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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20532
DEXTERITY SURGICAL, 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 .
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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, 1998: $18,492,041
AT MARCH 25, 1999 (BASED UPON THE LAST REPORTED SALES PRICE OF $1.875 PER
SHARE), THE AGGREGATE MARKET VALUE OF THE COMMON STOCK, $.001 PAR VALUE, OF THE
REGISTRANT HELD BY NON-AFFILIATES WAS APPROXIMATELY $11.8 MILLION. AT MARCH 25,
1999, THERE WERE OUTSTANDING 10,212,742 SHARES OF COMMON STOCK, $.001 PAR VALUE,
OF THE REGISTRANT.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT FORM 10-KSB PART
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Definitive Proxy Statement for 1999 Annual Meeting of Stockholders
Transitional Small Business Disclosure Format. Part III, Items 9, 10, 11 and 12
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 (File No. 333-58849) filed on October 13, 1998, 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
Dexterity Surgical, Inc., formerly known as LifeQuest Medical, Inc.
(the "Company"), is engaged in the development, manufacture and distribution of
instruments, equipment and surgical supplies used in minimally invasive surgery
("MIS") and hand-assisted laparoscopic surgery ("HALS").
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(1), trocars(2), trocar
sleeves/cannulas(3), video systems, mechanical and laser-related cutting
devices, stapling(4) systems, electrocautery(5) systems, suction and irrigation
systems, graspers and dissectors, and hand-operated retractors(6). The products
are used by surgeons in hospitals and outpatient surgery facilities.
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(1) an instrument for the examination of the interior of a hollow viscus, such
as the bladder.
(2) a sharp-pointed instrument equipped with a cannula, used to puncture the
wall of a body cavity and withdraw fluids.
(3) a tube for insertion into a duct or cavity; during insertion its lumen is
usually occupied by a trocar.
(4) the act or process of closing a wound fastening with staples instead of
sutures.
(5) an apparatus for cauterizing tissue, consisting of a platinum wire in a
holder which is heated to a red or white heat when the instrument is
activated by an electric current.
(6) an instrument for maintaining operative exposure by separating the edges of
a wound and holding back underlying organs and tissues; many shapes, sizes,
and styles are available; any retractile muscle.
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HALS is a hybrid between open and laparoscopic surgery during which the
surgeon inserts one hand into the abdominal cavity during laparoscopic surgery.
By having his or her hand in the abdomen when performing laparoscopic surgery,
the surgeon has tactile feedback, rapid finger dissection, enhanced retraction
capabilities and simplified hemostasis.
The Company acquired Dexterity Incorporated, a Delaware corporation
("Dexterity"), effective March 1999. Dexterity is located in the Philadelphia,
Pennsylvania metropolitan area and develops, manufactures and distributes
proprietary instruments, equipments and supplies used in HALS. Effective with
such acquisition, the Company changed its name to Dexterity Surgical, Inc.
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 distributes equipment, instruments and surgical supplies used
in MIS.
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 distribute instruments, equipment and surgical
supplies used in MIS.
In February 1996, the Company acquired GM Engineering, Inc. ("GME"), a
private company.
The Company intends to continue to allocate its resources toward
becoming a significant competitor in the MIS and HALS markets by utilizing the
combined capabilities of its divisions 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 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 traded
on The NASDAQ SmallCap Market. Effective January 1, 1998, the Company merged
each of its wholly-owned subsidiaries, LifeQuest Endoscopic Technologies, Inc.
("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 approximately 20% of the common
stock of Dexterity, a business development subsidiary of Teleflex, Inc. In March
1999, the Company acquired the remaining capital stock of Dexterity by merging
Dexterity into the Company (the "Dexterity Merger"), pursuant to a Plan of
Merger and Acquisition Agreement between the Company and Dexterity (the
"Dexterity Agreement"). Under the terms of the Dexterity Agreement, which was
approved by the stockholders of the Company at a special meeting held March 18,
1999, the Dexterity stockholders, other than the Company, received an aggregate
of:
o $1,500,000;
o 3,000,000 shares of common stock, $.001 par value ("Common
Stock"), of the Company;
o warrants to purchase an aggregate of 1,500,000 shares of
Common Stock, at an exercise price per share of $2.00;
o promissory notes in the aggregate amount of $1,000,000; and
o a royalty for seven years in an amount equal to 15% of all
sales of Dexterity products (the "Royalty") pursuant to a
royalty agreement (the "Royalty Agreement") among the Company
and the Dexterity
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Stockholders other than the Company. The Royalty is subject to
minimum annual payments which aggregate, over the seven years
of the Royalty Agreement, approximately $9,695,095.
The Company determined the fair market value of the above consideration to be
approximately $16,000,000. The Company launched distribution of Dexterity's
primary products, the Dexterity(R) Pneumo Sleeve and Dexterity(R) Protractor, in
March 1998. The Dexterity products are currently the only HALS products approved
for sale in the United States. Simultaneous with the effectiveness of the
Dexterity Merger, the Company changed its name to Dexterity Surgical, Inc.
The Pneumo Sleeve is a device that allows the surgeon to insert one
hand into the abdominal cavity while preserving pneumoperitoneum(7) 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. According to a Private Placement Memorandum (the "PPM") prepared by
Dexterity, 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. According to the PPM, 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, will become integral components of LifeQuest's Lapro-PAK
surgical procedure kits.
Ana-Tech
In June 1998, the Company acquired approximately 4% of the membership
interests of Ana-Tech, L.L.C., a developmental stage company engaged in the
development, manufacturing and distribution of fecal incontinence devices, in
exchange for 370,000 shares of Common Stock. Ana-Tech, LLC is a Nevada limited
liability company and has one class of membership interests. As a member of
Ana-Tech, the Company has the right, along with the other members, to
participate in elections of managers of Ana-Tech, LLC and to receive
distributions of Net Cash Flow and Net Capital Proceeds (each as defined in the
Operating Agreement of Ana-Tech, LLC) on a pro-rata basis in accordance with the
Company's percentage of ownership of Ana-Tech, LLC. Allocations of profit and
loss of AnaTech, LLC will be allocated among the members of Ana-Tech, LLC
pro-rata in accordance with percentage of ownership.
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.
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(7) the presence of air or gas in the preperitoneal space; it may occur
spontaneously or be deliberately introduced as an aid to radiologic examination
and diagnosis.
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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.
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.
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 the sole shareholder of KMI, pursuant to which such
shareholder received 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. The clip applier is
currently not market-ready, and the Company plans to exercise such option and
introduce this product when it becomes commercially viable. 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.
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.
INDUSTRY BACKGROUND
The health care industry continues to undergo change, led primarily by
market forces demanding greater efficiencies and reduced costs. Government
proposed health care mandates in the United States have not occurred,
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and it is unclear whether, and to what extent, any future government mandates
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. Both MIS and HALS decrease 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 and HALS, 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 and/or distribute 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.
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, or,
if greater utilization of such procedures does result, that the Company will
benefit.
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.
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PRODUCTS
The Company distributes a variety of products manufactured and owned by
other companies and used primarily for MIS procedures. The list of companies
which utilize the Company to distribute selected products includes the
following: Origin MedSystems, Inc., ConMed Corporation, Sony Medical Products
Division, Welch Allyn Imaging, 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.
SALES AND MARKETING
The Company began commercial sales of its first MIS 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. In March
1999, the Company completed the Dexterity Merger. These acquisitions, along with
the Klein Merger, the Val-U-Med Merger and the GM Merger, allow the Company to
specialize in the sales, marketing and distribution of MIS and HALS devices,
including the Dexterity products. The Company is marketing the Dexterity
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 HALS and MIS. In the United
States, the Company markets MIS products and the Dexterity products primarily
through sales representatives who are employed by the Company within selected
geographical areas and independent sub-distributors 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 has continually expanded its geographical coverage in the
U.S. and plans to continue to add significant new products to its existing line
through internal development, licensing and acquisition. In 1998, the combined
distribution coverage of the Company included 35 U.S. states. Management intends
to add a significant number of direct sales representatives in 1999 to achieve
national distribution coverage. The table below set forth the Company's sales
force distribution, including independent contractors and distributors as of
March 12, 1999:
SALES FORCE DISTRIBUTION
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STATE SALES REPRESENTATIVES
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Alabama 2
Arizona 1
California 9
Colorado 1
Connecticut 1
Florida 4
Georgia 6
Idaho 1
Illinois 3
Indiana 1
Iowa 1
Kentucky 1
Louisiana 1
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STATE SALES REPRESENTATIVES
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Maine 1
Maryland 2
Massachusetts 3
Michigan 4
Minnesota 2
Mississippi 1
Missouri 3
Nebraska 1
New Jersey 4
New York 4
North Carolina 2
North Dakota 1
Ohio 3
Oklahoma 1
Pennsylvania 8
South Carolina 1
Tennessee 8
Texas 12
Utah 1
Virginia 2
West Virginia 1
Wisconsin 3
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Total 100
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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.
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Many of the Company's competitors and potential competitors have
substantially greater resources, including easier 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 certain hospitals. Such arrangements may
prevent the Company from obtaining access to such hospitals. 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.
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 as well as third party payers.
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 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. The Company's primary supplier, Origin MedSystems, Inc., provided
products which accounted for 38% and 43% of the Company's revenues in 1997 and
1998 respectively. The Company is a party to a distribution agreement with such
supplier which terminates in May 1999. There can be no assurance that the
Company will be able to renew the distribution agreement with its primary
supplier and the failure to do so will have an adverse impact on the Company's
business, financial condition and results of operations. 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, the Company's management estimates that United Parcel Service ("UPS")
delivers approximately 90% of the Company's products to its customers. The
termination of the Company's relationship with UPS, 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, another employee work stoppage at UPS or an employee
work stoppage or slow-down at one or more of these independent shipping
companies could materially impair
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<PAGE> 10
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, including Richard A.
Woodfield, President and Chief Executive Officer of the Company and Randall K.
Boatright, Executive Vice-President, Chief Financial Officer and Secretary of
the Company. The Company has entered into employment agreements with each of Mr.
Boatright and Mr. Woodfield. The Company does not maintain key man life
insurance on either Mr. Boatright or Mr. Woodfield. 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.
GOVERNMENT REGULATION
As a developer and distributor 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.
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 Good
Manufacturing Practices ("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 a 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. Through December 31, 1998, the Company has received 510(k) Notifications
for the following products:
<TABLE>
<CAPTION>
510(k) Number Description
- ------------- ------------
<S> <C>
K930756 Endo Aid Aspiration Irrigation Device
K942703 Disposable and Reusable Trocar Disposable and Reusable Light Cannula System
K974139 LQET Cannula/Trocar System
K934035 Monopolar Cautery/Suction Probe
K979335 Reusable Palpation Probe
</TABLE>
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
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<PAGE> 11
modified versions of existing products. The Company anticipates that most of the
products it develops 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.
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 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 various 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.
All of the products manufactured by or on behalf of the Company have
received all regulatory approvals as required, and the Company believes, to its
best knowledge, that all of the products it distributes but does not manufacture
have received all regulatory approvals as required. The Company has no
applications for approval before either the FDA or any similar regulatory body
in other countries nor does the Company anticipate filing any applications in
the near future. The Company has never had any sales in Europe nor has it ever
applied for the CE mark for sales in Europe.
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
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 generally have not
occurred, and it is unclear whether, and to what extent, any government mandate
will affect the domestic health
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<PAGE> 12
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 consolidation and cost
containment. Third-party payors, principally federal Medicare, state Medicaid
and private health insurance plans, have been able to exercise greater influence
through managed treatment and hospitalization patterns, including a shift from
reimbursement on a cost basis to per capita limits for patient treatment.
Hospitals have been severely impacted by the resulting cost restraints. The
increasing use of managed care, centralized purchasing decisions through group
purchasing organizations, 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. Managed care
providers are attempting to control the cost of health care by authorizing fewer
elective surgical procedures. All of these factors have contributed to
reductions in prices for the Company's products, to a reduction in the volume of
hospital purchasing and, in the near term, 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. While
the Company has implemented programs to assist hospitals in cost containment
through more efficient surgical practices and application of minimally invasive
surgery, there can be no assurance that the Company will not continue to be
adversely affected by these matters. There can be no assurance as to the impact
of cost containment on the Company's future operations.
The Company's products are purchased by hospitals, physicians, and
other health care providers, which bill various third-party payors, such as
government health programs, private health insurance plans, managed care
organizations and other similar programs, for the health care goods and services
provided to their patients. Third-party payors may deny reimbursement if they
determine that a product was not used in accordance with established payor
protocol regarding cost-effective treatment methods, or was used for an
unapproved treatment. Increasingly, third-party payors are also contesting the
prices charged for medical products and services and, in some instances, have
put pressure on medical device suppliers to lower their prices. There is no
assurance that reimbursement for the Company's products will be available or, if
available, that payors' reimbursement levels will not adversely affect the
Company's ability to sell its products on a profitable basis. Failure by
hospitals and other users of the Company's products to obtain reimbursement from
third-party payors, and changes in third-party payors' policies towards
reimbursement for procedures using the Company's products, could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
PRODUCT LIABILITY AND INSURANCE
The 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 products are purchased by hospitals, physicians, and
other health care providers, which in turn bill various third-party payors, such
as government health programs, private health insurance plans, managed care
organizations and other similar programs, for the health care goods and services
provided to their patients. Third-party payors may deny reimbursement if they
determine that a product was not used in accordance with established payor
protocol regarding cost-effective treatment methods, or was used for an
unapproved treatment. Increasingly, third-party payors are also contesting the
prices charged for medical products and services and, in some instances, have
put pressure on medical device suppliers to lower their prices. There is no
assurance that reimbursement for procedures performed by healthcare providers
utilizing the Company's products will be available or, if available, that the
third-party payors' reimbursement levels will not adversely affect the Company's
ability to sell its products on a profitable basis. Failure by hospitals and
other users of the Company's products to obtain reimbursement from third-party
payors, and changes in third-party payors' policies towards reimbursement for
procedures utilizing the Company's products, could have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
-12-
<PAGE> 13
ADDITIONAL BUSINESS RISKS
HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. The Company has experienced
operating losses since its inception on January 1, 1989. At December 31, 1998,
the Company had an accumulated deficit of approximately $19.3 million. Prior to
1996, 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 and in 1998,
sold their rights to such devices for a cash payment and a royalty on all future
sales of such devices. Primarily as a result of its acquisitions in 1996 and
1997, the Company generated revenues of approximately $18.5 million during the
year ended December 31, 1998.
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.
RECENT PRIVATE PLACEMENTS. In November 1998, pursuant to the terms of a
private placement, the Company issued to two affiliates of Renaissance Capital
Group, Inc. (collectively, such affiliates referred to herein as "Renaissance")
an aggregate of 1,000 shares of Series B Cumulative Convertible Preferred Stock,
$.001 par value ("Series B Preferred Stock") for aggregate proceeds of
$1,000,000. On the date the Company closed such private placement, November 19,
1998, the closing per share price of Common Stock on the NASDAQ SmallCap Market
was $2.125. The Company used such proceeds for working capital. The annual
dividends on the Series B Preferred Stock are cumulative at a rate of $80 per
share. The Series B Preferred Stock is initially convertible into shares of
Common Stock at a conversion price of $2 per share, for an aggregate of 500,000
shares of Common Stock. The conversion price for the Series B Preferred Stock is
subject to downward adjustment in the event the Company sells shares of Common
Stock, or securities convertible into shares of Common Stock, at a per share
price less than $2. The conversion price for the Series B Preferred Stock is
subject to a one-time downward adjustment if, following the Company's public
release of its 1998 financial results, the then current market price of Common
Stock, as defined in the Company's Certificate of Incorporation, is less than $2
per share. The holders of Series B Preferred Stock are entitled to one vote per
share on all matters submitted to a vote of the stockholders of the Company, and
the affirmative vote of the holders of 66 2/3% of the votes entitled to be cast
by the holders of the Series B Preferred Stock is required in order to amend the
Company's Certificate of Incorporation or Bylaws to materially affect the rights
of the holders of Series B Preferred Stock, including authorizing and creating a
class of stock having rights prior to or senior to the Series B Preferred Stock.
In the event two quarterly dividends payable on the Series B Preferred Stock are
in arrears, the holders of Series B Preferred Stock, by a majority vote, shall
be entitled to designate two additional directors to serve on the Company's
Board of Directors.
In August 1998, pursuant to the terms of a private placement, the
Company issued to Renaissance and two individuals, including one who is an
officer and director of the Company, an aggregate of 1,170 shares of 8% Series A
Cumulative Preferred Stock, $.001 par value ("Series A Preferred Stock"), for
aggregate proceeds of $1,170,000. On the date the Company closed such private
placement, August 11, 1998, the closing per share price of Common Stock on the
NASDAQ SmallCap Market was $1.75. The Company used such proceeds for working
capital. Annual dividends on the Series A Preferred Stock are cumulative at a
rate of $80 per share. The Series A Preferred Stock is initially convertible
into shares of Common Stock at a conversion price of $2 per share, for an
aggregate of 585,000 shares of Common Stock. The conversion price for the Series
A Preferred Stock is subject to downward adjustment in the event the Company
sells shares of Common Stock, or securities convertible into shares of Common
Stock, at a per share price less than $2. The conversion price for the Series A
Preferred Stock is subject to a one-time downward adjustment if, following the
Company's public release of its 1998 financial results, the then current market
price of Common Stock, as defined in the Company's Certificate of Incorporation,
is less than $2 per share. The holders of Series A Preferred Stock are entitled
to one vote per share on all matters submitted to a vote of the stockholders of
the Company, and the affirmative vote of the holders of 66 2/3% of the votes
entitled to be cast by the holders of the Series A Preferred Stock is required
in order to amend the Company's Certificate of Incorporation or Bylaws to
materially affect the rights of the holders of Series A Preferred Stock,
including authorizing and creating a class of stock having rights prior to or
senior to the Series A Preferred Stock. In the event two quarterly dividends
payable on the Series A Preferred Stock are in arrears, the holders of Series A
Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.
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<PAGE> 14
In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make an equity
investment in TFX, and for working capital purposes. The Debentures are secured
by substantially all of the assets of the Company and require monthly payments
of interest beginning in February 1998 and, unless sooner paid, redeemed or
converted, require monthly principal payments commencing in December 2000 of $10
per $1000 of the then remaining principal amount. The remaining principal
balance will mature in December 2004. The Debentures require the Company to
comply with the following financial covenants (all as defined in the
Debentures): (i) a Debt to Net Worth Ratio of no greater than .85:1; (ii) an
Interest Coverage Ratio of at least 5:1; (iii) a Debt Coverage Ratio of at least
.10:1; and (iv) a Current Ratio of at least 1.8:1. At December 31, 1998, the
Company was not in compliance with Interest Coverage Ratio and Debt Coverage
Ratio covenants, and has obtained a waiver from Renaissance to suspend the
Current Ratio, Interest Coverage Ratio and Debt Coverage Ratio covenants through
June 30, 1999, at which point the Company believes it will be in compliance with
such covenants. However, if the Company is unable to comply with such covenants
in the future, the Company could be found to be in technical default under the
Debentures and the holders thereof would have the right to demand the immediate
repayment of the entire amount outstanding. The Company believes that sufficient
resources would be available to fund such amounts in the event of such
acceleration. The holders of the Debentures have the option to convert at any
time all or a portion of the Debentures into shares of Common Stock at an
initial price of $4 per share of Common Stock. On the date the Company closed
such private placement, December 19, 1997, the closing per share price of the
Company's Common Stock on the NASDAQ SmallCap Market was $4.063. The conversion
price is subject to downward revision if the Company sells shares of its Common
Stock, or securities convertible into Common Stock, at a price less than $4 per
share of Common Stock, subject to certain allowed exceptions, during the term of
the Debentures. Accordingly, the conversion price for the Debentures was reduced
to $2 per share of Common Stock in connection with the August 1998 private
placement. The Debentures are also subject to a one-time adjustment to the
conversion price whereby the price will be reduced if, following the Company's
public release of its 1998 financial results, the then current market price of
Common Stock, as defined in the Debentures, is less than $2 per share. The
Debentures are currently convertible for an aggregate of 1,500,000 shares of
Common Stock; however, since the conversion price is subject to downward
adjustment as described above, and there is no minimum conversion price, the
maximum number of shares of Common Stock which may be issued pursuant to the
Debentures is undeterminable. The provisions of the Debentures provide that the
holders of the Debentures have an option to redeem the Debentures, in an amount
equal to an 18 percent annual yield on the principal balance, upon the
occurrence of certain events, including the delisting of Common Stock from the
NASDAQ SmallCap Market and certain "change of control" provisions, as defined in
the Debentures, as they relate to the Company. The Company may redeem the
Debentures at its option subject to certain share price and market activity
levels being obtained. The Company's right of redemption is subject to the
holder's prior right of conversion of the Debenture.
