject to limitation. Additionally,
because the Code limits the time during which NOL and tax credit carryforwards
may be applied against future taxable income and tax liabilities, the Company
may not be able to take full advantage of its NOL and tax credits for federal
income tax purposes.
YEAR 2000 COMPLIANCE
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
the year 2000, such systems may not properly recognize such 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 will not have a material effect on its financial
position or results of operations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data described in Item
13(a) herein are attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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<PAGE> 24
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item will be contained in the
Company's Proxy Statement for 1998 Annual Meeting, which is incorporated herein
by reference.
See also "Executive Officers of the Registrant" under Part I, Item 1,
herein.
ITEM 10. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the
Company's Proxy Statement for 1998 Annual Meeting, which is incorporated herein
by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information required under this Item will be contained in the
Company's Proxy Statement for 1998 Annual Meeting, which is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the
Company's Proxy Statement for 1998 Annual Meeting, which is incorporated herein
by reference.
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PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets at December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations for the years ended December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity for the years ended December 31, 1996 and 1997 . . . . . . . . . . . . F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1997 . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
</TABLE>
2. EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
<S> <C>
2.1 Plan of Merger and Acquisition Agreement dated February 13, 1996, but effective as of January 1, 1996,
among LifeQuest Medical, Inc., LifeQuest Endoscopic Technologies, Inc., GM Engineering, Inc., Gregory
M. Miles and Susan G. Miles (incorporated by reference herein to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed February 27, 1996).
2.2 Plan of Merger and Acquisition Agreement dated November 27, 1996, among LifeQuest Medical, Inc., Klein
Medical Acquisition Co., Klein Medical, Inc. and Richard H. Klein (incorporated by reference herein to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed December 12, 1996).
2.3 Plan of Merger and Acquisition Agreement dated December 27, 1996, among LifeQuest Medical, Inc., Val-U-
Med Acquisition Co., Val-U-Med, Inc. and the Stockholders of Val-U-Med, Inc. (incorporated by reference
herein to Exhibit 2.1 to the Company's Current Report on Form 8-K filed January 10, 1997).
2.4 Plan of Merger and Acquisition Agreement dated June 30, 1997, among LifeQuest Medical, Inc., Klein
Medical, Inc., Trimedica, Inc., and Mark Lovejoy. (incorporated by reference herein to Exhibit 2.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ending June 30, 1997).
2.5 Plan of Merger and Acquisition Agreement dated September 30, 1997, among LifeQuest Medical, Inc., Val-
U-Med, Inc., W. H. Bookwalter & Associates, Inc., and the shareholders of W. H. Bookwalter &
Associates, Inc. (incorporated by reference herein to Exhibit 21.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ending September 30, 1997).
2.6 Plan of Merger and Acquisition Agreement dated October 7, 1997, among LifeQuest Medical, Inc., Klein
Medical, Inc., Mishbucha, Inc. d/b/a Medex Surgical, Inc., Edward Kraus, and Robert Kraus (incorporated
by reference herein to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1997).
2.7* Plan of Merger and Acquisition Agreement dated December 30, 1997, among LifeQuest Medical, Inc.,
LifeQuest Endoscopic Technologies, Inc., Klein Medical, Inc. and Val-U-Med, Inc.
</TABLE>
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<PAGE> 26
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of the Registrant (incorporated by reference herein to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 filed on August 19,1992, Registration No. 33-49196).
3.2 Bylaws of the Registrant (incorporated by reference herein to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 filed on August 19, 1992, Registration No. 33-49196).
4.1* Convertible Loan Agreement among the Company, Renaissance Capital Growth and Income Fund III, Inc.,
Renaissance US Growth and Income Trust PLC and Renaissance Capital Group, Inc. dated December 19, 1997.
10.1 1989 Stock Option Plan of LifeQuest Medical, Inc. (incorporated by reference herein to Exhibit 4.4 to
the Company's Registration Statement on Form S-8 filed on October 12, 1993, Registration No. 33-70174).
10.2 Employment Agreement dated February 15, 1992, between LifeQuest Medical, Inc. and Herbert H. Spoon
(incorporated by reference herein to Exhibit 10.8 to the Company's Registration Statement on Form S-1
filed on August 19, 1992, Registration No. 33-49196).
10.3 Incentive Stock Option Agreement dated January 15, 1990, between LifeQuest Medical, Inc. and Herbert H.
Spoon (incorporated herein to Exhibit 10.12 to the Company's Registration Statement on Form S-1 filed
on August 19, 1992, Registration No. 33-49196).
10.4 Patent License Agreement dated January 1, 1989, between LifeQuest Medical, Inc. and The Board of
Regents of the University of Texas System, as amended by instrument dated November 1, 1989
(incorporated herein to Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed on
August 19, 1992, Registration No. 33-49196).
10.5 License Agreement dated June 26, 1992, between LifeQuest Medical, Inc. and George C. Kramer, Ph.D.
(incorporated herein to Exhibit 10.22 to the Company's Registration Statement on Form S-1 filed on
August 19, 1992, Registration No. 33-49196).
10.6 Incentive Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and Herbert H.
Spoon (incorporated herein by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.7 Incentive Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and Randall K.
Boatright (incorporated herein by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994).
10.8 Incentive Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and David J.
Collette, M.D. (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.9 1994 Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.10 Non-Qualified Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and Robert
B. Johnson (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
10.11 Non-Qualified Stock Option Agreement dated March 2, 1995, between LifeQuest Medical, Inc. and Jeffrey
H. Berg, Ph.D. (incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
</TABLE>
-25-
<PAGE> 27
<TABLE>
<S> <C>
10.12 ValQuest Medical, Inc. 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.13 Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and Herbert H.
Spoon (incorporated herein by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.14 Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and Randall K.
Boatright (incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994).
10.15 Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and David J.
Collette, M.D. (incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.16 Non-Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and Robert
B. Johnson (incorporated herein by reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
10.17 Assignment and License Agreement dated May 11, 1994, between ValQuest Medical, Inc. and Fibotech, Inc.
d/b/a Valdor Fiber Optics (incorporated herein by reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994).
10.18 Employment Agreement dated November 27, 1996, between Klein Medical Acquisition Co. and Richard H.
Klein (incorporated by reference herein to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed December 12, 1996).
10.19 Non-Qualified Stock Option Agreement dated November 27, 1996, between LifeQuest Medical, Inc. and
Richard H. Klein (incorporated by reference herein to Exhibit 10.2 to the Company's Current Report on
Form 8-K filed December 12, 1996).
10.20 Employment Agreement dated December 27, 1996, between Val-U-Med Acquisition Co. and K.C. Fadem
(incorporated by reference herein to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
January 10, 1997).
10.21 Non-Qualified Stock Option Agreement dated December 27, 1996, between LifeQuest Medical, Inc. and K.C.
Fadem (incorporated by reference herein to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed January 10, 1997).
10.22 Employment Agreement dated December 27, 1996, between Val-U-Med Acquisition Co. and Robert Fadem
(incorporated by reference herein to Exhibit 10.3 to the Company's Current Report on Form 8-K filed
January 10, 1997).
10.23 Non-Qualified Stock Option Agreement dated December 27, 1996, between LifeQuest Medical, Inc. and
Robert Fadem (incorporated by reference herein to Exhibit 10.4 to the Company's Current Report on Form
8-K filed January 10, 1997).
10.24 Lease Agreement dated April 28, 1997, between Interpark Jack Limited Partnership and LifeQuest Medical,
Inc. (incorporated by reference herein to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997).
10.25 Lease Agreement dated March 1, 1997, between Williams North Fulton Group and the Company (incorporated
by reference herein to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997).
</TABLE>
-26-
<PAGE> 28
<TABLE>
<S> <C>
10.26 Employment Agreement dated September 30, 1997, between William H. Bookwalter and the Company
(incorporated by reference herein to Exhibit No. 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997).
11* Computation of earnings (loss) per share
22 Subsidiaries
Name Under Which
Name State of Incorporation Doing Business
---- ---------------------- ----------------
ValQuest Medical, Inc. Nevada ValQuest Medical, Inc.
23* Consent of Arthur Andersen LLP
27* Financial Data Schedule
</TABLE>
- -------------------------------
* Filed herewith
(b) REPORTS ON FORM 8-K
(1) Form 8-K dated December 27, 1996 and filed January 10, 1997
described the merger of Val-U-Med, Inc., a Georgia
corporation, with and into Val-U-Med Acquisition Co., a Nevada
corporation and newly formed, wholly owned subsidiary of
LifeQuest Medical, Inc.
(2) Form 8-K/A Amendment No. 1, was filed February 7, 1997, which
provided the financial statements, pro forma financial
information and exhibits pertaining to the previously
announced merger of Klein Medical, Inc., a Texas corporation
with and into Klein Medical, Inc., a Nevada corporation and
newly formed, wholly owned subsidiary of LifeQuest Medical,
Inc.
(3) Form 8-K/A, Amendment No. 1, was filed March 12, 1997 which
provided the financial statements, pro forma financial
information and exhibits pertaining to the previously
announced merger of Val-U-Med, Inc., a Georgia corporation
with and into Val-U-Med, Inc., a Nevada corporation and newly
formed, wholly owned subsidiary of LifeQuest Medical, Inc.
-27-
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 27, 1998 By /s/ Randall K. Boatright
------------------------------------------
Randall K. Boatright
Interim President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Randall K. Boatright Interim President and Chief March 27, 1998
--------------------------------- Executive Officer, Chief
Randall K. Boatright Financial Officer and Director
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
/s/ Robert B. Johnson Director March 27, 1998
---------------------------------
Robert B. Johnson
/s/ K.C. Fadem Director March 27, 1998
-----------------------------
K.C. Fadem
/s/ Jeffrey H. Berg, Ph.D. Director March 27, 1998
---------------------------------
Jeffrey H. Berg, Ph.D.
/s/ Richard H. Klein Director March 27, 1998
---------------------------------
Richard H. Klein
/s/ Robert L. Evans Director March 27, 1998
---------------------------------
Robert L. Evans
/s/ William H. Bookwalter Director March 27, 1998
--------------------------------
William J. Bookwalter
</TABLE>
-28-
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of LifeQuest Medical, Inc.:
We have audited the accompanying consolidated balance sheets of
LifeQuest Medical, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated 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 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 financial position of LifeQuest Medical,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 16, 1998
F-1
<PAGE> 31
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1996 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 294,143 $ 3,236,307
Short-term investments 2,464,743 144,682
Accounts receivable (net of allowance for doubtful accounts of
$231,891 in 1996 and $256,362 in 1997) 1,162,880 2,292,235
Accounts receivable from related party 14,871 17,710
Interest receivable 60,381 5,318
Inventories, net 1,628,913 1,745,523
Prepaid and other assets 74,379 172,209
-------------- --------------
Total current assets 5,700,310 7,613,984
-------------- --------------
Property, plant and equipment 1,253,277 1,541,376
Less-Accumulated depreciation (785,897) (922,437)
-------------- --------------
Net property, plant and equipment 467,380 618,939
-------------- --------------
Deferred finance charges -- 180,996
-------------- --------------
Intangible assets:
Licensed technology rights 441,358 441,358
Goodwill, net 2,677,142 1,882,839
-------------- --------------
Total assets $ 9,286,190 $ 10,738,116
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-2
<PAGE> 32
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
-------------- --------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,689,686 $ 2,605,366
Accrued expenses 998,965 826,695
Current portion of long-term debt and
capital lease obligations 11,577 6,838
-------------- --------------
Total current liabilities 2,700,228 3,438,899
Long-term debt and capital lease obligations 790,991 --
-------------- --------------
Minority interest 120,380 108,802
-------------- --------------
Convertible debentures -- 3,000,000
-------------- --------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.001 par value; 10,000,000 shares authorized;
shares issued and outstanding: 6,134,071 (1996)
and 6,653,883 (1997) 6,134 6,654
Additional paid-in capital 19,989,524 21,576,854
Deferred compensation -- (40,055)
Accumulated deficit (14,321,067) (17,353,038)
-------------- --------------
Total stockholders' equity 5,674,591 4,190,415
-------------- --------------
Total liabilities and stockholders' equity $ 9,286,190 $ 10,738,116
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-3
<PAGE> 33
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1997
------------ -------------
<S> <C> <C>
Retail value of product and commission sales $ 6,885,650 $ 17,903,295
============ =============
Net sales
Product sales $ 5,594,763 $ 13,427,839
Commissions earned 241,798 908,989
------------ -------------
5,836,561 14,336,828
============ =============
Cost and expenses:
Cost of sales 3,495,293 8,701,263
Research and development 398,438 32,424
Selling, general and administrative 3,932,545 8,188,384
Interest 62,598 83,788
Depreciation and amortization 138,907 432,160
------------ -------------
8,027,781 17,438,019
------------ -------------
Loss from operations (2,191,220) (3,101,191)
Other income:
Other 2,608 9,417
Investment income 209,152 83,069
------------ -------------
Net loss before minority interest (1,979,460) (3,008,705)
Minority interest in net loss of
consolidated subsidiary 20,984 11,578
------------ -------------
Net loss $ (1,958,476) $ (2,997,127)
============ ============
Basic and diluted loss per share of common stock $ (.40) $ (.48)
============ ============
Weighted average shares used in computing
basic and diluted loss per share of common stock 4,941,771 6,299,592
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-4
<PAGE> 34
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------
Shares $.001 Additional
Issued and Par Paid-In Deferred Accumulated
Outstanding Value Capital Compensation Deficit Total
----------- ----- --------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995 4,878,451 $ 4,879 $ 17,666,587 $ -- $ (12,299,424) $ 5,372,042
Contribution from stockholder -- -- 17,500 -- -- 17,500
Exercise of stock options 38,370 38 13,402 -- -- 13,440
Issuance of stock, finder's fee 17,250 17 30,635 -- -- 30,652
Issuance of stock, Val-U-Med 1,200,000 1,200 2,261,400 -- -- 2,262,600
acquisition
Trimedica dividend -- -- -- -- (63,167) (63,167)
Net loss -- -- -- -- (1,958,476) (1,958,476)
----------- -------- ------------ ----------- --------------- -----------
Balances, December 31, 1996 6,134,071 6,134 19,989,524 -- (14,321,067) 5,674,591
Exercise of stock options 121,566 122 131,304 -- -- 131,426
Trimedica dividend -- -- -- (34,844) (34,844)
Revaluation of stock options -- -- 78,346 (78,346) -- --
Compensation expense -- -- -- 38,291 -- 38,291
Sale of stock to officer 50,000 50 199,950 -- -- 200,000
Sale of stock 250,000 250 999,750 -- -- 1,000,000
Issuance of stock options to -- -- 158,611 -- -- 158,611
consultant
Issuance of stock, Medex Surgical 98,246 98 902 -- -- 1,000
acquisition
Issuance of stock for services by -- -- 18,467 -- -- 18,467
acquired entity
Net loss -- -- -- -- (2,997,127) (2,997,127)
----------- -------- ------------ ----------- -------------- -----------
Balances, December 31, 1997 6,653,883 $ 6,654 $21,576,854 $ (40,055) $ (17,353,038) $ 4,190,415
=========== ======== =========== =========== ============== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-5
<PAGE> 35
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,958,476) $ (2,997,127)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 138,907 432,160
Option expense -- 56,758
Issuance of stock, finder's fee 30,652 --
Issuance of stock and options to consultants 17,500 36,005
Loss on disposal of fixed assets 3,198 7,070
Minority interest in net loss of consolidated subsidiary (20,984) (11,578)
Changes in operating assets and liabilities
(Increase) in accounts receivable, net (129,634) (959,739)
Decrease in interest receivable, net 35,274 55,063
(Increase) in inventories (866,215) (121,408)
(Increase) decrease in prepaid and other assets (4,581) 24,776
(Increase) in accounts receivable from related parties (5,915) (2,839)
Increase in accounts payable 561,591 915,680
Increase in accrued expenses 261,034 316,567
-------------- --------------
Net cash used in operating activities (1,937,649) (2,248,612)
-------------- --------------
Cash flows from investing activities:
Additions to property, plant, and equipment (252,678) (378,679)
Acquisitions, net of cash received -- (70,462)
Cash paid in connection with Val-U-Med acquisition (400,000) --
Purchases of investments (2,464,743) (2,248,153)
Sale of investments 4,817,221 4,568,214
-------------- --------------
Net cash provided by investing activities 1,699,800 1,870,920
-------------- --------------
Cash flows from financing activities:
Additional capital contributed (2,847) --
Proceeds from issuance of notes payable 1,016,000 --
Proceeds from convertible debentures -- 3,000,000
Proceeds from issuance of common stock -- 1,200,000
Payments for deferred finance charges -- (180,996)
Proceeds from exercise of stock options 13,440 131,426
Payments to stockholder (27,599) --
Dividends paid by acquired entities (63,167) (34,844)
Payments on long-term debt and capital lease obligations (713,787) (795,730)
-------------- -------------
Net cash provided by financing activities 222,040 3,319,856
-------------- --------------
Net (decrease) increase in cash and cash equivalents (15,809) 2,942,164
Cash and cash equivalents, beginning of year 309,952 294,143
-------------- --------------
Cash and cash equivalents, end of year $ 294,143 $ 3,236,307
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-6
<PAGE> 36
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF LIFEQUEST AND RISK FACTORS
LifeQuest Medical, Inc., a Delaware corporation ("LifeQuest" or the
"Company"), was incorporated on December 23, 1988 and commenced operations on
January 1, 1989. LifeQuest is engaged in the development and commercialization
of proprietary and non-proprietary medical devices. In 1994, LifeQuest and
Valdor Fiber Optics formed ValQuest Medical, Inc., a Nevada corporation
("ValQuest"), a corporate joint venture (see Note 5). ValQuest currently
operates as an 82% owned subsidiary of LifeQuest. In December 1996, LifeQuest
completed the merger of Val-U-Med, Inc., a Georgia corporation ("VMI") with and
into Val-U-Med, Inc., a Nevada corporation ("Val-U-Med ") and wholly owned
subsidiary of LifeQuest. Val-U-Med merger was accounted for as a purchase
transaction. The accounts of Val-U-Med have been included since acquisition
date. In February 1996, LifeQuest completed the merger of GM Engineering,
Inc., a California corporation ("GME") with and into LifeQuest Endoscopic
Technologies, Inc., a Nevada corporation ("LQET") and wholly owned subsidiary
of LifeQuest. In November 1996, LifeQuest completed the merger of Klein
Medical, Inc., a Texas corporation ("KMI") with and into Klein Medical, Inc., a
Nevada corporation ("Klein") and wholly owned subsidiary of LifeQuest. In June
1997, LifeQuest completed the merger of Trimedica, Inc., a Colorado corporation
("Trimedica") with and into Klein. In September 1997, LifeQuest completed the
merger of Mishbucha, Inc., a Texas corporation d/b/a Medex Surgical ("Medex
Surgical") with and into Klein. In September 1997, LifeQuest completed the
merger of W. H. Bookwalter and Associates, Inc., a Vermont corporation
("Bookwalter") with and into Val-U-Med. The LQET, Klein, Trimedica, Medex
Surgical, and Bookwalter mergers were accounted for as pooling-of-interest
business combinations. See Note 6 for further description of the Company's
recent acquisitions. The consolidated financial statements for 1996 have been
restated to include the accounts of Trimedica, Medex Surgical, and Bookwalter.
The accompanying consolidated financial statements include the accounts of
LifeQuest and subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Since its inception, The Company has incurred cumulative net losses of
approximately $17,400,000. During the years ended December 31, 1996 and 1997
the Company incurred net losses of approximately $2,000,000 and $3,000,000
respectively. The Company's cumulative losses have been funded primarily
through the Company's initial public offering of common stock, private sales of
common stock, cash proceeds from the exercise of stock options, debt financing
and the sale of convertible debentures. As discussed in Note 11, the Company
has obtained a waiver for certain affirmative financial covenant requirements
associated with its convertible debentures for the quarters ending March 31 and
June 30, 1998. The Company has also taken steps to improve its 1998 operating
results which include anticipated improvements relating to the Company's recent
acquisitions described in Note 6 and the anticipated launch of new products.
The Company's management believes that it is likely the Company's operating
results for 1998 will significantly improve over 1997 and will generate
sufficient working capital along with available cash and available borrowings
under the Company's line of credit, to sustain its operations throughout the
year. However, there are no assurances that the Company can achieve such
operating improvements. If the Company is unable to significantly improve
operations, the Company will require additional capital infusions or debt
financing to maintain continuing operations. There are no assurances that any
additional capital infusions or debt financing would be available to the
Company.
The medical devices industry in which the Company competes is highly
competitive and dominated by a relatively small number of competitors with
financial and other resources much greater than those possessed by the Company.
The Company's ability to achieve increases in sales or to sustain current sales
levels depends in part on the ability and willingness of the Company's
suppliers to provide products to the Company. Furthermore, while the Company
has written distribution agreements with many of its suppliers, these
agreements in certain instances provide for non-exclusive distribution rights
and often include territorial restrictions that limit the geographical area in
which the Company is permitted to distribute the products. The agreements are
also generally short-term, are subject to periodic renewal and often contain
provisions permitting termination by either party without cause upon relatively
short notice. These, and other factors which are beyond the control of the
Company, provide no assurances that the Company will be able to successfully
compete in the medical devices market and the failure to do so would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
F-7
<PAGE> 37
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Operating revenues are recognized upon the shipment of products to the
customer.
Inventory
Inventory consists of raw materials, work-in-process, and finished
goods which are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Research and Development
Research and development costs are expensed as incurred.
Fixed Assets and Depreciation
Fixed assets are recorded at cost less accumulated depreciation.
Depreciation is provided utilizing the straight-line method over the estimated
useful lives of the respective assets (3 - 7 years).
Additions and improvements that extend the useful life of the asset are
capitalized. Repairs and maintenance are charged to expense as incurred. Upon
sales or retirement of property and equipment, the related cost and accumulated
depreciation are eliminated from the accounts and the resulting gain or loss is
recorded.
Licensed Technology Rights
Licensed technology rights will be amortized upon the commencement of
ValQuest's planned principle operations. The carrying value of the licensed
technology is periodically reviewed by the Company with impairments being
recognized when the expected future operating cash flows derived from such
licensed technology rights is less than their carrying value.
Net Loss Per Share
Net loss per share has been computed using the weighted average number
of shares of common stock outstanding during the year. Stock options are
excluded from the computation as their effect is antidilutive.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 may differ from those estimates.
Statements of Cash Flows
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
During 1996 and 1997, the Company had cash payments for interest of
$62,598 and $83,788, respectively. During 1997, the Company had a cash payment
for income taxes of $70,462 relating to a preacquisition liability of an
acquired entity. The Company had no cash payments for income taxes during
1996.
The following provides supplemental disclosure of noncash investing
and financing activities during 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------------- ----------------
<S> <C> <C>
Assets acquired in connection with acquisitions $ 3,588,104 $ 121,973
Liabilities assumed in connection with acquisitions $ 925,504 $ 121,973
Common stock issued in connection with acquisitions $ 2,262,600 $ --
</TABLE>
F-8
<PAGE> 38
During 1997, the Company determined that approximately $700,000 of
accrued liabilities that had been recorded in connection with the Val-U-Med
acquisition (see Note 6) were not required. Accordingly, the liabilities and
goodwill were reduced by a corresponding amount during 1997.
See Note 6 for a description of shares of the Company's common stock
issued in connection with mergers and acquisitions.
Impact of Recently Issued Accounting Standards
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" ("SFAS 128"), was issued. SFAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
SFAS 128 supercedes Accounting Principles Board Opinion No. 15 and replaces the
presentation of Primary EPS with Basic EPS and requires dual presentation of
Basic and Diluted EPS on the face of the statements of operations. Basic EPS
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for
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. SFAS 128 is effective for financial statements
issued after December 15, 1997, and accordingly, the accompanying consolidated
financial statements reflect the adoption of SFAS 128. As the Company had a
net loss for the years ended December 31, 1996 and 1997, Diluted EPS equals
Basic EPS as potentially dilutive common stock equivalents are antidilutive in
loss periods. Prior period EPS date has been restated as required by SFAS 128.
Reclassifications
Certain prior period amounts have been reclassified to conform with the 1997
presentation.
NOTE 3 - CONCENTRATION OF RISK:
Credit Risk
The Company's accounts receivable are from various hospitals, clinics
and practicing surgeons. Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base. Ongoing credit evaluations of customers' financial
condition are performed and, generally, no collateral is required. The Company
maintains reserves for potential credit losses and such losses have not
exceeded management's expectations.
Customers
The Company had one customer that accounted for 14 percent of
consolidated sales for the year ended December 31, 1996. No single customer
accounted for more than 10 percent of consolidated sales during the year ended
December 31, 1997.