POTENTIAL ADVERSE EFFECTS OF CONVERSION OF DEBENTURES AND PREFERRED
STOCK AND EXERCISE OF WARRANTS. The Company cannot predict what effect, if any,
the conversion of the Debentures or Preferred Stock or exercise of warrants into
Common Stock and/or the sale of such Common Stock into the public market will
have on the market price of the Company's Common Stock. Offers or sales of
significant quantities of the Company's Common Stock, or the perception that
such sales may occur or have occurred, could adversely affect the market price.
The conversion features of the Debentures and Preferred Stock operates such that
the holders thereof receive more shares of the Common Stock upon conversion if
the conversion price is adjusted downward as described above. As the conversion
price of the Preferred Stock and the Debentures may be adjusted downward to an
amount equal to the volume-weighted average closing bid price of the Common
Stock for the twenty-one consecutive trading days following the Company's public
release of its 1998 financial results, sales of Common Stock by the holders of
the Preferred Stock or Debentures, or others, whether short or long selling,
could drive the market price of the Common Stock down during such twenty-one day
period, after which the holders of the Debentures and Preferred Stock could
profit by converting their securities into Common Stock at a lower price, then
selling such shares of Common Stock if the market price rises to a higher level.
The issuance of shares of Common Stock upon the conversion of the Preferred
Stock or the Debentures will substantially dilute the voting rights and other
interests of stockholders of the Company. As the number of shares of Common
Stock issuable upon the conversion of the Preferred Stock and the Debentures is
indeterminate, the Company is unable to predict to what extent the Company's
stockholders' rights will be diluted. Such uncertainty creates downward pressure
on the public market price of the Company's Common Stock. In the event such
holders convert their Debentures or shares of Preferred Stock, as applicable,
and sell a large number of shares of Common Stock into the public market over a
short time, the market price for the Common Stock could decline. Such a decline
may make future equity financings more difficult for the Company to obtain on an
acceptable basis, if at all.
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 resources required to protect the Company's intellectual property;
the resources expended, if any, to acquire complementary businesses,
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<PAGE> 15
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 Company believes
that its revenues and other sources of liquidity will provide adequate funding
for its capital requirements through at least 1999, 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. In the event
that substantial amounts of additional financing are required, including amounts
that may be required for any potential redemption of the Debentures described
above, the Company does not believe it will be able to obtain such financing
from traditional commercial lenders. Rather, the Company likely will have to
conduct additional sales of its equity and/or debt securities. In three private
placements since December 1997, the Company has issued securities currently
convertible into 2,585,000 shares of Common Stock. If the holders of such
securities were to convert them into shares of Common Stock and sell a large
number of shares of Common Stock on the public market, the market price for the
Common Stock could decline, thus making additional equity financings more
difficult for the Company to obtain on an acceptable basis, if at all. There can
be no assurance that such additional financing will be available if and when,
and in the amounts required, by the Company. Moreover, even if such financing is
available if and when required, there can be no assurance that such financing
will be obtained on terms that are favorable to the Company, and substantial and
immediate dilution to existing stockholders likely would result from any sales
of equity securities or other securities convertible into equity securities. Any
additional debt financings, 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. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The integration of these acquisitions has required a
significant expansion, and in some instances the replacement, of the Company's
accounting and other internal management systems and the implementation of a
variety of procedures and controls, including systems and procedures designed to
harmonize (i) the various management systems of the acquired companies and (ii)
the management styles of management personnel of the acquired companies. There
can be no assurance that significant problems in these areas will not occur. Any
failure to continue to expand or replace, as applicable, these systems and
implement such procedures and controls in an efficient manner and at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.
In connection with the Company's acquisitions and growth, the Company's
operating expenses have increased significantly, and the Company anticipates
that operating expenses will continue to increase in absolute dollars in the
future. In particular, in order to continue to provide quality products and
customer service and to meet anticipated demands of its customers, the Company
will be required to continue to increase staffing and other expenses, including
expenditures on sales and marketing and the infrastructure to support them.
Should the Company increase its expenditures in anticipation of a future level
of sales that does not materialize, the Company's business, financial condition
and results of operations would be materially and adversely affected. Certain
customers have required and may continue to require rapid increases in
production and accelerated delivery schedules which have placed and may continue
to place a significant burden on the Company's resources. In order to achieve
anticipated sales levels and profitability, the Company will continue to be
required to manage its assets and operations efficiently. In addition, should
the Company continue to expand geographically, it may experience certain
inefficiencies from the management of geographically dispersed personnel and
other resources.
Although many of the companies acquired by the Company 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 connection with an acquisition made in December 1996, the
Company paid an aggregate of $400,000 in cash. In addition, as of December 31,
1998 pursuant to the exemptions from registration provided for in Section 4(2)
of the Securities Act, the Company has issued approximately 2.8 million shares
of Common Stock, which represents approximately 38% of its outstanding and
issued shares of Common Stock at December 31, 1998, in connection with its six
acquisitions since February 1996. The issuance of Common Stock 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, and in making acquisitions, if any, the
Company may issued additional shares of Common Stock, other equity securities,
debt
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<PAGE> 16
securities or equity or debt securities convertible into shares of Common Stock.
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, 1997 and 1998, 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 announced increases in the
quantitative standards, which became effective in February 1998, for maintenance
of listings on The Nasdaq SmallCap Market. The revised standards for continued
listing 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 "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
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<PAGE> 17
severely limit the market liquidity of Common Stock and the ability of
stockholders 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.
RISK RELATED TO INTANGIBLE ASSETS. Largely as a result of acquisitions,
net goodwill accounts for approximately 14% and 29% of the Company's total
assets and total stockholders' equity, respectively, at December 31, 1998. Net
goodwill was approximately $1.67 million at December 31, 1998. Goodwill arises
when an acquirer pays more for a business than the fair value of the tangible
and separately measurable intangible net assets acquired. The Company
periodically evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of amounts allocable to the Company's
intangible assets may not be recoverable. If factors indicate that the carrying
value of the Company's intangible assets has been impaired, the Company would be
required to reduce the carrying value of such assets. Any future determination
requiring the write-off of a significant portion of the unamortized intangible
assets could have a material adverse effect on the Company's business, results
of operations or financial condition. A reduction in net income resulting from
the amortization of goodwill may have an adverse impact upon the market price of
the Company's Common Stock.
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.
SHARES ELIGIBLE FOR FUTURE SALE OR ISSUANCE. Sales of shares of Common
Stock by existing stockholders under Rule 144 of the Securities Act, or through
the exercise of outstanding vested options or the conversion of the Debentures
or Preferred Stock, could have an adverse effect on the price of the Common
Stock. At March 25, 1999, approximately 669,425 shares of Common Stock are
eligible for sale in the public market upon compliance with the volume and other
limitations contained in Rule 144 of the Securities Act. In addition, at
December 31, 1998 there were outstanding options to acquire up to approximately
1,128,000 shares of Common Stock, 1,500,000 shares of Common Stock issuable upon
conversion of the Debentures, 585,000 shares of Common Stock issuable upon
conversion of Series A Preferred Stock and 500,000 shares of Common Stock
issuable upon conversion of the Series B Preferred Stock. In the event a large
number of shares are sold in the public market over a short period of time, the
market price for Common Stock could decline.
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
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<PAGE> 18
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.
If any person or group 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 may also deter a person or group from attempting to acquire the
Company and therefore may inhibit the ability of stockholders of the Company to
sell their shares of Common Stock at a premium price in a takeover situation.
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.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND DELAWARE LAW. Certain provisions of the Delaware General
Corporation Law ("DGCL") and the Company's Certificate of Incorporation could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of the Company. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of Common Stock. These provisions of the DGCL and
provisions of the Company's Certificate of Incorporation may also have the
effect of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of the Company (including unsolicited
takeover attempts), even though such a transaction may offer the Company's
stockholders the opportunity to sell their stock at a price above the prevailing
market price. The Company is subject to the provisions of Section 203 of the
DGCL. In general, Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior to
such transaction, did own) 15% or more of the corporation's voting 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. The Board of Directors may issue one or more
series of preferred stock, without any action on the part of the stockholders of
the Company, the terms of which may adversely affect the rights of holders of
Common Stock. Issuance of preferred stock, which may be accomplished through a
public offering or a private placement, may dilute the voting power of holders
of Common Stock (such as by issuing preferred stock with super voting rights)
and may render more difficult the removal of current management, even if such
removal may be in the stockholders' best interests.
The issuance of preferred stock, for example, could decrease the amount
of earnings or assets available for distribution to the holders of Common Stock
or could adversely affect the rights and powers, including voting rights, of the
holders of Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock, as well as having the
anti-takeover effect discussed above. Further, the issuance of preferred stock
may be used as an "anti-takeover" device without further action on the part of
the stockholders.
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<PAGE> 19
Although the Company issued 1,170 shares of preferred stock in August 1998,
1,000 shares of preferred stock in November 1998 and 25 shares of preferred
stock in January 1999, it has no present intention to issue any additional
shares of its preferred stock; however, 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 the convertible
debentures and certain of the Company's loan agreements restrict the payment of
dividends on Common Stock.
EMPLOYEES
As of March 16, 1999, the Company employed approximately 83 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 16, 1999 and their
names, ages, positions and tenure with the Company are as follows:
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
---- --- -------- -------
<S> <C> <C> <C>
Richard A. Woodfield 56 President and Chief Executive Officer 1998
Randall K. Boatright 50 Executive Vice President, Chief Financial 1992
Officer and Secretary
K.C. Fadem 40 Vice President 1996
Robert Fadem 37 Vice President 1996
William H. Bookwalter 33 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 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 1998 the
Company paid aggregate rentals of approximately $290,000.
ITEM 3. LEGAL PROCEEDINGS
In June 1998, a case was filed in the State Court of Fulton County,
Georgia, alleging that the Company breached a distribution agreement with the
plaintiff. The plaintiff, Endo-Tech Ltd., Inc., asserted damages of
approximately $400,000, plus unspecified "consequential" damages. The Company
filed a counterclaim against the plaintiff and removed the case to the United
States District Court for the Northern District of Georgia, Atlanta Division. In
November 1998, the Company and the plaintiff agreed to dismiss their respective
claims against each other and entered into a settlement agreement pursuant to
which the Company agreed to purchase $18,000 of products per month from January
1999 through December 2000.
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<PAGE> 20
The Company is also a party to claims and legal proceedings arising in
the ordinary course of business. The Company believes it is unlikely that the
final outcome of any of the claims or proceedings to which the Company is a
party, including the case described above, would have a material adverse effect
on the Company's financial statements; however, due to the inherent uncertainty
of litigation, the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that the resolution
of any particular claim or proceeding would not have an adverse effect on the
Company's results of operations for the interim period in which such resolution
occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 21
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
traded on the Nasdaq SmallCap Market under the symbol "LQMD" until March 19,
1999, at which time it began trading under the symbol "DEXT." The Common Stock
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
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ---- ---
<S> <C> <C>
Fiscal 1998:
Fourth Quarter $2 9/16 $1 1/4
Third Quarter 2 13/16 1 1/4
Second Quarter 4 13/16 2 1/8
First Quarter 4 15/16 3 3/16
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
</TABLE>
At March 16, 1999, there were approximately 194 record holders of
Common Stock and approximately 1,760 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.
On November 19, 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc. an aggregate
of 1,000 shares of 8% Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred") at a per share purchase price of $1,000. The Series B
Preferred is convertible into an aggregate of 500,000 shares of Common Stock
(subject to adjustment) at a conversion price not to exceed $2.00. Dividends
cumulatively accrue on the Series B Preferred at a rate of $80 per annum per
share. So long as any accrued dividends on Series B Preferred are unpaid, no
dividends may be declared on Common Stock. The holders of Series B Preferred
shall be entitled, upon a liquidation of the Company, to receive $1,000 per
share of Series B Preferred, plus all accrued and unpaid dividends. The holders
of the Series B Preferred have the right to one vote per share of Series B
Preferred on all matters submitted to a vote of the stockholders of the Company.
The affirmative vote of 66-2/3% of the shares of Series B Preferred then
outstanding is required to materially amend the Certificate of Incorporation or
Bylaws of the Company. In the event two quarterly dividends on the Series B
Preferred shall be in arrears, the holders of the Series B Preferred have the
right to elect or designate two directors of the Company.
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<PAGE> 22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this 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 of 1933, as amended, and Section 21E of the Exchange Act of 1934, as
amended. Specifically, all statements other than statements of historical fact
included in this Item 6 regarding Dexterity Surgical, Inc. and its subsidiaries'
and affiliates' (collectively, the "Company") financial position, business
strategy and plans and objectives of management of the Company for future
operations are forward-looking statements. These forward-looking statements are
based on the beliefs of the Company's management, as well as assumptions made by
and information currently available to the Company's management. When used in
this report, the words "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar import, as they relate to the Company
or Company's management are intended to identify forward-looking statements.
Such statements reflect the current view of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions related
to certain factors including, without limitation, the Company's ability to
manufacture, market and distribute safe and effective products on a
cost-effective basis, demand for and acceptance of the Company's products, the
level of competition in the marketplace, the ability of the Company's customers
to be reimbursed by third-party payors, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, product introductions and
acceptance, technological change, changes in industry practices, one-time events
and other factors described herein, in the Company's Registration Statement on
Form S-3 (File No. 333-58849) filed with the Security and Exchange Commission
("SEC") on October 13, 1998, and in the Company's annual, quarterly and other
reports filed with the SEC (collectively, "cautionary statements"). Although the
Company believes that its expectations are reasonable, it can give no assurance
that such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements. The Company
does not intend to update these forward-looking statements.
OVERVIEW
From inception through December 31, 1995, the Company was a development
stage enterprise whose efforts and resources were devoted primarily to research
and development activities related to its initial products. During this
development stage, the Company generated minimal operating revenues and, thus,
was unprofitable. In 1996, the Company decided to reduce continuing investment
in research and development related to such technologies and to focus its
efforts on acquiring and distributing MIS devices. Accordingly, during the last
three fiscal years, the Company has continued to decrease its engagement in
Company sponsored research and development, and in fiscal 1998, eliminated
virtually all expenditures in this area. However, due to the Dexterity Merger
(defined below), the Company intends to invest moderate amounts in research and
development in 1999. As of December 31, 1998, the Company had an accumulated
deficit of approximately $19,327,000. 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.
In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity, a business development subsidiary of Teleflex, Inc. In March
1999, the Company acquired the remaining common stock of Dexterity by merging
Dexterity into the Company (the "Dexterity Merger") pursuant to a Plan of Merger
and Acquisition agreement between the Company and Dexterity (the "Dexterity
Agreement"). Under the terms of the Dexterity Agreement, which was approved by
the stockholders of the Company at a special meeting held March 18, 1999, the
Dexterity stockholders, other than the Company, received an aggregate of:
o $1,500,000;
o 3,000,000 shares of Common Stock;
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<PAGE> 23
o warrants to purchase an aggregate of 1,500,000 shares of
Common Stock, at an exercise price per share of $2.00;
o promissory notes in the aggregate amount of $1,000,000; and
o a royalty for seven years in an amount equal to 15% of all
sales of Dexterity products (the "Royalty") pursuant to a
royalty agreement (the "Royalty Agreement") among the Company
and the Dexterity stockholders, other than the Company. The
Royalty is subject to minimum annual payments which aggregate,
over the seven years of the Royalty Agreement, approximately
$9,695,095.
The Company determined the fair market value of the above consideration to be
approximately $16,000,000. The Company launched distribution of Dexterity's
primary products, the Dexterity(R) Pneumo Sleeve and Dexterity(R) Protractor, in
March 1998. The transaction was accounted for using the purchase method of
accounting.
Effective January 1, 1998, the Company merged all of its wholly owned
subsidiaries with and into the Company. In conjunction with this upward merger,
the Company created four new operating divisions: Endo-Surgery, Surgical
Systems, Med-Service, and Technologies.
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; and 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
provides the Company with distribution coverage in the Dallas/Fort Worth and
North Texas 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 to 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 period 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> 24
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had current assets of $7,004,000 and
current liabilities of $3,395,000 resulting in working capital of $3,609,000.
This compares to a working capital position of $4,175,000 at December 31, 1997.
The decline in working capital is primarily due to the Company's net loss for
1998 offset by proceeds from two preferred stock placements.
In January 1999, pursuant to the terms of a private placement, the
Company issued to an officer and director of the Company 25 shares of 8% Series
B Cumulative Preferred Stock, $.001 par value ("Series B Preferred"), for
proceeds of $25,000.
In November 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, such affiliates referred to herein as "Renaissance") 1,000 shares
of 8% Series B Preferred for aggregate proceeds of $1,000,000. The Company used
such proceeds for working capital. Annual dividends on the Series B Preferred
are cumulative at a rate of $80 per share. The Series B Preferred is initially
convertible into shares of Common Stock at a conversion price of $2 per share,
for an aggregate of 500,000 shares of Common Stock. On the date the Company
closed such private placement, November 19, 1998, the closing per share price of
Common Stock on the NASDAQ SmallCap Market was $2.13.
In August 1998, pursuant to the terms of a private placement, the
Company issued to Renaissance and two individuals, including one who is an
officer and director of the Company, an aggregate of 1,170 shares of 8% Series A
Cumulative Preferred Stock, $.001 par value ("Series A Preferred"), for
aggregate proceeds of $1,170,000. The Company used such proceeds for working
capital. Annual dividends on the Series A Preferred are cumulative at a rate of
$80 per share. The Series A Preferred is initially convertible into shares of
Common Stock at a conversion price of $2 per share, for an aggregate of 585,000
shares of Common Stock. On the date the Company closed such private placement,
August 11, 1998, the closing per share price of Common Stock on the NASDAQ
SmallCap Market was $1.75.
In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make an equity
investment in Dexterity, and for working capital purposes. The Debentures are
secured by substantially all of the assets of the Company and require monthly
payments of interest beginning in February 1998 and, unless sooner paid,
redeemed or converted, require monthly principal payments commencing in December
2000 of $10 per $1000 of the then remaining principal amount. The remaining
principal balance will mature in December 2004. The Debentures require the
Company to comply with the following financial covenants (all as defined in the
Debentures): (i) a Debt to Net Worth Ratio of no greater than .85:1; (ii) an
Interest Coverage Ratio of at least 5:1; (iii) a Debt Coverage Ratio of at least
.10:1; and (iv) a Current Ratio of at least 1.8:1. At December 31, 1998, the
Company was not in compliance with Interest Coverage Ratio and Debt Coverage
Ratio covenants, and has obtained a waiver from Renaissance to suspend the
Interest Coverage Ratio, Debt Coverage Ratio and Current Ratio covenants through
June 30, 1999 at which time the Company believes it will be in compliance with
such covenants. However, if the Company is unable to comply with such covenants
in the future, the Company could be found to be in technical default under the
Debentures and the holders thereof would have the right to demand the immediate
repayment of the entire amount outstanding. The Company believes that sufficient
resources would be available to fund such amounts in the event of such
acceleration. The holders of the Debentures have the option to convert at any
time all or a portion of the Debentures into shares of Common Stock at an
initial price of $4 per share of Common Stock. On the date the Company closed
such private placement, December 19, 1997, the closing per share price of the
Company's Common Stock on the NASDAQ SmallCap Market was $4.063.
Pursuant to a Subscription Agreement dated June 9, 1998, the Company
issued 370,000 shares of the Company's Common Stock, at a per share price of
$3.25, with an aggregate value of $1,202,500 in exchange for approximately four
percent (4%) of the ownership interests of Ana-Tech, L.L.C. At the same time,
Ana-Tech, L.L.C. sold ownership interests for cash to third parties at the same
unit price. The Company also has entered into an Assignment Agreement dated June
30, 1998 with Ana-Tech, L.L.C., pursuant to which the Company assigned all of
its rights, duties and obligations under its Osteoport(R) device patent license
agreement. As consideration for such assignment, the Company received $600,000
cash and will receive a five percent (5%) royalty on future gross sales of the
Osteoport(R) device. The assignment resulted in a gain of $411,000.
On February 2, 1996, the Company borrowed $750,000 from a commercial
bank pledging a like amount of short-term investments as collateral. On
September 3, 1997, the loan was converted to a line of credit maturing September
1998 whereby all inventories, accounts receivable and intangibles of the Company
are pledged as collateral. The line of credit was paid in full in December 1997
with proceeds from the December 1997 private placement
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<PAGE> 25
described above. The line of credit expired September 3, 1998. The Company has
received preliminary approval of a new $5,000,000 line of credit from a
financial institution and estimates completion of the transaction in April 1999.
All inventories, accounts receivable and intangibles of the Company are
anticipated to be pledged as collateral. However, there can be no assurance the
transaction will be consummated.
For the year ended December 31, 1998, operating activities utilized
$1,842,000 of cash primarily due to the net loss for the year. Investment
activities during 1998 utilized cash of $2,121,000, primarily from the purchase
of investments. During 1998, the Company realized $2,170,000 from the sale of
preferred stock and $254,000 from the exercise of stock options.
For the year ended December 31, 1997, operating activities utilized
$2,304,000 of cash primarily from the net loss for the year. Investment
activities during 1997 provided cash of $1,926,000 primarily from the sale of
investments. Total cash provided from financing activities for 1997 was
$3,320,000. The Company sold common stock and convertible debentures during 1997
realizing net proceeds of $4,200,000. Also, during 1997, the Company repaid
$796,000 of long-term debt.
Based upon the current level of operations, the Company believes that
projected cash flow from operations plus the Company's cash from the realization
of its current assets will be adequate to meet its anticipated requirements for
working capital and capital expenditures through 1999. However, additional
capital may be required in order for the Company to take advantage of any
potential acquisition opportunities or to participate in future alliances or
joint ventures. There can be no assurance that the Company will not require
additional funding or that such additional funding, if needed, will be available
on terms beneficial to the Company or at all.
RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 1998
For the year ended December 31, 1998, the Company reported a net loss
applicable to common stock of $1,974,000 or $.28 per basic and diluted share.
This compares with a net loss applicable to common stock of $2,997,000 or $.48
per basic and diluted share for the year ended December 31, 1997. The
improvement in reported results for 1998 was primarily due to an increase in net
sales and gross profit margins. Also, the Company is continually monitoring
non-profitable divisions and non-performing assets. Accordingly, during 1998,
the Company closed the Med-Service division, closed its Colorado office and sold
the Osteoport(R) device. Furthermore, the Technologies division was closed March
15, 1999 at an approximate cost of $30,000, which was accrued in the fourth
quarter of 1998. The net loss for the year ended December 31, 1998 included an
approximate $400,000 gain on the sale of the Osteoport(R) device as previously
discussed.
Product sales increased 29% in 1998 as compared with 1997. Product
sales were $17,325,000 for 1998 and $13,428,000 for 1997. These increases were
due to continued sales growth throughout the Company within existing product
lines and sales generated by the Dexterity(R) product line, which was added in
March 1998.
Commissions earned increased 28% in 1998 as compared with 1997.
Commissions earned were $1,167,000 in 1998 and $909,000 in 1997. The increase in
commissions earned reflects the continuing acquisition of new product
representations and new sales territories within existing product lines.
Gross profit from product sales was $7,011,000 in 1998 versus
$4,727,000 in 1997. The corresponding gross profit margins were 40% in 1998 and
35% in 1997. The increase in margins is a result of the realization of the
efficiencies incurred through expanding volumes and economies of scale. Also,
marketing emphasis on higher margin products contributed to higher gross profit
margins.
In 1998, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Company's infrastructure, increased 20% to $9,820,000 from $8,181,000 in
1997. These increased costs primarily reflect higher sales commissions due to
the increased level of sales. However, as a percentage of net sales, selling,
general and administrative expenses have decreased: 53% for 1998 versus 57% for
1997.
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
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<PAGE> 26
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 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 the launch of the
Dexterity products in 1998, which significantly increased selling, general and
administrative expenses as discussed below.
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 in sales
is due to the acquisition of Val-U-Med, which transaction was recorded using the
purchase method of accounting. Therefore, the results of operations of Val-U-Med
are included in the Company's consolidated statement of operations for 1997 but
not 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.
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 $8,181,000 in 1997 from $3,933,000 in
1996. The increased costs reflect higher sales commissions due to the inclusion
of the Val-U-Med results, 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.
YEAR 2000 ISSUE
The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has
evaluated its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with customers, and
services supplied by vendors to coordinate year 2000 compliance and conversion.
The year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information for
the year 2000 and beyond. Unless modified prior to December 31, 1999, such
systems may not properly recognize date-sensitive information and could generate
erroneous data or cause a system to fail to operate properly. Based on current
information, the Company believes its Programs and Systems are year 2000
compliant. 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. Problems encountered by the Company's vendors,
customers and other third parties also may have a material adverse effect on the
Company's financial condition and results of operations.
In the event the Company determines, following the year 2000 date
change, that its Programs and Systems are not year 2000 compliant, the Company
will likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is year 2000 compliant, and until such hardware and/or software
can be obtained, the Company will plan to use non-computer systems for its
business, including information management services and financial reporting, as
well as its various administrative functions.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's Year 2000 readiness.
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<PAGE> 27
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> 28
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 1999 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 1999 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 1999 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 1999 Annual Meeting, which is incorporated herein by
reference.
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<PAGE> 29
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
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Page
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Report of Independent Public Accountants.................................................... F-1
Balance Sheets at December 31, 1997 and 1998................................................ F-2
Statements of Operations for the years ended December 31, 1997 and 1998..................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1997 and 1998........... F-5
Statements of Cash Flows for the years ended December 31, 1997 and 1998..................... F-6
Notes to Financial Statements............................................................... F-7
</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> 30
<TABLE>
<S> <C>
2.8* Plan of Merger and Acquisition Agreement dated December 18, 1998
between Dexterity Incorporated and the Company.
3.1* Restated Certificate of Incorporation of the Registrant.
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).
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).
</TABLE>
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<PAGE> 31
<TABLE>
<S> <C>
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).
</TABLE>
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<PAGE> 32
<TABLE>
<S> <C>
10.27 Distribution Agreement dated May 1, 1997 between LifeQuest
Medical, Inc. and Origin MedSystems, Inc. (incorporated by
reference herein to Exhibit No. 10.27 to the Company's Annual
Report on Form 10-KSB/A for the year ended December 31, 1997).
10.28 Employment Agreement dated April 1, 1998 between the Company and
Randall K. Boatright (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ended June 30,
1998).
10.29 Subscription Agreement dated June 9, 1998 between the Company and
Ana-Tech, L.L.C. (incorporated herein by reference to Exhibit
10.4 to the Company's Form 10-Q for the quarter ended June 30,
1998).
10.30 Series A Cumulative Convertible Stock Purchase Agreement dated
August 11, 1998, among the Company, Renaissance Capital Growth &
Income Fund III, Inc. and Renaissance U.S. Growth & Income Trust,
PLC (incorporated herein by reference to Exhibit 10.5 to the
Company's Form 10-Q for the quarter ended June 30, 1998).
10.31 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated August 11, 1998, among the Company, Richard A.
Woodfield and R. Michael Yates (incorporated herein by reference
to Exhibit 10.6 to the Company's Form 10-Q for the quarter ended
June 30, 1998).
10.32* Series B Convertible Stock Purchase Agreement dated November 19,
1998, among the Company, Renaissance Capital Growth & Income
Trust Fund III, Inc. and Renaissance U.S. Growth & Income Trust,
PLC
10.33* Amended Employment Agreement between the Company and Richard A.
Woodfield dated December 15, 1998.
10.34* Amended Option Agreement between the Company and Richard A.
Woodfield dated December 15, 1998.
22 Subsidiaries
Name Under Which
Name State of Incorporation Doing Business
---- ---------------------- ----------------
ValQuest Medical, Inc. Nevada ValQuest Medical, Inc.
11* Computation of earnings (loss) per share
23* Consent of Arthur Andersen LLP
27* Financial Data Schedule
</TABLE>
* Filed herewith
(b) REPORTS ON FORM 8-K
None
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<PAGE> 33
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 ___, 1999 By /s/ Richard A. Woodfield
------------------------------------
Richard A. Woodfield
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/ Richard A. Woodfield President, Chief Executive Officer March ___, 1999
- -------------------------- and Director (Principal Executive
Richard A. Woodfield Officer)
/s/ Randall K. Boatright Executive Vice President, Chief March ___, 1999
- -------------------------- Financial Officer and Director
Randall K. Boatright (Principal Financial and
Accounting Officer)
/s/ Robert B. Johnson Director March ___, 1999
- -------------------------
Robert B. Johnson
/s/ K.C. Fadem Director March ___, 1999
- -------------------------
K.C. Fadem
/s/ Jeffrey H. Berg, Ph.D. Director March ___, 1999
- -------------------------
Jeffrey H. Berg, Ph.D.
/s/ Robert L. Evans Director March ___, 1999
- -------------------------
Robert L. Evans
/s/ William H. Bookwalter Director March ___, 1999
- -------------------------
William H. Bookwalter
/s/Robert Pearson Director March ___, 1999
- -------------------------
Robert Pearson
/s/ Christopher K. Black Director March ___, 1999
- -------------------------
Christopher K. Black
/s/ John J. Sickler Director March ___, 1999
- -------------------------
John J. Sickler
</TABLE>
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<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dexterity Surgical, Inc.:
We have audited the accompanying consolidated balance sheets of Dexterity
Surgical, Inc., formerly LifeQuest Medical, Inc. (a Delaware corporation), and
subsidiaries as of December 31, 1997 and 1998, 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 Dexterity Surgical, Inc., and
subsidiaries as of December 31, 1997 and 1998, 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 12, 1999
F-1
<PAGE> 35
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
(Formerly LifeQuest Medical, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
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December 31
------------------------------
ASSETS 1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,236,307 $ 1,644,535
Short-term investments 150,000 983,714
Accounts receivable (net of allowance for doubtful accounts of
$256,362 and $219,829 in 1997 and 1998, respectively) 2,292,235 2,786,909
Accounts receivable from related parties 17,710 56,619
Inventories, net 1,745,523 1,482,899
Prepaid and other assets 172,209 49,715
------------ ------------
Total current assets 7,613,984 7,004,391
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 1,541,376 1,604,043
Less- Accumulated depreciation (922,437) (1,051,117)
------------ ------------
Net property, plant and equipment 618,939 552,926
------------ ------------
DEFERRED FINANCE CHARGES 180,996 155,139
------------ ------------
INVESTMENTS, at cost -- 2,202,500
------------ ------------
INTANGIBLE ASSETS:
Licensed technology rights and other 441,358 680,912
Goodwill, net 1,882,839 1,673,818
------------ ------------
Net intangible assets 2,324,197 2,354,730
------------ ------------
Total assets $ 10,738,116 $ 12,269,686
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE> 36
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
(Formerly LifeQuest Medical, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,605,366 $ 2,633,032
Accrued liabilities 826,695 645,605
Current portion of long-term debt 6,838 116,310
------------ ------------
Total current liabilities 3,438,899 3,394,947
------------ ------------
MINORITY INTEREST 108,802 106,544
------------ ------------
CONVERTIBLE DEBENTURES 3,000,000 3,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares authorized; 0 (1997)
and 2,170 (1998) shares issued and outstanding -- 2
Common stock, $.001 par value; 50,000,000 shares authorized; 6,653,883
(1997) and 7,212,742 (1998) shares issued and outstanding 6,654 7,213
Additional paid-in capital 21,576,854 25,095,313
Deferred compensation (40,055) (6,857)
Accumulated deficit (17,353,038) (19,327,476)
------------ ------------
Total stockholders' equity 4,190,415 5,768,195
------------ ------------
Total liabilities and stockholders' equity $ 10,738,116 $ 12,269,686
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE> 37
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
(Formerly LifeQuest Medical, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1998
------------ ------------
<S> <C> <C>
NET SALES:
Product sales $ 13,427,839 $ 17,325,096
Commissions earned 908,989 1,166,945
------------ ------------
14,336,828 18,492,041
COST AND EXPENSES:
Cost of sales 8,701,263 10,313,931
Research and development 32,424 --
Selling, general and administrative 8,181,314 9,819,634
Depreciation and amortization 432,160 404,881
------------ ------------
17,347,161 20,538,446
------------ ------------
LOSS FROM OPERATIONS (3,010,333) (2,046,405)
OTHER INCOME (EXPENSE):
(Loss) gain on sale of assets, net (7,070) 389,503
Interest expense (83,788) (330,620)
Investment and other income 92,486 56,374
------------ ------------
NET LOSS BEFORE MINORITY INTEREST (3,008,705) (1,931,148)
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY 11,578 2,258
------------ ------------
NET LOSS (2,997,127) (1,928,890)
Less- Dividend requirement on cumulative preferred stock -- (45,548)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (2,997,127) $ (1,974,438)
============ ============
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK $ (.48) $ (.28)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING USED IN COMPUTING
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK 6,299,592 6,989,951
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 38
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
(Formerly LifeQuest Medical, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------------- -----------------------------
Shares $.001 Shares $.001
Issued and Par Issued and Par
Outstanding Value Outstanding Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1996 -- $ -- 6,134,071 $ 6,134
Exercise of stock options -- -- 121,566 122
Trimedica dividend -- -- -- --
Revaluation of stock options -- -- -- --
Compensation expense -- -- -- --
Sale of stock to officer -- -- 50,000 50
Sale of stock -- -- 250,000 250
Issuance of stock options to consultant -- -- -- --
Issuance of stock, Medex Surgical acquisition -- -- 98,246 98
Issuance of stock for services by acquired
entity -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 1997 -- -- 6,653,883 6,654
Exercise of stock options -- -- 188,859 189
Issuance of stock, Ana-Tech -- -- 370,000 370
Compensation expense -- -- -- --
Sale of preferred stock 2,170 2 -- --
Preferred stock dividends -- -- -- --
Cancellation of stock options to consultant -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 1998 2,170 $ 2 7,212,742 $ 7,213
============ ============ ============ ============
<CAPTION>
Additional
Paid-In Deferred Accumulated
Capital Compensation Deficit Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1996 $ 19,989,524 $ -- $(14,321,067) $ 5,674,591
Exercise of stock options 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 199,950 -- -- 200,000
Sale of stock 999,750 -- -- 1,000,000
Issuance of stock options to consultant 158,611 -- -- 158,611
Issuance of stock, Medex Surgical acquisition 902 -- -- 1,000
Issuance of stock for services by acquired
entity 18,467 -- -- 18,467
Net loss -- -- (2,997,127) (2,997,127)
------------ ------------ ------------ ------------
BALANCES, December 31, 1997 21,576,854 (40,055) (17,353,038) 4,190,415
Exercise of stock options 253,611 -- -- 253,800
Issuance of stock, Ana-Tech 1,202,130 -- -- 1,202,500
Compensation expense -- 33,198 -- 33,198
Sale of preferred stock 2,169,998 -- -- 2,170,000
Preferred stock dividends -- -- (45,548) (45,548)
Cancellation of stock options to consultant (107,280) -- -- (107,280)
Net loss -- -- (1,928,890) (1,928,890)
------------ ------------ ------------ ------------
BALANCES, December 31, 1998 $ 25,095,313 $ (6,857) $(19,327,476) $ 5,768,195
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 39
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
(Formerly LifeQuest Medical, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,997,127) $(1,928,890)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation and amortization 432,160 404,881
Amortization of deferred finance charges -- 25,857
Option expense 56,758 33,198
Issuance of stock and options to consultant 36,005 --
Loss on disposal of fixed assets 7,070 23,187
Disposal of intangible asset -- 11,066
Minority interest in net loss of consolidated subsidiary (11,578) (2,258)
Changes in operating assets and liabilities-
Increase in accounts receivable, net (959,739) (494,674)
(Increase) decrease in inventories, net (121,408) 262,624
Decrease in prepaid and other assets 24,776 15,212
Increase in accounts receivable from related parties (2,839) (38,909)
Increase in accounts payable 915,680 27,666
Increase (decrease) in accrued liabilities 316,567 (181,090)
----------- -----------
Net cash used in operating activities (2,303,675) (1,842,130)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (378,679) (133,703)
Additions to licensed technology rights and other -- (153,639)
Acquisitions and investments, net of cash received (70,462) (1,000,000)
Purchases of investments (2,248,153) (1,111,160)
Sales of investments 4,568,214 291,085
(Increase) decrease in interest receivable 55,063 (13,639)
----------- -----------
Net cash provided by (used in) investing activities 1,925,983 (2,121,056)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures 3,000,000 --
Proceeds from issuance of common stock 1,200,000 --
Proceeds from issuance of preferred stock -- 2,170,000
Payments for deferred finance charges (180,996) --
Proceeds from exercise of stock options 131,426 253,800
Payments to stockholders (34,844) --
Payments of preferred stock dividends -- (45,548)
Payments on long-term debt (795,730) (6,838)
----------- -----------
Net cash provided by financing activities 3,319,856 2,371,414
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,942,164 (1,591,772)
CASH AND CASH EQUIVALENTS, beginning of year 294,143 3,236,307
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,236,307 $ 1,644,535
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 40
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
(Formerly LifeQuest Medical, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF
THE COMPANY AND RISK FACTORS:
Dexterity Surgical, Inc., a Delaware corporation (Dexterity or the Company),
formerly LifeQuest Medical, Inc. (LifeQuest), see Note 15, was incorporated on
December 23, 1988, and commenced operations on January 1, 1989. The Company is
engaged in the development, commercialization and distribution of proprietary
and nonproprietary medical devices. In 1994, the Company 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 percent owned
subsidiary of the Company. In December 1996, the Company 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 the Company. The
Val-U-Med merger was accounted for as a purchase transaction. The accounts of
Val-U-Med have been included in the accompanying consolidated financial
statements since the acquisition date. In February 1996, the Company 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 the Company. In November 1996, the Company 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 the Company. In June 1997, the Company completed the merger of Trimedica,
Inc., a Colorado corporation (Trimedica), with and into Klein. In September
1997, the Company completed the merger of Mishbucha, Inc., a Texas corporation
d/b/a Medex Surgical (Medex Surgical), with and into Klein. In September 1997,
the Company completed the merger of W. H. Bookwalter and Associates, Inc., a
Vermont corporation (Bookwalter), with and into Val-U-Med. The GME, KMI,
Trimedica, Medex Surgical and Bookwalter mergers were accounted for as
pooling-of-interests business combinations. Effective January 1, 1998, the
Company merged each of its wholly owned subsidiaries, LQET, Klein and Val-U-Med,
into the Company. The accompanying consolidated financial statements include the
accounts of Dexterity and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
At December 31, 1998, the Company had an accumulated deficit of approximately
$19.3 million. During the years ended December 31, 1997 and 1998, the Company
incurred net losses of approximately $3 million and $1.9 million , 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 and
preferred 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 through June 30, 1999,
at which point the Company believes it will be in compliance with the covenants.
However, if the Company is unable to comply with such requirements in the
future, the Company could be found to be in technical default under the
Debentures and the holder would have the right to demand immediate repayment of
the entire amount outstanding. The Company believes that sufficient resources
would be available to fund such amounts in the event of such acceleration. The
Company has also taken steps to improve its 1999 operating results which include
anticipated improvements relating to the Company's acquisitions described in
Notes 6 and 15 and the anticipated launch of new products. The Company's
management believes that it is likely the Company's
F-7
<PAGE> 41
operating results for 1999 will significantly improve over 1998 and will
generate sufficient working capital, along with available cash and available
borrowings under an anticipated revolving line of credit, to sustain its
operations throughout the year. However, there are no assurances that the
Company can achieve such operating improvements.
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 of the Company's suppliers to provide products in the
quantities the Company requires. While the Company has written distribution
agreements with many of its suppliers, these agreements in certain instances
provide for nonexclusive 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Product sales are recognized upon the shipment of products to the customer.
Commissions earned are recognized when customer orders are placed with product
suppliers. Customers may return products in the event of product defect or
inaccurate order fulfillment. The Company maintains an allowance for sales
returns based upon an historical analysis of returns. Substantially all returns
relate to inaccurate order fulfillment.
Inventory
Inventory consists of raw materials, work in process and finished goods which
are stated at the lower of cost (determined on an average cost basis which
approximates the 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 are amortized upon the commencement of commercial
sales of the underlying products. 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.
F-8
<PAGE> 42
Goodwill
The Company recorded the assets and liabilities of VMI at fair value as of the
purchase date. The excess of the purchase price over the net assets acquired was
recorded as goodwill and is being amortized over 10 years.
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 1997 and 1998, the Company
had cash payments for interest of $83,788 and $269,086 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 1998. The following provides supplemental disclosure of
noncash investing and financing activities during 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Assets acquired in connection with acquisitions $ 121,973 $ --
Liabilities assumed in connection with acquisitions 121,973 --
Common stock issued in connection with an investment -- 1,202,500
Cancellation of options issued under a consulting arrangement -- 107,280
Note issued for distributorship agreement -- 100,000
Note issued for purchase of property -- 16,310
</TABLE>
During 1997, the Company determined that approximately $700,000 of accrued
liabilities that had been recorded in connection with the Val-U-Med acquisition
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 recent mergers and
acquisitions.