Suppliers
The Company had two suppliers that accounted for 22 percent and 21
percent of purchases for the year ended December 31, 1996. The Company had one
supplier that accounted for 52 percent of purchases for the year ended December
31, 1997.
NOTE 4 - INVENTORIES
Inventories at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Raw materials $ 66,979 $ 328,375
Work-in-process 128,774 18,557
Finished goods 1,463,160 1,579,551
Allowances (30,000) (180,960)
-------------- --------------
$ 1,628,913 $ 1,745,523
============== ==============
</TABLE>
F-9
<PAGE> 39
NOTE 5 - CORPORATE JOINT VENTURES AND INVESTMENTS
In May 1994, LifeQuest and Valdor Fiber Optics ("Valdor") of San Jose,
California, formed ValQuest, a corporate joint venture. 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. LifeQuest 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. LifeQuest contributed
$400,000 to be used as working capital in exchange for a 55% interest in
ValQuest. At December 31, 1997, purchases of additional ValQuest stock had
increased LifeQuest's ownership interest to 82%.
In December 1997, the Company entered into an agreement to acquire
approximately 20 percent of the stock of TFX Holding Co. ("TFX") for
$1,000,000. TFX, an affiliate of Teleflex, Inc., is a newly formed entity and
the Company plans to begin distribution of TFX's minimally invasive surgical
devices, the Dexterity(R) Pneumo Sleeve and Dexterity(R) Protractor. The
Company recognized no revenues or expenses associated with TFX operations
during 1997.
In December 1997, the Company and Canwell Medical, Inc. formed Canwell
Surgical, Inc. ("Canwell"). Canwell is 50 percent owned by the Company and
Canwell Medical, Inc. and was formed for the purpose of selling minimally
invasive surgical products in China and other Asian countries. The Company
recognized no revenues or expenses associated with Canwell operations during
1997.
NOTE 6 - ACQUISITIONS
The following describes acquisitions by the Company during the years ended
December 31, 1996 and December 31, 1997:
G.M. Engineering, Inc.
In February 1996, GME was merged with and into LQET, a subsidiary of
LifeQuest. The merger was accomplished through exchanging all of the
outstanding common stock of GME for 350,000 shares of LifeQuest restricted
common stock. The transaction was recorded using the pooling-of-interest
method of accounting.
Klein Medical, Inc.
In November 1996, KMI was merged with and into Klein, a subsidiary of
LifeQuest. The merger was accomplished through exchanging all of the
outstanding common stock of KMI for 600,000 shares of LifeQuest restricted
common stock. The transaction was recorded using the pooling-of-interest
method of accounting.
The Klein merger agreement also provides a compensation agreement with
the former stockholder of KMI to act as chief executive officer and president
of the surviving corporation, Klein, through December 31, 1999. The agreement
provides for base compensation of $125,000 per year, additional performance
based compensation and participation in all employee benefits provided by
LifeQuest. LifeQuest issued 17,250 shares of LifeQuest restricted common stock
to a third party for a finder's fee associated with the transaction. In
addition, LifeQuest and the former stockholder have entered into a nonqualified
stock option agreement pursuant to which LifeQuest has granted to the former
stockholder nonqualified stock options to buy up to 60,000 shares of LifeQuest
common stock, as specified in the agreement.
Val-U-Med, Inc.
In December 1996, VMI was merged with and into Val-U-Med, a subsidiary
of LifeQuest. The merger was accomplished through exchanging all of the
outstanding stock of VMI for 1,200,000 shares of LifeQuest restricted common
stock and $400,000. In addition, LifeQuest is obligated to give 57,000 shares
of LifeQuest restricted common stock to a third party for a finder's fee
associated with the transaction. The transaction was recorded using the
purchase method of accounting effective December 27, 1996.
LifeQuest recorded the assets and liabilities of VMI at fair value as
of the purchase date. The excess of the purchase price over net assets
acquired of approximately $2,100,000 was recorded as goodwill and will be
amortized over 10 years.
F-10
<PAGE> 40
The following table reflects unaudited pro forma combined results of
operations of the Company and VMI on the basis that the acquisition had taken
place at the beginning of the fiscal year ended December 31, 1996:
<TABLE>
<S> <C>
Net sales $ 10,224,886
Net loss (2,355,787)
Net loss per common share $ ( .48)
</TABLE>
The unaudited pro forma combined results of operations are not
necessarily indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of 1996 nor does such information
purport to project the results of operations for any future period.
The Val-U-Med merger agreement also provides a compensation agreement
with the former president of VMI to act as president and chief operating
officer of the surviving corporation, Val-U-Med, and as vice president of
LifeQuest through December 31, 1999. Furthermore the agreement provides a
compensation agreement with the former vice president of sales of VMI to act as
vice president of sales of the surviving corporation, Val-U-Med, through
December 31, 1999. The agreements provide for base compensations of $100,000
each per year, additional performance based compensation and participation in
all employee benefits provided by LifeQuest. In addition, LifeQuest and the
president and vice president of sales of Val-U-Med have entered into a
nonqualified stock option agreement pursuant to which LifeQuest has granted to
the president and vice president of sales of Val-U-Med nonqualified stock
options to receive up to 60,000 shares each of LifeQuest common stock, as
specified in the agreement.
Trimedica, Inc.
Effective June 1997, 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-interest
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 will
constitute the new orthopedic sales force of Klein.
The following table shows the net sales and net income related to
Trimedica through the date of acquisition that have been included in the
consolidated statements of operations:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Net sales $ 192,451 $ 148,464
Net income $ 61,657 49,230
</TABLE>
Medex Surgical
Effective September 1997, Medex Surgical was acquired by the Company
and merged into Klein. Medex Surgical was purchased for an aggregate of 98,246
shares of common stock. Medex Surgical was formed during 1997 and the
transaction was accounted for using the pooling-of-interest accounting method,
therefore, the assets, liabilities, and operations of Medex Surgical prior to
the merger are included in the consolidated financial statements for 1997.
Medex Surgical business activity will allow the Company to further expand its
geographical area.
The following table shows the net sales and net loss related to Medex
Surgical through the date of acquisition that have been included in the
consolidated statements of operations for the fiscal year ended December 31,
1997:
<TABLE>
<S> <C>
Net sales $ 58,579
Net loss $ (5,757)
</TABLE>
W. H. Bookwalter and Associates, Inc.
Effective September 1997, Bookwalter was acquired by the Company and
merged into Val-U-Med. Bookwalter was purchased for an aggregate of 466,473
shares of common stock. The transaction was accounted for using the
pooling-of- interest 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 will provide the Company with distribution coverage in the
northeastern region of the United States.
F-11
<PAGE> 41
The following table shows the net sales and net loss related to
Bookwalter through the date of acquisition that have been included in the
consolidated statements of operations:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Net sales $ 2,005,040 $ 1,790,572
Net loss $ (41,750) $ (89,839)
</TABLE>
The following table reconciles the net sales and net income (loss)
included in the 1996 operating results as previously reported, to the restated
amounts resulting from pooling-of-interest business combinations.
<TABLE>
<CAPTION>
Net Sales Net Income (Loss)
-------------- -----------------
<S> <C> <C>
As reported in the 1996 10-KSB $ 3,639,070 $ (1,978,383)
Trimedica 192,451 61,657
Bookwalter 2,005,040 (41,750)
-------------- -----------------
As reported in the 1997 10-KSB $ 5,836,561 $ (1,958,476)
============== ================
</TABLE>
NOTE 7 - FEDERAL INCOME TAXES
As of December 31, 1997, the Company had net operating loss (NOL)
carryforwards of approximately $14,300,000 for federal income tax purposes that
are available to reduce future taxable income and will expire in 2006 through
2012 if not utilized. 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 associated 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 also has research and development credit carryforwards
available to offset future income taxes and expire in 2005 through 2010.
The tax effect of significant temporary differences representing
income tax assets (liabilities) at December 31, 1996, and 1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Capitalized research and development and acquisition costs $ 735,000 $ 735,000
Depreciation 15,000 5,000
Accruals 20,000 59,000
Reserves not deductible for tax 94,000 149,000
Other 34,000 --
Research and development credit carryforwards 552,000 552,000
Tax loss carryforwards 4,021,000 4,871,000
-------------- --------------
Net deferred tax assets 5,471,000 6,371,000
Deferred tax valuation reserve (5,471,000) (6,371,000)
-------------- --------------
Net deferred tax assets $ -- $ --
============== ==============
</TABLE>
As there is no assurance of future income, a 100% valuation reserve in
1996 and 1997 has been established against the Company's deferred tax assets.
The Company will continue to evaluate the necessity for such valuation reserve
in the future.
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, the Company's existing NOL carryforwards are subject to limitation.
Additionally, because United States tax laws limit the time during which NOL
and tax credit carryforwards may be applied against future taxable income and
tax liabilities, the Company may not be able to take full advantage of its NOL
and tax credits for federal income tax purposes.
F-12
<PAGE> 42
NOTE 8 - SHORT-TERM INVESTMENTS
Short-term investments consist solely of debt securities issued by the
United States Treasury. The Company intends to hold these securities to
maturity and believes it has the ability to do so. Therefore, these securities
are reported at amortized cost. A portion of the investments is pledged as
collateral (see Note 10). The following table summarizes short-term
investments held by the Company at December 31, 1996, and 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized Fair Market Unrealized Unrealized
Cost Value Holding Gains Holding Losses
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
December 31, 1996:
Debt securities issued by the
U.S. Treasury $ 2,464,743 $ 2,522,766 $ 58,033 $ --
December 31, 1997:
Debt securities issued by the
U.S. Treasury $ 144,682 $ 149,816 $ 5,134 $ --
</TABLE>
NOTE 9 - LEASE OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under non-cancelable operating leases.
Rentals are subject to escalation for increases in property taxes, insurance
and various other expenses. Future minimum rental payments of the Company
under existing and pending operating lease agreements at December 31, 1997, are
as follows:
<TABLE>
<S> <C>
1998 266,832
1999 278,385
2000 281,495
2001 273,024
2002 71,335
Thereafter --
-----------
$ 1,171,071
===========
</TABLE>
Rent expense totaled approximately $191,123 and $249,482 for the years ended
December 31, 1996, and 1997, respectively.
Employment Agreements
In connection with certain of the Company's acquisitions, the Company
has entered into various employment agreements that provide for future
compensation as described below:
<TABLE>
<CAPTION>
Employee Annual Compensation Expires
-------- ------------------- --------------
<S> <C> <C>
A $ 125,000 December 1999
B $ 100,000 December 1999
C $ 100,000 December 1999
D $ 100,000 June 2000
E $ 100,000 September 2000
</TABLE>
In addition, certain of the Company's employees have an opportunity to
earn bonuses based upon the achievement of specified performance criteria of
various Company divisions.
F-13
<PAGE> 43
Contingencies
The Company is 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 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 10 - DEBT AND CAPITAL LEASE OBLIGATIONS
The Company had the following current and long-term debt and capital
lease obligations at December 31:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Secured note payable for a vehicle loan, bearing interest at 8.75
percent, principal and interest due monthly, maturing in 1998 11,879 6,838
Line of credit with a financial institution, secured by short-term
investments, bearing interest at 6.41 percent, interest due monthly
with a maturity date of September, 1998 682,500 --
Unsecured note, bearing interest at a bank's prime rate plus 3.09
(11.34 percent at December 31, 1996), interest payable monthly,
principal due on demand or, if no demand is made, in monthly
installments of $1,458 through August 1997 11,577 --
Note payable to a financial institution, secured by substantially all
assets of Bookwalter, bearing interest at 10.75 percent, interest due
monthly, maturing January 1997 96,612 --
-------------- --------------
Total long-term debt and capital lease obligations 802,568 6,838
Less - Current portion 108,189 6,838
-------------- --------------
Long-term debt and capital lease obligations $ 694,379 $ --
============== ==============
</TABLE>
The carrying amount of the debt approximates the fair value of the debt. This
determination is based on management's estimate of the fair value at which such
instruments could be sold or obtained in a third-party transaction.
At December 31, 1997 the Company had a line of credit with a financial
institution which provides the Company with the ability to borrow up to
$750,000. Interest is due monthly at a rate equal to the institution's prime
rate, plus 1.5 percent. The line of credit expires in September 1998. At
December 31, 1997, no amounts were outstanding under the line of credit.
F-14
<PAGE> 44
NOTE 11 - CONVERTIBLE DEBENTURES
In December 1997, the Company sold 250,000 shares of its common stock
to affiliates of Renaissance Capital Group, Inc. (Renaissance) in a private
placement for proceeds of $ 1,000,000 and placed $3,000,000 in 9 percent
Convertible Debentures (Debentures) with Renaissance. The Debentures 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 Debenture
agreement contains various affirmative and negative convenant requirements and
the maintenance of certain financial ratios and the Debentures are secured by
substantially all assets of the Company. At December 31, 1997, the Company was
in compliance with all of the covenants of the Debentures. The Company has
obtained a waiver to suspend certain affirmative financial covenant
requirements for the quarters ending March 31 and June 30, 1998. The following
table shows the principal maturities of the Debentures as of December 31, 1997:
<TABLE>
<S> <C>
1998 $ --
1999 --
2000 30,000
2001 335,000
2002 300,000
Thereafter 2,335,000
----------------
Total $ 3,000,000
================
</TABLE>
The holders of the Debentures have the option to convert at any time
all or a portion of the Debentures into shares of the Company's common stock at
a conversion price of $4 per common share. The conversion price is subject to
downward revision if the Company sells shares of its common stock at a price
less than $4 per share, subject to certain allowed exceptions, during the term
of the Debentures. The Debentures are also subject to a one-time adjustment to
the conversion price whereby the price will be reduced if the Company does not
achieve certain financial objectives during 1998 and the current market price,
as defined in the Debenture agreement, following the Company's public release
of its 1998 financial results is less than $4 per share. The provisions of the
Debenture agreement 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
delisting of the Company's common stock and certain "change of control"
provisions, as defined in the Debenture agreement, 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 12 - STOCK OPTIONS
In October 1995, SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), was issued. SFAS 123 defines a fair value based
method of accounting for employee stock options or similar equity instruments
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period of the award, which is usually the
vesting period. However, SFAS 123 also allows entities to continue to measure
compensation costs for employee stock compensation plans using the intrinsic
value method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). The Company has adopted SFAS 123
effective January 1, 1996, and has elected to remain with the accounting
prescribed by APB 25. The Company has made the required disclosures prescribed
by SFAS 123
In December 1989, the Company adopted a stock option plan (the "1989
Plan"). Under the 1989 Plan, the Company may grant incentive and non-statutory
stock options to employees, directors and consultants of the Company. The
maximum number of shares available for grant under the 1989 Plan, as amended in
1993, is 685,000. Unexercised options expire ten years from the date of grant.
In August 1994, ValQuest adopted the 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, ValQuest may grant incentive and non-statutory
stock options to employees, directors and consultants of ValQuest. The maximum
number of shares of ValQuest common stock available for grant under the 1994
Plan is 250,000. Stock options under the 1989 Plan and the 1994 Plan become
exercisable pursuant to the individual written agreements between the Company
and ValQuest, respectively, and the participants. Unexercised options expire
ten years from the date of grant for the 1994 Plan.
F-15
<PAGE> 45
In May 1995, the Company adopted the 1995 Non-Employee Director Stock
Option Plan ("NEDSOP"). Under NEDSOP, the Company may grant stock options to
non-employee directors of the Company. The maximum number of shares available
for grant under NEDSOP is 400,000. The NEDSOP options vest in 25 percent
increments on each succeeding anniversary of the grant date, with unexercised
options expiring on the tenth anniversary of the date they vest. Under the
three plans the option exercise price must be equal to at least the stock's
market price on the date of grant.
Pursuant to certain agreements entered into in May 1990, the Company
granted to three consultants in January 1993, non-qualified stock options to
purchase in the aggregate up to 21,141 shares of common stock at an exercise
price of $.001 per share. The options, which expire in January 2003, were
granted outside any option plan and vested in 1994. Options to purchase 14,094
shares have been exercised to date and 5,285 options are currently exercisable.
Prior to December 31, 1996, the Company has recognized approximately $236,000
(none in the current year) as research and development expense representing the
difference between the exercise price and the fair market value of options that
became exercisable.
In 1996, the Company granted four employee directors non-qualified
options to purchase in the aggregate up to 380,000 shares of common stock at an
exercise price equal to the stock's market price on the date of grant. The
options were granted outside any option plan, vest over three years based on
continued employment, and expire ten years from grant date. During 1997, one
employee terminated employment with the Company and 185,000 unvested options
were forfeited. There are 60,000 options currently exercisable.
During 1997, the Company granted certain employees 304,700 options to
purchase shares of common stock at exercise prices ranging from $3.00 to $5.03
per share. The options were granted outside any option plan and vest over time
periods ranging from 3 to 4 years. During 1997, 26,000 of these options were
forfeited by employees upon termination of service. As of December 31, 1997,
there were 278,700 options outstanding under these option grants with none
exercisable.
Had compensation cost for these plans been determined consistent with
SFAS 123, the Company's net loss and net loss per share (EPS) would have been
reduced to the following pro forma amounts at December 31:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C> <C>
Net Loss: As Reported $ (1,958,476) $ (2,997,127)
Pro Forma (2,118,851) (3,495,377)
EPS: As Reported $ ( .40) $ (.48)
Pro Forma ( .43) (.55)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
A summary of the status of the Company's stock options at December 31,
1996, and 1997, and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1996 1997
----------------------------- --------------------------------
Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price
(000) Per Share (000) Per Share
-------- --------------- -------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 577 $ 1.34 954 $ 1.95
Granted 440 2.67 522 3.85
Exercised (39) .35 (122) 1.11
Forfeited (24) 3.05 (268) 2.56
-------- -------------- -------- ---------------
Outstanding at end of year 954 $ 1.95 1,086 $ 2.81
Options exercisable at end of year 436 $ .83 438 $ 1.99
Weighted average fair value of $ 2.51 $ 2.94
options granted
</TABLE>
F-16
<PAGE> 46
The following table summarizes the information about options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted Avg.
Remaining Number
Exercise Prices Number Contractual Exercisable at
Per Share Outstanding Life Dec. 31, 1997
--------------- ----------- ----------- -------------
<S> <C> <C> <C>
$ .001 5,285 5.04 years 5,285
.35 168,638 3.57 years 112,254
.75 72,000 6.64 years 72,000
2.00 20,000 8.67 years 20,000
2.25 50,000 7.39 years 50,000
2.50 64,165 7.57 years 32,765
3.00 288,700 8.99 years 60,000
3.13 59,300 9.08 years 2,800
3.50 5,500 9.14 years --
4.00 68,580 6.80 years 51,435
4.25 5,000 9.87 years --
4.38 209,500 9.68 years 12,500
4.63 5,000 9.68 years --
4.75 5,000 9.18 years --
4.875 19,200 9.51 years 19,200
5.03 40,000 9.76 years --
--------- -------
1,085,868 7.67 years 438,239
========= =======
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model for a stock that does not pay
dividends with the following weighted-average assumptions used for grants in
1996 and 1997, respectively: risk-free interest rates of 6.0 and 6.4 percent;
expected lives of 10 years and expected volatility of 111 and 61 percent.
NOTE 13 - RELATED-PARTY TRANSACTIONS
The Company made payments to certain stockholders for consulting fees
of approximately $12,000 for the year ended December 31, 1996.
During 1997, the Company sold 50,000 shares of common stock to its
former President and Chief Executive Officer for $200,000.
NOTE 14 - MARKETING AGREEMENT
In April 1995, GME entered into an agreement, as amended, whereby a
marketing consultant would provide marketing, distribution and sales consulting
services to GME over the three-year term of the agreement. As compensation for
entering into this contract, a stockholder gave to the consultant shares equal
to 3.75 percent of the outstanding shares of GME stock, which had an estimated
fair market value of $17,500. This stock was subsequently exchanged for the
Company's stock. The consultant also earned commissions based on sales levels
as defined in the agreement. The Company accounted for this transaction as a
contribution of capital and recognized the related expense in 1995.
During 1996, the Company expensed approximately $35,000 related to
this agreement. The agreement was terminated June 30, 1996.
F-17
<PAGE> 47
NOTE 15 - SUBSEQUENT EVENTS
Effective January 1, 1998, the Company merged each of its wholly owned
subsidiaries, LQET, Klein, and Val-U-Med into the Company.
In January 1998, the Company paid $1,000,000 to acquire approximately
20 percent of the stock of TFX.
In January 1998, the Company loaned $100,000 to Canwell for initial
working capital requirements. The loan is unsecured and bears interest at 9
percent with the principal maturing in January 2000.
F-18
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
<S> <C>
2.1 Plan of Merger and Acquisition Agreement dated February 13, 1996, but effective as of January 1, 1996,
among LifeQuest Medical, Inc., LifeQuest Endoscopic Technologies, Inc., GM Engineering, Inc., Gregory
M. Miles and Susan G. Miles (incorporated by reference herein to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed February 27, 1996).
2.2 Plan of Merger and Acquisition Agreement dated November 27, 1996, among LifeQuest Medical, Inc., Klein
Medical Acquisition Co., Klein Medical, Inc. and Richard H. Klein (incorporated by reference herein to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed December 12, 1996).
2.3 Plan of Merger and Acquisition Agreement dated December 27, 1996, among LifeQuest Medical, Inc., Val-U-
Med Acquisition Co., Val-U-Med, Inc. and the Stockholders of Val-U-Med, Inc. (incorporated by reference
herein to Exhibit 2.1 to the Company's Current Report on Form 8-K filed January 10, 1997).
2.4 Plan of Merger and Acquisition Agreement dated June 30, 1997, among LifeQuest Medical, Inc., Klein
Medical, Inc., Trimedica, Inc., and Mark Lovejoy. (incorporated by reference herein to Exhibit 2.1 to
the Company's Quarterly Report on Form 10-QSB for the quarter ending June 30, 1997).
2.5 Plan of Merger and Acquisition Agreement dated September 30, 1997, among LifeQuest Medical, Inc., Val-
U-Med, Inc., W. H. Bookwalter & Associates, Inc., and the shareholders of W. H. Bookwalter &
Associates, Inc. (incorporated by reference herein to Exhibit 21.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ending September 30, 1997).
2.6 Plan of Merger and Acquisition Agreement dated October 7, 1997, among LifeQuest Medical, Inc., Klein
Medical, Inc., Mishbucha, Inc. d/b/a Medex Surgical, Inc., Edward Kraus, and Robert Kraus (incorporated
by reference herein to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter
ending September 30, 1997).
2.7* Plan of Merger and Acquisition Agreement dated December 30, 1997, among LifeQuest Medical, Inc.,
LifeQuest Endoscopic Technologies, Inc., Klein Medical, Inc. and Val-U-Med, Inc.
3.1 Certificate of Incorporation of the Registrant (incorporated by reference herein to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 filed on August 19,1992, Registration No. 33-49196).
3.2 Bylaws of the Registrant (incorporated by reference herein to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 filed on August 19, 1992, Registration No. 33-49196).
4.1* Convertible Loan Agreement among the Company, Renaissance Capital Growth and Income Fund III, Inc.,
Renaissance US Growth and Income Trust PLC and Renaissance Capital Group, Inc. dated December 19, 1997.
10.1 1989 Stock Option Plan of LifeQuest Medical, Inc. (incorporated by reference herein to Exhibit 4.4 to
the Company's Registration Statement on Form S-8 filed on October 12, 1993, Registration No. 33-70174).
10.2 Employment Agreement dated February 15, 1992, between LifeQuest Medical, Inc. and Herbert H. Spoon
(incorporated by reference herein to Exhibit 10.8 to the Company's Registration Statement on Form S-1
filed on August 19, 1992, Registration No. 33-49196).
10.3 Incentive Stock Option Agreement dated January 15, 1990, between LifeQuest Medical, Inc. and Herbert H.
Spoon (incorporated herein to Exhibit 10.12 to the Company's Registration Statement on Form S-1 filed
on August 19, 1992, Registration No. 33-49196).
10.4 Patent License Agreement dated January 1, 1989, between LifeQuest Medical, Inc. and The Board of
Regents of the University of Texas System, as amended by instrument dated November 1, 1989
(incorporated herein to Exhibit 10.15 to the Company's Registration Statement on Form S-1 filed on
August 19, 1992, Registration No. 33-49196).
10.5 License Agreement dated June 26, 1992, between LifeQuest Medical, Inc. and George C. Kramer, Ph.D.
(incorporated herein to Exhibit 10.22 to the Company's Registration Statement on Form S-1 filed on
August 19, 1992, Registration No. 33-49196).
10.6 Incentive Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and Herbert H.
Spoon (incorporated herein by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.7 Incentive Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and Randall K.