Net Loss Per Share
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
supersedes 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, 1997 and 1998, Diluted EPS equals Basic
EPS as potentially dilutive common stock equivalents, which consist of options
and warrants, are antidilutive in loss periods. The average market price per
share of the Company's common stock for the years ended December 31, 1997 and
1998, was $4.41 and $2.76, respectively. Note 13 provides a detail of options
and warrants outstanding and their corresponding exercise prices. If the Company
would have had net income for the years ended December 31, 1997 and 1998, the
denominator (weighted average common shares and common share equivalents
outstanding) in the Diluted EPS calculation would have been increased, through
application of the treasury stock method, for each class of option or warrant
for which the average market price per share of the Company's common stock
exceeded the common stock equivalent's exercise price.
F-9
<PAGE> 43
Reclassifications
Certain prior period amounts have been reclassified to conform with the 1998
presentation.
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
No single customer accounted for more than 10 percent of consolidated sales
during the years ended December 31, 1997 and 1998.
Suppliers
The Company had one supplier that accounted for 52 percent and 57 percent of
purchases for the years ended December 31, 1997 and 1998, respectively.
4. INVENTORIES:
Inventories at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------ -----------
<S> <C> <C>
Raw materials $ 328,375 $ 29,250
Work in process 18,557 431,986
Finished goods 1,579,551 1,186,279
Allowances (180,960) (164,616)
----------- -----------
$ 1,745,523 $ 1,482,899
=========== ===========
</TABLE>
5. CORPORATE JOINT VENTURES AND INVESTMENTS:
In May 1994, the Company 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. 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. At December 31, 1997 and 1998, purchases of additional
ValQuest stock had increased the Company's ownership interest to 82 percent.
F-10
<PAGE> 44
In December 1997, the Company entered into an agreement to acquire approximately
19 percent of the stock of Dexterity Incorporated (DI), formerly TFX Holding
Co., for $1,000,000 which was paid in January 1998. DI, an affiliate of
Teleflex, Inc., was a newly formed entity and the Company began distribution of
DI's minimally invasive surgical devices, the Dexterity(R) Pneumo Sleeve and
Dexterity(R) Protractor, during 1998. The Company recognized no revenues or
expenses associated with DI operations prior to 1998. The Company has accounted
for its approximate 19 percent interest in DI under the cost method. As
discussed in Note 6, in December 1998, the Company entered into an agreement to
acquire the remaining DI stock it did not currently own.
In June 1998, the Company issued 370,000 shares of common stock at a per share
price of $3.25 with an aggregate value of $1,202,500 in exchange for
approximately 4 percent of the ownership interests of Ana-Tech, L.L.C.
(Ana-Tech), pursuant to a subscription agreement dated June 9, 1998. At the same
time, Ana-Tech sold ownership interests for cash to third parties at the same
unit price. The Company accounts for the investment in Ana-Tech using the cost
method of accounting. The Company also has entered into an Assignment Agreement
dated June 30, 1998, with Ana-Tech, pursuant to which the Company assigned all
of its rights, duties and obligations under its Osteoport(R) device patent
license agreement. As consideration for such assignment, the Company received
$600,000 cash and will receive a 5 percent royalty on future gross sales of the
Osteoport(R) device. The assignment resulted in a net gain of $411,000 for
financial reporting purposes.
In December 1998, the Company entered into an agreement to acquire the rights to
a distributorship agreement for certain minimally invasive surgical devices from
a company whose president was a former officer and director of the Company. In
connection with obtaining such rights, the Company paid $100,000 and entered
into a promissory note payable in the amount of $100,000 (see Note 10). These
amounts are reflected as a component of licensed technology rights on the
accompanying consolidated balance sheets.
6. ACQUISITIONS AND ANTICIPATED TRANSACTIONS:
The following describes acquisitions by the Company during the year ended
December 31, 1997, and an anticipated transaction:
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-interests
accounting method, therefore, the assets, liabilities and operations of
Trimedica prior to the merger are included in the consolidated financial
statements for all periods reported herein. Trimedica business activity 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 statement of operations
for the year ended December 31, 1997:
<TABLE>
<S> <C>
Net sales $ 148,464
Net income 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-interests accounting method,
F-11
<PAGE> 45
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 statement of operations for the 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-interests
accounting method, therefore, the assets, liabilities and operations of
Bookwalter prior to the merger are included in the consolidated financial
statements for all periods reported herein. Bookwalter business activity will
provide the Company with distribution coverage in the northeastern region of the
United States. 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 statement of operations for the year ended December 31, 1997:
<TABLE>
<S> <C>
Net sales $ 1,790,572
Net loss (89,839)
</TABLE>
Anticipated Transaction
On December 18, 1998, LifeQuest and DI entered into a Plan of Merger and
Acquisition Agreement (Agreement) whereby DI, subject to LifeQuest shareholder
approval, would be merged with and into LifeQuest (Merger), and LifeQuest would
be the surviving corporation. Contemporaneously with the Merger, the surviving
corporation would change its name to Dexterity Surgical, Inc. The Company will
account for this business combination as a purchase. If the Merger had been
consummated at December 31, 1998, the Company's net loss for 1998 would have
been increased by approximately $140,000, or $.02 per basic and diluted common
share, reflecting the Company's approximate 19 percent interest in DI's net loss
for 1998 and the amortization of the premium the Company paid for its 19 percent
interest over the Company's share of DI's underlying net assets. See Note 15 for
a description of the Merger consummated in March 1999.
7. FEDERAL INCOME TAXES:
As of December 31, 1998, the Company had net operating loss (NOL) carryforwards
of approximately $15 million for federal income tax purposes that are available
to reduce future taxable income and will expire in 2006 through 2018 if not
utilized. For federal income tax purposes, the Company has deferred, for future
amortization, certain acquisition and research and development costs in the
amount of $1,292,000. 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.
F-12
<PAGE> 46
The tax effect of significant temporary differences representing income tax
assets (liabilities) at December 31, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Capitalized research and development and acquisition costs $ 735,000 $ 439,000
Depreciation 5,000 15,000
Accruals 59,000 171,000
Reserves not deductible for tax 149,000 141,000
Research and development credit carryforwards 552,000 552,000
Tax loss carryforwards 4,871,000 5,073,000
----------- -----------
Net deferred tax assets 6,371,000 6,391,000
Deferred tax valuation reserve (6,371,000) (6,391,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
As there is no assurance of future income, a 100 percent valuation reserve in
1997 and 1998 has been established against the Company's net 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 U. S. 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 and may become further
limited by future ownership changes. 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.
8. SHORT-TERM INVESTMENTS:
Short-term investments consist solely of debt securities issued by the U. S.
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. The
following table summarizes short-term investments held by the Company at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Gross
Unrealized
Holding
Amortized Fair Market Gain
Cost Value (Loss)
--------- ----------- ----------
<S> <C> <C> <C>
December 31, 1997-
Debt securities issued by the U.S. Treasury $150,000 $149,816 $ (184)
======== ======== ========
December 31, 1998-
Debt securities issued by the U.S. Treasury $983,714 $985,000 $ 1,286
======== ======== ========
</TABLE>
F-13
<PAGE> 47
9. LEASE OBLIGATIONS, COMMITMENTS
AND CONTINGENCIES:
Operating Leases
The Company leases office space under noncancelable 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, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 274,602
2000 277,712
2001 270,502
2002 71,335
2003 --
Thereafter --
----------
$ 894,151
==========
</TABLE>
Rent expense totaled approximately $250,000 and $290,000 for the years ended
December 31, 1997 and 1998, respectively.
Employment Agreements
As of December 31, 1998, the Company had entered into various employment
agreements that provide for future compensation as described below:
<TABLE>
<CAPTION>
Annual
Employee 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
F $175,000 May 2002
G $150,000 March 2001
</TABLE>
In December 1998, Employee A and Employee D resigned and the Company has no
continuing obligation under the related employment agreement. Certain of the
Company's employees have an opportunity to earn bonuses based upon the
achievement of specified performance criteria of various Company divisions.
Contingencies
In June 1998, a case was filed in the State Court of Fulton County, Georgia,
alleging that the Company breached a distribution agreement with the plaintiff.
The plaintiff, Endo-Tech Ltd., Inc., asserted damages of approximately $400,000,
plus unspecified "consequential" damages. The Company contested the plaintiff's
claims. The Company filed a counterclaim against the plaintiff and removed the
case to the United States District Court for the Northern District of Georgia,
Atlanta Division. In November 1998, the plaintiff and the Company dropped their
claims against each other and entered into a compromise and settlement agreement
whereby each party released the other from any and all claims that were or could
have been asserted under the distribution agreement and covenanted not to sue
each other with respect to all claims released. Additionally, the Company and
the plaintiff amended the terms of the distribution agreement whereby the
Company agreed to purchase certain medical devices in an amount totaling $18,000
per month from January 1999 through December 2000. In connection therewith, the
Company escrowed $54,000.
F-14
<PAGE> 48
The Company is also a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party
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.
10. DEBT:
The Company had the following current and long-term debt at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Unsecured note payable for a distributorship agreement,
bearing interest at 6 percent, principal and interest due
monthly, maturing in 1999 $ -- $ 100,000
Secured note payable for a vehicle loan, bearing interest at
9 percent, principal and interest due monthly, maturing in
1999 -- 16,310
Secured note payable for a vehicle loan, bearing interest at
8.75 percent, principal and interest due monthly, maturing
in 1998 6,838 --
-------- ---------
Total long-term debt 6,838 116,310
Less- Current portion 6,838 116,310
-------- ---------
Long-term debt $ -- $ --
======== ========
</TABLE>
The carrying amount of the Company's 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.
11. CONVERTIBLE DEBENTURES:
In December 1997, the Company sold 250,000 shares of common stock to affiliates
of Renaissance Capital Group, Inc. (Renaissance), in a private placement for
aggregate proceeds of $1,000,000 and placed $3,000,000 in 9 percent Convertible
Debentures (Debentures) with Renaissance. The proceeds from the private
placement were used to repay the Company's line of credit with another financial
institution, to make an equity investment in Dexterity and for working capital
purposes. The Debentures are secured by substantially all of the assets of the
Company and require monthly payments of interest beginning in February 1998 and,
unless sooner paid, redeemed or converted, require monthly principal payments
commencing in December 2000 of $10 per $1,000 of the then remaining principal
amount. The remaining principal balance will mature in December 2004. The
Debentures require the Company to comply with the following financial covenants
(all as defined in the Debentures): (i) a Debt to Net Worth Ratio of no greater
than .85:1; (ii) an Interest Coverage Ratio of at least 5:1; (iii) a Debt
Coverage Ratio of at least .10:1; and (iv) a Current Ratio of at least 1.8:1. At
December 31, 1998, the Company was not in compliance with certain of the
covenants and has obtained a waiver from Renaissance to suspend the Interest
Coverage Ratio, Current Ratio and Debt Coverage Ratio covenants through June 30,
1999, at which point the Company believes it will be in compliance with the
covenants. However, if the Company is unable to comply with such requirements in
the
F-15
<PAGE> 49
future, the Company could be found to be in technical default under the
Debentures and the holder would have the right to demand immediate repayment of
the entire amount outstanding. The Company believes that sufficient resources
would be available to fund such amounts in the event of such acceleration. The
holders of the Debentures have the option to convert at any time all or a
portion of the Debentures into shares of common stock at an initial price of $4
per share of common stock. On the date the Company closed such private
placement, the closing per share price of the Company's common stock
approximated the conversion price. The conversion price is subject to downward
revision if the Company sells shares of its common stock, or securities
convertible into common stock, at a price less than $4 per share of common
stock, subject to certain allowed exceptions, during the term of the Debentures.
Accordingly, the conversion price for the Debentures was reduced to $2 per share
of common stock in connection with the 1998 private placements discussed in Note
12. In the event of the issuance of common stock, or securities convertible into
common stock, for consideration other than cash, the amount of the consideration
received therefore shall be deemed to be the fair market value of the property
received as consideration for the issuance of such shares of common stock. The
Debentures are also subject to a one-time adjustment to the conversion price
whereby the price will be reduced if (i) the Company does not have pretax
income, excluding extraordinary gains, of at least $4,400,000 in 1998 and (ii)
the volume-weighted average closing bid price of the common stock, as determined
by Bloomberg Financial Markets and Commodities News, for the 21 consecutive
trading days following the Company's public release of its 1998 financial
results (the 1998 Conversion Price Adjustment), is less than $2 per share. Upon
the occurrence of (i) and (ii) above, the conversion price of the Debentures
will be adjusted downward to an amount equal to the 1998 Conversion Price
Adjustment. The Debentures at December 31, 1998, were convertible for an
aggregate of 1,500,000 shares of common stock; however, since the conversion
price is subject to downward adjustment as described above, and there is no
minimum conversion price, the maximum number of shares of common stock which may
be issued pursuant to conversion of the Debentures is undeterminable. The
provisions of the Debentures provide that the holders of the Debentures have an
option to redeem the Debentures, in an amount equal to an 18 percent annual
yield on the principal balance, upon the occurrence of certain events, including
the delisting of common stock from the NASDAQ SmallCap Market and certain
"change of control" provisions, as defined in the Debentures, as they relate to
the Company. The Company may redeem the Debentures at its option subject to
certain share price and market activity levels being obtained. The Company's
right of redemption is subject to the holder's prior right of conversion of the
Debenture. The following table shows the principal maturities of the Debentures
as of December 31, 1998:
<TABLE>
<S> <C>
1999 $ --
2000 30,000
2001 335,000
2002 300,000
2003 265,000
Thereafter 2,070,000
------------
Total $ 3,000,000
============
</TABLE>
12. PREFERRED STOCK PLACEMENTS:
In August 1998, pursuant to the terms of a private placement, the Company issued
to Renaissance and two individuals, including one who is an officer and director
of the Company, an aggregate of 1,170 shares of 8 percent Series A Cumulative
Preferred Stock, $.001 par value (Series A Preferred Stock), for aggregate
proceeds of $1,170,000. In November 1998, pursuant to the terms of a private
placement, the Company issued to Renaissance an aggregate of 1,000 shares of 8
percent Series B Cumulative Preferred Stock, $.001 par value (Series B Preferred
Stock), for aggregate proceeds of $1,000,000. The Company used such proceeds for
working capital. Annual dividends on the Preferred Stock are cumulative at a
rate of $80 per share. The Preferred Stock is initially convertible into shares
of common stock at a conversion price of $2 per share, for an aggregate of
585,000 shares (Series A) and 500,000 shares (Series B) of common stock. On the
dates the Company closed such private placements, the closing per share price of
the Company's common stock
F-16
<PAGE> 50
approximated the conversion price. Since the conversion price is subject to
downward adjustment as described below, and there is no minimum conversion
price, the maximum number of shares of common stock which may be issued pursuant
to the conversion of the preferred stock is undeterminable. The conversion price
for the Preferred Stock is subject to downward adjustment in the event the
Company sells shares of common stock, or securities convertible into shares of
common stock, at a per share price less than $2. In the event of the issuance of
common stock, or securities convertible into common stock, for consideration
other than cash, the amount of the consideration received therefore shall be
deemed to be the fair market value of the property received as consideration for
the issuance of such shares of common stock. The conversion price for the
Preferred Stock is also subject to the one-time 1998 Conversion Price Adjustment
described in Note 11. The holders of Preferred Stock are entitled to one vote
per share on all matters submitted to a vote of the stockholders of the Company,
and the affirmative vote of the holders of 66-2/3 percent of the votes entitled
to be cast by the holders of the Preferred Stock is required in order to amend
the Company's Certificate of Incorporation or Bylaws to materially affect the
rights of the holders of Preferred Stock, including authorizing and creating a
class of stock having rights prior to or senior to the Preferred Stock. In the
event two quarterly dividends payable on the Preferred Stock are in arrears, the
holders of each class of Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.
In January 1999, pursuant to the terms of a private placement, the Company
issued to an officer and director of the Company 25 shares of Series B Preferred
Stock for proceeds of $25,000.
13. 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 in
Accounting Principles Board 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 nonstatutory 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 10 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 nonstatutory 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 10 years from the
date of grant for the 1994 Plan.
F-17
<PAGE> 51
In May 1995, the Company adopted the 1995 Non-Employee Director Stock Option
Plan (NEDSOP). Under NEDSOP, the Company may grant stock options to nonemployee
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 10th anniversary of the date they vest. Under the three plans, the option
exercise price must be at least equal to 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, nonqualified 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 recognized approximately $236,000 (none in 1997 or 1998)
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 nonqualified 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 10 years from grant date. During 1997, one employee
terminated employment with the Company and 185,000 unvested options were
forfeited. During 1998, one employee terminated employment with the Company and
20,000 unvested options were forfeited. There are 120,000 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 three to four years.
During 1998, the Company granted a certain employee 250,000 options to purchase
shares of common stock at an exercise price of $4 per share. In December 1998,
this option grant was canceled and the employee was granted 350,000 options to
purchase shares of common stock at an exercise price of $2 per share. These
options were granted outside any option plan and vest in equal increments over
four years commencing in May 1999. As of December 31, 1998, there were 350,000
options outstanding under this option grant with none exercisable.
Had compensation cost for these plans been determined consistent with SFAS 123,
the Company's net loss applicable to common stock and net loss per share (EPS)
would have been changed to the following pro forma amounts at December 31:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Net Loss Applicable to
Common Stock As Reported $(2,997,127) $ (1,974,438)
Pro Forma (3,495,377) (2,733,996)
EPS As Reported $ (.48) $ (.28)
Pro Forma (.55) (.39)
</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.
F-18
<PAGE> 52
A summary of the status of the Company's stock options at December 31, 1997 and
1998, and changes during the years then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
1997 1998
-------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
(000s) Per Share (000s) Per Share
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 954 $ 1.95 1,086 $ 2.81
Granted 522 3.85 865 3.06
Exercised (122) 1.11 (189) 1.34
Canceled -- -- (250) 2.00
Forfeited (268) 2.56 (336) 2.97
------- ------- ------- -------
Outstanding, end of year 1,086 $ 2.81 1,176 $ 2.93
Options exercisable, end of year 438 $ 1.99 370 $ 2.96
Weighted average fair value of options granted $ 2.94 $ 1.88
</TABLE>
The following table summarizes the information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Number
Remaining Exercisable at
Exercise Prices Number Contractual December 31,
Per Share Outstanding Life (Years) 1998
--------------- ----------- ------------ --------------
<S> <C> <C> <C>
$.001 5,285 4.04 5,285
.75 48,000 5.64 48,000
2.00 350,000 9.96 --
2.25 50,000 6.40 50,000
2.50 20,050 6.68 12,825
3.00 248,000 7.99 142,000
3.13 27,950 8.09 7,925
3.25 154,700 9.14 --
3.50 2,500 9.12 --
4.00 30,700 5.80 30,700
4.25 30,000 9.14 1,250
4.38 149,333 8.91 39,833
4.88 19,200 8.47 19,200
5.03 40,000 8.75 13,332
----------- --------------
1,175,718 370,350
=========== ==============
</TABLE>
The fair value of each option grant is estimated on the date of grant using an
option pricing model, which approximates the Black-Scholes option pricing model,
for a stock that does not pay dividends with the following weighted average
assumptions used for grants in 1997 and 1998, respectively: risk-free interest
rates of 6.4 percent and 5.0 percent; expected lives of 10 years and 10 years;
and expected volatility of 61 percent and 77 percent.
F-19
<PAGE> 53
14. RELATED-PARTY TRANSACTIONS:
During 1997, the Company sold 50,000 shares of common stock to its former
president and chief executive officer for $200,000. During 1998, the Company
sold 20 shares of Preferred Stock to an officer and director of the Company as
further described in Note 12. During 1998, the Company acquired the rights to a
distributorship agreement from a company affiliated with a former officer and
director of the Company as further described in Note 5.
15. SUBSEQUENT EVENTS (UNAUDITED):
On March 18, 1999, the Company's stockholders approved the Merger.
Contemporaneously with the Merger, the Company changed its name to Dexterity
Surgical, Inc. The Company will account for this business combination as a
purchase. The consideration given to the selling stockholders by the Company for
the DI stock it did not previously own consisted of:
(a) $1.5 million cash.
(b) Three million shares of the Company's common stock valued at
approximately $5.6 million.
(c) Warrants to purchase 1.5 million shares of the Company's common stock
valued at approximately $2.3 million.
(d) A one year, $1 million promissory note bearing interest at
12 percent.
(e) A royalty to be paid to the selling stockholders in an amount equal
to 15 percent of all sales of Dexterity products for a period of
seven years. The royalty is subject to minimum payments which
aggregate approximately $9.7 million over the seven-year royalty
period, with a net present value, discounted at 12 percent, of
approximately $5.95 million.
F-20
<PAGE> 54
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>
<PAGE> 55
<TABLE>
<S> <C>
2.8* Plan of Merger and Acquisition Agreement dated December 18, 1998
between Dexterity Incorporated and the Company.
3.1* Restated Certificate of Incorporation of the Registrant.
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).
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).
</TABLE>
<PAGE> 56
<TABLE>
<S> <C>
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).
</TABLE>
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<TABLE>
<S> <C>
10.27 Distribution Agreement dated May 1, 1997 between LifeQuest
Medical, Inc. and Origin MedSystems, Inc. (incorporated by
reference herein to Exhibit No. 10.27 to the Company's Annual
Report on Form 10-KSB/A for the year ended December 31, 1997).
10.28 Employment Agreement dated April 1, 1998 between the Company and
Randall K. Boatright (incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ended June 30,
1998).
10.29 Subscription Agreement dated June 9, 1998 between the Company and
Ana-Tech, L.L.C. (incorporated herein by reference to Exhibit
10.4 to the Company's Form 10-Q for the quarter ended June 30,
1998).
10.30 Series A Cumulative Convertible Stock Purchase Agreement dated
August 11, 1998, among the Company, Renaissance Capital Growth &
Income Fund III, Inc. and Renaissance U.S. Growth & Income Trust,
PLC (incorporated herein by reference to Exhibit 10.5 to the
Company's Form 10-Q for the quarter ended June 30, 1998).
10.31 Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated August 11, 1998, among the Company, Richard A.
Woodfield and R. Michael Yates (incorporated herein by reference
to Exhibit 10.6 to the Company's Form 10-Q for the quarter ended
June 30, 1998).
10.32* Series B Convertible Stock Purchase Agreement dated November 19,
1998, among the Company, Renaissance Capital Growth & Income
Trust Fund III, Inc. and Renaissance U.S. Growth & Income Trust,
PLC
10.33* Amended Employment Agreement between the Company and Richard A.
Woodfield dated December 15, 1998.
10.34* Amended Option Agreement between the Company and Richard A.
Woodfield dated December 15, 1998.
22 Subsidiaries
Name Under Which
Name State of Incorporation Doing Business
---- ---------------------- ----------------
ValQuest Medical, Inc. Nevada ValQuest Medical, Inc.
11* Computation of earnings (loss) per share
23* Consent of Arthur Andersen LLP
27* Financial Data Schedule
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 2.8
PLAN OF MERGER AND ACQUISITION AGREEMENT
DATED EFFECTIVE DECEMBER 18, 1998
BETWEEN
LIFEQUEST MEDICAL, INC.
AND
DEXTERITY INCORPORATED
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. GENERAL DEFINITIONS....................................................................................A-1
1.1 "Accounts Receivable".........................................................................A-1
1.2 "Affiliate"...................................................................................A-1
1.3 "Article".....................................................................................A-1
1.4 "Assets"......................................................................................A-1
1.5 "Authorization"...............................................................................A-2
1.6 "Balance Sheet Date"..........................................................................A-2
1.7 "Best Knowledge"..............................................................................A-2
1.8 "Brokerage Fee"...............................................................................A-2
1.9 "Business Combination"........................................................................A-2
1.10 "Business Day"................................................................................A-2
1.11 "CERCLA"......................................................................................A-2
1.12 "Certificate".................................................................................A-2
1.13 "Closing".....................................................................................A-2
1.14 "Closing Date"................................................................................A-2
1.15 "Code"........................................................................................A-2
1.16 "Contracts"...................................................................................A-2
1.17 "Control".....................................................................................A-3
1.18 "Damages".....................................................................................A-3
1.19 "Deposits"....................................................................................A-3
1.20 "Effective Time"..............................................................................A-3
1.21 "Encumbrance".................................................................................A-3
1.22 "Environmental Laws"..........................................................................A-3
1.23 "Exchange Act"................................................................................A-3
1.24 "Financial Statements"........................................................................A-3
1.25 "Governmental Authority"......................................................................A-3
1.26 "Governmental Requirement"....................................................................A-4
1.27 "Intellectual Property".......................................................................A-4
1.28 "LifeQuest Stock".............................................................................A-4
1.29 "Merger"......................................................................................A-4
1.30 "Material Adverse Effect".....................................................................A-5
1.31 "Merger Consideration"........................................................................A-5
1.32 "Parties "....................................................................................A-5
1.33 "Permitted Encumbrances"......................................................................A-5
1.34 "Person"......................................................................................A-5
1.35 "Reference Balance Sheet".....................................................................A-5
1.36 "Reorganization"..............................................................................A-5
1.37 "Representations and Warranties of LifeQuest".................................................A-5
1.38 "Representations and Warranties of Seller"....................................................A-5
1.39 "Royalty Agreement"...........................................................................A-5
1.40 "Schedule"....................................................................................A-5
1.41 "SEC" or "Commission".........................................................................A-5
1.42 "SEC Documents"...............................................................................A-5
1.43 "Section".....................................................................................A-6
1.44 "Securities Act"..............................................................................A-6
1.45 "Seller Stock"................................................................................A-6
1.46 "Shareholders"................................................................................A-6
1.47 "Subsidiary"..................................................................................A-6
1.48 "Surviving Corporation".......................................................................A-6
1.49 "Taxes".......................................................................................A-6
</TABLE>
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<TABLE>
<S> <C> <C>
1.50 "Tax Returns".................................................................................A-6
1.51 "Teleflex"....................................................................................A-6
1.52 "Waste Materials".............................................................................A-6
2. MERGER.................................................................................................A-6
2.1 The Merger....................................................................................A-6
2.2 Surviving Corporation.........................................................................A-7
2.3 Liabilities...................................................................................A-7
2.4 Certificate of Incorporation and Bylaws.......................................................A-7
2.5 Directors and Officers........................................................................A-7
2.6 Conversion or Cancellation of Stock Upon Merger...............................................A-7
2.7 Fractional Shares.............................................................................A-8
2.8 Exchange Procedures...........................................................................A-9
2.9 Interim Dividends.............................................................................A-9
2.10 Further Assurances............................................................................A-9
3. CLOSING; CLOSING DATE..................................................................................A-9
4. REPRESENTATIONS AND WARRANTIES OF SELLER..............................................................A-10
4.1 Incorporation................................................................................A-10
4.2 Share Capital................................................................................A-10
4.3 Financial Statements.........................................................................A-10
4.4 Events Since the Balance Sheet Date..........................................................A-11
4.5 Taxes........................................................................................A-11
4.6 Employee Matters.............................................................................A-12
4.7 Contracts and Agreements.....................................................................A-12
4.8 Effect of Agreement..........................................................................A-14
4.9 Properties, Assets and Leasehold Estates.....................................................A-15
4.10 Intellectual Property........................................................................A-15
4.11 Suits, Actions and Claims....................................................................A-15
4.12 Licenses and Permits; Compliance With Governmental Requirements..............................A-16
4.13 Authorization................................................................................A-16
4.14 Records......................................................................................A-16
4.15 Environmental Protection Laws................................................................A-16
4.16 Accounts Receivable..........................................................................A-17
4.17 Brokers and Finders..........................................................................A-18
4.18 Deposits.....................................................................................A-18
4.19 Work Orders..................................................................................A-18
4.20 Customer List; Supplier List.................................................................A-18
4.21 No Royalties.................................................................................A-18
4.22 Bank Accounts................................................................................A-18
4.23 Working Capital..............................................................................A-18
4.24 Shareholder Approval.........................................................................A-19
4.25 No Untrue Statements.........................................................................A-19
5. REPRESENTATIONS AND WARRANTIES OF LIFEQUEST...........................................................A-19
5.1 LifeQuest Incorporation......................................................................A-19
5.2 Authorization................................................................................A-19
5.3 Brokers and Finders..........................................................................A-19
5.4 Authorization for Stock Consideration........................................................A-19
5.5 SEC Documents................................................................................A-19
6. NATURE OF STATEMENTS AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES...................................A-20
</TABLE>
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<TABLE>
<S> <C>
7. TAX TREATMENT.........................................................................................A-20
8. PRE-CLOSING COVENANTS.................................................................................A-20
8.1 General......................................................................................A-20
8.2 Notices and Consents.........................................................................A-21
8.3 Operation of Business........................................................................A-21
8.4 Full Access..................................................................................A-23
8.5 Notice of Developments.......................................................................A-23
8.6 Exclusivity..................................................................................A-23
9. CONDITIONS TO OBLIGATION TO CLOSE.....................................................................A-24
9.1 Conditions to Obligation of LifeQuest........................................................A-24
9.2 Conditions to Obligation of Seller...........................................................A-25
10. SPECIAL CLOSING AND POST-CLOSING COVENANTS............................................................A-26
10.1 General......................................................................................A-26
10.2 Litigation Support...........................................................................A-26
10.3 Transition...................................................................................A-27
10.4 Intellectual Property Assignment.............................................................A-27
10.5 Tax-Free Reorganization......................................................................A-27
10.6 Teleflex Debt................................................................................A-27
10.7 Board Representation.........................................................................A-27
11. NOTICES...............................................................................................A-27
12. TERMINATION...........................................................................................A-28
12.1 Termination of Agreement.....................................................................A-28
12.2 Effect of Termination........................................................................A-29
13. GENERAL PROVISIONS....................................................................................A-29
13.1 Governing Law; Interpretation; Section Headings..............................................A-29
13.2 Severability.................................................................................A-29
13.3 Entire Agreement.............................................................................A-30
13.4 Binding Effect...............................................................................A-30
13.5 Assignment...................................................................................A-30
13.6 Amendment; Waiver............................................................................A-30
13.7 Gender; Numbers..............................................................................A-30
13.8 Counterparts.................................................................................A-30
13.9 Telecopy Execution and Delivery..............................................................A-30
13.10 Expenses.....................................................................................A-31
13.11 Effect of Due Diligence......................................................................A-31
13.12 Press Releases and Public Announcements......................................................A-31
13.13 No Third Party Beneficiaries.................................................................A-31
13.14 Construction.................................................................................A-31
13.15 Incorporation of Exhibits, and Schedules.....................................................A-31
13.16 Specific Performance.........................................................................A-31
</TABLE>
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<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
1.20 Form of Certificate of Merger
2.6(a) Form of Warrant
2.6(b) Form of Promissory Note
2.6(c) Royalty Agreement
9.1(e)1 Form of Opinion of Seller's General Counsel
9.1(e)2 Form of Opinion of Seller's Intellectual Property Counsel
9.1(f) Form of Non-Competition Agreements
9.1(g) Form of Indemnity Agreement
9.2(e) Form of Consulting Agreement
9.2(g) Form of Registration Rights Agreement
9.2(i) Form of Opinion of LifeQuest's Counsel
10.4 Intellectual Property Assignment
Schedules
- ---------
4.2 Capitalization of Dexterity
4.3 Financial Statements
4.7 Material Contracts
4.8 Required Consents
4.9 Personal Property
4.10 Intellectual Property
4.11 Suits, Actions and Claims
4.12 Licenses and Permits
4.17 Brokers and Finders
4.20 Customers and Suppliers
4.21 Royalties
4.22 Bank Accounts
</TABLE>
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<PAGE> 6
PLAN OF MERGER AND ACQUISITION AGREEMENT
THIS PLAN OF MERGER AND ACQUISITION AGREEMENT (this "Agreement") is
made and entered into this 18th day of December 1998, between LifeQuest Medical,
Inc., a Delaware corporation ("LifeQuest") and Dexterity Incorporated, a
Delaware corporation ("Seller").
W I T N E S S E T H :
WHEREAS, LifeQuest is primarily in the business of distributing
minimally invasive surgical equipment and supplies; and
WHEREAS, Seller is in the business of distributing Dexterity(R)
products, including the pneumosleeve and protractor medical devices and surgical
instruments designed for use in handoscopic surgery (the "Business"); and
WHEREAS, the Shareholders own and hold all of the issued and
outstanding shares of capital stock of Seller not owned by LifeQuest; and
WHEREAS, the respective boards of directors of LifeQuest and Seller
have voted to approve the merger of Seller with and into LifeQuest (the
"Merger") pursuant to the terms and subject to the conditions of this Agreement;
and
WHEREAS, the transaction provided for in this Agreement is intended to
qualify as a corporate reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the parties hereto agree that Seller shall be merged with and into
LifeQuest and that the terms and conditions of the Merger, the method of
carrying the Merger into effect and certain other provisions relating thereto
shall be as hereinafter set forth:
1. GENERAL DEFINITIONS. For purposes of this Agreement, the following
terms shall have the respective meanings set forth below:
1.1 "Accounts Receivable" shall have the meaning assigned to it in
Section 4.16.
1.2 "Affiliate" of any Person shall mean any Person Controlling,
Controlled by or under common Control with such Person.
1.3 "Article" shall mean an Article of this Agreement unless otherwise
stated.
1.4 "Assets" shall mean the assets, properties and rights of Seller of
every nature, kind and description, wherever located, tangible and intangible,
real, personal and mixed, whether or not
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<PAGE> 7
reflected in the books and records of Seller necessary or desirable to permit
the Business to be carried on in the manner as is presently conducted.
1.5 "Authorization" shall mean any consent, approval or authorization
of, expiration or termination of any waiting period requirement (including
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended) by, or filing, registration, qualification, declaration or designation
with, any Governmental Authority.
1.6 "Balance Sheet Date" shall have the meaning assigned to it in
Section 4.3.
1.7 "Best Knowledge" shall mean what a Person actually knew. When used
with respect to Seller, the term "Best Knowledge" shall mean Best Knowledge of
any of John J. Sickler, Christopher K. Black or Frederick C. Feiler.
1.8 "Brokerage Fee" shall mean the fee payable by Seller to Cleary &
Oxford Associates upon consummation of the transactions contemplated herein,
pursuant to the agreement referred to at Item 23 of Schedule 4.7.
1.9 "Business Combination" shall mean (i) any merger or consolidation
of, or share exchange involving, the Seller with or into any Person, (ii) any
sale, lease, exchange, transfer or other disposition (whether in one transaction
or a series of related transactions) or more than ten percent of the Seller's
consolidated assets (iii) the adoption of any plan or proposal for the
liquidation or dissolution of the Seller, (iv) any issuance, sale, purchase or
redemption of equity securities, any reclassification or equity securities of
recapitalization of the Seller, and (v) any transaction having an effect similar
to those described above.
1.10 "Business Day" shall mean any day other than Saturday, Sunday or
other day on which federally chartered commercial banks in San Antonio, Texas
are authorized or required by law to close.
1.11 "CERCLA" shall mean the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980, as amended.
1.12 "Certificate" shall mean each stock certificate representing
shares of Seller Stock.
1.13 "Closing" shall have the meaning assigned to it in Article 3.
1.14 "Closing Date" shall have the meaning assigned to it in Article 3.
1.15 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.16 "Contracts" shall have the meaning assigned to it in Section 4.7.
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1.17 "Control" and all derivations thereof shall mean the ability to
either (a) vote (or direct the vote of) 50% or more of the voting interests in
any Person or (b) direct the affairs of another, whether through voting power,
contract or otherwise.
1.18 "Damages" shall mean any and all liabilities, losses, damages,
demands, assessments, punitive damages, loss of profits, refund obligations
(including, without limitation, interest and penalties thereon) claims of any
and every kind whatsoever, costs and expenses (including interest, awards,
judgments, penalties, settlements, fines, costs of remediation, diminutions in
value, costs and expenses incurred in connection with investigating, prosecuting
and defending any claims or causes of action (including, without limitation,
reasonable attorneys' fees and reasonable expenses and all reasonable fees and
reasonable expenses of consultants and other professionals)).
1.19 "Deposits" shall have the meaning assigned to it in Section 4.18.
1.20 "Effective Time" shall mean the time at which a properly executed
certificate of merger in substantially the form attached to this Agreement as
Exhibit 1.20 (together with other documents required by law to effect the
Merger) shall have been filed with the Secretary of State of Delaware.
1.21 "Encumbrance" shall mean any security interest, mortgage, pledge,
trust, claim, lien, charge, option, defect, restriction, encumbrance or other
right or interest of any third Person of any nature whatsoever.
1.22 "Environmental Laws" shall mean any and all applicable laws,
statutes, ordinances, rules, regulations, orders, or determinations of any
Governmental Authority pertaining to the environment heretofore or currently in
effect in any and all jurisdictions in which Seller is conducting or at any time
has conducted business, or where any of the Assets are located, or where any
hazardous substances generated by or disposed of by Seller are located.
"Environmental Laws" shall include, but not be limited to, the Clean Air Act, as
amended, CERCLA, the Federal Water Pollution Control Act, as amended, RCRA, the
Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as
amended, and all other applicable laws, statutes, ordinances, rules,
regulations, orders and determinations of any Governmental Authority relating to
(a) the control of any potential pollutant or protection of the air, water or
land, (b) solid, gaseous or liquid waste generation, handling, treatment,
storage, disposal or transportation and (c) exposure to hazardous, toxic or
other substances alleged to be harmful. The terms "hazardous substance,"
"release" and "threatened release" shall have the meanings specified in CERCLA,
and the terms "solid waste" and "disposal" (or "disposed") have the meanings
specified in RCRA.
1.23 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.24 "Financial Statements" shall have the meaning assigned to it in
Section 4.3.
1.25 "Governmental Authority" shall mean any and all foreign, federal,
state or local governments, governmental institutions, public authorities and
governmental entities of any nature whatsoever, and any subdivisions or
instrumentalities thereof, including, but not limited to,
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<PAGE> 9
departments, boards, bureaus, commissions, agencies, courts, administrations and
panels, and any divisions or instrumentalities thereof, whether permanent or ad
hoc and whether now or hereafter constituted or existing.
1.26 "Governmental Requirement" shall mean any and all applicable laws
(including, but not limited to, applicable common law principles), statutes,
ordinances, codes, rules, regulations, interpretations, guidelines, directions,
orders, judgments, writs, injunctions, decrees, decisions or similar items or
pronouncements, promulgated, issued, passed or set forth by any Governmental
Authority in effect as of the Effective Time.
1.27 "Intellectual Property" shall mean:
(a) all of Seller's patents and applications therefor, further
including, but not limited to, all divisions, reissues, substitutions,
reexaminations, continuations, continuations-in-part and extensions thereof; and
(b) all of Seller's inventions, whether or not patentable,
further including, but not limited to, all new developments and inventions, as
well as all improvements on prior inventions regardless of prior inventorship;
and
(c) all of Seller's know-how and work product, regardless of
form and whether tangible or intangible, further including, but not limited to,
invention and laboratory notebooks, source code and object code, system design,
system specifications, flow charts, test data, records and journals; blueprints,
drawings and photographs; research and engineering reports, including any models
or other hardware; licensing, marketing or development analysis; and customer or
prospective customer lists; and
(d) all of Seller's copyright interests regardless of actual
or potential registrability, and including moral rights, rights of publication
and rights of attribution and integrity; and
(e) all of Seller's trademark or service mark interests,
together with all of the goodwill of the business associated therewith and
represented thereby; and
(f) all of Seller's trade secrets; and
(g) all of Seller's other intellectual property and other
proprietary interests, whether or not identifiable as of the date of execution
hereof, relating to, or used in connection with, the Business or Assets now or
at any time in the future.
1.28 "LifeQuest Stock" shall mean the common stock, $.001 par value, of
LifeQuest.
1.29 "Merger" shall have the meaning assigned to it in Section 2.1.
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<PAGE> 10
1.30 "Material Adverse Effect" shall mean a material adverse effect on
the Business, Assets, properties, operations, condition (financial or otherwise)
or results of operations of Seller, or LifeQuest and its Subsidiaries taken as a
whole, as applicable.
1.31 "Merger Consideration" shall have the meaning assigned to it in
Section 2.6.
1.32 "Parties" or "parties" shall mean collectively LifeQuest and
Seller.
1.33 "Permitted Encumbrances" shall mean (a) Encumbrances for current
taxes and assessments not yet past due or which are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves are
reflected in the Financial Statements, (b) mechanics and materialmen
Encumbrances for construction in progress to the extent not perfected by filing,
recording, giving of notice or other appropriate action in the relevant
jurisdiction, (c) workmen, repairmen, warehousemen, carriers, lessors and
operators Encumbrances arising in the ordinary course of business to the extent
not perfected by filing, recording, giving of notice or other appropriate action
in the relevant jurisdiction and (d) easements, including agreements and deeds
of easement, and other minor imperfections of title which would not have a
Material Adverse Effect.
1.34 "Person" shall mean any natural person, any Governmental Authority
and any entity, the separate existence of which is recognized by any
Governmental Authority or Governmental Requirement, including, but not limited
to, corporations, partnerships, joint ventures, joint stock companies, trusts,
estates, companies and associations, whether organized for profit or otherwise.
1.35 "Reference Balance Sheet" shall have the meaning assigned to it in
Section 4.3.
1.36 "Reorganization" shall have the meaning assigned to it in Article
7.