Boatright (incorporated herein by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994).
10.8 Incentive Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and David J.
Collette, M.D. (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.9 1994 Non-Employee Director Stock Option Plan (incorporated herein by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.10 Non-Qualified Stock Option Agreement dated October 17, 1994, between LifeQuest Medical, Inc. and Robert
B. Johnson (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
10.11 Non-Qualified Stock Option Agreement dated March 2, 1995, between LifeQuest Medical, Inc. and Jeffrey
H. Berg, Ph.D. (incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
10.12 ValQuest Medical, Inc. 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.13 Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and Herbert H.
Spoon (incorporated herein by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.14 Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and Randall K.
Boatright (incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1994).
10.15 Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and David J.
Collette, M.D. (incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.16 Non-Incentive Stock Option Agreement dated August 19, 1994, between ValQuest Medical, Inc. and Robert
B. Johnson (incorporated herein by reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
10.17 Assignment and License Agreement dated May 11, 1994, between ValQuest Medical, Inc. and Fibotech, Inc.
d/b/a Valdor Fiber Optics (incorporated herein by reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994).
10.18 Employment Agreement dated November 27, 1996, between Klein Medical Acquisition Co. and Richard H.
Klein (incorporated by reference herein to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed December 12, 1996).
10.19 Non-Qualified Stock Option Agreement dated November 27, 1996, between LifeQuest Medical, Inc. and
Richard H. Klein (incorporated by reference herein to Exhibit 10.2 to the Company's Current Report on
Form 8-K filed December 12, 1996).
10.20 Employment Agreement dated December 27, 1996, between Val-U-Med Acquisition Co. and K.C. Fadem
(incorporated by reference herein to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
January 10, 1997).
10.21 Non-Qualified Stock Option Agreement dated December 27, 1996, between LifeQuest Medical, Inc. and K.C.
Fadem (incorporated by reference herein to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed January 10, 1997).
10.22 Employment Agreement dated December 27, 1996, between Val-U-Med Acquisition Co. and Robert Fadem
(incorporated by reference herein to Exhibit 10.3 to the Company's Current Report on Form 8-K filed
January 10, 1997).
10.23 Non-Qualified Stock Option Agreement dated December 27, 1996, between LifeQuest Medical, Inc. and
Robert Fadem (incorporated by reference herein to Exhibit 10.4 to the Company's Current Report on Form
8-K filed January 10, 1997).
10.24 Lease Agreement dated April 28, 1997, between Interpark Jack Limited Partnership and LifeQuest Medical,
Inc. (incorporated by reference herein to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997).
10.25 Lease Agreement dated March 1, 1997, between Williams North Fulton Group and the Company (incorporated
by reference herein to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997).
10.26 Employment Agreement dated September 30, 1997, between William H. Bookwalter and the Company
(incorporated by reference herein to Exhibit No. 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997).
11* Computation of earnings (loss) per share
22 Subsidiaries
Name Under Which
Name State of Incorporation Doing Business
---- ---------------------- ----------------
ValQuest Medical, Inc. Nevada ValQuest Medical, Inc.
23* Consent of Arthur Andersen LLP
27* Financial Data Schedule
</TABLE>
- -------------------------------
* Filed herewith
<PAGE> 1
EXHIBIT 2.7
PLAN OF MERGER AND ACQUISITION AGREEMENT
This Plan of Merger and Acquisition Agreement (this "Merger
Agreement") is entered into as of the 30th day of December, 1997, between
LifeQuest Medical, Inc., a Delaware corporation ("LifeQuest"), LifeQuest
Endoscopic Technologies, Inc., a Nevada corporation ("LQET"), Klein Medical,
Inc., a Nevada corporation ("KMI") and Val-U-Med, Inc., a Nevada corporation
("VMI") (LifeQuest, LQET, KMI and VMI are sometimes hereinafter collectively
referred to as the "Constituent Corporations").
Recitals
A. As of the date hereof, LifeQuest has authorized capital stock
consisting of 10,000,000 shares of common stock, $.001 par value, of which
6,710,883 shares are issued and outstanding and 2,000,000 shares of preferred
stock, $.001 par value, of which no shares are issued and outstanding
("LifeQuest Stock").
B. As of the date hereof, LQET has authorized capital stock
consisting of 1,000 shares of common stock, $.01 par value ("LQET Stock"), of
which 1,000 shares are issued and outstanding.
C. As of the date hereof, KMI has authorized capital stock
consisting of 1,000 shares of common stock, $.01 par value ("KMI Stock"), of
which 1,000 shares are issued and outstanding.
D. As of the date hereof, VMI has authorized capital stock
consisting of 1,000 shares of common stock, $.01 par value ("VMI Stock"), of
which 1,000 shares are issued and outstanding.
E. As of the date hereof, LifeQuest owns all of the issued and
outstanding capital stock of each of LQET, KMI and VMI.
F. The Board of Directors of each of the Constituent Corporations
have deemed it in the best interests of each of LifeQuest, LQET, KMI and VMI
that each of LQET, KMI and VMI be merged (the "Merger") with and into LifeQuest
(such corporation in its capacity as the surviving corporation being
hereinafter sometimes called the "Surviving Corporation") on the terms and
conditions herein set forth, and has authorized the execution and delivery of
this Merger Agreement.
Agreements
In consideration of the premises and the mutual agreements, covenants
and provisions herein contained, the parties hereto agree as follows:
ARTICLE I
1.1 Merger. At the Effective Time (as defined in Section 1.2
hereof), each of LQET, KMI and VMI shall be merged with and into LifeQuest, the
separate existence of each of LQET, KMI and VMI shall cease and LifeQuest as
the surviving corporation, shall continue to exist by virtue of and shall be
governed by the laws of the State of Delaware and shall maintain a registered
office in the State of Delaware, c/o The Corporation Trust Company, 1209 Orange
Street, Wilmington, Delaware 19801.
1.2 Effective Time of Merger. The Merger shall be effective at
12:01 a.m. on January 1, 1998 (the time of such effectiveness is herein called
the "Effective Time").
<PAGE> 2
1.3 Effect of Merger. At the Effective Time, LifeQuest, without
further action, as provided by the laws of each of the State of Delaware and
the State of Nevada, shall succeed to, possess and enjoy all the rights,
privileges, powers, immunities and franchises of a public as well as of a
private nature, of each of LQET, KMI and VMI. All debts due to each of LQET,
KMI and VMI on whatever account and all and every other interest and asset of
or belonging to each of LQET, KMI and VMI, respectively, shall be taken and
deemed to be transferred to and vested in LifeQuest as effectually as they were
vested in each of LQET, KMI and VMI, respectively, without further act or deed;
the title to any real estate vested by deed or otherwise in each of LQET, KMI
and VMI shall not revert or be in any way impaired by reason of the Merger; all
rights of creditors and all liens upon the property of each of LQET, KMI and
VMI shall be preserved unimpaired; all debts, obligations, liabilities and
duties of each of LQET, KMI and VMI shall thenceforth attach to LifeQuest and
may be enforced against LifeQuest, and LifeQuest shall thenceforth be
responsible and liable therefor to the same extent as if such debts,
obligations, liabilities and duties had been incurred or contracted by it; and
any claim existing or action or proceeding pending by or against each of LQET,
KMI and VMI may be prosecuted as if the Merger had not taken place, or
LifeQuest may be substituted in place of any of LQET, KMI and VMI. At any time
or from time to time after the Effective Time, the last acting officers of each
of LQET, KMI and VMI shall, in the name of each of LQET, KMI and VMI, execute
and deliver all such proper deeds, assignments and other instruments as
LifeQuest may deem necessary or desirable in order to vest, perfect or confirm
LifeQuest's title to and possession of all of each of LQET, KMI and VMI's
property, rights, privileges, powers, immunities and franchises and otherwise
to carry out the purposes of this Merger Agreement.
1.4 Certificate of Incorporation. The provisions of the
certificate of incorporation of LifeQuest as in effect at the Effective Time
shall be and remain the certificate of incorporation of the Surviving
Corporation, until such certificate of incorporation shall be amended as
provided by law.
1.5 Bylaws. The bylaws of LifeQuest as in effect at the Effective
Time shall be and remain the bylaws of the Surviving Corporation, until the
same shall thereafter be altered, amended or repealed in accordance with law.
ARTICLE II
2.1 Conversion of LifeQuest Stock. Each share of LifeQuest Stock
outstanding at the Effective Time shall be converted into one fully paid and
nonassessable share of common stock, $.001 par value ("Surviving Corporation
Stock"), of the Surviving Corporation, without any action on the part of the
holder thereof. The certificates for such shares shall not be surrendered or
in any way modified by reason of the Merger's becoming effective.
2.2 Cancellation of LQET Stock. Each share of LQET Stock
outstanding at the Effective Time shall be cancelled, without any action on the
part of the holder thereof. After the Effective Time, each outstanding
certificate which prior thereto represented shares of the LQET Stock shall for
all purposes be cancelled.
2.3 Cancellation of KMI Stock. Each share of KMI Stock
outstanding at the Effective Time shall be cancelled, without any action on the
part of the holder thereof. After the Effective
-2-
<PAGE> 3
Time, each outstanding certificate which prior thereto represented shares of
the KMI Stock shall for all purposes be cancelled.
2.4 Cancellation of VMI Stock. Each share of VMI Stock
outstanding at the Effective Time shall be cancelled, without any action on the
part of the holder thereof. After the Effective Time, each outstanding
certificate which prior thereto represented shares of the VMI Stock shall for
all purposes be cancelled.
ARTICLE III
3.1 Termination. This Merger Agreement may be terminated and the
Merger abandoned at any time prior to the Effective Time by mutual agreement of
the Board of Directors of each of LifeQuest, LQET, KMI and VMI.
3.2 Void Upon Termination. In the event of termination of this
Merger Agreement as provided herein, this Merger Agreement shall forthwith
become wholly void and of no effect and there shall be no liability on the part
of any party hereto or their respective officers, directors or stockholders
pursuant to this Merger Agreement.
3.3 Waivers. Without action on the part of the stockholders of
either LifeQuest, LQET, KMI and VMI, except as otherwise may be required by
law, the parties may by written agreement (i) waive any inaccuracies contained
herein, (ii) waive compliance with any covenants or agreements contained
herein, or (iii) amend or modify any of the provisions of this Merger Agreement
in such manner as may be approved by the Board of Directors of LifeQuest;
provided, however, that no such amendment or modification, without the approval
of the stockholders of LifeQuest, shall change any term of the certificate of
incorporation of the Surviving Corporation.
3.4 Counterparts. This Merger Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
3.5 Governing Law. This Merger Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware.
3.6 Section Headings. The section headings contained in this
Merger Agreement are inserted for convenience of reference only and shall not
affect the meaning of interpretation hereof.
[signatures on next page]
-3-
<PAGE> 4
IN WITNESS WHEREOF, this Merger Agreement has been executed by duly
authorized officers of the undersigned companies as of the date first above
written.
LIFEQUEST MEDICAL, INC.
ATTEST:
By:
- ------------------------------ ----------------------------------
Randall K. Boatright, Herbert H. Spoon,
Secretary President
ATTEST: LIFEQUEST ENDOSCOPIC TECHNOLOGIES,
INC.
By:
- ------------------------------ ------------------------------------
Randall K. Boatright, Herbert H. Spoon,
Secretary President
ATTEST: KLEIN MEDICAL, INC.
By:
- ------------------------------ -------------------------------------
Randall K. Boatright, Herbert H. Spoon,
Secretary President
ATTEST: VAL-U-MED, INC.
By:
- ------------------------------ ------------------------------------
Randall K. Boatright, Herbert H. Spoon,
Secretary President
-4-
<PAGE> 1
EXHIBIT 4.1
CONVERTIBLE LOAN AGREEMENT
DATED DECEMBER 19, 1997
BY AND AMONG
LIFEQUEST MEDICAL, INC.
AS BORROWER
AND
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
AND
RENAISSANCE US GROWTH & INCOME TRUST PLC
AS LENDERS
AND
RENAISSANCE CAPITAL GROUP, INC.
AS AGENT FOR THE LENDERS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - DEFINITION OF TERMS . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Other Definition Provisions . . . . . . . . . . . . . . 8
ARTICLE II - LOAN PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.01. The Loan . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.02. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 10
Section 2.03. Interest Rate and Interest Payments . . . . . . . . . . 10
Section 2.04. Maturity . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.05. Mandatory Principal Repayment . . . . . . . . . . . . 10
Section 2.06. Redemption . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.07. Fees and Expenses . . . . . . . . . . . . . . . . . . . 10
Section 2.08. Finder's Fees . . . . . . . . . . . . . . . . . . . . . 11
Section 2.09. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2.10 Conversion Rights . . . . . . . . . . . . . . . . . . . 12
ARTICLE III - CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 12
Section 3.01. Document Requirements . . . . . . . . . . . . . . . . . 12
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BORROWER . . . . . . . . . . . 13
Section 4.01. Organization and Good Standing . . . . . . . . . . . . 14
Section 4.02. Authorization and Power . . . . . . . . . . . . . . . . 14
Section 4.03. No Conflicts or Consents . . . . . . . . . . . . . . . 14
Section 4.04. Enforceable Obligations . . . . . . . . . . . . . . . . 14
Section 4.05. No Liens . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.06. Financial Condition . . . . . . . . . . . . . . . . . . 15
Section 4.07. No Default . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.08. Material Agreements . . . . . . . . . . . . . . . . . . 15
Section 4.09. No Litigation . . . . . . . . . . . . . . . . . . . . . 15
Section 4.10. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.11. Capitalization . . . . . . . . . . . . . . . . . . . . 16
Section 4.12. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 16
Section 4.13. Employee Matters . . . . . . . . . . . . . . . . . . . 17
Section 4.14. Compliance with Laws . . . . . . . . . . . . . . . . . 17
Section 4.15. Shares Issuable Upon Conversion . . . . . . . . . . . . 18
Section 4.16. Insider . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.17. Subsidiaries . . . . . . . . . . . . . . . . . . . . . 18
Section 4.18. Casualties . . . . . . . . . . . . . . . . . . . . . . 19
Section 4.19. Investment Company Act . . . . . . . . . . . . . . . . 19
Section 4.20. Sufficiency of Capital . . . . . . . . . . . . . . . . 19
Section 4.21. Corporate Names . . . . . . . . . . . . . . . . . . . . 19
Section 4.22. Insurance . . . . . . . . . . . . . . . . . . . . . . . 19
Section 4.23. Licenses, Trademarks, Service Marks and Copyrights . . 19
Section 4.24. Real Property; Leases . . . . . . . . . . . . . . . . . 20
Section 4.25. Survival of Representations and Warranties . . . . . . 20
Section 4.26. Full Disclosure . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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ii
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V - AFFIRMATIVE COVENANTS OF BORROWER . . . . . . . . . . . . . . . . 20
Section 5.01. Financial Statements, Reports and Documents . . . . . . 21
Section 5.02. Preparation of Budget . . . . . . . . . . . . . . . . . 22
Section 5.03. Payment of Taxes and Other Indebtedness . . . . . . . . 22
Section 5.04. Maintenance of Existence and Rights; Conduct of
Business . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.05. SEC Filings . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.06. Notice . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.07. Compliance with Loan Documents . . . . . . . . . . . . 23
Section 5.08. Compliance with Material Agreements . . . . . . . . . . 23
Section 5.09. Operations and Properties . . . . . . . . . . . . . . . 23
Section 5.10. Books and Records; Access . . . . . . . . . . . . . . . 23
Section 5.11. Compliance with Law . . . . . . . . . . . . . . . . . . 24
Section 5.12. Insurance . . . . . . . . . . . . . . . . . . . . . . . 24
Section 5.13. Authorizations and Approvals . . . . . . . . . . . . . 24
Section 5.14. ERISA Compliance . . . . . . . . . . . . . . . . . . . 24
Section 5.15. Further Assurances . . . . . . . . . . . . . . . . . . 24
Section 5.16. Indemnity by Borrower . . . . . . . . . . . . . . . . . 25
Section 5.17. Reservation of Shares . . . . . . . . . . . . . . . . . 26
Section 5.18. Ownership of Subsidiaries. . . . . . . . . . . . . . . 26
Section 5.19. Retention of Stock Ownership. . . . . . . . . . . . . . 26
ARTICLE VI - NEGATIVE COVENANTS OF BORROWER . . . . . . . . . . . . . . . . . 26
Section 6.01. Limitation on Indebtedness . . . . . . . . . . . . . . 27
Section 6.02. Limitation on Liens . . . . . . . . . . . . . . . . . . 27
Section 6.03. Limitation on Investments . . . . . . . . . . . . . . . 27
Section 6.04. Alteration of Material Agreements . . . . . . . . . . . 27
Section 6.05. Transactions with Affiliates . . . . . . . . . . . . . 27
Section 6.06. Limitations on Acquisition of Nonrelated Business . . . 28
Section 6.07. Limitation on Sale of Properties . . . . . . . . . . . 28
Section 6.08. Fiscal Year and Accounting Method . . . . . . . . . . . 28
Section 6.09. Liquidation . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.10. Material Amendments to Articles of Incorporation or
Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.11. Executive Compensation . . . . . . . . . . . . . . . . 28
Section 6.12. Restricted Payments . . . . . . . . . . . . . . . . . . 29
Section 6.13. Consolidation or Merger. . . . . . . . . . . . . . . . 29
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS . . . . . . . . 29
Section 7.01. Financial Ratios . . . . . . . . . . . . . . . . . . . 29
ARTICLE VIII - EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 30
Section 8.01. Events of Default . . . . . . . . . . . . . . . . . . . 30
Section 8.02. Remedies Upon Event of Default. . . . . . . . . . . . . 31
Section 8.03. Performance by the Lenders . . . . . . . . . . . . . . 32
Section 8.04. Payment of Expenses Incurred by the Lenders . . . . . . 32
</TABLE>
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iii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE IX - REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . 32
Section 9.01. Demand Registration . . . . . . . . . . . . . . . . . 32
Section 9.02. "Piggy-Back" Registration . . . . . . . . . . . . . . 33
Section 9.03. Shelf Registration . . . . . . . . . . . . . . . . . . 34
Section 9.04. Obligations of Borrower . . . . . . . . . . . . . . . 34
Section 9.05. Furnish Information . . . . . . . . . . . . . . . . . 36
Section 9.06. Expenses of Registration . . . . . . . . . . . . . . . 36
Section 9.07. Indemnification Regarding Registration Rights . . . . 36
Section 9.08. Reports Under the 1934 Act. . . . . . . . . . . . . . 38
Section 9.09. Assignment of Registration Rights . . . . . . . . . . 39
Section 9.10. Other Matters . . . . . . . . . . . . . . . . . . . . 39
ARTICLE X - BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . 40
Section 10.01. Board Representation or Attendance by Observer . . . . 40
Section 10.02. Limitation of Authority of Persons Designated as a
Director Nominee . . . . . . . . . . . . . . . . . . . 40
Section 10.03. Nonliability of the Lenders . . . . . . . . . . . . . 41
ARTICLE XI - AGENCY AND INTER-LENDER PROVISIONS . . . . . . . . . . . . . . . 41
Section 11.01. The Lenders' Representations and Warranties to Other
Lenders . . . . . . . . . . . . . . . . . . . . . . . 41
Section 11.02. Waiver of Loan Provisions or Interest or Principal
Payments . . . . . . . . . . . . . . . . . . . . . . . 42
Section 11.03. Agency . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 11.04. Subordination of Liens . . . . . . . . . . . . . . . . 43
ARTICLE XII - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 12.01. Strict Compliance . . . . . . . . . . . . . . . . . . 43
Section 12.02. Waivers and Modifications . . . . . . . . . . . . . . 44
Section 12.03. Limitation on Liability . . . . . . . . . . . . . . . 44
Section 12.04. Choice of Forum; Consent to Service of Process and
Jurisdiction . . . . . . . . . . . . . . . . . . . . . 44
Section 12.05. Arbitration. . . . . . . . . . . . . . . . . . . . . . 44
Section 12.06. Invalid Provisions . . . . . . . . . . . . . . . . . . 46
Section 12.07. Maximum Interest Rate . . . . . . . . . . . . . . . . 47
Section 12.08. Participations and Assignments of the Debentures . . . 47
Section 12.09. Confidentiality . . . . . . . . . . . . . . . . . . . 48
Section 12.10. Binding Effect . . . . . . . . . . . . . . . . . . . . 48
Section 12.11. No Third Party Beneficiary . . . . . . . . . . . . . . 48
Section 12.12. Entirety . . . . . . . . . . . . . . . . . . . . . . . 49
Section 12.13. Headings . . . . . . . . . . . . . . . . . . . . . . . 49
Section 12.14. Survival . . . . . . . . . . . . . . . . . . . . . . . 49
Section 12.15. Multiple Counterparts . . . . . . . . . . . . . . . . 49
Section 12.16. Notices . . . . . . . . . . . . . . . . . . . . . . . 49
Section 12.17. Governing Law. . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
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iv
<PAGE> 5
Agreement
- --------------------------------------------------------------------------------
THIS AGREEMENT, dated as of DECEMBER 19, 1997, by and among LIFEQUEST
MEDICAL, INC., a Delaware corporation, as borrower ("BORROWER"), RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC., a Texas corporation, and RENAISSANCE US
GROWTH & INCOME TRUST PLC, a public limited company registered in England and
Wales, (individually referred to as Renaissance III and Renaissance PLC,
respectively, and together with any permitted assignees or successors in
interest individually referred to as each or any "LENDER" and collectively
referred to as the "LENDERS"), and RENAISSANCE CAPITAL GROUP, INC., a Texas
corporation, as agent (the "AGENT") for the Lenders. All references herein to
Borrower shall include the Subsidiaries, unless the context otherwise requires.
WITNESSETH:
WHEREAS, Borrower seeks to obtain THREE MILLION DOLLARS ($3,000,000)
from the Lenders through the issuance of Debentures to be used for
acquisitions, working capital and general corporate purposes in accordance with
Section 2.02 hereof; and
WHEREAS, Borrower has requested that the Lenders provide such loan as
herein provided, and that the Lenders are willing to furnish such to Borrower
upon the terms and subject to the conditions and for the considerations
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises herein contained
and for other valuable consideration, receipt and sufficiency of which is
acknowledged, the parties hereto agree as follows:
ARTICLE I - DEFINITION OF TERMS
SECTION 1.01. DEFINITIONS.
(a) For the purposes of this Agreement, the following terms shall
have the respective meanings assigned to them in this Article I or in the
section or recital referred to below:
"Acquisition Indebtedness" shall mean Indebtedness or mandatorily
redeemable preferred stock of Borrower or a Subsidiary incurred in connection
with, or to provide all or any portion of the funds or credit support utilized
to consummate, the transaction or series of related transactions pursuant to
which such Subsidiary became a Subsidiary or was acquired by Borrower.
"Affiliate" with respect to any Person shall mean a person that directly
or indirectly, through one or more intermediaries, controls or is controlled
by, or is under common control with, such Person.
"Capital Expenditure" shall mean an expenditure for assets that is
properly classifiable as a capital expenditure in accordance with generally
accepted accounting principles.
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Agreement (Continued)
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"Capital Lease" shall mean any lease of property, real or personal,
which would be properly classifiable as a capital lease in accordance with
generally accepted accounting principles.
"Common Stock"shall mean Borrower's common stock, $.001 par value.
"Consolidated Current Assets" shall mean, for any Person as of any date,
the assets of such Person and its Consolidated Subsidiaries which would be
reflected as current assets on a consolidated balance sheet for such Person and
its Subsidiaries prepared as of such date in accordance with GAAP.
"Consolidated Current Liabilities" shall mean, for any Person as of any
date, the liabilities of such Person and its Consolidated Subsidiaries which
would be reflected as current liabilities on a consolidated balance sheet for
such Person and its Subsidiaries prepared as of such date in accordance with
GAAP. For purposes of calculating compliance with any covenant contained in
this Agreement or any other Loan Document, the principal amount of Consolidated
Current Liabilities shall include any balance under any revolving credit
facility of Borrower, regardless of whether such revolving credit facility
would be reflected as a current liability in accordance with GAAP.
"Consolidated Net Income" shall mean, for any Person for any period,
consolidated net income of such Person and its Consolidated Subsidiaries for
such period which would be reflected in accordance with GAAP, but excluding (a)
any gain or loss arising from the sale of capital assets, (b) any gain or loss
arising from any write-up or write-down of assets, (c) income or loss of any
other Person, substantially all of the assets of which have been acquired by
such Person in any manner, to the extent that such earnings or losses were
realized by such other Person prior to the date of such acquisition, (d) income
or loss of any Person in which the Person has any ownership interest (other
than Consolidated Subsidiaries of such Person), unless such earnings have
actually been received or paid by the Person or its Consolidated Subsidiaries
in the form of cash distributions or additional cash calls, (e) income or loss
of any other Person to which assets of the Person or its Consolidated
Subsidiaries shall have been sold, transferred or disposed of, or into which
the Person shall have merged, to the extent that such earnings or losses of any
other Person arise prior to the date of such transaction, (f) any gain or loss
arising from the acquisition of any securities of the Person or any of its
Consolidated Subsidiaries, and (g) any extraordinary gain or loss realized by
such Person or any of its Consolidated Subsidiaries during such period.