1.37 "Representations and Warranties of LifeQuest" shall have the
meaning assigned to it in Section 6.2.
1.38 "Representations and Warranties of Seller" shall have the meaning
assigned to it in Section 6.1.
1.39 "Royalty Agreement" shall mean the Royalty Agreement referred to
in the penultimate sentence of Section 2.6.
1.40 "Schedule" shall mean a Schedule to this Agreement unless
otherwise stated. The Schedules to this Agreement may be attached to this
Agreement or may be set forth in a separate document denoted as the Schedules to
this Agreement, or both.
1.41 "SEC" or "Commission" shall mean the United States Securities and
Exchange Commission.
1.42 "SEC Documents" shall have the meaning assigned to it in Section
5.5.
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<PAGE> 11
1.43 "Section" shall mean a Section of this Agreement unless otherwise
stated.
1.44 "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.45 "Seller Stock" shall mean the common stock, par value $1.00, of
Seller.
1.46 "Shareholders" shall mean the record owners, other that LifeQuest,
of the Seller Stock on the Closing Date.
1.47 "Subsidiary" shall mean, with respect to any Person (the
"parent"), (a) any corporation, association, joint venture, partnership or other
business entity of which securities or other ownership interests representing
more than 50% of the ordinary voting power or beneficial interest are, at the
time as of which any determination is being made, owned or controlled by the
parent or one or more subsidiaries of the parent or by the parent and one or
more subsidiaries of the parent and (b) any joint venture or partnership of
which the parent or any Subsidiary of the parent is a general partner or has
responsibility for its management.
1.48 "Surviving Corporation" shall mean the corporation existing at and
after the Effective Time as a result of the Merger.
1.49 "Taxes" shall mean any foreign, federal, state or local tax,
assessment, levy, impost, duty, withholding, estimated payment or other similar
governmental charge, together with any penalties, additions to tax, fines,
interest and similar charges thereon or related thereto.
1.50 "Tax Returns" shall mean all Tax returns and reports (including,
without limitation, income, franchise, sales and use, unemployment compensation,
excise, severance, property, gross receipts, profits, payroll and withholding
Tax returns and information returns).
1.51 "Teleflex" means Teleflex Incorporated, a Delaware corporation.
1.52 "Waste Materials" shall mean any toxic or hazardous materials or
substances, or solid wastes, including asbestos, buried contaminants, chemicals,
flammable or explosive materials, radioactive materials, petroleum and petroleum
products, and any other chemical, pollutant, contaminant, substance or waste
that is regulated by any Governmental Authority under any Environmental Law.
2. MERGER.
2.1 The Merger. Subject to the terms and conditions of this Agreement,
Seller shall be merged with and into LifeQuest in accordance with all applicable
laws (the "Merger"), with LifeQuest being the Surviving Corporation. LifeQuest
and Seller shall cause a certificate of merger to be filed with the Secretary of
State of Delaware on the Closing Date (as hereinafter defined). The Merger shall
be effective at the Effective Time.
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<PAGE> 12
2.2 Surviving Corporation. From and after the Effective Time, the
Surviving Corporation shall have the name "Dexerity Surgical, Inc." and shall
possess all assets and property of every description, and every interest in the
assets and property, wherever located, and the rights, privileges, immunities,
powers, franchises and authority, of a public as well as of a private nature, of
each of Seller and LifeQuest, and all debts and all other things in action or
belonging or due to each of Seller and LifeQuest, all of which shall be vested
in the Surviving Corporation without further act or deed, and title to any real
estate or any interest in the real estate vested in either Seller or LifeQuest
shall not revert or in any way be impaired.
2.3 Liabilities. The Surviving Corporation shall be liable for all the
debts, liabilities and duties of each of Seller and LifeQuest; any action or
proceeding pending, by or against either Seller or LifeQuest, may be prosecuted
to judgment, with right of appeal, as if the Merger had not taken place, or the
Surviving Corporation may be substituted in its place, and all the rights of
creditors of each of Seller and LifeQuest shall be preserved unimpaired, and all
liens upon the property of each of Seller and LifeQuest shall be preserved
unimpaired, on only the property affected by the liens immediately prior to the
Effective Time.
2.4 Certificate of Incorporation and Bylaws. The certificate of
incorporation and bylaws of LifeQuest in effect immediately prior to the
Effective Time shall be the certificate of incorporation and bylaws of the
Surviving Corporation following the Merger until otherwise amended or repealed.
2.5 Directors and Officers. Subject to the provisions of Section 10.7
hereof, the directors and officers of LifeQuest immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation
until their successors are duly elected or appointed and qualified in the manner
provided in the bylaws of the Surviving Corporation, or as otherwise provided by
law.
2.6 Conversion or Cancellation of Stock Upon Merger. In consideration
for the Merger and the non-competition agreements and indemnity agreements
described in Section 9.1 hereof, as of the Effective Time, by virtue of the
Merger and without any action on the part of the holders of any shares of Seller
Stock, or the holder of the shares of LifeQuest Stock:
(a) each share of Seller Stock outstanding immediately before the
Effective Time and held by the Shareholders shall be converted into the
right to receive, subject to Section 2.7,
(i) the numbers of shares of LifeQuest Stock equal to the
quotient of (1) 3,000,000 divided by (2) the number
of shares of Seller Stock held by the Shareholders
immediately before the Effective Time (the "Stock
Consideration");
(ii) the quotient of (1) $1,500,000, less 50% of Brokerage
Fee divided by (2) the number of shares of Seller
Stock held by the Shareholders immediately before the
Effective Time (the "Cash Consideration");
(iii) a warrant dated the Closing Date substantially in the
form attached hereto as Exhibit 2.6(a) to purchase
such number of shares of LifeQuest Stock equal to
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the quotient of (1) 1,500,000 divided by (2) the
number of shares of Seller Stock held by the
Shareholders immediately before the Effective Time,
all at an exercise price of $2.00 per share (the
"Warrants");
(iv) a promissory note dated the Closing Date
substantially in the form attached hereto as Exhibit
2.6(b) in a principal amount equal to the quotient of
(1) $1,000,000 divided by (2) the number of shares of
Seller Stock held by the Shareholders immediately
before the Effective Time, payable within one year
from the date of Closing and accruing interest at the
rate of 12% per annum (the "Promissory Notes" and,
together with Stock Consideration, the Cash
Consideration and the Warrants, the "Merger
Consideration"); and
(v) an undivided fractional interest in the Royalty
Agreement equal to one over the number of shares of
Seller Stock held by the Shareholders immediately
before the Effective Time.
(b) each share of Seller Stock outstanding immediately before the
Effective Time and held by LifeQuest shall be converted into the right
to receive one (1) share of common stock of the Surviving Corporation;
and
(c) each share of LifeQuest Stock outstanding immediately before the
Effective Time shall be converted into one share of Common Stock of the
Surviving Corporation.
At the Closing, LifeQuest shall (i) issue and deliver to the Shareholders
certificates representing the Stock Consideration, (ii) pay the Cash
Consideration, (iii) issue and deliver the Warrants and the Promissory Notes to
the Shareholders, (iv) execute and deliver to TFX Equities, as agent for the
Shareholders, a Royalty Agreement, dated the Closing Date, in substantially the
form of Exhibit 2.6(c) and (v) execute and deliver to the proper Persons an
assumption of the assignment of those contracts and agreements of Seller listed
on Schedule 4.7 which require an express assumption of the liabilities of Seller
as contained in such contracts or agreements. At the Closing, Seller shall
execute and deliver to LifeQuest the intellectual property assignment as
contemplated by Section 10.4.
2.7 Fractional Shares. Notwithstanding Section 2.6, no certificates or
scrip representing fractional shares of LifeQuest Stock shall be issued upon the
surrender for exchange of certificates that prior to the Effective Time
represented shares of Seller Stock, no dividend or distribution of LifeQuest
shall relate to any fractional share interest and no fractional share interest
shall entitle the owner thereof to vote or to exercise any rights of a
stockholder of LifeQuest. In the event that any Former Seller Shareholder shall
be entitled to any fractional share interest then any fractional amount shall be
rounded down to the nearest whole share.
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2.8 Exchange Procedures.
(a) After the Effective Time, each outstanding Certificate
shall, until duly surrendered to LifeQuest as contemplated by this Section 2.8,
be deemed to represent only the right to receive the Merger Consideration.
(b) After the Effective Time, there shall be no further
transfer on the records of Seller of Certificates, and each share of Seller
Stock presented or surrendered to LifeQuest shall be canceled in exchange for
the Merger Consideration as contemplated by Section 2.6. LifeQuest shall not be
obligated to deliver Merger Consideration to any holder of a Certificate until
such holder surrenders such Certificate as provided herein.
2.9 Interim Dividends. No dividends or other distributions declared
after the Effective Time on LifeQuest Stock issuable pursuant to the Merger and
payable to a Former Seller Shareholder after the Effective Time shall be paid to
the holder of any unsurrendered certificates formerly representing shares of
Seller Stock until the certificates shall be surrendered as provided herein,
provided, however, that (a) upon surrender there shall be paid to the
shareholder in whose name the certificates representing the shares of LifeQuest
Stock shall be issued the amount of unpaid dividends with respect to the
holder's shares of LifeQuest Stock and (b) at the appropriate payment date, or
as soon as practicable thereafter, there shall be paid to the shareholder the
amount of dividends declared with respect to whole shares of LifeQuest Stock
with a record date on or after the Effective Time but before surrender and a
payment date subsequent to surrender, subject in any case to any applicable
escheat laws. No interest shall be payable with respect to the payment of
dividends or other distributions on surrender of outstanding certificates.
2.10 Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any further assignments
or assurances in law or otherwise are necessary or desirable to vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation, all rights, title
and interests in all the Assets and all privileges, powers and franchises of
Seller, the Surviving Corporation and its proper officers and directors, in the
name and on behalf of Seller, shall execute and deliver all such proper deeds,
assignments and assurances in law and do all things necessary and proper to
vest, perfect or confirm title to such property or rights in the Surviving
Corporation and otherwise to carry out the purpose of this Agreement, and the
proper officers and directors of the Surviving Corporation are fully authorized
in the name of Seller or otherwise to take any and all such action.
3. CLOSING; CLOSING DATE.
As soon as practicable after satisfaction or waiver of all conditions
to the Merger, including the approval by the stockholders of LifeQuest of the
Merger and the issuance of the Stock Consideration, the consummation of the
transactions referenced above shall take place (the "Closing") at 10:00 a.m.,
E.S.T., at the offices of Saul, Ewing, Remick & Saul, LLP, Centre Square West,
1500 Market Street, 38th Floor, Philadelphia, Pennsylvania or at such other
time, date and place as LifeQuest and Seller shall in writing designate. The
date of the Closing is referred to herein as the "Closing Date".
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4. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents
and warrants to the LifeQuest as follows:
4.1 Incorporation. Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and is
qualified and in good standing as a foreign corporation in Pennsylvania. Seller
is not required to qualify or otherwise be authorized to do business as a
foreign corporation in any other jurisdiction in order to carry on any of its
businesses as now conducted or to own, lease or operate the Assets except for
such jurisdictions where the failure to so qualify will not have a Material
Adverse Effect. Complete and correct copies of the Certificate of Incorporation
of Seller and all amendments thereto, certified in each case by the Secretary of
State of the State of Delaware, and of the Bylaws of Seller and all amendments
thereto, certified by the Secretary of Seller, heretofore have been delivered to
LifeQuest. The minute books of Seller previously made available to LifeQuest are
complete and accurately reflect all action taken prior to the date of this
Agreement by its board of directors and shareholders, in their capacities as
such. Seller has no Subsidiaries. Seller is not engaged in any business or
operations other than the Business.
4.2 Share Capital
(a) The authorized capital stock of Seller consists of 4,000
shares of Seller Stock, of which 1,263 shares are outstanding as of the date
hereof, and 1,000 shares of preferred stock of Seller, of which none shares are
outstanding as of the date hereof. All of the outstanding Seller Stock is held
of record by the Persons identified as such owners on Schedule 4.2. All
outstanding Seller Stock is duly authorized and issued in compliance with all
federal, state and foreign securities laws. True and correct copies of the stock
records of Seller, showing all issuances and transfers of shares of capital
stock of Seller since inception, have previously been provided to LifeQuest.
(b) On the Closing Date there will be outstanding no rights of
first refusal, preemptive rights, conversion rights, options, warrants or other
rights to acquire, directly or indirectly, capital stock from Seller. Set forth
in Schedule 4.2 is the number of options outstanding on the date hereof, the
grant dates and exercise prices thereof (in each case, as applicable).
(c) Seller is not a party or subject to any agreement or
understanding, and to the Best Knowledge of Seller there is no agreement or
understanding between any Persons, that affects or relates to the voting or
giving of written consents with respect to any securities of Seller or the
voting by any director of Seller. No Shareholder nor any Affiliate thereof is
indebted to Seller. Seller is not indebted to any Shareholder or any Affiliate
thereof other than Teleflex Incorporated ("Teleflex").
4.3 Financial Statements. Seller has delivered to LifeQuest copies of
the following financial statements for Seller, all of which financial statements
are included in Schedule 4.3 (collectively, the "Financial Statements"):
Unaudited Balance Sheet of Seller (the "Reference Balance Sheet") as of October
31, 1998 (the "Balance Sheet Date") and Unaudited Income Statement of Seller for
the ten-month period ended on the Balance Sheet Date. The Financial Statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent
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basis throughout the periods indicated, and present fairly the financial
condition of Seller as of the dates and for the periods indicated thereon,
except that such financial statements do not include footnote disclosures which
are required by generally accepted accounting principles. However, all material
matters which would have been disclosed in such footnotes are disclosed in this
Agreement and the Schedules hereto or in the documents referred to in this
Agreement or such Schedules.
4.4 Events Since the Balance Sheet Date. Since the Balance Sheet Date,
there has not been:
(a) any change in the condition (financial or otherwise) or in
the properties, assets, liabilities, business or prospects of the Business,
except changes in the ordinary course of business, all of which in the aggregate
have not been materially adverse; (b) any breach or default by Seller or, to the
Best Knowledge of Seller, by any other party, under any agreement or obligation
included in the Assets or by which any of the Assets are bound; (c) any damage,
destruction or loss (whether or not covered by insurance) materially adversely
affecting the Assets or the Business; (d) any material change in the types,
nature, composition or quality of the services of the Business, any material
adverse change in the contributions of any of the service lines of the Business
to the revenues or net income of such Business, or any adverse change in the
sales, revenue or net income of the Business; (e) any transaction related to or
affecting the Assets or the Business other than transactions in the ordinary
course of business of Seller; (f) any declaration, setting aside or payment of
any dividend (whether in cash, stock or property) with respect to any of
Seller's capital stock except as permitted by Section 8.3; (g) (i) any granting
by Seller to any executive officer of Seller of any increase in compensation
payable after the Closing Date, (ii) any granting by Seller to any executive
officer of any increase in severance or termination pay payable after the
Closing Date, or (iii) any entry by Seller into any employment, severance or
termination agreement with any executive officer; (h) any change in accounting
methods, principles or practices by Seller materially affecting its assets,
liabilities or business, except insofar as may have been required by a change in
tax-basis or generally accepted accounting principles, and except as required by
LifeQuest; (i) any condition, event or occurrence through the date hereof which,
in the aggregate, could reasonably be expected to prevent, hinder or delay in
any material respect the ability of Seller to consummate the transactions
contemplated by this Agreement; or (j) any agreement, in writing or otherwise,
by Seller or any corporate action by Seller with respect to the foregoing.
4.5 Taxes.
(a) All Tax Returns of or relating to any Taxes that are
required to be filed on or before the Effective Time, subject to any allowable
extension periods, for, by, on behalf of or with respect to Seller, including,
but not limited to, those relating to the income, business, operations or
property of Seller (whether on a separate, consolidated, affiliated, combined,
unitary or any other basis), have been or will prior to the Effective Time be
timely filed with the appropriate foreign, federal, state and local authorities,
and all Taxes shown to be due and payable on such Tax Returns have been or will
prior to the Effective Time be paid in full on or before the Effective Time,
except Taxes which have not yet become due, before the Effective Time, liability
for which is or will prior to the Effective Time be reflected on the Seller's
books of account;
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(b) all Taxes assessed and due and owing from or against
Seller on or before the Effective Time have been or will be timely paid in full
on or before the Effective Time; and
(c) all withholding Tax, Tax deposit and estimated Tax payment
requirements imposed on Seller for any and all periods ending on or before the
Effective Time, or through and including the Effective Time for periods that
have not ended on or before the Effective Time, have been or will be satisfied
in full on or before the Effective Time or reserves adequate for the payment of
such withholding, deposit and estimated Taxes have been or will be established
in the books of account of Seller on or before the Effective Time.
4.6 Employee Matters. Seller has no employees and has not at any time
in the past had any employees.
4.7 Contracts and Agreements. (a) Except for the contracts or
arrangements referred to in Schedule 4.7, Seller is not a party to or bound by:
(i) any contract, agreement or commitment in respect of the
sale or distribution of products or services or the purchase of raw materials,
supplies or other products or utilities other than pending orders given or
received in the ordinary course of business consistent with past practice;
(ii) any offer, tender or the like outstanding and capable of
being converted into an obligation of Seller by the passage of time or by an
acceptance or other act of some other person or entity or both, except for those
incurred in the ordinary course of Seller's business, none of which have had a
Material Adverse Effect;
(iii) any sale, agency, distributorship agreement, franchise
agreement or legally enforceable commitment or obligation with respect thereto;
(iv) any collective bargaining agreement, union agreement,
employment agreement, consulting agreement, management service agreement,
agreement providing for the services of an independent contractor or any other
similar type of contract or agreement;
(v) any profit-sharing, pension, stock option, severance pay,
retirement, bonus, deferred compensation, group life and health insurance or
other employee benefit plan, agreement, arrangement or commitment of a similar
nature or any agreement with any present or former officer, director or
shareholder of Seller;
(vi) any loan or credit agreement, indenture, guarantee (other
than endorsements made for collection), mortgage, pledge, conditional sale or
other title retention agreement, any equipment financing obligation, lease and
lease-purchase agreement;
(vii) any lease related to the Assets or the Business, and any
other contract, agreement or legally enforceable commitment relating to or
affecting the Assets or the Business;
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(viii) any performance bond, bid bond, surety bond and the
like, any contract and bid covered by such bond, and any letter of credit and
guaranty;
(ix) any consent decree and other judgment, decree or order,
settlement agreement and agreement relating to competitive activities, requiring
or prohibiting any future action;
(x) any contract, commitment or agreement of any nature with a
Shareholder, or Affiliate of a Shareholder;
(xi) any contracts, commitments and agreements entered into
outside the ordinary course of the operation of the Business;
(xii) any agreement, indenture or other instrument which
contains restrictions with respect to the payment of dividends or any other
distribution in respect of its capital stock or the purchase, redemption or
other acquisition of capital stock;
(xiii) other than expenditures regularly made in the ordinary
course of business of Seller for items that are not property, plant or
equipment, any agreement, contract or commitment relating to any expenditure or
a series of related expenditures in excess of $10,000;
(xiv) any outstanding loan or advance by Seller to, or
investment by Seller in, any Person, or any agreement, contract, commitment or
understanding relating to the making of any such loan, advance or investment
(excluding trade receivables);
(xv) any contract, agreement, indenture, note or other
instrument relating to (A) the borrowing of money by Seller or the granting of
any Encumbrance or (B) any guarantee or other contingent liability (identifying
the primary contract or agreement to which such guarantee or contingent
liability relates or the agreement pursuant to which such guarantee was
delivered) in respect of any indebtedness, commitment, liability or obligation
of any Person (other than the endorsement of negotiable instruments for deposit
or collection in the ordinary course of business);
(xvi) any agreement, contract or commitment limiting the
freedom of Seller or any Affiliate of Seller to engage in any line of business,
to own, operate, sell, transfer, pledge or otherwise dispose of or encumber any
Asset or to compete with any Person or to engage in any business or activity in
any geographic area;
(xvii) any agreement, lease, contract or commitment or series
of related agreements, leases, contracts or commitments not entered into in the
ordinary course of business that is not cancelable under the terms of such
agreement, lease, contract or commitment without penalty to Seller within 30
days;
(xviii) any agreement, contract or commitment requiring (A)
the payment for goods or services whether or not such goods or services are
actually provided or (B) the furnishing of goods or services at a price less
than Seller's cost of producing such goods or providing such services;
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(xix) any agreement or contract obligating Seller or that
would obligate or require any subsequent owner of the business currently
conducted by Seller or any of the Assets to provide for indemnification or
contribution with respect to any matter (other than customary indemnification
provisions in leases of property leased by Seller);
(xx) any license, royalty or similar agreement; or
(xxi) any agreement, contract or commitment that Seller
expects to have a Material Adverse Effect on Seller and/or LifeQuest subsequent
to Closing.