"Consolidated Subsidiaries" shall mean those entities whose assets,
liabilities and operations are consolidated with those of Borrower for purposes
of Borrower's consolidated financial statements.
"Consolidated Trailing Twelve Months EBITDA" shall mean for any Person,
for the immediately preceding twelve-month period ended on such date,
Consolidated Net Income of such Person for such twelve-month period, plus (a)
all income tax expense of such Person and its Consolidated Subsidiaries for
such twelve-month period, (b) all interest expense of such Person and its
Consolidated Subsidiaries for such twelve-month period, (c) all depreciation
expense of such Person and its Consolidated Subsidiaries for such twelve-month
period, and (d) all amortization expense of such Person and its Consolidated
Subsidiaries for such twelve-month period.
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Agreement (Continued)
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"Consolidated Trailing Twelve Months Free Cash Flow" shall mean for any
Person, for the immediately preceding twelve-month period ended on such date,
Consolidated Net Income of such Person for such twelve-month period, plus (a)
all deferred income tax expense of such Person and its Consolidated
Subsidiaries for such twelve-month period, (b) all depreciation expense of such
Person and its Consolidated Subsidiaries for such twelve-month period, and (c)
all amortization expense of such Person and its Consolidated Subsidiaries for
such twelve-month period, less Capital Expenditures of such Person and its
Consolidated Subsidiaries for such twelve-month period.
"Conversion" or "Conversion Rights" shall mean exchange of, or the
rights to exchange, the Principal Amount of the Loan, or any part thereof, for
fully paid and nonassessable Common Stock on the terms and conditions provided
in the Debenture.
"Current Liabilities" shall mean all liabilities classified in
accordance with GAAP as current liabilities, but specifically including all
amounts outstanding under Borrower's revolving credit loans.
"Current Ratio" shall mean, for any Person as of any date, the ratio of
such Person's Consolidated Current Assets to Consolidated Current Liabilities
as of such date.
"Debentures" shall mean the Debentures executed by Borrower and
delivered pursuant to the terms of this Agreement, together with any renewals,
extensions or modifications thereof.
"Debtor Laws" shall mean all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization
or similar laws from time to time in effect affecting the rights of creditors
or debtors generally.
"Default" or "Event of Default" shall mean any of the events specified
in Article VIII.
"Dividends," in respect of any corporation, shall mean (i) cash
distributions or any other distributions on, or in respect of, any class of
capital stock of such corporation, except for distributions made solely in
shares of stock of the same class, and (ii) any and all funds, cash and other
payments made in respect of the redemption, repurchase or acquisition of such
stock, unless such stock shall be redeemed or acquired through the exchange of
such stock with stock of the same class.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, together with all rules and regulations issued pursuant thereto.
"Fixed Charge Coverage Ratio" shall mean for Borrower for the
immediately preceding twelve-month period ended on such date, the ratio of (a)
Consolidated Trailing Twelve Months Free Cash Flow, to (b) Borrower's total
scheduled payments of principal on Indebtedness for the same twelve-month
period, excluding Indebtedness under Borrower's revolving credit loans and
mandatory redemption payments as set forth herein.
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Agreement (Continued)
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"GAAP" shall mean United States generally accepted accounting principles
applied on a consistent basis, set forth in the Opinions of the Accounting
Principles Board of the American Institute of Certified Public Accountants or
the Financial Accounting Standards Board or their successors, which are
applicable in the circumstances as of the date in question. The requirement
that such principles be applied on a consistent basis shall mean that the
accounting principles observed in a current period are comparable in all
material respects to those applied in a preceding period.
"Governmental Authority" shall mean any government (or any political
subdivision or jurisdiction thereof), court, bureau, agency or other
governmental authority having jurisdiction over Borrower or a Subsidiary or any
of its or their businesses, operations or properties.
"Guaranty" of any Person shall mean any contract, agreement or
understanding of such Person pursuant to which such Person in effect guarantees
the payment of any Indebtedness of any other Person (the "Primary Obligor") in
any manner, whether directly or indirectly, including without limitation
agreements: (i) to purchase such Indebtedness or any property constituting
security therefor; (ii) to advance or supply funds primarily for the purpose of
assuring the holder of such Indebtedness of the ability of the Primary Obligor
to make payment; or (iii) otherwise to assure the holder of the Indebtedness of
the Primary Obligor against loss in respect thereof, except that "Guaranty"
shall not include the endorsement by Borrower or a Subsidiary in the ordinary
course of business of negotiable instruments or documents for deposit or
collection.
"Holder" shall mean the owner of Registrable Securities.
"Indebtedness" shall mean, with respect to any Person, without
duplication, the following indebtedness, obligations and liabilities of such
Person: (i) indebtedness for borrowed money; (ii) all obligations of such
Person in respect of any Guaranty; (iii) all obligations of such Person in
respect of any Capital Lease, (iv) all obligations, indebtedness and
liabilities secured by any lien or any security interest on any property or
assets of such Person, but only to the extent so secured; and (v) all preferred
stock of such Person which is subject, at the time of calculation of
Indebtedness, to a mandatory redemption requirement, valued at the greater of
its involuntary redemption price or liquidation preference plus accrued and
unpaid dividends, and all extensions, renewals, modifications and amendments
thereto.
"Investment" in any Person shall mean any investment, whether by means
of share purchase, loan, advance, capital contribution or otherwise, in or to
such Person, the Guaranty of any Indebtedness of such Person, or the
subordination of any claim against such Person to other Indebtedness of such
Person; provided however, that "Investment" shall not include (i) any demand
deposits in a duly chartered state or national bank or other cash equivalent
investments (ii) any loans permitted by Section 6.12, or (iii) any acquisitions
of equity in any other Person.
"IRS Code" shall mean the Internal Revenue Code of 1986, as amended,
together with all rules and regulations issued thereunder.
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Agreement (Continued)
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"Lien" shall mean any lien, mortgage, security interest, tax lien,
pledge, encumbrance, conditional sale or title retention arrangement, or any
other interest in property designed to secure the repayment of Indebtedness,
whether arising by agreement or under any statute or law, or otherwise.
"Loan" shall mean the money lent to Borrower pursuant to this Agreement,
along with any accrued, unpaid interest thereon.
"Loan Closing" or "Loan Closing Date" shall mean the disbursement of
Loan funds, which shall occur within ten (10) days of the execution and
delivery of this Agreement.
"Loan Documents" shall mean this Agreement, the Debentures and any other
agreements or documents required to be executed or delivered by Borrower
pursuant to the terms of this Agreement (and any amendments or supplements
hereto or modifications hereof).
"Lock-Up Agreement" shall mean the "lock-up" agreements to be executed
by the executive officers, directors and principal shareholders of the Company
pursuant to Section 5.19 of this Agreement.
"Material Adverse Effect" or "Material Adverse Change" shall mean any
change, factor or event that shall (i) have a material adverse effect upon the
validity or enforceability of any Loan Documents, (ii) have a material adverse
effect upon the financial condition, results of operations, business,
properties, operations or assets of Borrower or its Subsidiaries taken as a
whole, or, (iii) have a material adverse effect upon the ability of Borrower to
fulfill its obligations under the Loan Documents, or (iv) any event that causes
an Event of Default or which, with notice or lapse of time or both, could
become an Event of Default.
"Material Indebtedness" shall mean any debt incurred by Borrower that
shall have a Material Adverse Effect.
"Obligation" shall mean: (i) all present and future Indebtedness,
obligations and liabilities of Borrower to the Lenders arising pursuant to this
Agreement, regardless of whether such Indebtedness, obligations and liabilities
are direct, indirect, fixed, contingent, joint, several, or joint and several;
(ii) all present and future Indebtedness, obligations and liabilities of
Borrower to the Lenders arising pursuant to or represented by the Debentures
and all interest accruing thereon, and reasonable attorneys' fees incurred in
the enforcement or collection thereof; (iii) all present and future
indebtedness, obligations and liabilities of Borrower and any Subsidiary
evidenced by or arising pursuant to any of the Loan Documents; (iv) all costs
incurred by the Lenders or Agent, including but not limited to reasonable
attorneys' fees and legal expenses related to this transaction and (v) all
renewals, extensions and modifications of the indebtedness referred to in the
foregoing clauses, or any part thereof.
"Permits" shall have the meaning set forth in Section 4.14.
"Permitted Indebtedness" shall mean Indebtedness outstanding as of the
date hereof or incurred in compliance with Section 6.01 and the other terms of
this Agreement that constitutes (i) Senior Obligations,
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Agreement (Continued)
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(ii) obligations under capital leases, (iii) letters of credit, (iv) Current
Liabilities, (v) debt associated with Permitted Liens, (vi) any other
Subordinated Debt, (vii) Acquisition Indebtedness, (viii) purchase money
Indebtedness, (ix) Indebtedness of foreign Subsidiaries, (x) intercompany
Indebtedness, (xi) Indebtedness under this Agreement or the Debentures, and
(xii) any refunding, refinancing or extension of any of the above.
"Permitted Liens" shall mean: (i) Liens (if any) granted for the
benefit of the Lenders; (ii) Liens to secure the Permitted Indebtedness; (iii)
pledges or deposits made to secure payment of worker's compensation insurance
(or to participate in any fund in connection with worker's compensation
insurance), unemployment insurance, pensions or social security programs; (iv)
Liens imposed by mandatory provisions of law such as for carriers', landlord's,
materialmen's, mechanics', warehousemen's, vendors' and other like Liens
arising in the ordinary course of business, securing Indebtedness whose payment
is made within 90 days of the date such Lien arises, or that are being
contested in good faith by appropriate proceedings as to which adequate
reserves have been established to the extent required by GAAP; (v) Liens for
taxes, assessments and governmental charges or levies imposed upon a Person or
upon such Person's income or profits or property, if the same are not yet due
and payable or if the same are being contested in good faith and as to which
adequate cash reserves have been provided or if an extension is obtained with
respect thereto; (vi) Liens arising from good faith deposits in connection with
tenders, leases, bids or contracts (other than contracts involving the
borrowing of money), pledges or deposits to secure public or statutory
obligations and deposits to secure (or in lieu of) surety, stay, appeal or
customs bonds and deposits to secure the payment of taxes, assessments, customs
duties or other similar charges; (vii) encumbrances consisting of zoning
restrictions, easements, reservations, licenses, covenants and other minor
irregularities of title or other restrictions on the use of real property
(whether owned or leased) provided that such items do not materially impair the
intended use of such property, and none of which is violated by Borrower's
existing structures or land use; (viii) mortgages, financing statements,
equipment leases or other encumbrances incurred in connection with the
acquisition of property or equipment or the replacement of existing property or
equipment, provided that such liens shall be limited to the property or
equipment then being acquired; and (ix) Liens listed in Schedule 4.05.
"Person" shall include an individual, a corporation, a joint venture, a
general or limited partnership, a trust, an unincorporated organization or a
government or any agency or political subdivision thereof.
"Plan" shall mean an employee benefit plan or other plan maintained by
Borrower for employees of Borrower and/or any Subsidiaries and covered by Title
IV of ERISA, or subject to the minimum funding standards under Section 412 of
the Internal Revenue Code of 1986, as amended.
"Principal Amount" shall mean, as of any time, the then aggregate
outstanding face amount of the Debentures after any conversions or redemptions
and after giving effect to any installment payments received by the Lenders.
"Registrable Securities" shall mean (i) the Common Stock issuable upon
Conversion of the Debentures, (ii) any Common Stock issued upon Conversion of
the Debentures or upon exercise of any
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Agreement (Continued)
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warrant, right or other security that is issued with respect to the Common
Stock by way of (a) stock dividend; (b) any other distribution with respect to
or in exchange for, or in replacement of Common Stock; (c) stock split; or (d)
in connection with a combination of shares, recapitalization, merger, or
consolidation excluding in all cases, however, any Common Stock that is not a
Restricted Security and any Registrable Securities sold or transferred by a
Person in a transaction in which the rights under this Agreement are not
assigned, or (iii) any Common Stock purchased from the Company by the Lenders.
"Registrable Securities Then Outstanding" shall mean an amount equal to
the number of Registrable Securities outstanding which have been issued
pursuant to the Conversion of the Debentures.
"Renaissance III" shall mean Renaissance Capital Growth & Income Fund
III, Inc., a Texas corporation.
"Renaissance PLC" shall mean Renaissance US Growth & Income Trust PLC, a
public limited company registered in England and Wales.
"Renaissance Group" shall mean Renaissance Capital Group, Inc., a Texas
corporation.
"Restricted Security" shall mean a security that has not been (i)
registered under the 1933 Act or (ii) distributed to the public pursuant to
Rule 144 (or any similar provisions that are in force) under the 1933 Act.
"SEC" shall mean the Securities and Exchange Commission, or any other
federal agency at the time administering the 1933 Act and the 1934 Act.
"1933 Act" shall refer to the Securities Act of 1933, as amended, or any
similar federal statute and rules and regulations promulgated thereunder, all
as the same may be in effect from time to time.
"1934 Act" shall refer to the Securities Exchange Act of 1934, as
amended, or any similar federal statute and rules and regulations promulgated
thereunder, all as the same may be in effect from time to time.
"1940 Act" shall refer to the Investment Company Act of 1940, as
amended, or any similar federal statute and rules and regulations promulgated
thereunder, all as the same may be in effect from time to time.
"Senior Documents" means all loan documents evidencing the Senior
Obligations, as each may now or hereafter be amended, modified, supplemented,
renewed or extended from time to time.
"Senior Obligations" means one or more senior debt facilities (including
loans and other extensions of credit under the Senior Documents) or commercial
paper facilities with banks or other institutional lenders providing for
revolving credit loans, term loans, capital expenditure loans, receivables
financings (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit as now existing or hereafter incurred, in
each case, as amended, restated, modified, renewed or extended from time to
time.
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Agreement (Continued)
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"Solvent" shall mean, with respect to any Person on a particular date,
that on such date: (i) the fair value of the assets of such Person is greater
than the total amount of liabilities, of such Person; (ii) the estimated
present fair salable value, in the ordinary course of business, of the assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured; (iii) such Person is able to realize upon its assets and pay its debts
and other liabilities, contingent obligations and other commitments as they
mature in the normal course of business; (iv) such Person does not intend to,
and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature; and (v) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practice in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount which, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.
"Subordinated Debt" shall mean any indebtedness of Borrower or any
Subsidiaries, now existing or hereafter incurred, which indebtedness is, by its
terms, junior in right of repayment to the payment of the Debentures.
"Subsidiary" or "Subsidiaries" shall mean any or all corporations or
entities whether now existing or hereafter acquired of which over 50% the
Voting Shares or equity interests are owned, directly or indirectly, by
Borrower.
"Subsidiary Documents" shall mean the Guaranties, Security Agreements
and any other agreements or documents required to be executed or delivered by
any Subsidiary pursuant to the terms of this Agreement (and any amendments or
supplements hereto or modifications hereof).
"Total Capitalization" shall mean for any Person, total Indebtedness
plus shareholders' equity as defined in accordance with GAAP.
"Voting Shares" of any corporation shall mean shares of any class or
classes (however designated) having ordinary voting power for the election of
at least a majority of the members of the Board of Directors (or other
governing bodies) of such corporation, other than shares having such power only
by reason of the happening of a contingency.
SECTION 1.02. OTHER DEFINITION PROVISIONS.
(a) All terms defined in this Agreement shall have the above-defined
meanings when used in the Debentures or any other Loan Documents, certificate,
report or other document made or delivered pursuant to this Agreement, unless
the context therein shall otherwise require.
(b) Defined terms used herein in the singular shall import the plural
and vice versa.
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Agreement (Continued)
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(c) The words "hereof," "herein," "hereunder" and similar terms when
used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.
(d) References to financial statements and reports shall be deemed to
be a reference to such statements and reports prepared in accordance with GAAP.
(e) Accounting terms not specifically defined above in this Agreement
shall be construed in accordance with GAAP.
ARTICLE II - LOAN PROVISIONS
SECTION 2.01. THE LOAN.
(a) Subject to the terms and conditions of this Agreement, and the
compliance with such terms and conditions by all parties, each Lender agrees to
lend to Borrower, and Borrower agrees to borrow from the Lenders, the aggregate
sum of THREE MILLION DOLLARS ($3,000,000) as follows:
RENAISSANCE CAPITAL GROWTH & INCOME III, INC. $1,500,000
RENAISSANCE US GROWTH & INCOME TRUST PLC $1,500,000
(b) The Loan shall be disbursed at Loan Closing, subject to the
conditions provided hereunder, and shall be evidenced by the Debentures, in the
Principal Amounts specified above. The Debentures shall rank pari passu with
all Indebtedness of Borrower, other than the Senior Obligations and the
Subordinated Debt.
(c) Unless otherwise mutually agreed, the Loan Closing shall be at
the offices of Renaissance Capital Group, Inc., 8080 North Central Expressway,
Suite 210, Dallas, Texas.
(d) If, within 10 days of the date of this Agreement (i) Borrower has
failed to comply with the conditions precedent to the Loan Closing as specified
in Article III hereof (unless compliance with such conditions in whole or in
part has been waived or modified by the Lenders in their sole discretion) or
(ii) the Loan Closing has not occurred (unless the date of such Loan Closing
has been mutually extended), other than as a result of any failure of Lenders
to comply with the terms of this Agreement, then, in either such case, the
obligations of the Lenders under this Agreement shall terminate; provided,
however, that Borrower shall be obligated for payment of the fees and expenses
provided in Section 2.07 due and payable as of such date of termination.
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Agreement (Continued)
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SECTION 2.02. USE OF PROCEEDS.
(a) Borrower intends to use the Loan proceeds for acquisitions,
working capital and general corporate purposes.
(b) Borrower hereby acknowledges that the proceeds from the Loan
shall be of benefit to Borrower for the growth of its business by providing
capital which will provide additional opportunities for Borrower.
SECTION 2.03. INTEREST RATE AND INTEREST PAYMENTS.
Interest on the Principal Amount outstanding from time to time shall
accrue at the rate of 9.00% per annum, with the first installment of accrued,
unpaid interest being due and payable on FEBRUARY 1, 1998 and subsequent
payments of accrued, unpaid interest being due and payable on the first day of
each month thereafter. Overdue principal and interest on the Debentures shall
bear interest at the maximum rate permitted by applicable law. Interest on the
Principal Amount of each Debenture shall be calculated, from time to time, on
the basis of the actual days elapsed in a year consisting of 365 days.
SECTION 2.04. MATURITY.
If not sooner redeemed or converted, the Debentures shall mature on
DECEMBER 19, 2004, at which time all the remaining unpaid principal, interest
and any other charges then due under this Agreement shall be due and payable in
full. The Debentures may be prepaid without premium or penalty and shall be
prepaid pro rata with any prepayments of Indebtedness (other than Senior
Obligations) which is pari passu with or subordinated to the Debentures.
SECTION 2.05. MANDATORY PRINCIPAL REPAYMENT .
The Debentures shall be subject to mandatory principal repayment as
provided in the Debentures.
SECTION 2.06. REDEMPTION.
The Debentures shall be subject to redemption as provided in the
Debentures.
SECTION 2.07. FEES AND EXPENSES.
(a) Subject to the provisions of Section 12.07, upon Loan Closing:
(1) Borrower shall pay to Agent a closing fee of $40,000.
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Agreement (Continued)
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(2) Borrower shall pay the legal fees and expenses of the
Lenders and the Agent in connection with the preparation and negotiation
of the Loan Documents and the Loan Closing.
(3) All unpaid fees and expenses required to have been paid
under the Preliminary Outline of Terms among the parties.
(b) Subject to the provisions of Section 12.07, Borrower shall also
pay to the Agent monthly a monitoring fee of $1,000 per month for consulting
and monitoring services, and Borrower shall reimburse Agent for its reasonable
travel and out-of-pocket expenses in monitoring Borrower's compliance with this
Agreement.
SECTION 2.08. FINDER'S FEES.
Borrower represents to the Lenders that, except as set forth in Schedule
2.08, no commissions, brokerage or finder's fees were incurred by Borrower in
connection with this Agreement or the Debentures.
SECTION 2.09. TAXES.
(a) Each Debenture shall be convertible into shares of Common Stock
and on such terms as are stated in the Debentures. Such conversion shall be
made without deduction for any present or future taxes, duties, charges or
withholdings, (excluding, in the case of the Lenders, any foreign taxes, any
federal, state or local income taxes and any franchise taxes or taxes imposed
upon them by the jurisdiction, or any political subdivision thereof, under
which the Lenders are organized or are qualified to do business), and all
liabilities with respect thereto (herein "Taxes") shall be paid by Borrower.
If Borrower shall be required by law to deduct any Taxes for which Borrower is
responsible under the preceding sentence from any sum payable hereunder to the
Lenders: (i) the sum payable shall be increased so that after making all
required deductions, the Lenders shall receive an amount equal to the sum it
would have received had no such deductions been made; (ii) Borrower shall make
such deductions; and (iii) Borrower shall pay the full amount deducted to the
relevant taxing authority or other authority in accordance with applicable law.
Borrower shall be entitled to any refunds or returns from any such taxing
authority.
(b) Except as otherwise set forth in this Agreement or the other Loan
Documents, Borrower shall pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies which arise
from any payment made hereunder or under the Loan Documents or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or the other Loan Documents (hereinafter referred to as "Other
Taxes").
(c) Borrower shall indemnify the Lenders for the full amount of Taxes
and Other Taxes reasonably paid by the Lenders or any liability (including any
penalties or interest assessed because of Borrower's defaults) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes
were correctly or legally asserted. This indemnification shall be made within
thirty (30) days from the date
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Agreement (Continued)
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the Lenders make written demand therefor. The Lenders shall subrogate any and
all rights and claims relating to such Taxes and Other Taxes to Borrower upon
payment of said indemnification.
(d) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower in this Section
2.09 shall survive the payment in full of the Obligation.
SECTION 2.10 CONVERSION RIGHTS.
Each Debenture shall be convertible into shares of Common Stock on such
terms and in such amounts as are stated in the Debenture. The holders of the
shares issued upon exercise of the right of conversion as provided in said
Debenture shall be entitled to all the rights of the Lenders as stated in this
Agreement or the other Loan Documents, to the extent such rights are
specifically stated to survive the surrender of the Debenture for conversion as
therein provided.
ARTICLE III - CONDITIONS PRECEDENT
SECTION 3.01. DOCUMENT REQUIREMENTS.
The obligation of the Lenders to advance funds at the Loan Closing Date
hereof is subject to the condition precedent that, on or before the date of
such advance, the Lenders shall have received the following:
(i) Duly executed Debentures from Borrower in the Principal Amount of
Loan, each in amounts as requested by the Lenders, styled "Compass Bank, FBO,
Renaissance Capital Growth and Income Fund III, Inc.," and "Compass Bank, FBO,
Renaissance U.S. Growth and Income Trust PLC," which shall be in form and
substance acceptable to the Lenders and their counsel. Duly executed Pledge
Agreement and Security Agreement from Borrower, which shall be in form and
substance acceptable to the Lenders and their counsel.
(ii) Duly executed Guaranties and Security Agreements from each of the
Subsidiaries, which shall be in the form and substance acceptable to the
Lenders and their counsel.
(iii) A true and correct certificate signed by a duly authorized
officer of Borrower and dated as of the Loan Closing Date stating that, to the
best knowledge and belief of such officer, after reasonable and due
investigation and review of matters pertinent to the subject matter of such
certificate: (A) all of the representations and warranties contained in Article
IV hereof and the other Loan Documents are true and correct in all material
respects as of the Loan Closing Date and (B) no event has occurred and is
continuing, or would result from the Loan, which constitutes, or with notice or
lapse of time or both would constitute, a Default or an Event of Default.
(iv) Copies of resolutions, as adopted by Borrower and each
Subsidiary's Board of Directors, approving the execution, delivery and
performance, as applicable, of this Agreement, the Debentures, the
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Agreement (Continued)
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Guaranties and the other Loan Documents, including the transactions
contemplated herein and accompanied by a certificate of the Secretary or
Assistant Secretary of Borrower or the Subsidiary, stating that such
resolutions have been duly adopted, are true and correct, have not been altered
or repealed and are in full force and effect.
(v) A signed certificate of the Secretary or Assistant Secretary of
Borrower and each Subsidiary which shall certify the names of the officers of
Borrower and each Subsidiary authorized to sign the Loan Documents to be
executed by such officer, together with the true signatures of each of such
officers. It is herewith stipulated and agreed that the Lenders may thereafter
rely conclusively on the validity of this certificate as a representation of
the officers of Borrower and each Subsidiary duly authorized to act with
respect to the Loan Documents until such time as the Lenders shall receive a
further certificate of the Secretary or Assistant Secretary of Borrower and
each Subsidiary canceling or amending the prior certificate and submitting the
signatures of the officers thereupon authorized in such further certificate.
(vi) Certificates of good standing (or other similar instrument) for
Borrower and each Subsidiary issued by the Secretary of State of the state of
incorporation of Borrower and each Subsidiary, and certificates of
qualification and good standing for Borrower and each Subsidiary issued by the
Secretary of State of each of the states wherein such Borrower and each
Subsidiary has operating facilities of such nature so as to be required to be
qualified to do business as a foreign corporation, dated within ten (10) days
prior to Loan Closing.
(vii) A copy of the Articles of Incorporation of Borrower and each
Subsidiary and all amendments thereto, certified by the Secretary of State of
the state of incorporation and dated within ten (10) days prior to Loan Closing
and a copy of the bylaws of Borrower and each Subsidiary and all amendments
thereto, certified by the Secretary or Assistant Secretary of Borrower and the
Subsidiary, as being true, correct and complete as of the date of such
certification.
(viii) Copies of all registration statements, reports and proxy
statements filed with the SEC during or for the three fiscal years ended
December 31, 1996 and the nine months ended September 30, 1997.
(ix) A legal opinion from counsel to Borrower, in form and substance
satisfactory to the Lenders and their counsel.
(x) "Lock-up" Agreements, in form and substance satisfactory to the
Lenders and their counsel.
(xi) Such other information, documents and agreements as may
reasonably be required by the Lenders and the Lenders' counsel to substantiate
Borrower's compliance with the requirements of this Agreement and the Lenders'
compliance with the 1940 Act.
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Agreement (Continued)
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ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BORROWER
All references in this Article to Borrower shall include the
Subsidiaries, unless the context otherwise requires. To induce the Lenders to
make the Loan hereunder, Borrower represents and warrants to the Lenders that:
SECTION 4.01. ORGANIZATION AND GOOD STANDING.
Borrower is duly organized and existing in good standing under the laws
of the state of its incorporation, is duly qualified as a foreign corporation
and in good standing in all states in which failure to qualify would have a
Material Adverse Effect, and has the corporate power and authority to own its
properties and assets and to transact the business in which it is engaged and
is or will be qualified in those states wherein it proposes to transact
material business operations in the future.
SECTION 4.02. AUTHORIZATION AND POWER.
Borrower has the corporate power and requisite authority to execute,
deliver and perform the Loan Documents to be executed by Borrower. Borrower is
duly authorized to, and has taken all corporate action necessary to authorize,
execute, deliver and perform the Loan Documents executed by Borrower. Borrower
is and will continue to be duly authorized to perform the Loan Documents
executed by Borrower.
SECTION 4.03. NO CONFLICTS OR CONSENTS.
Except as disclosed on Schedule 4.03, neither the execution and delivery
of the Loan Documents, nor the consummation of any of the transactions therein
contemplated, nor compliance with the terms and provisions thereof, will
contravene or materially conflict with any judgment, license, order or permit
applicable to Borrower, or any indenture, loan agreement, mortgage, deed of
trust, or other agreement or instrument to which Borrower is a party or by
which Borrower is or becomes bound, or to which Borrower is or becomes subject,
or violate any provision of the charter or bylaws of Borrower or trigger any
preemptive rights or rights of first refusal of any third party. No consent,
approval, authorization or order of any court or governmental authority or
third party is required in connection with the execution and delivery by
Borrower of the Loan Documents or to consummate the transactions contemplated
hereby or thereby except those that have been obtained.
SECTION 4.04. ENFORCEABLE OBLIGATIONS.
The Loan Documents have been duly executed and delivered by Borrower and
are the legal, valid and binding obligations of Borrower, enforceable in
accordance with their respective terms.
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Agreement (Continued)
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SECTION 4.05. NO LIENS.
Except for Permitted Liens, all of the properties and assets owned or
leased by Borrower are free and clear of all Liens and other adverse claims of
any nature, and Borrower has good and marketable title to such properties and
assets. A true and complete list of all known or recorded liens for borrowed
money is disclosed on Schedule 4.05.
SECTION 4.06. FINANCIAL CONDITION.
Borrower has delivered to the Lenders copies of the balance sheets of
Borrower as of December 31, 1996, and the related statements of income,
stockholders' equity and statement of cash flow for the year then ended,
audited by its independent certified public accountant. Borrower has also
delivered to the Lenders copies of the balance sheet of Borrower as of
September 30, 1997, and the related statements of income, stockholders' equity
and statement of cash flow for the nine month period ended such date, which
financial statements have not been audited by its independent certified public
accountant. Such financial statements are true and correct in all material
respects, fairly represent the financial condition of Borrower as of such dates
and have been prepared in accordance with GAAP (except that unaudited financial
statements omit certain footnotes); and as of the date hereof, there are no
obligations, liabilities or Indebtedness (including contingent and indirect
liabilities and obligations) of Borrower which are (separately or in the
aggregate) material and are not reflected in such financial statements or
otherwise disclosed herein. Since the date of the above-referenced year end
financial statements and quarterly financial statements, there have not been,
except as disclosed in Schedule 4.06: (i) any Material Adverse Change; (ii) any
dividend declared or paid or distribution made on the capital stock of Borrower
or any capital stock thereof redeemed or repurchased; (iii) any incurrence of
long-term debt by Borrower; (iv) any salary, bonus or compensation increases to
any officers, key employees or agents of Borrower, other than in the ordinary
course of business and consistent with past practice, or; (v) any other
material transaction entered into by Borrower, except in the ordinary course of
business and consistent with past practice.
SECTION 4.07. NO DEFAULT.
No event has occurred and is continuing which constitutes, or with
notice and passage of time or both, would constitute, a Default or an Event of
Default under this Agreement.
SECTION 4.08. MATERIAL AGREEMENTS.
Neither Borrower nor any other party is in default, and no event has
occurred and is continuing which, with notice or lapse of time or both, would
constitute, a default, under any material contract, lease, loan agreement,
indenture, mortgage, security agreement, license agreement or other agreement
or obligation to which it is a party or by which any of its properties is
subject, except as described on Schedule 4.08. To the best knowledge of
Borrower, it is not a party to, or bound by, any contract or agreement, the
faithful performance of which is so onerous so as to create or to likely create
a Material Adverse Effect on the business, operations or financial condition of
Borrower.
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Agreement (Continued)
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SECTION 4.09. NO LITIGATION.
Except as disclosed on Schedule 4.09, there are no actions, suits,
investigations, arbitrations or administrative proceedings pending, or to the
knowledge of Borrower threatened, against Borrower, and there has been no
change in the status of any of the actions, suits, investigations, litigation
or proceedings disclosed to the Lenders which could reasonably be expected have
a Material Adverse Effect on Borrower or on any transactions contemplated by
any Loan Document.
SECTION 4.10. TAXES.
All tax returns required to be filed by Borrower in any jurisdiction
have been filed and all taxes (including mortgage recording taxes),
assessments, fees and other governmental charges upon Borrower or upon any of
its properties, income or franchises now due have been paid, in each case,
except where the same are being contested in good faith by appropriate
proceedings, as disclosed on Schedule 4.10.
Except as disclosed on Schedule 4.10, Borrower has not received any
notice of deficiency or other adjustment from any taxing authority that is
unresolved as of the Closing. No audit or examination, claim or proposed
assessment by any taxing authority is pending or, to the knowledge of Borrower,
threatened against Borrower or any of its properties. All ad valorem and other
property taxes imposed on Borrower, or that may become a lien on Borrower's
assets and that are due and payable, have been paid in full. Borrower has
withheld or collected from each payment made to each of its U.S. employees the
amount of all taxes (including federal income taxes, Federal Insurance
Contributions Act ("FICA") taxes, and state and local income, payroll, and wage
taxes, among others) required to be withheld or collected.
SECTION 4.11. CAPITALIZATION.
The authorized capital stock of Borrower consists of 10,000,000 shares
of Common Stock , $.001 par value, of which 6,410,883 shares of Common Stock
are issued and outstanding as of the date hereof. All of such outstanding
shares have been duly authorized and validly issued are fully paid and
nonassessable, and were not issued in violation of the preemptive rights or
rights of first refusal of any person. Schedule 4.11 sets forth all stock
options, warrants, conversion rights, subscription rights, preemptive rights,
rights of first refusal and other rights or agreements to acquire securities of
Borrower and any shares held in treasury or reserved for issue upon exercise of
such stock options, warrants or conversion rights, subscription rights and
other rights or agreements to acquire securities, including the date of
termination of such rights and the consideration therefor. As of the Loan
Closing Date, Borrower does not have class of securities with respect to which
a member of a national securities exchange, broker, or dealer may extend or
maintain credit to or for a customer pursuant to rules or regulation adopted by
the Board of Governors of the Federal Reserve System under Section 7 of the
1934 Act. Borrower has, and will continue to have as long as the Debentures
remain outstanding, authorized and reserved an adequate number of shares of
Common Stock to permit Conversion of the Debentures.
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Agreement (Continued)
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SECTION 4.12. USE OF PROCEEDS.
Borrower intends to use proceeds from the Loan as disclosed in Section
2.02 hereof.
SECTION 4.13. EMPLOYEE MATTERS.
(a) Borrower is not obligated under any Plan.
(b) Except as set forth on Schedule 4.13, Borrower is not a party to
any collective bargaining agreement and is not aware of any activities of any
labor union that is currently seeking to represent or organize its employees.
(c) Borrower is in compliance with all federal, state and municipal
laws respecting employment and employment practices, terms and conditions of
employment, and wages and hours, and is not engaged in any unfair labor
practice, and there are no arrears in the payment of wages or social security
taxes;
(d) there is no unfair labor practice complaint against Borrower
pending before the National Labor Relations Board or any state or local agency;
(e) to the best knowledge of Borrower, there is no pending labor
strike or other material labor trouble affecting Borrower (including, without
limitation, any organizational drive);
(f) to the best knowledge of Borrower, there is no material labor
grievance pending against Borrower;
(g) there is no pending representation question respecting the
employees of Borrower before any local, state or federal agency; and
(h) there are no pending arbitration proceedings arising out of or
under any collective bargaining agreement to which Borrower is a party, or to
the best knowledge of Borrower, any basis for which a claim may be made under
any collective bargaining agreement to which Borrower is a party.
SECTION 4.14. COMPLIANCE WITH LAWS.
Borrower has all requisite licenses, permits and certificates, including
environmental, health and safety permits, from federal, state and local
authorities necessary to conduct its business and own and operate its assets
(collectively, the "Permits"). Except as set forth on Schedule 4.14, Borrower
is not in violation of any law, regulation or ordinance (including, without
limitation, laws, regulations or ordinances relating to food and drug or
similar matters) relating to its business, operations and properties, which
individually or in the aggregate would have a Material Adverse Effect, and the
business and operations of Borrower do not violate, in any material respect,
any federal, state, local or foreign laws, regulations or orders (including,
but
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Agreement (Continued)
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not limited to, any of the foregoing relating to employment discrimination,
occupational safety, environmental protection, food and drug matters or corrupt
practices). Except as set forth on Schedule 4.14, Borrower has not received
any notice or communication from any federal, state or local governmental or
regulatory authority or otherwise of any such violation or noncompliance.
Borrower has not engaged in any practices in violation of any anti-trust law or
regulation of any federal, state or local Governmental Authority.
SECTION 4.15. SHARES ISSUABLE UPON CONVERSION.
The shares of Common Stock of Borrower when issued to the Lenders upon
conversion of the Debentures will be duly and validly issued, fully paid and
nonassessable and in compliance with all applicable securities laws. Such
issuance will not give rise to preemptive rights, rights of first refusal or
similar rights by any other security holder of Borrower.
SECTION 4.16. INSIDER.
(a) Neither Borrower, nor any Person having "control" (as that term
is defined in the 1940 Act or in the regulations promulgated pursuant thereto)
of Borrower is an "executive officer," "director," or "principal shareholder"
(as those terms are defined in the 1940 Act) of any Lender.
(b) Borrower's 1996 Annual Report on Form 10-K discloses all material
transactions required to be disclosed therein pursuant to Item 404 of
Regulation S-K promulgated under the 1933 Act.
(c) All agreements between Borrower and any of its officers,
directors, and principal shareholders, including employment agreements, are
disclosed in reports and filings made with the SEC or listed on Schedule 4.16.
SECTION 4.17. SUBSIDIARIES.
(a) All of the Subsidiaries of Borrower are listed on Schedule 4.17.
Except as disclosed on Schedule 4.17, Borrower owns all of the outstanding
capital stock or other equity interests of the Subsidiaries, free and clear of
all adverse claims, other than Liens securing the Senior Obligations. All of
such outstanding capital stock of each Subsidiary has been duly and validly
authorized and issued and is fully paid and nonassessable. All such
Subsidiaries are duly organized and existing in good standing under the laws of
the respective jurisdictions of their incorporation or organization, are duly
qualified as foreign corporations and in good standing in all jurisdictions in
which failure to qualify would have a Material Adverse Effect, and have the
corporate power and authority to own their respective properties and assets and
to transact the business in which they are engaged and are or will be qualified
in those jurisdictions wherein they propose to transact material business
operations in the future.
(b) Except as disclosed on Schedule 4.17, Borrower does not own any
equity or long-term debt interest in any other Person, or any right or option
to acquire any such interest in any such Person.
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Agreement (Continued)
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(c) There are no restrictions on the payment of dividends by or
advances from any Subsidiary to Borrower.
SECTION 4.18. CASUALTIES.
Neither the business nor the properties of Borrower is currently
affected by any environmental hazard, fire, explosion, accident, strike,
lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act
of God or other casualty (whether or not covered by insurance).
SECTION 4.19. INVESTMENT COMPANY ACT.
Borrower is not an "investment company" as defined in Section 3 of the
1940 Act nor a company that would be an investment company, except for the
exclusions from the definition of an investment company in Section 3(C) of the
1940 Act, and Borrower is not controlled by such a company.
SECTION 4.20. SUFFICIENCY OF CAPITAL.
Borrower is, and after consummation of this Agreement and giving effect
to all Indebtedness incurred and transactions contemplated in connection
herewith will be, Solvent.
SECTION 4.21. CORPORATE NAMES.
Borrower has not, during the preceding five (5) years, been known as or
used any assumed, fictitious or trade names.
SECTION 4.22. INSURANCE.
All of the insurable properties of Borrower are insured for its benefit
under valid and enforceable policies, issued by insurers of recognized
responsibility in amounts and against such risks and losses as is customary in
Borrower's industry. Schedule 4.22 sets forth all of Borrower's property
insurance policies.
SECTION 4.23. LICENSES, TRADEMARKS, SERVICE MARKS AND COPYRIGHTS.
Borrower owns or possesses legal, valid and binding licenses to use all
material trademarks, service marks, trade names, patents and copyrights
presently used to conduct its business. All material licenses of Borrower are
listed in Schedule 4.23, showing licensor, character or trademark license,
product and licensed area, date of grant, date of renewal or modification (if
any) and date of expiration. Borrower has the right to use such intellectual
property rights without infringing or violating the rights of any third
parties. No claim has been asserted by any person to the ownership of or right
to use any such rights or challenging or questioning the validity or
effectiveness of any such license or agreement. Borrower is not in default of
any such license agreements in any material respect and no event has occurred
and is continuing which, with
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Agreement (Continued)
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notice or lapse of time or both, would constitute a material default. Each
license agreement is enforceable in accordance with its terms and has not been
canceled, abandoned or terminated, nor has Borrower received notice thereof.
There are no claims for trademark or copyright infringement against Borrower or
the Subsidiaries, or their respective officers or directors. Neither Borrower
nor any Subsidiary is currently using copyrightable material for which Borrower
or any Subsidiary needs, but does not have, a license to conduct its existing
business, if the failure to have any such license could reasonably be expected
to have a Material Adverse Effect. Neither Borrower nor any Subsidiary is
currently using any trademarks for which Borrower or any Subsidiary needs, but
does not have, a valid character or trademark license to conduct its existing
business, if the failure to have any such license could reasonably be expected
to have a Material Adverse Effect.
SECTION 4.24. REAL PROPERTY; LEASES.
Set forth on Schedule 4.24 is an accurate description of each parcel of
real property owned by or leased to Borrower. All such real property, and the
use by Borrower of such real property, (i) complies with all applicable
federal, state and local environmental and wetlands laws, rules and
regulations, and there is not now, and never has been, manufacture, storage, or
disposal of hazardous wastes at such real property in violation of said laws,
rules and regulations, where the noncompliance with such laws, rules and
regulations could reasonably be expected to have a Material Adverse Effect, and
(ii) complies with all applicable building, health and fire codes, and
subdivision control laws, rules and regulations, where the noncompliance with
such laws, rules and regulations could reasonably be expected to have a
Material Adverse Effect. All leases of such real property are valid and in
full force and effect, binding and enforceable against Borrower, and there does
not exist any default or event that with notice or lapse of time, or both,
would constitute a default under any of such leases.
SECTION 4.25. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
All representations and warranties of Borrower herein shall survive the
Loan Closing and the delivery of the Debentures, and any investigation at any
time made by or on behalf of the Lenders shall not diminish the Lenders' right
to rely on Borrower's representations and warranties as herein set forth.
SECTION 4.26. FULL DISCLOSURE.
Neither the representations, warranties, schedules, financial statements
referenced in Section 4.06, nor any business plan, offering memorandum,
prospectus, SEC registration statement, report or proxy statement, certificate,
document or written statement to be delivered or caused to be delivered by
Borrower or any of its agents or representatives to the Lenders in connection
with this Agreement, contains or will contain, as of the date thereon, any
untrue statement of a material fact or omits or will omit to state any material
fact necessary to keep the statements contained herein or therein from being
misleading in any material respect.
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Agreement (Continued)
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ARTICLE V - AFFIRMATIVE COVENANTS OF BORROWER
So long as any part of the Debentures remains unpaid or has not been
redeemed or converted hereunder, and until such payment, redemption or
conversion in full, unless the Lenders shall otherwise consent in writing,
Borrower agrees that:
SECTION 5.01. FINANCIAL STATEMENTS, REPORTS AND DOCUMENTS.
(a) Borrower shall accurately and fairly maintain its books of
account in accordance with GAAP, retain Arthur Andersen LLP, or other such firm
of independent certified public accountants, requested by Borrower and approved
by the Lenders, to make annual audits of its accounts in accordance with
generally accepted auditing standards.
(b) Borrower shall provide the following reports and information to
each Lender:
(i) As soon as available, and in any event within forty-five
(45) days after the close of each fiscal quarter, Borrower's quarterly reports
on Form 10-Q with exhibits for said period. As soon as available, Borrower's
reports on Form 8-K with any exhibits.
(ii) As soon as available, and in any event within ninety (90)
days after the close of each fiscal year, Borrower's annual report on Form 10-K
with exhibits for said period.
(iii) Each fiscal quarter, concurrent with the periodic report
required above, a certificate executed by the Chief Financial Officer or Chief
Executive Officer of Borrower, (A) stating that a review of the activities of
Borrower during such fiscal period has been made under his supervision and that
Borrower has observed, performed and fulfilled each and every obligation and
covenant contained herein and is not in default under any of the same or, if
any such default shall have occurred, specifying the nature and status thereof,
and (B) stating that Borrower and the Subsidiaries are in compliance as of the
end of such fiscal quarter with the agreed minimum financial ratios and
standards set forth in Schedule 7.01 to this Agreement.
(iv) Promptly (but in any event within five (5) business days)
upon becoming aware of the existence of any condition or event which
constitutes a Default or which, with notice or the passage of time or both
would become a Default or an Event of Default, written notice specifying the
nature and period of existence thereof and the action which Borrower is taking
or proposes to take with respect thereto.
(v) Promptly (but in any event within five (5) business days)
upon the receipt thereof by Borrower or the Board of Directors of Borrower,
copies of all reports, all management letters and other detailed information
submitted to Borrower or the Board by independent accountants in connection
with each annual or interim audit or review of the accounts or affairs of
Borrower made by such accountants.
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Agreement (Continued)
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(vi) Promptly (but in any event within five (5) business days),
such other information relating to the finances, budgets, properties, business
and affairs of Borrower and each Subsidiary, as the Lenders or the Agent may
reasonably request from time to time.
(vii) Promptly upon its becoming available, one copy of each
financial statement, report, press release, notice or proxy statement sent by
Borrower to stockholders generally, and of each regular or periodic report,
registration statement or prospectus filed by Borrower with any securities
exchange or the SEC or any successor agency, and of any order issued by any
Governmental Authority in any proceeding to which Borrower is a party.
SECTION 5.02. PREPARATION OF BUDGETS.
(a) Prior to the beginning of Borrower's fiscal year Borrower agrees
to prepare and submit to the Board and furnish to each Lender a copy of, an
annual plan for such year which shall include, without limitation, plans for
expansion, if any, plans for incurrences of Indebtedness and projections
regarding other sources of funds, quarterly projected capital and operating
expense budgets, cash flow statements, profit and loss statements and balance
sheet projections, itemized in such detail as the Board may request.
(b) Borrower shall furnish to the Lenders monthly financial reports,
including budgets (as currently used by management in the conduct of business)
within 30 days of the end of each month.
(c) Borrower agrees that it will review its operations with Agent.
Such operations reviews will be in such depth and detail as Agent shall
reasonably request and will be held as reasonably necessary, generally once a
fiscal quarter.
SECTION 5.03. PAYMENT OF TAXES AND OTHER INDEBTEDNESS.
Borrower shall, and shall cause its Subsidiaries to, pay and discharge
(i) all taxes, assessments and governmental charges or levies imposed upon it
or upon its income or profits, or upon any property belonging to it, before
delinquent, (ii) all lawful claims (including claims for labor, materials and
supplies), which, if unpaid, will give rise to a Lien upon any of its property,
other than a Permitted Lien, and (iii) all of its other Indebtedness in
accordance with their respective terms, except as prohibited hereunder;
provided, however, that Borrower and its Subsidiaries, if any, shall not be
required to pay any such tax, assessment, charge, levy or other claim if and so
long as the amount, applicability or validity thereof shall currently be
contested in good faith by appropriate proceedings and appropriate accruals and
reserves therefor have been established in accordance with GAAP.
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Agreement (Continued)
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SECTION 5.04. MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS.
Subject to Section 6.13, Borrower shall, and shall cause its operating
Subsidiaries to, preserve and maintain their respective corporate existence and
all of their respective material rights, privileges and franchises necessary in
the normal conduct of its business, except where the failure to maintain such
rights, privileges and franchises could reasonably be expected to have a
Material Adverse Effect, and conduct their respective businesses in an orderly
and efficient manner consistent with good business practices and in accordance
with all valid regulations and orders of any Governmental Authority. Borrower
shall keep its principal place of business within the United States.
SECTION 5.05. SEC FILINGS.
So long as Borrower has a class of securities registered pursuant to
Section 12 of the 1934 Act, Borrower shall duly file, when due, all reports and
proxy statements required of a company whose securities are registered for
public trading under and pursuant to the 1934 Act and any rules and regulations
issued thereunder, and to preserve and maintain its registration thereunder.
SECTION 5.06. NOTICE.
Borrower shall promptly notify the Lenders of (i) any Material Adverse
Change, (ii) any default under any Senior Obligations, other Indebtedness
having an aggregate principal amount in excess of $50,000, material agreement,
contract or other instrument to which it is a party or by which any of its
properties are bound, or any acceleration of the maturity of any Indebtedness
having an aggregate principal amount in excess of $50,000, if any, (iii) any
material adverse claim against or affecting Borrower or its Subsidiaries, if
any, or any of its properties, and (iv) the commencement of, and any
determination in, any material litigation with any third party or any
proceeding before any Governmental Authority.
SECTION 5.07. COMPLIANCE WITH LOAN DOCUMENTS.
Borrower shall, and shall cause each of its Subsidiaries to, promptly
comply with any and all covenants and provisions of the Loan Documents.
SECTION 5.08. COMPLIANCE WITH MATERIAL AGREEMENTS.
Borrower shall, and shall cause each of its Subsidiaries to, comply in
all material respects with all material agreements, indentures, mortgages or
documents binding on it or affecting its properties or business.
SECTION 5.09. OPERATIONS AND PROPERTIES.