(b) All of such contracts, agreements, leases, licenses,
plans, arrangements, commitments and documents specified in Schedule 4.7
(collectively, the "Contracts") are to the Best Knowledge of Seller valid,
binding and in full force and effect. To the Best Knowledge of Seller there are
no facts or documents rendering any Contract unenforceable by Seller or
otherwise invalid. There is no existing default thereunder or breach thereof by
Seller, or, to the Best Knowledge of Seller, by any other party to a Contract,
or any conditions which, with the passage of time or the giving of notice or
both, would constitute such a default by Seller, or, to the Best Knowledge of
Seller, by any other party to a Contract, and none of the Contracts will be
breached by or give any other party a right of termination as a result of the
transactions contemplated by this Agreement. There are no pending or, to the
Best Knowledge of Seller, threatened disputes with respect to the Contracts.
There are no obligations, including payment of money, past due by either party
to any Contract. There are no disclosed or undisclosed breaches of warranty,
whether or not within a time period to cure, pertaining to any Contract. There
is no condition existing that has or will trigger a right to terminate any
Contract. There is no requirement in any Contract requiring a third party to be
a signatory to this Agreement. Copies of all of the Contracts (or in the case of
oral commitments, descriptions of the material terms thereof) have been
delivered by Seller to LifeQuest, and such copies and/or descriptions are true,
complete and accurate and include all amendments, supplements or modifications
thereto. All of the contracts are assignable to and assumable by LifeQuest as
set forth herein so as to give LifeQuest exactly the same rights and/or
obligations thereunder enjoyed by Seller, without the requirement of obtaining
any consent or approval, giving any prior or subsequent notice, paying any
further royalty or fee to any party thereto or to any other third party, or
performing any duty that has not already been fully performed by Seller. All of
the Contracts will be fully vested in LifeQuest as of the Effective Time of the
Merger, without the approval or consent of any Person.
4.8 Effect of Agreement. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby will not (a)
violate any provision of the Articles of Incorporation or other charter
documents or bylaws of Seller; (b) result in any violation of any Governmental
Requirement applicable to Seller, the Assets or the Business; (c) conflict with,
or result in any breach of, or default or loss of any right under (or an event
or circumstance that, with notice or the lapse of time, or both, would result in
a default), or the creation of an Encumbrance pursuant to, or cause or permit
the acceleration prior to maturity or "put" right with respect to, any
obligation under, any contract, indenture, mortgage, deed of trust, lease, loan
agreement or other agreement or instrument to which Seller is a party or to
which any of the Assets or Business are subject; or (d) require notice to or the
consent, authorization, approval, clearance, waiver or order of any Person
(except as specified in Schedule 4.8). The execution, delivery and performance
of this
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Agreement by Seller will not result in the loss of any governmental license,
franchise or permit possessed by Seller.
4.9 Properties, Assets and Leasehold Estates.
(a) Set forth on Schedule 4.9 is a description of each item of
personal property, excluding inventory, owned by Seller that had a book value as
of the Balance Sheet Date greater than $10,000. For purposes of this Section
4.9, "personal property" excludes Intellectual Property. Seller owns all of such
personal property free and clear of all Encumbrances, except for Permitted
Encumbrances and those Encumbrances set forth on Schedule 4.9.
(b) Seller leases no personal property.
(c) Seller owns no real property.
(d) Seller leases no real property.
4.10 Intellectual Property.
(a) Schedule 4.10 is a complete list of Intellectual Property
in which Seller either has an ownership interest or rights/obligations pursuant
to agreements.
(b) Except as set forth in agreements itemized on, or
otherwise disclosed in, Schedule 4.10, (i) there is no contract obligation of
Seller concerning, or any license or encumbrance affecting Seller's interest in
or title to, such Intellectual Property; (ii) Seller has received no notice that
the manufacture or sale by Seller of any of the products offered for sale by
Seller infringes the patent or trademark rights of any other Person nor, to the
Best Knowledge of Seller, is there any valid basis for any such claim; and (iii)
to the Best Knowledge of Seller no product presently offered for sale by any
Person infringes the patent rights of Seller. To the Best Knowledge of Seller,
Seller's use of the Intellectual Property does not infringe on any third party
proprietary interest, including (without limitation) any third party patent,
copyright, trademark, or trade secret interest. To the Best Knowledge of Seller,
Seller's right to the exclusive use of the Intellectual Property is not being
infringed by any third party proprietary interest, including (without
limitation) any third party patent, copyright, trademark, or trade secret
interest. To the Best Knowledge of Seller, except for agreements itemized on
Schedule 4.10, no agreements or arrangements are in effect with respect to the
development, nondisclosure, marketing, distribution, licensing, or promotion of
the Intellectual Property by any independent contractor, salesperson,
distributor, sublicensor, or other remarketer or sales organization.
4.11 Suits, Actions and Claims. Except as set forth in Schedule 4.11,
(a) there are no suits, actions, claims, or to the Best Knowledge of Seller,
investigations by any Person, or any legal, administrative or arbitration
proceedings in which Seller is engaged, which are pending or, to the Best
Knowledge of Seller, threatened, against or affecting Seller or any of its
properties, assets or business, or to which Seller is or might become a party,
or which question the validity or legality of the transactions contemplated
hereby, (b) to the Best Knowledge of Seller, no reasonable basis or
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reasonable grounds for any such suit, action, claim, investigation or proceeding
exists, and (c) there is no outstanding order, writ, injunction or decree of any
Governmental Authority against or affecting Seller or any of its properties,
assets or business.
4.12 Licenses and Permits; Compliance With Governmental Requirements.
No federal, state, local or foreign governmental license or permit is necessary
for the conduct by Seller of the operation of its business as currently
conducted, except for the licenses, permits and approvals required to be
obtained by Medical Creative Technologies, Inc. referred to in Schedule 4.12.
Seller has not received and is not aware of any reports of inspections under the
United States Occupational Safety and Health Act, or under any other applicable
federal, state or local health and safety laws and regulations relating to
Seller, the Assets or the operation of Seller's business. There are no safety,
health, anti-competitive or discrimination claims that have been made or are
pending or, to the Best Knowledge of Seller, that are threatened relating to the
business or employment practices of Seller. Seller has complied with all
Governmental Requirements applicable to its business and all Governmental
Requirements with respect to the distribution and sale of products and services
by it.
4.13 Authorization. Seller has full legal right, power, and authority
to enter into and deliver this Agreement, to consummate the transactions set
forth herein and to perform all the terms and conditions hereof to be performed
by it. The execution and delivery of this Agreement by Seller and the
performance by it of the transactions contemplated herein have been duly and
validly authorized by all requisite corporate actions of Seller, and this
Agreement has been duly and validly executed and delivered by Seller and is the
legal, valid and binding obligation of Seller, enforceable against Seller in
accordance with the terms of the Agreement, except as limited by applicable
bankruptcy, moratorium, insolvency or other similar laws affecting generally the
rights of creditors or by principles of equity.
4.14 Records. The books, records and minutes kept by Seller with
respect to the Assets and the Business, including, but not limited to, all
customer files, service agreements, correspondence and historic revenue of
Seller, have been kept properly and contain records of all matters required to
be included therein by any Governmental Requirement or by generally accepted
accounting principles, and such books, records and minutes are true, accurate
and complete in all material respects.
4.15 Environmental Protection Laws.
(a) Seller has at all times operated in compliance with all
applicable limitations, restrictions, conditions, standards, prohibitions,
requirements and obligations of Environmental Laws and related orders of any
court or other Governmental Authority.
(b) There are no existing, pending or, to the Best Knowledge
of Seller, threatened actions, suits, claims, investigations or proceedings by
or before any court or any other Governmental Authority directed against Seller
or its Assets or the Business which pertain or relate to (i) any remedial
obligations under any applicable Environmental Law, (ii) violations of any
Environmental Law, (iii) personal injury or property damage claims relating to
the release of chemicals or Waste Materials or (iv) response, removal or
remedial costs under CERCLA or any similar state law.
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(c) All notices, permits, licenses or similar authorizations
required to be obtained or filed by Seller under all applicable Environmental
Laws in connection with its current and previous operation or use of the Assets,
any other assets or properties currently or previously leased or owned by Seller
or the current and previous conduct of its business have been duly obtained or
filed and are in full force and effect.
(d) Seller has not received notice that any permit, license or
similar authorization referred to in subparagraph (a) above, is to be revoked or
suspended by any Governmental Authority.
(e) Seller does not own or operate any underground storage
tanks.
(f) No portion of the Assets or any other assets or properties
currently or previously leased or owned by Seller is part of a Superfund site
under CERCLA or any similar ranking or listing under any similar state law.
(g) All Waste Materials generated by Seller have been
transported, stored, treated and disposed of by carriers, storage, treatment and
disposal facilities authorized and maintaining valid permits under all
applicable Environmental Laws.
(h) No Person has disposed or released any Waste Materials on
or under the Assets or any other asset or property currently or previously
leased or owned by Seller and Seller has not disposed or released Waste
Materials on or under the Assets or any other asset or property currently or
previously leased or owned by Seller, except in compliance with all
Environmental Laws.
(i) No facts or circumstances exist which could reasonably be
expected to result in any liability of Seller to any Person with respect to the
current or past business and operations of Seller, the Assets or any other
assets or properties currently or previously leased or owned by Seller in
connection with (i) any release, transportation or disposal of any Waste
Materials, hazardous substance or solid waste or (ii) action taken or omitted
that was not in full compliance with or was in violation of, any applicable
Environmental Law.
4.16 Accounts Receivable. All notes and accounts receivable of Seller
that are reflected on the Reference Balance Sheet or that have arisen since the
Balance Sheet Date ("Accounts Receivable") have arisen in the ordinary course of
business. All Accounts Receivable either (a) have been collected or (b) are
collectible on the respective due dates thereof, or, if no due date is stated
with respect thereto, within 150 days of their creation in the ordinary course
of business, in each case in the aggregate recorded amounts thereof, less the
applicable reserves with respect thereto reflected on the Reference Balance
Sheet. Seller has not factored or discounted or agreed to factor or discount any
Account Receivable. The values at which the Accounts Receivable are carried on
the Reference Balance Sheet reflect the accounts receivable valuation policy of
Seller which is consistent with Seller's past practice and in accordance with
generally accepted accounting principles consistently applied. No Accounts
Receivable have been written off by Seller, in whole or in part, as
uncollectible during the two years preceding the date hereof.
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4.17 Brokers and Finders. Except as set forth in Schedule 4.17, no
broker or finder has acted for Seller or, to the Best Knowledge of Seller, any
Shareholder in connection with this Agreement or the transactions contemplated
by this Agreement and no broker or finder is entitled to any brokerage or
finder's fee or to any commission in respect thereof based in any way on
agreements, arrangements or understandings made by or on behalf of Seller or
any, to the Best Knowledge of Seller, Shareholder.
4.18 Deposits. Seller does not now hold any deposits or prepayments
(except prepayments for goods ordered in the aggregate not exceeding $10,000) by
third parties with respect to any of the Assets or the Business ("Deposits").
4.19 Work Orders. There are no outstanding work orders or contracts
relating to any portion of the Assets from or required by any policy of
insurance, fire department, sanitation department, health authority or other
Governmental Authority nor is there any matter under discussion with any such
parties or authorities relating to work orders or contracts.
4.20 Customer List; Supplier List.
(a) Schedule 4.20 sets forth a true, correct and complete list of all
customers of the Business to which Seller has sold or provided products or
services since inception. This list provides an accurate statement of the gross
revenues received from each such customer by the Business during the ten-month
period ended October 31, 1998.
(b) Schedule 4.20 sets forth a true, correct and complete list of all
suppliers of the Business from which Seller has purchased or otherwise received
more than $10,000 worth of products or services since inception. This list
provides an accurate statement of the gross payments to each such supplier by
the Business during the ten-month period ended October 31, 1998.
4.21 No Royalties. Except as set forth on Schedule 4.21, no royalty or
similar item or amount is being paid or is owing by Seller, nor is any such item
accruing, with respect to the operation, ownership or use of the Business or the
Assets.
4.22 Bank Accounts. Schedule 4.22 sets forth a true and complete list
of all bank or financial accounts and safe deposit boxes of Seller and of the
credit and debit balances of such bank and financial accounts as of the most
recent practicable date. Except as set forth in Schedule 4.22, since the date of
the balances set forth on such list, there have been no payments out of or
drafts against any of the accounts included therein other than routine payments
and drafts in the ordinary course of business, and the balances in such accounts
as of the date hereof are not materially different from those reflected in such
list. Schedule 4.22 also lists all persons having signatory authority over or
access to such bank and financial accounts and safe deposit boxes.
4.23 Working Capital. On the Closing Date, the current assets of Seller
will exceed the current liabilities of Seller, as determined in accordance with
generally accepted accounting principles.
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4.24 Shareholder Approval. This Agreement and transactions contemplated
herein have been approved by the Shareholders of Seller, and such approval
cannot be revoked unless this Agreement is terminated pursuant to provisions of
Article 12 hereof.
4.25 No Untrue Statements. The Representations and Warranties of Seller
set forth in this Agreement do not include any untrue statement of a material
fact or omit to state any material fact necessary to make such Representations
and Warranties made not misleading.
5. REPRESENTATIONS AND WARRANTIES OF LIFEQUEST. LifeQuest represents
and warrants to Seller as follows:
5.1 LifeQuest Incorporation. LifeQuest is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
5.2 Authorization. LifeQuest has have full legal right, power and
authority, corporate and otherwise, to enter into this Agreement and to
consummate the transactions set forth herein and to perform all the terms and
conditions hereof to be performed by them. The execution and delivery of this
Agreement and the performance by LifeQuest of the transactions contemplated
herein have been duly authorized by all requisite corporate action of LifeQuest
and is the legal, valid and binding obligation of LifeQuest, enforceable against
LifeQuest in accordance with its terms, except as limited by applicable
bankruptcy, moratorium, insolvency or similar laws affecting generally the
rights of creditors or by principles of equity.
5.3 Brokers and Finders. No broker or finder has acted for LifeQuest in
connection with this Agreement or the transactions contemplated by this
Agreement and no broker or finder is entitled to any brokerage or finder's fee
or to any commission in respect thereof based in any way on agreements,
arrangements or understandings made by or on behalf of LifeQuest.
5.4 Authorization for Stock Consideration. LifeQuest has taken all
necessary action to permit it to issue the number of shares of Stock
Consideration required to be issued pursuant to the terms of this Agreement. The
shares of Stock Consideration issued pursuant to the terms of this Agreement
will, when issued, be validly issued, fully paid and nonassessable and not
subject to preemptive rights. The Stock Consideration issuable pursuant to this
Agreement will, when issued, be listed on the NASDAQ SmallCap Market.
5.5 SEC Documents. LifeQuest has provided to Seller and each
Shareholder its Form S-3 dated October 30, 1998, its Annual Report on Form
10-KSB/A for the year ended December 31, 1997, its Quarterly Reports on Form
10-QSB for the quarters ended March 31, 1998, June 30, 1998, and September 30,
1998 and its proxy statement with respect to the Annual Meeting of Stockholders
held on May 19, 1998 (such documents collectively referred to herein as the "SEC
Documents"). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder applicable to such SEC
Documents, and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were
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made, not misleading. The consolidated financial statements of LifeQuest
included in the SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the Commission with respect thereto, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto) and
fairly present the consolidated financial position of LifeQuest and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (except in the
case of interim period financial information for normal year-end adjustments).
6. NATURE OF STATEMENTS AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
6.1 "Representations and Warranties of Seller" means all of
the representations and warranties of Seller set forth in Article 4, including
the statements in the Schedules referred to in Article 4, and the statements of
Seller set forth in the certificate delivered by Seller at Closing pursuant to
Section 9.1(d). All Representations and Warranties of Seller shall survive the
Effective Time regardless of any investigation at any time made by or on behalf
of LifeQuest. The covenants and agreements made by Seller herein, shall continue
until all obligations with respect thereto shall have been performed or
satisfied or shall have been terminated in accordance with their respective
terms.
6.2 "Representations and Warranties of LifeQuest" means all of
the representations and warranties of LifeQuest set forth in Article 5,
including the statements of LifeQuest set forth in the certificate delivered by
LifeQuest at Closing pursuant to Section 9.2(d). All Representations and
Warranties of LifeQuest shall survive the Effective Time regardless of any
investigation at any time made by or on behalf of Seller. The covenants and
agreements made by LifeQuest herein, shall continue until all obligations with
respect thereto shall have been performed or satisfied or shall have been
terminated in accordance with their respective terms.
7. TAX TREATMENT.
Seller and LifeQuest intend that the transactions contemplated
hereunder constitute a tax-free reorganization (a "Reorganization") for federal
income tax purposes under Sections 368(a)(1) and 368(a)(2)(D) of the Code, and
agree to treat and report for federal income tax purposes the transactions
hereunder as a Reorganization. This Agreement shall be construed in a manner to
result in treatment of the transactions hereunder as a Reorganization for
federal income tax purposes.
8. PRE-CLOSING COVENANTS.
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
8.1 General. Each of the Parties will use his or its best
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make
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effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver, of the closing conditions set forth in
Article 9).
8.2 Notices and Consents. Each of the Parties, as promptly as
practicable, (i) will make, or cause to be made, all filings and
submissions required under laws, rules and regulations applicable to
it, or to its Subsidiaries and Affiliates, as may be required for it to
consummate the transactions contemplated hereby; (ii) will use their
best efforts to obtain, or cause to be obtained, all authorizations,
approvals, consents and waivers from all Persons and Governmental
Authorities necessary to be obtained by each of them, or any of their
respective Subsidiaries or Affiliates, in order for each of them,
respectively, so to consummate such transactions; and (iii) will use
their respective best efforts to take, or cause to be taken, all other
actions necessary, proper or advisable in order for each of them to
fulfill their respective obligations hereunder.
8.3 Operation of Business. Except as contemplated by this
Agreement or as set forth in the Schedules, during the period from the
date of this Agreement to the Effective Time, (a) Seller will conduct
its operations according to its ordinary course of business and
consistent with past practice, (b) Seller will not enter into any
transaction other than in the ordinary course of business and
consistent with past practice, (c) Seller will deliver to LifeQuest on
or before the 15th day of each month true and correct unaudited monthly
balance sheets and statements of income for the Business for the
immediately preceding month, and (d) to the extent consistent with the
foregoing, using best efforts and with no less diligence and effort
than would be applied in the absence of this Agreement, Seller will
seek to preserve intact its current business organizations, keep
available the services of its current officers and consultants and
preserve its relationships with customers, suppliers and others having
business dealings with it with the objective that their goodwill and
ongoing businesses shall be unimpaired at the Effective Time; provided
that nothing in this Agreement shall be deemed to limit the right of
Seller to declare and pay dividends in cash to its shareholders
(including the declaration of dividends to its shareholders payable
after the Effective Time) so long as no such declaration or payment
shall result in a breach of the warranty set forth in Section 4.23. For
purposes of this Agreement any such permitted declaration of cash
dividends payable after the Effective Time shall be treated as a
liability of Seller which shall be assumed by the Surviving Corporation
pursuant to Article 2. Without limiting the generality of the
foregoing, and except as otherwise permitted in this Agreement, prior
to the Effective Time, Seller will not, without the prior written
consent of LifeQuest:
(a) except for Seller Stock issued upon exercise of options
outstanding as of the date hereof, issue, deliver, sell, dispose of,
pledge or otherwise encumber, or authorize or propose the issuance,
delivery, sale, disposition or pledge or other Encumbrance of (i) any
additional shares of its capital stock of any class (including the
Seller Stock), or any securities or rights convertible into,
exchangeable for or evidencing the right to subscribe for any shares of
its capital stock, or any rights, warrants, options, calls, commitments
or any other agreements of any character to purchase or acquire any
shares of its capital stock or any securities or rights convertible
into, exchangeable for or evidencing the right to subscribe for
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any shares of its capital stock, or (ii) any other securities in
respect of, in lieu of or in substitution for Seller Stock outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to
redeem, purchase or otherwise acquire, any of its outstanding
securities (including the Seller Stock);
(c) (i) grant any increases in the compensation of any of its
directors, officers or key employees, (ii) pay or agree to pay any
pension, retirement allowance or other employee benefit hereof to any
such director, officer or key employee, whether past or present, (iii)
enter into any new, or amend any existing, employment agreement with
any such director, officer or key employee, (iv) enter into any new, or
amend any existing, severance agreement with any such director, officer
or key employee, or (v) except as may be required to comply with
applicable law, amend any existing, or become obligated under any new
employee benefit plan;
(d) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other reorganization of Seller (other than the Merger);
(e) make any acquisition, by means of merger, consolidation or
otherwise, of (i) any direct or indirect ownership interest in or
assets comprising any business enterprise or operation or (ii) any
other assets in excess of $10,000;
(f) adopt any amendments to its Certificate of Incorporation
or Bylaws;
(g) incur any long-term indebtedness for borrowed money or
guarantee any such indebtedness or make any loans, advances or capital
contributions to, or investments in, any other Person;
(h) amend any Contract;
(i) enter into or amend or assume any mortgage, pledge,
conditional sale or other title retention agreement, lien, encumbrance
or charge of any kind upon any of the Assets, or selling, leasing,
abandoning or otherwise disposing of any of the Assets, including, but
not limited to, real property, machinery, equipment or other operating
properties;
(j) increasing the compensation of any officer or employee of
Seller associated with the Business;
(k) engage in the conduct of any business the nature of which
is different then the business Seller is currently engaged in;
(l) enter into or assume any oral or written agreement
providing for acceleration of payment or performance or other
consequence as a result of a change of control of Seller or its
Subsidiaries;
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(m) except for purchases of inventory pursuant to existing
contracts or arrangements, enter into or assume any oral or written
contract, arrangement or understanding requiring the purchase of
equipment, materials, supplies or services for the expenditure of
greater than $10,000;
(n) incur any liabilities other than in the ordinary course of
business;
(o) hire any employee; or
(p) authorize or announce an intention to do any of the
foregoing, or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
8.4 Full Access. Seller will, and cause each Shareholder to,
permit representatives of LifeQuest and its financing parties to have
full access at all reasonable times, and in a manner so as not to
interfere with the normal business operations of the Seller to all
premises, properties, personnel, books, records (including Tax records
and the workpapers of the independent accountants for the Seller),
contracts and documents of or pertaining to the Seller .