Borrower shall, and shall cause each of its Subsidiaries to, act
prudently and in accordance with customary industry standards in managing or
operating its assets, properties, business and investments. Borrower shall,
and shall cause each of its Subsidiaries to, keep in good working order and
condition,
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<PAGE> 28
Agreement (Continued)
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ordinary wear and tear excepted, all of its assets and properties which are
necessary to the conduct of its business.
SECTION 5.10. BOOKS AND RECORDS; ACCESS.
Borrower shall, and shall cause each of its Subsidiaries to, maintain
complete and accurate books and records of its transactions in accordance with
good accounting practices. Borrower shall give each duly authorized
representative of the Lenders access during all normal business hours, upon
reasonable notice, to, and shall permit such representative to examine, copy or
make excerpts from, any and all books, records and documents in the possession
of Borrower and its Subsidiaries and relating to its affairs, and to inspect
any of the properties of Borrower and its Subsidiaries; provided that the
Lender agrees that any such inspection will be performed so as not to interfere
with the Borrower's normal business operations. Borrower shall make a copy of
this Agreement, along with any waivers, consents, modifications or amendments,
available for review at its principal office by the Lenders or the Lenders'
representatives.
SECTION 5.11. COMPLIANCE WITH LAW.
Borrower shall, and shall cause each of its Subsidiaries to, comply in
all material respects with all applicable laws, rules, regulations, ordinances
and all orders and decrees of any Governmental Authority applicable to it or
any of its properties, businesses, or operations.
SECTION 5.12. INSURANCE.
Borrower shall, and shall cause each of its Subsidiaries to, maintain
such worker's compensation insurance, liability insurance and insurance on its
properties, assets and business, now owned or hereafter acquired, against such
casualties, risks and contingencies, and in such types and amounts, as are
consistent with customary practices and standards of companies engaged in
similar businesses.
SECTION 5.13. AUTHORIZATIONS AND APPROVALS.
Borrower shall, and shall cause each of its Subsidiaries to, promptly
obtain, from time to time at its own expense, all such governmental licenses,
authorizations, consents, permits and approvals as may be required to enable it
to comply with its obligations hereunder and under the other Loan Documents.
SECTION 5.14. ERISA COMPLIANCE.
Borrower shall (i) at all times, make prompt payment of all
contributions required under all Plans, if any, and shall meet the minimum
funding standards set forth in ERISA with respect to its Plans subject to
ERISA, if any, (ii) notify the Lenders immediately of any fact in connection
with any of its Plans, which might constitute grounds for termination thereof
by the Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer such Plan,
together with a statement, if requested by the Lenders as to the reason
therefor and the action, if any, proposed to be
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Agreement (Continued)
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taken with respect thereto, and (iii) furnish to the Lenders upon its request
such additional information concerning any of its Plans as may be reasonably
requested.
SECTION 5.15. FURTHER ASSURANCES.
Borrower shall, and shall cause each of its Subsidiaries to, make,
execute or endorse, and acknowledge and deliver or file or cause the same to be
done, all such notices, certifications and additional agreements, undertakings,
transfers, assignments, or other assurances, and take any and all such other
action, as the Lenders may, from time to time, deem reasonably necessary or
proper in connection with any of the Loan Documents, or the obligations of
Borrower or its Subsidiaries, if any, thereunder, which the Lenders may request
from time to time.
SECTION 5.16. INDEMNITY BY BORROWER.
Borrower shall indemnify, save, and hold harmless, the Lenders and their
directors, officers, lenders, attorneys, and employees (singularly or
collectively, the "Indemnitee") from and against (i) any and all claims,
demands, actions or causes of action that are asserted against any Indemnitee
if the claim, demand, action or cause of action directly or indirectly relates
to this Agreement and the other Loan Documents issued pursuant thereto, the use
of proceeds of the Loans, or the relationship of Borrower and the Lenders under
this Agreement or any transaction contemplated pursuant to this Agreement, (ii)
any administrative or investigative proceeding by any Governmental Authority
directly or indirectly related to a claim, demand, action or cause of action
described in clause (i) above, and (iii) any and all liabilities, losses,
costs, or expenses (including reasonable attorneys' fees and disbursements)
that any Indemnitee suffers or incurs as a result of any of the foregoing;
provided, however, that Borrower shall have no obligation under this Section
5.16 to the Lenders with respect to any of the foregoing arising out of the
gross negligence or willful misconduct of the Lenders or their assignees or the
breach by any Lender or their assignees of this Agreement or any other Loan
Document or other document executed in connection with any of the aforesaid,
the breach by the Lenders or their assignees of any intercreditor or
participation agreement or commitment with other parties, the violation or
alleged violation of any law, rule or regulation by the Lenders or their
assignees, or from the transfer or disposition by the Lenders of any Debenture
or the Common Stock issued upon conversion of the Debenture. If any claim,
demand, action or cause of action is asserted against any Indemnitee, such
Indemnitee shall promptly notify Borrower, but the failure to so promptly
notify Borrower shall not affect Borrower's obligations under this Section
unless such failure materially prejudices Borrower's right or ability to
participate in the contest of such claim, demand, action or cause of action, as
hereinafter provided. In the event that such Indemnitee's failure to properly
notify Borrower materially prejudices Borrower's right or ability to
participate in the contest of such claim, demand, action, or cause of action,
then said Indemnitee shall have no right to receive, and Borrower shall have no
obligation to pay, any indemnification amounts hereunder. Borrower may elect
to defend any such claim, demand, action or cause of action (at its own
expense) asserted against said Indemnitee and, if requested by Borrower in
writing and so long as no Default or Event of Default shall have occurred and
be continuing, such Indemnitee (at Borrower's expense) shall in good faith
contest the validity, applicability and amount of such claim, demand, action or
cause of action and shall permit Borrower to participate in such contest. Any
Indemnitee that
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Agreement (Continued)
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proposes to settle or compromise any claim or proceeding for which Borrower may
be liable for payment to or on behalf of an Indemnitee hereunder shall give
Borrower written notice of the terms of such proposed settlement or compromise
reasonably in advance of settling or compromising such claim or proceeding and
shall obtain Borrower's written concurrence thereto. In the event that said
Indemnitee fails to obtain Borrower's prior written consent to any such
settlement or compromise, said Indemnitee shall have no right to receive and
Borrower shall have no obligation to pay any indemnification amounts hereunder.
Each Indemnitee may employ counsel, which counsel shall be reasonably
acceptable to Borrower, in enforcing its rights hereunder and in defending
against any claim, demand, action, or cause of action covered by this Section
5.16; provided, however, that each Indemnitee shall endeavor in connection with
any matter covered by this Section 5.16 which also involves any other
Indemnitee, use reasonable efforts to avoid unnecessary duplication of effort
by counsel for all Indemnitees, including by allowing Borrower to select one
lawyer for all parties, such selection to be subject to the approval of such
parties, which approval shall not be unreasonably withheld. Any obligation or
liability of Borrower to any Indemnitee under this Section 5.16 shall survive
the expiration or termination of this Agreement and the repayment of the
Debentures.
SECTION 5.17. RESERVATION OF SHARES.
Borrower shall at all times reserve and keep available sufficient
authorized and unissued shares of Common Stock to effect the conversion of the
Debentures.
SECTION 5.18. OWNERSHIP OF SUBSIDIARIES.
Borrower shall own at all times all of the capital stock, or other
equity interests in, of the Subsidiaries, except that Borrower shall own
1,995,654 shares of common stock (81.6%) of ValQuest Medical, Inc. at Closing.
Additionally, Borrower plans to acquire approximately 294 shares of the common
stock of TFX Holding Company, Inc., a Delaware corporation and the parent
company of Dexterity, Inc. on or before December 31, 1997, which shares shall
represent 16.95% of the then issued and outstanding shares.
SECTION 5.19. RETENTION OF STOCK OWNERSHIP.
(a) Borrower shall not offer, sell or otherwise dispose of any shares
of Common Stock or securities exercisable or convertible into shares of Common
Stock for a period of 120 days following the Loan Closing, other than except
(A) Common Stock issued upon the conversion of any of the Debentures; (B)
Common Stock issued upon exercise of any outstanding warrants or options; (C)
Common Stock issued upon exercise of outstanding employee stock options; (D) up
to 200,000 shares of Common Stock issued upon exercise of employee stock
options to be granted subsequent to the date hereof, and (E) Common Stock sold
to the Lenders concurrently with the issuance of this Debenture.
(b) All executive officers, directors and principal shareholders of
the Company will execute and deliver Lock-Up Agreements at the Loan Closing
which shall provide that they will not offer, sell or otherwise dispose of
eighty-five percent (85%) of the shares of Common Stock beneficially owned or
controlled by them (including subsequently acquired shares or securities
exercisable or convertible into
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Agreement (Continued)
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shares), except for intra-family transfers or estate planning purposes, for a
period of twelve (12) months following the Loan Closing. Thereafter, each such
person shall only sell such securities pursuant to Rule 144, without the
consent of the Lenders, until the Debentures have been paid in full.
ARTICLE VI - NEGATIVE COVENANTS OF BORROWER
So long as any part of the Debentures have not been redeemed or
converted hereunder, and until such redemption or conversion in full, unless
the Lenders shall otherwise consent in writing, Borrower agrees that:
SECTION 6.01. LIMITATION ON INDEBTEDNESS.
At Loan Closing, Borrower and its Subsidiaries shall not have any
outstanding Indebtedness, except Indebtedness arising under this Agreement, the
Debentures, the Guaranties, Permitted Indebtedness or as set forth in Schedule
6.01. Borrower and its Subsidiaries will not incur or guarantee any
Indebtedness senior to or pari passu with the Debentures, without the consent
of the Lenders, except for bank debt and asset-based loans for Borrower's
operations and acquisitions.
SECTION 6.02. LIMITATION ON LIENS.
Borrower shall not, and shall not permit its Subsidiaries to, create,
cause, incur, permit, suffer to exist any Lien upon any of its properties or
assets, other than Permitted Liens.
SECTION 6.03. LIMITATION ON INVESTMENTS.
Borrower shall not, and shall not permit its Subsidiaries to, make or
have outstanding any Investments in any Person, except for Borrower's and any
Subsidiary's acquisition or ownership of stock of or other equity interests in
Subsidiaries (including Persons that will be Subsidiaries after giving effect
to such Investments), loans and other transactions between Borrower and any
Subsidiaries, short term bank deposits, money market investments, investment-
grade commercial paper, government securities and such other "cash equivalent"
investments as the Lenders may from time to time approve, and customer
obligations and receivables arising out of sales or leases made or the
rendering of services in the ordinary course of business.
SECTION 6.04. ALTERATION OF MATERIAL AGREEMENTS.
Borrower shall not, and shall not permit its Subsidiaries to, consent to
or permit any alteration, amendment, modification, release, waiver or
termination of any material agreement to which it is party, other than in the
ordinary course of business.
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Agreement (Continued)
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SECTION 6.05. TRANSACTIONS WITH AFFILIATES.
Except as disclosed in Schedule 6.05, Borrower shall not, and shall not
permit its Subsidiaries to, enter into any transaction not in the ordinary
course of business with, or pay any management fees to, any Affiliate, except
for intercompany transactions, without the consent of the Lenders, unless the
terms thereof (1) are no less favorable to Borrower or such Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not an Affiliate, or (2) if such transaction
involves an amount less than $50,000, are set forth in writing and have been
approved by a majority of the members of the Board of Directors having no
personal stake in the transaction.
SECTION 6.06. LIMITATIONS ON ACQUISITION OF NONRELATED BUSINESS.
Borrower shall not, and shall not permit its Subsidiaries to, engage in
any line of business or acquire any new product lines or business or acquire
any companies unless such new product line or business of the company acquired
is primarily involved in, or substantially similar or related to, Borrower's
current lines of business.
SECTION 6.07. LIMITATION ON SALE OF PROPERTIES.
Borrower shall not, and shall not permit its Subsidiaries to, (i) sell,
assign, convey, exchange, lease or otherwise dispose of any of its properties,
rights, assets or business (including the capital stock of its operating
Subsidiaries), whether now owned or hereafter acquired having a market value in
excess of $500,000 in any single transaction or series of related transactions,
or (ii) sell, assign or discount any accounts receivable except in the ordinary
course of business (which shall include receivable financing or
securitization), without the consent of the Lenders; provided, however, that
Borrower may sell its securities to unaffiliated third parties for fair market
value and to employees under its existing stock option plan.
SECTION 6.08. FISCAL YEAR AND ACCOUNTING METHOD.
Borrower shall not, and shall not permit its Subsidiaries to, change its
fiscal year or method of accounting, except as permitted by GAAP.
SECTION 6.09. LIQUIDATION.
Borrower shall not, and shall not permit its Subsidiaries to, (i)
dissolve or liquidate (except for dissolution or liquidation of inactive
Subsidiaries in the ordinary course of business) or (ii) enter into any other
transaction that has a similar effect.
SECTION 6.10. MATERIAL AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS.
Borrower shall not, and shall not permit its Subsidiaries to, amend its
Certificate of Incorporation (or other charter document) or bylaws in any
material respect, without the consent of the Lenders.
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Agreement (Continued)
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SECTION 6.11. EXECUTIVE COMPENSATION.
(a) Borrower will not increase the salary, bonus, or other
compensation programs (whether in cash, securities, or other property, and
whether payment is deferred or current) of its five most senior executive
officers, unless such compensation increase is approved by a majority of the
Board or a Compensation Committee of the Board of Directors, a majority of whom
shall nonemployee Directors.
(b) Borrower shall not implement any bonus, profit sharing or other
incentive plans, until such plans are formally adopted by the majority of the
Board or a Compensation Committee of the Board of Directors, a majority of
which shall be nonemployee Directors. Borrower's executive compensation shall
be consistent with the general compensation policies adopted by the
Compensation Committee of the Board of Directors.
SECTION 6.12. RESTRICTED PAYMENTS.
Borrower shall not (i) without the consent of the Lenders declare or pay
any dividend (other than stock dividends) or make any other cash distribution
on (a) any Common Stock, (b) any Preferred Stock, other than the Series A
Preferred Stock, or (c) the Series A Preferred Stock, if at the time of such
declaration or payment, the Borrower is in Default with respect to the Loan,
(ii) purchase, redeem, or otherwise acquire any shares of Common Stock or
Preferred Stock, without the consent of the Lenders, (iii) make any payments of
Indebtedness (other than Senior Obligations) which are pari passu or
subordinated to the Debentures, if at the time of such payment, Borrower is in
Default with respect to the Loan, or (iv) make any prepayments of Indebtedness
(other than Senior Obligations) which are pari passu or subordinated to the
Debentures, unless the Debentures are prepaid on a pro rata basis. Borrower
shall not permit its Subsidiaries to enter into any agreements restricting the
payment of dividends from the Subsidiaries to the Borrower without the written
consent of the Lenders.
SECTION 6.13. CONSOLIDATION OR MERGER.
Borrower shall not consolidate with or merge into any other corporation,
unless the surviving corporation after such merger or consolidation will not be
in Default and the surviving corporation becomes a party to this Agreement.
Subsidiaries shall only consolidate with or merge into Borrower or another
Subsidiary; provided, however, that a Subsidiary may merge or consolidate with
any other entity as long as such Subsidiary is the surviving corporation of
such merger or consolidation, and the Company is not in Default.
ARTICLE VII - COVENANTS OF MAINTENANCE OF FINANCIAL STANDARDS
SECTION 7.01. FINANCIAL RATIOS.
So long as any of the Debentures have not been redeemed or converted
hereunder, and until such redemption or conversion has been made in full, or
unless the Lenders shall otherwise consent in writing,
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Agreement (Continued)
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Borrower, on a consolidated basis, shall be in compliance with the covenants
contained in its Senior Documents and with the agreed minimum financial ratios
and standards provided in Schedule 7.01, as of the end of each fiscal quarter
of Borrower and as set forth in its most recent quarterly compliance
certificates delivered pursuant to Section 5.01.
ARTICLE VIII - EVENTS OF DEFAULT
SECTION 8.01. EVENTS OF DEFAULT.
(a) An "Event of Default" shall exist if any one or more of the
following events (herein collectively called "Events of Default") shall occur
and be continuing:
(i) Borrower shall fail to pay when due (or shall state in
writing an intention not to pay or its inability to pay) any installment of
interest on or principal of, any Debenture or any fee, expense or other payment
required hereunder and such failure to pay shall continue unremedied for a
period three (3) days.
(ii) Any representation or warranty made under this Agreement,
or any of the other Loan Documents, or in any certificate or statement
furnished or made to Agent pursuant hereto or in connection herewith or with
the Loans hereunder, or in any Subsidiary Document shall prove to be untrue or
inaccurate in any material respect as of the date on which such representation
or warranty was made;
(iii) Default shall occur in the performance of any of the
covenants or agreements of Borrower or of its Subsidiaries contained herein,
or in any of the other Loan Documents or in any Subsidiary Document, which
Default is not remedied within ten (10) days after the occurrence of such
breach or failure to perform.
(iv) Default shall occur in the payment of any Senior
Obligations or in the payment of any other Indebtedness having an aggregate
principal amount in excess of $50, 000, or nonmonetary default shall occur in
respect of any note, loan agreement or credit agreement relating to any
Indebtedness having an aggregate principal amount in excess of $50,000, and
such default continues for more than the period of grace, if any, specified
therein or any Indebtedness having an aggregate principal amount in excess of
$50,000, shall become due before its stated maturity by acceleration of the
maturity, or any indebtedness having an aggregate principal amount in excess of
$50,000, shall become due by its terms and shall not be promptly paid or
extended;
(v) Any of the Loan Documents shall cease to be legal, valid
and binding agreements enforceable against Borrower in accordance with the
respective terms, or shall in any way be terminated or become or be declared by
any court or by Borrower or any Subsidiary in any legal proceeding to be
ineffective or inoperative, or shall in any way whatsoever cease to give or
provide the respective rights, titles, interests, remedies, powers or
privileges stated therein to be created thereby;
(vi) Borrower or its Subsidiaries shall (A) apply for or
consent to the appointment of a receiver, trustee, custodian, intervenor or
liquidator of itself, or of all or substantially all of such Person's assets,
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Agreement (Continued)
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(B) file a voluntary petition in bankruptcy, admit in writing that such Person
is unable to pay such Person's debts as they become due or generally not pay
such Person's debts as they become due, (C) make a general assignment for the
benefit of creditors, (D) file a petition or answer seeking reorganization or
an arrangement with creditors or to take advantage of any bankruptcy or
insolvency laws, (E) file an answer admitting the material allegations of, or
consent to, or default in answering, a petition filed against such Person in
any bankruptcy, reorganization or insolvency proceeding, or (F) take corporate
action for the purpose of effecting any of the foregoing;
(vii) An involuntary petition or complaint shall be filed
against Borrower or any of its Subsidiaries seeking bankruptcy or
reorganization of such Person or the appointment of a receiver, custodian,
trustee, intervenor or liquidator of such Person, or all or substantially all
of such Person's assets, and such petition or complaint shall not have been
dismissed within sixty (60) days of the filing thereof or an order, order for
relief, judgment or decree shall be entered by any court of competent
jurisdiction or other competent authority approving a petition or complaint
seeking reorganization of Borrower or its subsidiary or appointing a receiver,
custodian, trustee, intervenor or liquidator of such Person, or of all or
substantially all of such Person's assets;
(viii) Any final judgment(s) for the payment of money in excess
of the sum of $100,000 in the aggregate shall be rendered against Borrower or
any Subsidiary and such judgment or judgments shall not be satisfied or
discharged prior to the date on which any of its assets could be lawfully sold
to satisfy such judgment; or
(ix) Borrower shall fail to issue and deliver shares of Common
Stock as provided herein upon conversion of the Debentures.
SECTION 8.02. REMEDIES UPON EVENT OF DEFAULT.
(a) If an Event of Default shall have occurred and be continuing,
then the Lenders may exercise any one or more of the following rights and
remedies, and any other remedies provided in any of the Loan Documents, as the
Lenders in their sole discretion may deem necessary or appropriate:
(i) declare the unpaid Principal Amount (after application of
any payments or installments received by the Lenders) of, and all interest then
accrued but unpaid on, the Debentures and any other liabilities hereunder to be
forthwith due and payable, whereupon the same shall forthwith become due and
payable without presentment, demand, protest, notice of default, notice of
acceleration or of intention to accelerate or other notice of any kind, all of
which Borrower hereby expressly waives, anything contained herein or in the
Debentures to the contrary notwithstanding;
(ii) reduce any claim to judgment; and
(iii) without notice of default or demand, pursue and enforce
any of the Lenders' rights and remedies under the Loan Documents and the
Subsidiary Documents, or otherwise provided under or pursuant to any applicable
law or agreement, all of which rights may be specifically enforced.
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Agreement (Continued)
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(b) In the event of a violation by Borrower of the negative covenants
set forth in Article VI, the Lenders may, in their sole discretion, (i) waive
compliance with the covenants provided Borrower is in compliance with Section
7.01 hereof; or (ii) require Borrower to redeem the Debentures at the higher of
market value or the unpaid principal amount of the Debentures, together with an
amount equal to an 18% annual yield on the principal amount through the
Redemption Date, which ever is greater.
SECTION 8.03. PERFORMANCE BY THE LENDERS.
Should Borrower or any Subsidiary fail to perform any covenant, duty or
agreement contained herein or in any of the other Loan Documents or in any
Subsidiary Document, any Lender or Agent may perform or attempt to perform such
covenant, duty or agreement on behalf of Borrower. In such event, Borrower
shall, at the request of any Lender or Agent, promptly pay any amount
reasonably expended by any Lender or Agent in such performance or attempted
performance to any Lender or Agent at its principal office, together with
interest thereon, at the interest rate specified in the Debenture, from the
date of such expenditure until paid. Notwithstanding the foregoing, it is
expressly understood that any Lender or Agent assumes no liability or
responsibility for the performance of any duties of Borrower or any Subsidiary
hereunder or under any of the other Loan Documents or under any Subsidiary
Document.
SECTION 8.04. PAYMENT OF EXPENSES INCURRED BY THE LENDERS.
Upon the occurrence of a Default or an Event of Default, which
occurrence is not cured within the notice provisions, if any, provided herein,
Borrower agrees to pay and shall pay all costs and expenses (including
attorneys' fees and expenses) incurred by any Lender or Agent in connection
with the preservation and enforcement of the Lenders' rights under this
Agreement, the Debentures or any other Loan Document.
ARTICLE IX - REGISTRATION RIGHTS
SECTION 9.01. DEMAND REGISTRATION.
(a) Borrower hereby agrees to register all or any portion of the
Registrable Securities on two occasions (but no more than one per year) within
18 months after Closing, if, and only if, it shall receive a written request
from a Holder (the Initiating Holder) that Borrower file a registration
statement under the 1933 Act covering the registration of at least 25% of the
Registrable Securities Then Outstanding. Borrower shall, within 20 days of its
receipt thereof, give written notice of such request to all Holders of record
of Registrable Securities. The Holders of said Registrable Securities shall
then have 15 days from the date of mailing of such notice by Borrower to
request that all or a portion of their respective Registrable Securities be
included in said registration.
(b) If the Holders intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise
Borrower as a part of their request made pursuant to this Agreement, and
Borrower shall include such information in the written notice to the other
Holders of Registrable Securities referred to in Section 9.01(a). In such
event, the right of any Holder to include its Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's
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Agreement (Continued)
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Registrable Securities in the underwriting (unless otherwise mutually agreed by
Borrower, the underwriter, the Initiating Holder and such Holder) is limited to
the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with Borrower as provided
in Section 9.04(e)) enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by mutual
agreement of Borrower and the Initiating Holder, which agreement shall not be
unreasonably withheld. Notwithstanding any other provision of this Section
9.01, if the underwriter advises the Initiating Holder and Borrower in writing
that marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holder shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated on a pro rata basis among all Holders that have
requested to participate in such registration. The rights of the Holders shall
be senior to those of any Persons subsequently granted demand registration
rights.
(c) Each such registration shall remain effective for a period of 180
days, unless the Initiating Holder otherwise determines.
SECTION 9.02. "PIGGY-BACK" REGISTRATION.
If Borrower proposes to register any of its capital stock under the 1933
Act in connection with the public offering of such securities for its own
account or for the account of its security holders, other than Holders of
Registrable Securities pursuant hereto (a "Piggy-Back Registration Statement"),
except for (i) a registration relating solely to the sale of securities to
participants in Borrower's stock plans or employee benefit plans or (ii) a
registration relating solely to an transaction for which Form S-4 may be used,
then:
(a) Borrower shall give written notice of such determination to each
Holder of Registrable Securities, and each such Holder shall have the right to
request, by written notice given to Borrower within 15 days of the date that
such written notice was mailed by Borrower to such Holder, that a specific
number of Registrable Securities held by such Holder be included in the Piggy-
Back Registration Statement (and related underwritten offering, if any);
(b) If the Piggy-Back Registration Statement relates to an
underwritten offering, the notice given to each Holder shall specify the name
or names of the managing underwriter or underwriters for such offering. In
addition such notice shall also specify the number of securities to be
registered for the account of Borrower and for the account of its shareholders
(other than the Holders of Registrable Securities), if any;
(c) If the Piggy-Back Registration Statement relates to an
underwritten offering, each Holder of Registrable Securities to be included
therein must agree (i) to sell such Holder's Registrable Securities on the same
basis as provided in the underwriting arrangement approved by Borrower, and
(ii) to timely complete and execute all questionnaires, powers of attorney,
indemnities, hold-back agreements, underwriting agreements and other documents
required under the terms of such underwriting arrangements or by the SEC or by
any state securities regulatory body;
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Agreement (Continued)
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(d) If the managing underwriter or underwriters for the underwritten
offering under the Piggy-Back Registration Statement determines that inclusion
of all or any portion of the Registrable Securities in such offering would
materially adversely affect the ability of the underwriters for such offering
to sell all of the securities requested to be included for sale in such
offering at the best price obtainable therefor, the aggregate number of
Registrable Securities that may be sold by the Holders shall be limited to such
number of Registrable Securities, if any, that the managing underwriter or
underwriters determine may be included therein without such adverse effect as
provided below. If the number of securities proposed to be sold in such
underwritten offering exceeds the number of securities that may be sold in such
offering, there shall be included in the offering, first, up to the maximum
number of securities to be sold by Borrower for its own account and for the
account of other stockholders (other than Holders of Registrable Securities),
as they may agree among themselves, and second, as to the balance, if any,
Registrable Securities requested to be included therein by the Holders thereof
(pro rata as between such Holders based upon the number of Registrable
Securities initially proposed to be registered by each), or in such other
proportions as the managing underwriter or underwriters for the offering may
require; provided, however, that in the event that the number of securities
proposed to be sold in such underwritten offering exceeds the number of
securities that may be sold in such offering pursuant to the terms and
conditions set forth above and the Piggy-Back Registration Statement is a
result of public offering by Borrower of its securities for its own account,
there shall be included in the offering, first, up to the maximum number of
securities to be sold by Borrower for its own account and second, as to the
balance, if any, securities to be sold for the account of Borrower's
stockholders (both the Holders of Registrable Securities requested and such
other stockholders of Borrower requested to be included therein) on a pro rata
basis;
(e) Holders of Registrable Securities shall have the right to
withdraw their Registrable Securities from the Piggy-Back Registration
Statement, but if the same relates to an underwritten offering, they may only
do so during the time period and on the terms agreed upon among the
underwriters for such underwritten offering and the Holders of Registrable
Securities; and
(f) The exercise of the registration rights of the Holders with
respect to any specific underwriters offering shall be subject to a 90-day
delay at the request of the managing underwriter.
SECTION 9.03. SHELF REGISTRATION.
Borrower shall file a "shelf" registration statement on an appropriate
form under the 1933 Act (the "Shelf Registration") covering all of the
Registrable Securities within 90 days from the Loan Closing and shall use its
best efforts to cause the Shelf Registration to be declared effective and to
keep the Shelf Registration continuously effective until all of the Registrable
Securities registered therein cease to be Registrable Securities. The
securities shall cease to be Registrable Securities when (a) the Shelf
Registration shall have become effective under the 1933 Act and such securities
shall have been disposed of pursuant to the Shelf Registration, or (b) such
securities shall have been sold as permitted by Rule 144 under the 1933 Act.
The holders of the Debentures shall utilize Rule 144 in their sole discretion
to the extent it meets their distribution requirements. Borrower agrees, if
necessary, to supplement or amend the Shelf Registration, as required by the
registration form utilized by Borrower or by the instructions applicable to
such registration form or by the 1933 Act, and Borrower agrees to furnish to
the holders of the Registrable Securities copies of any such supplement or
amendment prior to its being used.
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Agreement (Continued)
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SECTION 9.04. OBLIGATIONS OF BORROWER.
Whenever required to effect the registration of any Registrable
Securities pursuant to this Agreement, Borrower shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and keep such registration
statement effective until the sooner of all such Registrable Securities having
been distributed, or until 120 days have elapsed since such registration
statement became effective (subject to extension of this period as provided
below);
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all securities covered by such
registration statement, or 120 days have elapsed since such registration
statement became effective (subject to the extension of this period as provided
below);
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
(d) Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that Borrower shall not be required in connection therewith or as a
condition thereto to qualify as a broker-dealer in any states or jurisdictions
or to do business or to file a general consent to service of process in any
such states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with the managing
underwriter of such offering, in usual and customary form reasonably
satisfactory to Borrower and the Holders of a majority of the Registrable
Securities to be included in such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement;
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto and
covered by such registration statement is required to be delivered under the
1933 Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing; and
(g) In the event of the notification provided for in Section 9.04(f)
above, Borrower shall use its best efforts to prepare and file with the SEC
(and to provide copies thereof to the Holders) as soon as reasonably
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Agreement (Continued)
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possible an amended prospectus complying with the 1933 Act, and the period
during which the prospectus referred to in the notice provided for in Section
9.04(f) above cannot be used and the time period prior to the use of the
amended prospectus referred to in this Section 9.04(g) shall not be counted in
the 120 day period of this Section 9.04.
SECTION 9.05. FURNISH INFORMATION.
(a) It shall be a condition precedent to the obligations of Borrower
to take any action pursuant to this Article IX that the selling Holders shall
furnish to Borrower any and all information reasonably requested by Borrower,
its officers, directors, employees, counsel, agents or representatives, the
underwriter or underwriters, if any, and the SEC or any other Governmental
Authority, including but not limited to: (i) such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities, as shall be required to effect the registration
of their Registrable Securities, and (ii) the identity of and compensation to
be paid to any proposed underwriter or broker-dealer to be employed in
connection therewith.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the 1933 Act,
Borrower shall give the Holders of Registrable Securities on whose behalf such
Registrable Securities are to be registered and their underwriters, if any, and
their respective counsel and accountants, at such Holders' sole cost and
expense (except as otherwise set forth herein), such access to copies of
Borrower's records and documents and such opportunities to discuss the business
of Borrower with its officers and the independent public accountants who have
certified its financial statements as shall be reasonably necessary in the
opinion of such Holders and such underwriters or their respective counsel, to
conduct a reasonable investigation within the meaning of the 1933 Act.
SECTION 9.06. EXPENSES OF REGISTRATION.
All expenses, other than underwriting discounts and commissions
applicable to the Registrable Securities sold by selling Holders, incurred in
connection with the registration of the Registerable Securities pursuant to
this Article, including, without limitation, all registration, filing and
qualification fees, printer's expenses, and accounting and legal fees and
expenses of Borrower, shall be borne by Borrower. Selling Holders shall also
be responsible for all costs of their due diligence and legal counsel in
connection with a registration of Registrable Securities.
SECTION 9.07. INDEMNIFICATION REGARDING REGISTRATION RIGHTS.
If any Registrable Securities are included in a registration statement
under this Article:
(a) To the extent permitted by law, Borrower will indemnify and hold
harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the 1933 Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of the 1933 Act
or the 1934 Act, against any losses, claims, damages, liabilities (joint or
several) or any legal or other costs and expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action
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Agreement (Continued)
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to which they may become subject under the 1933 Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, costs, expenses
or liabilities (or actions in respect thereof) arise out of or are based upon
any of the following statements, omissions or violations (each a "Violation"):
(i) any untrue statement or alleged untrue statement of a material fact with
respect to Borrower or its securities contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements therein; (ii) the omission or alleged omission to
state therein a material fact with respect to Borrower or its securities
required to be stated therein or necessary to make the statements therein not
misleading; or (iii) any violation or alleged violation by Borrower of the 1933
Act, the 1934 Act, any federal or state securities law or any rule or
regulation promulgated under the 1933 Act, the 1934 Act or any state securities
law. Notwithstanding the foregoing, the indemnity agreement contained in this
Section 9.07(a) shall not apply and Borrower shall not be liable (i) in any
such case for any such loss, claim, damage, costs, expenses, liability or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person, or (ii) for amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is
effected without the prior written consent of Borrower, which consent shall not
be unreasonably withheld.
(b) To the extent permitted by law, each Holder who participates in a
registration pursuant to the terms and conditions of this Agreement shall
indemnify and hold harmless Borrower, each of its directors and officers who
have signed the registration statement, each Person, if any, who controls
Borrower within the meaning of the 1933 Act or the 1934 Act, each of Borrower's
employees, agents, counsel and representatives, any underwriter and any other
Holder selling securities in such registration statement, or any of its
directors or officers, or any person who controls such Holder, against any
losses, claims, damages, costs, expenses, liabilities (joint or several) to
which Borrower or any such director, officer, controlling person, employee,
agent, representative, underwriter, or other such Holder, or director, officer
or controlling person thereof, may become subject, under the 1933 Act, the 1934
Act or other federal or state law, only insofar as such losses, claims,
damages, costs, expenses or liabilities or actions in respect thereto arise out
of or are based upon any Violation, in each case to the extent and only to the
extent that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such. Each such Holder will indemnify any legal or other expenses
reasonably incurred by Borrower or any such director, officer, employee, agent
representative, controlling person, underwriter or other Holder, or officer,
director or of any controlling person thereof, in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the indemnity agreement contained in this Section 9.07(b) shall
not apply to amounts paid in settlement of any such loss, claim, damage, costs,
expenses, liability or action if such settlement is effected without the prior
written consent of the Holder, which consent shall not be unreasonably
withheld.
(c) Promptly after receipt by an indemnified party under this Section
9.07 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 9.07, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an
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Agreement (Continued)
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indemnified party shall have the right to retain its own counsel, with the
reasonable fees and expenses of such counsel to be paid by the indemnifying
party, if representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or potential
conflict of interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement
of any such action shall not relieve the indemnifying party of its obligations
under this Section 9.07, except to the extent that the failure results in a
failure of actual notice to the indemnifying party and such indemnifying party
is materially prejudiced in its ability to defend such action solely as a
result of the failure to give such notice.
(d) If the indemnification provided for in this Section 9.07 is
unavailable to an indemnified party under this Section in respect of any
losses, claims, damages, costs, expenses, liabilities or actions referred to
herein, then each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, costs, expenses, liabilities or
actions in such proportion as is appropriate to reflect the relative fault of
Borrower, on the one hand and of the Holder, on the other, in connection with
the Violation that resulted in such losses, claims, damages, costs, expenses,
liabilities or actions. The relative fault of Borrower, on the one hand, and
of the Holder, on the other, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of the material fact or
the omission to state a material fact relates to information supplied by
Borrower or by the Holder, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission.
(e) Borrower, on the one hand, and the Holders, on the other hand,
agree that it would not be just and equitable if contribution pursuant to this
Section 9.07 were determined by a pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of losses, claims, damages, costs, expenses,
liabilities and actions referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
reasonable legal or other expenses incurred by such indemnified party in
connection with defending any such action or claim. Notwithstanding the
provisions of this Section 9.07, neither Borrower nor the Holders shall be
required to contribute any amount in excess of the amount by which the total
price at which the securities were offered to the public exceeds the amount of
any damages which Borrower or each such Holder has otherwise been required to
pay by reason of such Violation. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the 1933 Act) shall
be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
SECTION 9.08. REPORTS UNDER THE 1934 ACT.
So long as Borrower has a class of securities registered pursuant to
Section 12 of the 1934 Act, with a view to making available to the Holders the
benefits of Rule 144 promulgated under the 1933 Act ("Rule 144") and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of Borrower to the public without registration or pursuant to a
registration on Form S-3, if applicable, Borrower agrees to use its reasonable
efforts to:
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Agreement (Continued)
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(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
(b) File with the SEC in a timely manner all reports and other
documents required of Borrower under the 1933 Act and the 1934 Act;
(c) Use its best efforts to include all Common Stock covered by such
registration statement on NASDAQ if the Common Stock is then quoted on NASDAQ;
or list all Common Stock covered by such registration statement on such
securities exchange on which any of the Common Stock is then listed; or, if the
Common Stock is not then quoted on NASDAQ or listed on any national securities
exchange, use its best efforts to have such Common Stock covered by such
registration statement quoted on NASDAQ or, at the option of Borrower, listed
on a national securities exchange; and
(d) Furnish to any Holder, so long as the Holder owns any Registrable
Securities, (i) forthwith upon request a copy of the most recent annual or
quarterly report of Borrower and such other SEC reports and documents so filed
by Borrower, and (ii) such other information (but not any opinion of counsel)
as may be reasonably requested by any Holder seeking to avail himself of any
rule or regulation of the SEC which permits the selling of any such securities
without registration or pursuant to such form.
SECTION 9.09. ASSIGNMENT OF REGISTRATION RIGHTS.
Subject to the terms and conditions of this Agreement, and the
Debentures, the right to cause Borrower to register Registrable Securities
pursuant to this Agreement may be assigned by Holder to any transferee or
assignee of such securities; provided that said transferee or assignee is a
transferee or assignee of at least ten percent (10%) of the Registrable
Securities and provided that Borrower is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act; it being the intention that so long as Holder
holds any Registrable Securities hereunder, either Holder or its transferee or
assignee of at least ten percent may exercise the demand right to registration
and piggy-back registration rights hereunder. Other than as set forth above,
the parties hereto hereby agree that the registration rights hereunder shall
not be transferable or assigned and any contemplated transfer or assignment in
contravention of this Agreement shall be deemed null and void and of no effect
whatsoever.
SECTION 9.10. OTHER MATTERS.
(a) Each Holder of Registrable Securities hereby agrees by
acquisition of such Registrable Securities that, with respect to each offering
of the Registrable Securities, whether each Holder is offering such Registrable
Securities in an underwritten or nonunderwritten offering, such Holder will
comply with Rules 10b-2, 10b-6 and 10b-7 of the 1934 Act and such other or
additional anti-manipulation rules then in effect until such offering has been
completed, and in respect of any nonunderwritten offering, in writing will
inform Borrower, any other
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Agreement (Continued)
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Holders who are selling shareholders, and any national securities exchange upon
which the securities of Borrower are listed, that the Registrable Securities
have been sold and will, upon Borrower's request, furnish the distribution list
of the Registrable Securities. In addition, upon the request of Borrower, each
Holder will supply Borrower with such documents and information as Borrower may
reasonably request with respect to the subject matter set forth and described
in this Section 9.10.
(b) Each Holder of Registrable Securities hereby agrees by
acquisition of such Registrable Securities that, upon receipt of any notice
from Borrower of the happening of any event which makes any statement made in
the registration statement, the prospectus or any document incorporated therein
by reference, untrue in any material respect or which requires the making of
any changes in the registration statement, the prospectus or any document
incorporated therein by reference, in order to make the statements therein not
misleading in any material respect, such Holder will forthwith discontinue
disposition of Registrable Securities under the prospectus related to the
applicable registration statement until such Holder's receipt of the copies of
the supplemented or amended prospectus, or until it is advised in writing by
Borrower that the use of the prospectus may be resumed, and has received copies
of any additional or supplemental filings which are incorporated by reference
in the prospectus.
(c) Borrower hereby agrees not to effect any public sale or other
public distribution of its equity securities, or any securities convertible
into or exchangeable or exercisable for such equity securities, during the
period commencing on the 7th day prior to, and ending on the 90th day (subject
to extension as provided in Section 9.04 hereof) following the effective date
of any underwritten demand registration, other than pursuant to Form S-8.
ARTICLE X - BOARD OF DIRECTORS
SECTION 10.01. BOARD REPRESENTATION OR ATTENDANCE BY OBSERVER.
(a) Borrower herewith agrees that Agent shall have the right from
time to time to designate a nominee to serve as a member of the Board of
Directors of Borrower. In the event of a monetary Default under Section 8.01
hereof, the Agent shall have the right to designate one (1) additional nominee
to serve as a member of the Board of Directors of Borrower. Borrower will
nominate and use its best efforts to secure the election of such designee(s) as
Director(s) of Borrower. During such time as Agent has not exercised such
rights, the Agent shall have the right to designate an observer, who shall be
entitled to attend and participate (but not vote) in all meetings of the Board
of Directors and to receive all notices, information, correspondence and
communications sent by Borrower to members of the Board of Directors. All
costs and expenses incurred by any such designated Director or observer, or by
Agent on behalf of such Director of observer, shall be reimbursed by Borrower.
(b) Any such Director or observer shall, if requested to do so,
absent himself or herself from the meeting in the event of, and so long as, the
Directors are considering and acting on matters pertaining to any rights or
obligations of Borrower or the Lender under this Agreement, the Debentures, the
other Loan Documents or the Subsidiary Documents.
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Agreement (Continued)
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SECTION 10.02. LIMITATION OF AUTHORITY OF PERSONS DESIGNATED AS A DIRECTOR
NOMINEE.
It is provided and agreed that the actions and advice of any person
while serving pursuant to Section 10.01 as a Director or an observer at
meetings of the Board of Directors shall be construed to be the actions and
advice of that person alone and not be construed as actions of the Lender as to
any notice of requirements or rights of Lender under this Agreement, the
Debentures, the other Loan Documents or the Subsidiary Documents; nor as
actions of the Lender to approve modifications, consents, amendments or waivers
thereof; and all such actions or notices shall be deemed actions or notices of
the Lender only when duly provided in writing and given in accordance with the
provisions of this Agreement.
SECTION 10.03. NONLIABILITY OF THE LENDERS.
The relationship between Borrower and the Lenders is, and shall at all
times remain, solely that of borrower and lender. The Lenders neither
undertake nor assume any responsibility or duty to Borrower to review, inspect,
supervise, pass judgment upon, or inform Borrower of any matter in connection
with any phase of Borrower's business, operations, or condition, financial or
otherwise. Borrower shall rely entirely upon its own judgment with respect to
such matters, and any review, inspection, supervision, exercise of judgment, or
information supplied to Borrower by the Lenders, or any representative or agent
of the Lenders, in connection with any such matter is for the protection of the
Lenders, and neither Borrower nor any third party is entitled to rely thereon.
ARTICLE XI - AGENCY AND INTER-LENDER PROVISIONS
SECTION 11.01. THE LENDERS' REPRESENTATIONS AND WARRANTIES TO OTHER LENDERS.
Each Lender represents and warrants to the other Lenders and the Agent:
(a) It is legal for it to make its portion of the Loan, and the
making of such portion of the Loan complies with laws applicable to it;
(b) It has made, without reliance upon any other Lenders, its own
independent review (including any desired investigations and inspections) of,
and it accepts and approves, the Loan, this Agreement and the associated
documents and all other matters and information which it deems pertinent. It
acknowledges that the Loan Documents and the Subsidiary Documents are a
complete statement of all understandings and respective rights and obligations
between and among the Lenders, Subsidiaries and Borrowers regarding the Loan.
(c) None of the Lenders have made any express or implied
representation or warranty to any other Lender with respect to this
transaction.
(d) It will, independently and without reliance upon any other
Lender, and based upon such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement, and will
make such investigation as
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Agreement (Continued)
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it deems necessary to inform itself as to the Loan, the Loan Documents, the
Subsidiary Documents, Borrower and any collateral; provided, however, nothing
contained in this Section shall limit Agent's obligation to provide the other
Lenders with the information and documents Agent is expressly required to
deliver under this Agreement.
(e) The relationship of each Lender is, and shall at all times
remain, solely that of each Lender of its respective Loan. The Lenders are not
partners or joint venturers in connection with the Loan.
SECTION 11.02. WAIVER OF LOAN PROVISIONS OR INTEREST OR PRINCIPAL PAYMENTS.
A waiver of an interest or principal payment, a declaration of a Default
or any amendment, modification or waiver of this Agreement or the Debentures
will require the consent of the Lenders.
SECTION 11.03. AGENCY.
(a) Each of the Lenders hereby designates and appoints Renaissance
Group as its Agent under this Agreement and authorizes the Agent to take such
action on its behalf under the provisions of this Agreement and the other Loan
Documents and the Subsidiary Documents and to exercise such powers as are set
forth herein or therein, together with such other powers as are reasonable
incidental thereto. In performing its functions and duties under this
Agreement, the Agent shall act solely as agent of the Lenders and does not
assume and shall not be deemed to have assumed any obligation toward or
relationship of agency or trust with or for Borrower. The Agent may perform
any of its duties under this Agreement, or under the other Loan Documents or
the Subsidiary Documents, by or through its agents or employees.
(b) The Agent shall have no duties or responsibilities except those
expressly set forth in this Agreement, in the other Loan Documents or in the
Subsidiary Documents. Except as expressly provided herein, the duties of the
Agent shall be mechanical and administrative in nature. The Agent shall have
and may use its sole discretion with respect to exercising or refraining from
taking any actions which the Agent is expressly entitled to take or assert
under this Agreement, the other Loan Documents and the Subsidiary Documents.
The Agent shall not have by reason of this Agreement a fiduciary relationship
with respect to the Lenders. Nothing in this Agreement, any of the other Loan
Documents or any of the Subsidiary Documents, express or implied, is intended
to or shall be construed to impose upon the Agent any obligations in respect of
this Agreement, any of the other Loan Documents or any of the Subsidiary
Documents except as expressly set forth herein or therein. If the Agent seeks
the consent or approval of the Lenders to the taking or refraining from taking
any action hereunder, the Agent shall send notice thereof to the Lenders. The
Agent may employ agents, co-agents and attorneys-in-fact and shall not be
responsible to the Lenders or Borrower, except as to money or securities
received by it or its authorized agents, for the negligence or misconduct of
any such agents or attorneys-in-fact selected by it with reasonable care.
(c) Neither the Agent nor any of its officers, directors, employees
or agents shall be liable to the Lenders for any action taken or omitted by it
or any of them under this Agreement, any of the other Loan Documents or any of
the Subsidiary Documents, or in connection herewith or therewith, except that
no Person shall be relieved of any liability imposed by law, intentional tort
or gross negligence. The Agent shall not be
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Agreement (Continued)
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responsible to the Lenders for any recitals, statements, representations or
warranties contained in this Agreement or for the execution, effectiveness,
genuineness, validity, enforceability, collectability, or sufficiency of this
Agreement, any of the other Loan Documents or any of the Subsidiary Documents
or any of the transactions contemplated thereby, or for the financial condition
of any of Borrowers. The Agent shall not be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions
or conditions of this Agreement, any of the other Loan Documents or any of the
Subsidiary Documents or the financial condition of Borrower, or the existence
or possible existence of any Default or Event of Default. Agent shall give the
Lenders notice of any Default or Event of Default of which Agent has actual
notice. The Agent may at any time request instructions from the Lenders with
respect to any actions or approvals which by the terms of this Agreement, of
any of the other Loan Documents or of any of the Subsidiary Documents the Agent
is permitted or required to take or to grant, and if such instructions are
promptly requested, the Agent shall be absolutely entitled to refrain from
taking any action or to withhold any approval and shall not be under any
liability whatsoever to any Person for refraining from any action or
withholding any approval under any of the Loan Documents or any of the
Subsidiary Documents until it shall have received such instructions from the
Lenders. Without limiting the foregoing, the Lenders shall not have any right
of action whatsoever against the Agent as a result of the Agent acting or
refraining from acting under this Agreement, any of the other Loan Documents or
any of the Subsidiary Documents in accordance with the instructions of the
Lenders.
(d) The Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone message
believed by it in good faith to be genuine and correct and to have been signed,
sent or made by the proper Person, and with respect to all matters pertaining
to this Agreement, any of the other Loan Documents or any of the Subsidiary
Documents and its duties hereunder or thereunder, upon advice of counsel
selected by it.
(e) To the extent that the Agent is not reimbursed and indemnified by
Borrower, the Lenders will reimburse and indemnify the Agent for and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses, advances or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of this Agreement, any of the other
Loan Documents, or any of the Subsidiary Documents or any action taken or
omitted by the Agent under this Agreement, any of the other Loan Documents or
any of the Subsidiary Documents. The obligations of the Lenders under this
indemnification provision shall survive the payment in full of the Loans and
the termination of this Agreement.
SECTION 11.04. SUBORDINATION OF LIENS.
The Lenders agree to subordinate their Liens to the Liens granted by the
Borrower to secure the Senior Obligations on terms and conditions reasonably
satisfactory to the Lenders.
- --------------------------------------------------------------------------------
43
<PAGE> 48
Agreement (Continued)
- --------------------------------------------------------------------------------
ARTICLE XII - MISCELLANEOUS
SECTION 12.01. STRICT COMPLIANCE.
Any waiver by the Lenders of any breach or any term or condition of this
Agreement, the other Loan Documents or the Subsidiary Documents shall not be
deemed a waiver of any other breach, nor shall any failure to enforce any
provision of this Agreement, the other Loan Documents or the Subsidiary
Documents operate as a waiver of such provision or of any other provision, nor
constitute nor be deemed a waiver or release of Borrower for anything arising
out of, connected with or based upon this Agreement, the other Loan Documents
or the Subsidiary Documents.
SECTION 12.02. WAIVERS AND MODIFICATIONS.
All modifications, consents, amendments or waivers (herein "Waivers") of
any provision of this Agreement, the Debentures, any other Loan Documents or
any Subsidiary Documents, and any consent to departure therefrom, shall be
effective only if the same shall be in writing by the Lenders and then shall be
effective only in the specific instance and for the purpose for which given.
No notice or demand given in any case shall constitute a waiver of the right to
take other action in the same, similar or other instances without such notice
or demand. No failure to exercise, and no delay in exercising, on the part of
Agent or any Lender, any right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise any other right. The rights of any Lender
hereunder, under the other Loan Documents and under the Subsidiary Documents
shall be in addition to all other rights provided by law.
SECTION 12.03. LIMITATION ON LIABILITY.
The duties, warranties, covenants and promises arising from the Loan
Documents and the Subsidiary Documents of each Lender to Borrower shall be
several and not joint, and Borrower shall have no legal or equitable cause of
action against any Lender (or its successors or assigns) for any liability of
any other Lender (or its successors or assigns).
SECTION 12.04. CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION.
Any suit, action or proceeding against Borrower with respect to this
Agreement or the Debentures or any judgment entered by any court in respect
thereof, may be brought in the courts of the State of Texas, County of Dallas,
or in the United States federal courts located in the State of Texas, as each
Lender in its sole discretion may elect, and Borrower hereby submits to the
nonexclusive jurisdiction of such courts for the purpose of any such suit,
action or proceeding. Borrower hereby agrees that service of all writs,
process and summonses in any such suit, action or proceeding brought in the
State of Texas may be brought upon, and Borrower hereby irrevocably appoints,
the CT Corporation System, Dallas, Texas, as its true and lawful attorney-in-
fact in the name, place and stead of Borrower to accept such service of any and
all such writs, process and summonses. Borrower hereby irrevocably waives any
objections which it may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement or any
Debenture brought in such courts, and hereby
- --------------------------------------------------------------------------------
44
<PAGE> 49
Agreement (Continued)
- --------------------------------------------------------------------------------
further irrevocably waives any claim that any such suit, action or proceeding
brought in any such court has been brought in any inconvenient forum.
SECTION 12.05. ARBITRATION.
(a) Upon the demand of the Lenders or Borrower (collectively the
"parties"), made before the institution of any judicial proceeding or not more
than 60 days after service of a complaint, third party complaint, cross-claim
or counterclaim or any answer thereto or any amendment to any of the above, any
Dispute (as defined below) shall be resolved by binding arbitration in
accordance with the terms of this arbitration clause. A "Dispute" shall
include any action, dispute, claim, or controversy of any kind, whether founded
in contract, tort, statutory or common law, equity, or otherwise, now existing
or hereafter occurring between the parties arising out of, pertaining to or in
connection with this Agreement, any document evidencing, creating, governing,
or securing any indebtedness guaranteed pursuant to the terms hereof, or any
related agreements, documents, or instruments (the "Documents"). The parties
understand that by this Agreement they have decided that the Disputes may be
submitted to arbitration rather that being decided through litigation in court
before a judge or jury and that once decided by an arbitrator the claims
involved cannot later be brought, filed, or pursued in court. IF BORROWER
SHALL FAIL TO PAY (OR SHALL STATE IN WRITING AN INTENTION NOT TO PAY OR ITS
INABILITY TO PAY) NOT LATER THAN THREE (3) DAYS AFTER THE DUE DATE, ANY
INSTALLMENT OF INTEREST ON OR PRINCIPAL OF, ANY DEBENTURE OR ANY FEE, EXPENSE
OR OTHER PAYMENT REQUIRED HEREUNDER, THE LENDERS MAY, AT THEIR OPTION, ENFORCE
THEIR RIGHTS OUTSIDE THE ARBITRATION PROVISION FOUND IN THIS SECTION 12.05 OR
ANY DEBENTURE.
(b) Arbitrations conducted pursuant to this Agreement, including
selection of arbitrators, shall be administered by the American Arbitration
Association ("Administrator") pursuant to the Commercial Arbitration rules of
the Administrator. Arbitrations conducted pursuant to the terms hereof shall
be governed by the provisions of the Federal Arbitration Act (Title 9 of the
United States Code), and to the extent the foregoing are inapplicable,
unenforceable or invalid, the laws of the State of Texas. Judgment upon any
award rendered hereunder may be entered in any court having jurisdiction;
provided, however, that nothing contained herein shall be deemed to be a waiver
by any party that is a bank of the protections afforded to it under 12 U.S.C.
91 or similar governing state law. Any party who fails to submit to binding
arbitration following a lawful demand by the opposing party shall bear all
costs and expenses, including reasonable attorneys' fees, incurred by the
opposing party in compelling arbitration of any Dispute.
(c) No provision of, nor the exercise of any rights under, this
arbitration clause shall limit the right of any party to (i) foreclose against
any real or personal property collateral or other security, (ii) exercise self-
help remedies (including repossession and setoff rights) or (iii) obtain
provisional or ancillary remedies such as injunctive relief, sequestration,
attachment, replevin, garnishment, or the appointment of a receiver from a
court having jurisdiction. Such rights can be exercised at any time except to
the extent such action is contrary to a final award or decision in any
arbitration proceeding. The institution and maintenance of an action as
described above shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the Dispute to arbitration, nor render
inapplicable the compulsory arbitration provisions hereof. Any claim or
Dispute related to exercise of any self-help, auxiliary or other exercise of
rights under this section shall be a Dispute hereunder.
- --------------------------------------------------------------------------------
45
<PAGE> 50
Agreement (Continued)
- --------------------------------------------------------------------------------
(d) Arbitrator(s) shall resolve all Disputes in accordance with the
applicable substantive law of the State of Texas. Arbitrator(s) may make an
award of attorneys' fees and expenses if permitted by law or the agreement of
the parties. All statutes of limitation applicable to any Dispute shall apply
to any proceeding in accordance with this arbitration clause. Any arbitrator
selected to act as the only arbitrator in a Dispute shall be required to be a
practicing attorney with not less than five (5) years practice in commercial
law in the State of Texas. With respect to a Dispute in which the claims or
amounts in controversy do not exceed five hundred thousand dollars ($500,000),
a single arbitrator shall be chosen and shall resolve the Dispute. In such
case the arbitrator shall have authority to render an award up to but not to
exceed five hundred thousand dollars ($500,000) including all damages of any
kind whatsoever, costs, fees and expenses. Submission to a single arbitrator
shall be a waiver of all parties' claims to recover more than five hundred
thousand dollars ($500,000). A Dispute involving claims or amounts in
controversy exceeding five hundred thousand dollars ($500,000) shall be decided
by a majority vote of a panel of three arbitrators ("Arbitration Panel"), one
of whom must possess the qualifications to sit as a single arbitrator in a
Dispute decided by one arbitrator. If the arbitration is consolidated with one
conducted pursuant to the terms of an agreement between the Lenders and
Borrower related to the indebtedness guaranteed, then the Arbitration Panel
shall be one which meets the criteria set forth between the Lenders and
Borrower. Arbitrator(s) may, in the exercise of their discretion, at the
written request of a party, (i) consolidate in a single proceeding any multiple
party claims that are substantially identical and all claims arising out of a
single loan or series of loans including claims by or against borrower(s),
guarantors, sureties and/or owners of collateral if different from Borrower,
and (ii) administer multiple arbitration claims as class actions in accordance
with Rule 23 of the Federal Rules of Civil Procedure. The arbitrator(s) shall
be empowered to resolve any dispute regarding the terms of this Agreement or
any Dispute or any claim that all or any part (including this provision) is
void or voidable but shall have no power to change or alter the terms of this
Agreement. The award of the arbitrator(s) shall be in writing and shall
specify the factual and legal basis for the award.
(e) To the maximum extent practicable, the Administrator, the
arbitrator(s) and the parties shall take any action necessary to require that
an arbitration proceeding hereunder be concluded within 180 days of the filing
of the Dispute with the Administrator. The arbitrator(s) shall be empowered to
impose sanctions for any party's failure to proceed within the times
established herein. Arbitration proceedings hereunder shall be conducted in
Texas at a location determined by the Administrator. In any such proceeding a
party shall state as a counterclaim any claim which arises out of the
transaction or occurrence or is in any way related to the Documents which does
not require the presence of a third party which could not be joined as a party
in the proceeding, The provisions of this arbitration clause shall survive any
termination, amendment, or expiration of the Documents and repayment in full of
sums owed to the Lenders by Borrower unless the parties otherwise expressly
agree in writing. Each party agrees to keep all Disputes and arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the parties or as required by
applicable law or regulation.
SECTION 12.06. INVALID PROVISIONS.
If any provision of any Loan Document is held to be illegal, invalid or
unenforceable under present or future laws during the term of this Agreement,
such provision shall be fully severable; such Loan Document shall be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part of such Loan Document; and the remaining provisions of such
Loan Document shall remain in full force and effect and
- --------------------------------------------------------------------------------
46
<PAGE> 51
Agreement (Continued)
- --------------------------------------------------------------------------------
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from such Loan Document. Furthermore, in lieu of each such
illegal, invalid or unenforceable provision shall be added as part of such Loan
Document a provision mutually agreeable to Borrower and the Lenders as similar
in terms to such illegal, invalid or unenforceable provision as may be possible
and be legal, valid and enforceable. In the event Borrower and the Lenders are
unable to agree upon a provision to be added to the Loan Document within a
period of ten (10) business days after a provision of the Loan Document is held
to be illegal, invalid or unenforceable, then a provision acceptable to
independent arbitrators, such to be selected in accordance with the provisions
of the American Arbitration Association, as similar in terms to the illegal,
invalid or unenforceable provision as is possible and be legal, valid and
enforceable shall be added automatically to such Loan Document. In either
case, the effective date of the added provision shall be the date upon which
the prior provision was held to be illegal, invalid or unenforceable.
SECTION 12.07. MAXIMUM INTEREST RATE.
(a) Regardless of any provision contained in any of the Loan
Documents, the Lenders shall never be entitled to receive, collect or apply as
interest on the Debentures any amount in excess of interest calculated at the
Maximum Rate, and, in the event that any Lender ever receives, collects or
applies as interest any such excess, the amount which would be excessive
interest shall be deemed to be a partial prepayment of principal and treated
hereunder as such; and, if the principal amount of the Obligation is paid in
full, any remaining excess shall forthwith be paid to Borrower. In determining
whether or not the interest paid or payable under any specific contingency
exceeds interest calculated at the Maximum Rate, Borrower and the Lenders
shall, to the maximum extent permitted under applicable law, (i) characterize
any nonprincipal payment as an expense, fee or premium rather than as interest;
(ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize,
pro rate, allocate and spread, in equal parts, the total amount of interest
throughout the entire contemplated term of the Debentures; provided that, if
the Debentures are paid and performed in full prior to the end of the full
contemplated term thereof, and if the interest received for the actual period
of existence thereof exceeds interest calculated at the Maximum Rate, the
Lenders shall refund to Borrower the amount of such excess or credit the amount
of such excess against the principal amount of the Debentures and, in such
event, the Lenders shall not be subject to any penalties provided by any laws
for contracting for, charging, taking, reserving or receiving interest in
excess of interest calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean, on any day, the highest nonusurious
rate of interest permitted by applicable law on such day that at any time, or
from time to time, may be contracted for, taken, reserved, charged or received
on the Indebtedness evidenced by the Debentures under the laws which are
presently in effect of the United States of America and the laws of any other
jurisdiction which are or may be applicable to the holders of the Debentures
and such Indebtedness or, to the extent permitted by law, under such applicable
laws of the United States of America and the laws of any other jurisdiction
which are or may be applicable to the holder of the Debentures and which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
- --------------------------------------------------------------------------------
47
<PAGE> 52
Agreement (Continued)
- --------------------------------------------------------------------------------
SECTION 12.08. PARTICIPATIONS AND ASSIGNMENTS OF THE DEBENTURES.
(a) The Lenders and the Agent shall have the right to enter into a
participation agreement with any other party or its Affiliates with respect to
the Debentures, or to sell all or any part of the Debentures, but any
participation or sale shall not affect the rights and duties of any such Lender
or the Agent hereunder vis-a-vis Borrower. In the event that all or any
portion of the Loan shall be, at any time, assigned, transferred or conveyed to
other parties, any action, consent or waiver (except for compromise or
extension of maturity), to be given or taken by any Lender or the Agent
hereunder (herein "Action"), shall be such action as taken by the holders of a
majority in amount of the Principal Amount of the Debentures then outstanding,
as such holders are recorded on the books of Borrower and represented by the
Agent as described in subsection (b) below.
(b) Assignment or sale of the Debentures shall be effective, on the
books of Borrower only upon (i) endorsement of the Debenture, or part thereof,
to the proposed new holder, along with a current notation of the amount of
payments or installments received and net Principal Amount yet unfunded or
unpaid, and presentment of such Debenture to Borrower for issue of a
replacement Debenture, or Debentures, in the name of the new holder; and (ii)
delivery of an opinion of counsel, reasonably satisfactory to Borrower, that
transfer shall not require registration or qualification under applicable state
or federal securities laws.
(c) The Debentures may be sold, transferred or assigned only to
Affiliates of the Lenders or permitted transferees in multiples of $100,000.
SECTION 12.09. CONFIDENTIALITY.
(a) All financial reports or information that are furnished to the
Lenders or Holders, or their respective director designees or other
representatives, pursuant to this Agreement or pursuant to the Debentures, the
other Loan Documents or the Subsidiary Documents shall be treated as
confidential unless and to the extent that such information has been otherwise
disclosed by Borrower, but nothing herein contained shall limit or impair the
Lenders' or Holders' right to disclose such reports to any appropriate
Governmental Authority, or to use such information to the extent pertinent to
an evaluation of the Obligation, or to enforce compliance with the terms and
conditions of this Agreement, or to take any lawful action which the Lenders or
Holders deem necessary to protect their respective interests under this
Agreement.
(b) The Lenders and the Agent shall use their reasonable efforts to
protect and preserve the confidentiality of such information, except for such
disclosure as shall be required for compliance by the Lenders or their
respective director designees with SEC reporting requirements or any
administrative or judicial proceeding or otherwise as a matter of law. The
provisions of Section 5.01 notwithstanding, Borrower may refuse to provide
information as required pursuant thereto to an assignee or successor in
interest to the Lenders, unless and until such assignee or successor shall have
executed an agreement to maintain the confidentiality of the information as
provided herein.
- --------------------------------------------------------------------------------
48
<PAGE> 53
Agreement (Continued)
- --------------------------------------------------------------------------------
SECTION 12.10. BINDING EFFECT.
The Loan Documents shall be binding upon and inure to the benefit of
Borrower and the Lenders and their respective successors, assigns and legal
representatives; provided, however, that Borrower may not, without the prior
written consent of the Lenders, assign any rights, powers, duties or
obligations thereunder.
SECTION 12.11. NO THIRD PARTY BENEFICIARY.
The parties do not intend the benefits of this Agreement to inure to any
third party, nor shall this Agreement be construed to make or render the
Lenders liable to any materialman, supplier, contractor, subcontractor,
purchaser or lessee of any property owned by Borrower, or for debts or claims
accruing to any such persons against Borrower. Notwithstanding anything
contained herein, in the Debentures, in any other Loan Document or in any
Subsidiary Document, no conduct by any or all of the parties hereto, before or
after signing this Agreement, any other Loan Document nor any Subsidiary
Document, shall be construed as creating any right, claim or cause of action
against the Lenders, or any of their respective officers, directors, agents or
employees, in favor of any materialman, supplier, contractor, subcontractor,
purchaser or lessee of any property owned by Borrower, nor to any other person
or entity other than Borrower.
SECTION 12.12. ENTIRETY.
This Agreement and the Debentures, the other Loan Documents, the
Subsidiary Documents and any other documents or instruments issued or entered
into pursuant hereto and thereto contain the entire agreement between the
parties and supersede all prior agreements and understandings, written or oral
(if any), relating to the subject matter hereof and thereof.
SECTION 12.13. HEADINGS.
Section headings are for convenience of reference only and, except as a
means of identification of reference, shall in no way affect the interpretation
of this Agreement.
SECTION 12.14. SURVIVAL.
All representations and warranties made by Borrower herein shall survive
delivery of the Debentures and the making of the Loans.
SECTION 12.15. MULTIPLE COUNTERPARTS.
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same agreement, and any of
the parties hereto may execute this Agreement by signing any such counterpart.
- --------------------------------------------------------------------------------
49
<PAGE> 54
Agreement (Continued)
- --------------------------------------------------------------------------------
SECTION 12.16. NOTICES.
(a) Any notices or other communications required or permitted to be
given by this Agreement or any other documents and instruments referred to
herein must be (i) given in writing and personally delivered, mailed by prepaid
certified or registered mail or sent by overnight service, such as Federal
Express, or (ii) made by telex or facsimile transmission delivered or
transmitted to the party to whom such notice or communication is directed, with
confirmation thereupon given in writing and personally delivered or mailed by
prepaid certified or registered mail.
(b) Any notice to be mailed, sent or personally delivered shall be
mailed or delivered to the principal offices of the party to whom such notice
is addressed, as that address is specified herein below. Any such notice or
other communication shall be deemed to have been given (whether actually
received or not) on the day it is mailed, postage prepaid, or sent by overnight
service or personally delivered or, if transmitted by telex or facsimile
transmission, on the day that such notice is transmitted; provided, however,
that any notice by telex or facsimile transmission, received by any Borrower or
the Lenders after 4:00 p.m., Standard Time, at the recipient's address, on any
day, shall be deemed to have been given on the next succeeding business day.
Any party may change its address for purposes of this Agreement by giving
notice of such change to the other parties.
If to Borrower to:
LifeQuest Medical, Inc.
12961 Park Central, Suite 1300
San Antonio, Texas 78216
210/495-8787
210/495-4441 (fax)
with a copy to:
Phillip M. Renfro, Esq.
Fulbright & Jaworski L.L.P.
300 Convent Street, Suite 2200
San Antonio, Texas 78205
210/224-5575
210/270-7205 (fax)
- --------------------------------------------------------------------------------
50
<PAGE> 55
Agreement (Continued)
- --------------------------------------------------------------------------------
If to the Lenders to:
Renaissance Capital Growth & Income Fund III, Inc.
Renaissance US Growth & Income Trust PLC
8080 North Central Expressway, Suite 210-LB59
Dallas, Texas 75206
214/891-8294
214/891-8291 (fax)
with a copy to:
Norman R. Miller, Esq.
Wolin, Ridley & Miller LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
214/939-4906
214/939-4949 (fax)
If to Agent to:
Renaissance Capital Group, Inc.
8080 North Central Expressway, Suite 210-LB59
Dallas, Texas 75206
214/891-8294
214/891-8291 (fax)
with a copy to:
Norman R. Miller, Esq.
Wolin, Ridley & Miller LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
214/939-4906
214/939-4949 (fax)
Any notice delivered personally in the manner provided herein will be
deemed given to the party to whom it is directed upon the party's (or its
agent's) actual receipt. Any notice addressed and mailed in the manner
provided here will be deemed given to the party to whom it is addressed at the
close of business, local time of the recipient, on the fourth business day
after the day it is placed in the mail, or, if earlier, the time of actual
receipt.
- --------------------------------------------------------------------------------
51
<PAGE> 56
Agreement (Continued)
- --------------------------------------------------------------------------------
SECTION 12.17. GOVERNING LAW.
THIS LOAN AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND DELIVERED,
AND IS INTENDED TO BE PERFORMED IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS
OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA
SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
LOAN AGREEMENT.
- --------------------------------------------------------------------------------
52
<PAGE> 57
Agreement (Continued)
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed and delivered, as of the date and year first above written.
BORROWER
LIFEQUEST MEDICAL, INC.
By:
------------------------------------------------------
Herbert H. Spoon, President and Chief Executive Officer
LENDERS
RENAISSANCE US GROWTH & INCOME TRUST PLC
By:
------------------------------------------------------
Renaissance Capital Group, Inc., Investment Manager
By:
------------------------------------------------------
Vance M. Arnold, Executive Vice President
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
By:
------------------------------------------------------
Vance M. Arnold, Vice President
AGENT
RENAISSANCE CAPITAL GROUP, INC.
By:
------------------------------------------------------
Vance M. Arnold, Executive Vice President
- --------------------------------------------------------------------------------
53
<PAGE> 58
SCHEDULES TO CONVERTIBLE LOAN AGREEMENT
<TABLE>
<S> <C>
Schedule 2.08 Schedule of Brokers/Finders
Schedule 4.03 Schedule of Conflicts or Consents
Schedule 4.05 Schedule of Permitted Liens
Schedule 4.06 Schedule of Any Material Adverse Change
Schedule 4.08 Schedule of Material Agreements
Schedule 4.09 Schedule of Litigation
Schedule 4.10 Schedule of Unpaid Taxes
Schedule 4.11 Schedule of Capitalization
Schedule 4.13 Schedule of Employee Matters
Schedule 4.14 Schedule of Compliance with Laws Matters
Schedule 4.16 Schedule of Agreements between Borrower and any of its
officers, directors, and principal shareholders, including
employment agreements
Schedule 4.17 Schedule of Subsidiaries
Schedule 4.22 Schedule of Insurance
Schedule 4.23 Schedule of Licenses, Trademarks, Service Marks and
Copyrights
Schedule 4.24 Schedule of Real Property; Leases
Schedule 6.01 Schedule of Limitation on Indebtedness
Schedule 6.05 Schedule of Transactions with Affiliates
Schedule 7.01 Schedule of Financial Ratios
</TABLE>
- --------------------------------------------------------------------------------
54
<PAGE> 59
SCHEDULE 7.01
FINANCIAL RATIOS
1. DEBT TO NET WORTH RATIO. Borrower agrees to maintain a Debt to Net
Worth Ratio of no greater than 1.8:1.
2. INTEREST EARNED RATIO. Borrower agrees to maintain an Interest Coverage
Ratio of at least .85:1.
3. DEBT COVERAGE RATIO. Borrower agrees to maintain Debt Coverage Ratio of
at least 5:1.
4. CURRENT RATIO. Borrower agrees to maintain a Current Ratio of at least
.10:1.
<PAGE> 1
EXHIBIT 11
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Computation of basic loss per share:
Net loss $(1,958,476) $(2,997,127)
=========== ===========
Weighted average shares of common stock
outstanding used for computation 4,941,771 6,299,592
=========== ===========
Basic loss per share of common stock $ (.40) $ (.48)
=========== ===========
Computation of diluted loss per share:
Net loss $(1,958,476) $(2,997,127)
Interest on convertible debentures -- 9,616
----------- -----------
Net loss used for computation $(1,958,476) $(2,987,511)
=========== ===========
Weighted average shares of common stock outstanding 4,941,771 6,299,592
Weighted average incremental shares outstanding upon assumed
conversion of options and other dilutive securities 290,155 455,862
Weighted average incremental shares outstanding upon assumed
conversion of Convertible Debentures -- 26,712
----------- -----------
Weighted average shares of common stock and common stock
equivalents outstanding used for computation 5,231,926 6,782,166
=========== ===========
Diluted loss per common share and common share equivalents (a) $ (.37) $ (.44)
=========== ===========
</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
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-KSB, into the Company's previously filed
Registration Statement on Form S-3 (File No. 333-21361).
/s/ Arthur Andersen LLP
San Antonio, Texas
March 27, 1998
-29-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE YEAR TO DATE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,236,307
<SECURITIES> 144,682
<RECEIVABLES> 2,548,597
<ALLOWANCES> 256,362
<INVENTORY> 1,745,523
<CURRENT-ASSETS> 7,613,984
<PP&E> 1,541,376
<DEPRECIATION> 922,437
<TOTAL-ASSETS> 10,738,116
<CURRENT-LIABILITIES> 3,438,899
<BONDS> 3,000,000
0
0
<COMMON> 6,654
<OTHER-SE> 4,183,761
<TOTAL-LIABILITY-AND-EQUITY> 10,738,116
<SALES> 14,336,828
<TOTAL-REVENUES> 14,429,314
<CGS> 8,701,263
<TOTAL-COSTS> 17,438,019
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,788
<INCOME-PRETAX> (2,997,127)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,997,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,997,127)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