8.5 Notice of Developments. Each Party will give prompt
written notice to the others of any material adverse development which
has caused a breach of any of its own representations and warranties in
Articles 4 or 5 above and not been cured within five days and Seller
will give proper notice to LifeQuest of any development which has
caused a breach of its covenants contained in Section 8.3 above and not
cured within five days. No disclosure by any Party pursuant to this
Section 8.5, however, shall be deemed to amend or supplement the
Schedules hereto or to prevent or cure any misrepresentation, breach of
warranty or breach of covenant.
8.6 Exclusivity.
(a) Unless and until this Agreement has been terminated
pursuant to Section 12.1, Seller will not, and will not cause or permit
any of the Shareholders to, (i) solicit, initiate or encourage the
submission of any proposal or offer from any Person relating to a
Business Combination or (ii) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist
or participate in, or facilitate in any other manner any effort or
attempt by any Person to do or seek a Business Combination. Seller
will, and cause each Shareholder with such knowledge to, notify
LifeQuest immediately if any Person makes any proposal, offer, inquiry,
or contact with respect to any of the foregoing.
(b) The Parties hereto recognize and acknowledge that a breach
by Seller of this Section 8.6 will cause irreparable and material loss
and damage to LifeQuest as to which it will not have an adequate remedy
at law or in damages. Accordingly, each Party acknowledges and agrees
that the issuance of an injunction or other equitable remedy is an
appropriate remedy for any such breach. In addition, in the event of
any breach of the foregoing which results in Business Combination with
a Person other than LifeQuest, Seller
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shall be liable for and promptly reimburse LifeQuest for the reasonable
expenses incurred by LifeQuest in connection with the transactions
contemplated by this Agreement.
9. CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Obligation of LifeQuest. The obligation of
LifeQuest to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the following
conditions:
(a) All Seller's Representations and Warranties
contained in this Agreement (except for the Representations
and Warranties contained in Sections 4.10(b) and 4.11 to the
extent that such Representations and Warranties relate to
claims, demands or notices, or knowledge acquired after the
date of this Agreement) all written information delivered to
LifeQuest by Seller on or prior to the Closing Date pursuant
to this Agreement, (i) that are qualified as to materiality
shall be true in all respects on and as of the Closing Date
and (ii) that are not qualified as to materiality shall be
true in all material respects on and as of the Closing Date
with the same force and affect as though such representations
and warranties were made, and such written information was
delivered, on and as of the Closing Date;
(b) Seller shall have performed and complied with all
of its covenants hereunder in all material respects through
the Closing;
(c) no action, suit or proceeding shall be pending or
threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling or charge would
(i) prevent consummation of any of the transactions
contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded
following consummation, (iii) affect adversely the right of
LifeQuest to control the Seller, (iv) affect adversely the
right of the Seller to own its assets and to operate its
businesses, or (v) require or could reasonably be expected to
require any divestiture by the Seller of a portion of its
business that LifeQuest in its reasonable judgment believes
will have a material adverse effect on the Seller (and no such
injunction, judgment, order, decree, ruling or charge shall be
in effect);
(d) Seller shall have delivered to LifeQuest a
certificate to the effect that each of the conditions
specified above in Section 9.1(a), (b) and (c) is satisfied in
all respects;
(e) LifeQuest shall have received from counsel to
Seller opinions in substantially in the form attached hereto
as Exhibits 9.1(e)(1) and 9.1(e)(2), addressed to LifeQuest,
and dated as of the Closing Date;
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(f) Christopher K. Black, Surgical Visions I, Inc.,
TFX Equities, Inc. and Teleflex shall have executed and
delivered Non-Competition Agreements in the form of Exhibit
9.1(f) hereto;
(g) Christopher K. Black, TFX Equities Incorporated,
Teleflex and Surgical Visions I, Inc. shall have executed and
delivered Indemnity Agreements in the form of Exhibit 9.1(g)
hereto;
(h) The oral agreements between Seller and Teleflex
listed as items 11 and 12 on Schedule 4.7 hereto shall have
been terminated; and
(i) The stockholders of LifeQuest shall have approved
this Agreement and the consummation by LifeQuest of the
transactions contemplated hereby, including but not limited to
the issuance of the Stock Consideration.
LifeQuest may waive any condition specified in this Section 9.1 if it
executes a writing so stating at or prior to the Closing.
9.2 Conditions to Obligation of Seller. The obligation of
Seller to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the following
conditions:
(a) all Representations and Warranties of LifeQuest
contained in this Agreement, and all written information
delivered to Seller by LifeQuest on or prior to the Closing
Date pursuant to this Agreement, (i) that are qualified as to
materiality shall be true in all respects on and as of the
Closing Date and (ii) that are not qualified as to materiality
shall be true in all material respects on and as of the
Closing Date, with the same force and effect as though such
representations and warranties were made, and such written
information was delivered, on and as of the Closing Date;
(b) LifeQuest shall have performed and complied with
all of its covenants hereunder in all material respects
through the Closing;
(c) no action, suit, or proceeding shall be pending
or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local or foreign
jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling or charge would
(A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
transactions contemplated by this Agreement to be rescinded
following consummation (and no such injunction, judgment,
order, decree, ruling or charge shall be in effect);
(d) LifeQuest shall have delivered to Seller a
certificate to the effect that each of the conditions
specified above in Section 9.2(a), (b) and (c) is satisfied in
all respects;
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(e) LifeQuest shall have executed and delivered a
Consulting Agreement between LifeQuest and Christopher K.
Black in the form of Exhibit 9.2(e) hereto; and
(f) LifeQuest shall have executed and delivered the
Indemnity Agreement in the form of Exhibit 9.1(g) attached
hereto;
(g) LifeQuest shall have executed and delivered the
Registration Rights Agreement in the form attached hereto as
Exhibit 9.2(g);
(h) LifeQuest shall have executed and delivered the
Royalty Agreement with TFX Equities Incorporated as agent for
the Shareholders in the form attached hereto as Exhibit
2.6(c);
(i) Seller and the Shareholders shall have received
from counsel to LifeQuest an opinion substantially in the form
attached hereto as Exhibit 9.2(i) addressed to Seller, and
dated as of the Closing Date; and
(j) all actions to be taken by LifeQuest in
connection with consummation of the transactions contemplated
hereby and all certificates, opinions, instruments and other
documents required to effect the transactions contemplated
hereby will be reasonably satisfactory in form and substance
to Seller.
Seller may waive any condition specified in this Section 9.2 if it
executes a writing so stating at or prior to the Closing.
10. SPECIAL CLOSING AND POST-CLOSING COVENANTS.
The Parties agree as follows with respect to the period following the Closing:
10.1 General. In case at any time after the Closing any further action
is necessary or desirable to carry out the purposes of this Agreement, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor pursuant to the terms
of the Indemnity Agreement. Seller acknowledges and agrees that from and after
the Closing LifeQuest will be entitled to possession of all documents, books,
records (including Tax records), agreements, and financial data of any sort
relating to the Seller.
10.2 Litigation Support. In the event and for so long as any Party or
Teleflex or any of its Affiliates actively is contesting or defending against
any action, suit, proceeding, hearing, investigation, charge, complaint, claim
or demand in connection with (i) any transaction contemplated under this
Agreement or (ii) any fact, situation, circumstance, status, condition,
activity, practice, plan, occurrence, event, incident, action, failure to act or
transaction on or prior to the Closing Date involving the Seller, Seller will
cooperate with LifeQuest and its counsel in the contest or defense, make
available their personnel, and provide such testimony and access to their books
and records as
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shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party (unless the contesting or
defending Party is entitled to indemnification therefor pursuant to the terms of
the Indemnity Agreement.
10.3 Transition. Seller will not take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier or other business associate of the Seller from maintaining the same
business relationships with the Surviving Corporation after the Closing as it
maintained with the Seller prior to the Closing.
10.4 Intellectual Property Assignment. Although acknowledged by all
parties as also fully enabled by the Merger memorialized by this Agreement,
Seller shall also execute a separate assignment to LifeQuest of all of Seller's
right, title and interest in and to the Intellectual Property. This separate
assignment shall be in form reasonably satisfactory to Seller and LifeQuest, and
recordation thereof shall be at the sole discretion of LifeQuest.
10.5 Tax-Free Reorganization. Seller shall not, nor permit any
Shareholder to, nor shall LifeQuest, take any action which would disqualify the
transactions contemplated by this Agreement from treatment as a tax-free
reorganization of the Seller, to the extent that such treatment is otherwise
available to the Shareholders.
10.6 Teleflex Debt. Promptly following the Effective Time, LifeQuest
shall pay all amounts due from Seller to Teleflex.
10.7 Board Representation. At or prior to the Closing, LifeQuest's
Board of Directors shall elect Christopher K. Black and Lewis E. Hatch, Jr. to
serve as directors of LifeQuest effective as of the Effective Time. LifeQuest
shall take all requisite action to amend its Bylaws, if necessary, to increase
the size of its Board of Directors in order to effect the appointments
contemplated by this Section 10.7. For so long as Teleflex and its Affiliates
together shall hold in the aggregate more than 50% of the aggregate number of
shares of LifeQuest Stock acquired by Teleflex and its Affiliates pursuant
hereto, LifeQuest will cause each of two persons nominated by Teleflex and
acceptable to LifeQuest's Board of Directors to be nominated for election of
directors at LifeQuest's annual meetings of stockholders.
10.8 Exchange Act Filing; Cooperation. After the Closing Date, Seller
shall, and cause its Affiliates to, reasonably cooperate with and provide
information to LifeQuest as is necessary for LifeQuest to comply with its
reporting obligations under the Exchange Act, including, but not limited to, all
financial and other information, which shall include audited balance sheets,
income statements and statements of cash flow for two years prior to Closing,
and access to Seller's affiliates' personnel required in order for Seller to
comply with its reporting obligations under the Exchange Act.
11. NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally, given by prepaid telex
or telegram or by facsimile or other similar instantaneous electronic
transmission device or mailed first class, postage prepaid, certified United
States mail, return receipt requested, as follows:
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(a) If to Purchaser or LifeQuest, at:
LifeQuest Medical, Inc.
12961 Park Central, Suite 1300
San Antonio, Texas 78216
Attention: Randall K. Boatright
Facsimile No.: (210) 495-4441
With a copy to:
Fulbright & Jaworski L.L.P.
300 Convent Street, Suite 2200
San Antonio, Texas 78205
Attention: Phillip M. Renfro
Facsimile No.: (210) 270-7205
(b) If to Seller, at:
Dexterity Incorporated
1787 Sentry Parkway West, Bldg. Sixteen, Suite 220
Blue Bell Pennsylvania 19422
Attention: Christopher K. Black, President
Facsimile No.: (215) 641-9465
With a copy to:
Saul, Ewing, Remick & Saul, LLP
Centre Square West
1500 Market Street, 38th Floor
Philadelphia, PA 19102-2186
Attention: Donald Beckman
Facsimile No.: (215) 972-1821
provided that any party may change its address for notice by giving to the other
party written notice of such change. Any notice given under this Article 11
shall be effective (x) when delivered, if delivered personally, (y) 24 hours
after sending, if sent by telex or telegram or by facsimile or other similar
instantaneous electronic transmission device, and (z) 48 hours after mailing, if
mailed.
12. TERMINATION.
12.1 Termination of Agreement. Each of the Parties may terminate this
Agreement as provided below:
(a) LifeQuest and Seller may terminate this Agreement
by mutual written consent at any time prior to the Closing;
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(b) LifeQuest may terminate this Agreement by giving
written notice to Seller at any time prior to the Closing (i)
in the event the Seller has breached any Representation,
Warranty of Seller or covenant of Seller contained in this
Agreement in any material respect, LifeQuest has notified
Seller of the breach, and the breach has continued without
cure for a period of 15 days after the notice of breach or
(ii) if the Closing shall not have occurred on or before March
2, 1999, by reason of the failure of any condition precedent
under Section 9.1 hereof (unless the failure results primarily
from LifeQuest itself breaching any Representation, Warranty
or covenant of LifeQuest contained in this Agreement); and
(c) Seller may terminate this Agreement by giving
written notice to LifeQuest at any time prior to the Closing
(i) in the event LifeQuest has breached any representation,
warranty or covenant contained in this Agreement in any
material respect, Seller has notified LifeQuest of the breach,
and the breach has continued without cure for a period of 15
days after the notice of breach or (ii) if the Closing shall
not have occurred on or before March 2, 1999, by reason of the
failure of any condition precedent under Section 9.2 hereof
(unless the failure results primarily from Seller itself
breaching any Representation, Warranty or covenant of Seller
contained in this Agreement).
12.2 Effect of Termination. If any Party terminates this Agreement
pursuant to Section 12.1 herein, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach of its covenants
hereunder).
13. GENERAL PROVISIONS.
13.1 Governing Law; Interpretation; Section Headings. This Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of New York without regard to conflict-of-laws rules as applied in New
York. The section headings contained herein are for purposes of convenience only
and shall not be deemed to constitute a part of this Agreement or to affect the
meaning or interpretation of this Agreement in any way.
13.2 Severability. Should any provision of this Agreement be held
unenforceable or invalid under the laws of the United States of America or the
State of New York, or under any other applicable laws of any other jurisdiction,
then the parties hereto agree that such provision shall be deemed modified for
purposes of performance of this Agreement in such jurisdiction to the extent
necessary to render it lawful and enforceable, or if such a modification is not
possible without materially altering the intention of the parties hereto, then
such provision shall be severed herefrom for purposes of performance of this
Agreement in such jurisdiction. The validity of the remaining provisions of this
Agreement shall not be affected by any such modification or severance, except
that if any severance materially alters the intentions of the parties hereto as
expressed herein (a modification being permitted only if there is no material
alteration), then the parties hereto shall use commercially reasonable efforts
to agree to appropriate equitable amendments to this Agreement in light of such
severance.
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<PAGE> 35
13.3 Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior agreements, arrangements and
understandings related to the subject matter hereof. No representation, promise,
inducement or statement of intention has been made by any party hereto which is
not embodied or referenced in this Agreement and no party hereto shall be bound
by or liable for any alleged representation, promise, inducement or statement of
intention not so set forth.
13.4 Binding Effect. All the terms, provisions, covenants and
conditions of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective heirs, executors,
administrators, representatives, successors and assigns.
13.5 Assignment. This Agreement and the rights of the parties may be
assigned by any party hereto without the prior written consent of the other
parties hereto, provided that no such assignment shall relieve any party from
its obligations under this Agreement.
13.6 Amendment; Waiver. This Agreement may be amended, modified,
superseded or canceled, and any of the terms, provisions, representations,
warranties, covenants or conditions hereof may be waived, only by a written
instrument executed by all parties hereto, or, in the case of a waiver, by the
party waiving compliance. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect the right
to enforce the same. No waiver by any party of any condition contained in this
Agreement, or of the breach of any term, provision, representation, warranty or
covenant contained in this Agreement, in any one or more instances, shall be
deemed to be or construed as a further or continuing waiver of any such
condition or breach, or as a waiver of any other condition or of the breach of
any other term, provision, representation, warranty or covenant.
13.7 Gender; Numbers. All references in this Agreement to the
masculine, feminine or neuter genders shall, where appropriate, be deemed to
include all other genders. All plurals used in this Agreement shall, where
appropriate, be deemed to be singular, and vice versa.
13.8 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Agreement
shall be binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of the parties reflected hereon as
signatories.
13.9 Telecopy Execution and Delivery. A facsimile, telecopy or other
reproduction of this Agreement may be executed by one or more parties hereto,
and an executed copy of this Agreement may be delivered by one or more parties
hereto by facsimile or similar instantaneous electronic transmission device
pursuant to which the signature of or on behalf of such party can be seen, and
such execution and delivery shall be considered valid, binding and effective for
all purposes. At the request of any party hereto, all parties hereto agree to
execute an original of this Agreement as well as any facsimile, telecopy or
other reproduction hereof.
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<PAGE> 36
13.10 Expenses. In the event the transactions contemplated hereby are
not consummated, each of the parties will pay all costs and expenses of its or
his performance of and compliance with this Agreement.
13.11 Effect of Due Diligence. No investigation by or on behalf of
LifeQuest into the business, operations, prospects, assets or condition
(financial or otherwise) of the Seller shall diminish in any way the effect of
any representations or warranties made by Seller in this Agreement or shall
relieve Seller of any of its obligations under this Agreement.
13.12 Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of
LifeQuest and Seller; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law (in which
case the disclosing Party will use its reasonable best efforts to advise the
other Parties prior to making the disclosure).
13.13 No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
13.14 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty and covenant contained herein shall have
independent significance. If any Party has breached any representation, warranty
or covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
13.15 Incorporation of Exhibits, and Schedules. The Exhibits, and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
13.16 Specific Performance. Each of the Parties acknowledges and agrees
that the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Parties shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Parties and the matter, in addition to any other remedy to which they may be
entitled, at law or in equity.
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<PAGE> 37
IN WITNESS WHEREOF, the parties have executed this Plan of Merger and
Acquisition Agreement as of the date first above written.
LIFEQUEST:
LIFEQUEST MEDICAL, INC.
By:
--------------------------------------------
Richard A. Woodfield
President and Chief Executive Officer
SELLER:
DEXTERITY INCORPORATED
By:
--------------------------------------------
Christopher K. Black, President
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<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
LIFEQUEST MEDICAL, INC.
LifeQuest Medical, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
I. The name of the corporation is LifeQuest Medical, Inc. and the name
under which the corporation was originally incorporated was Lifeline, Inc. The
date of filing of its original Certificate of Incorporation with the Secretary
of State of Delaware is December 23, 1988.
II. Pursuant to Section 245 of the General Corporation Law of the State
of Delaware, this Restated Certificate of Incorporation restates and integrates
and does not further amend the provisions of the Certificate of Incorporation of
this corporation.
III. The text of the Restated Certificate of Incorporation as
heretofore amended and supplemented is hereby restated to read in its entirety
as follows:
1. The name of the corporation is LifeQuest Medical, Inc. (the
"Company").
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted
is: to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. The total number of shares of all classes of stock which the Company
shall be authorized to issue is 52,000,000 shares, divided into the following:
(i) 2,000,000 shares of preferred stock, of the par value of $.001 (one tenth of
one cent) per share (hereafter called "Preferred Stock"); and (ii) 50,000,000
shares of common stock, of the par value of $.001 (one tenth of one cent) per
share (hereafter called "Common Stock").
The board of directors of the Company shall have the authority to fix
by resolution the designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of any class or series of capital stock of the Company.
4.1 NUMBER OF SHARES AND DESIGNATION. This series of Preferred Stock,
$.001 par value, shall be designated as Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock"), and the number of shares which
shall constitute such series shall be 1,170 shares.
<PAGE> 2
4.2 DEFINITIONS. For purposes of the Series A Preferred Stock, the
following terms shall have the meanings indicated below:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" of a person means a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is
under common control with, the person specified.
"Board of Directors" shall mean the Board of Directors of the
Corporation or any committee authorized by such Board of Directors to
perform any of its responsibilities with respect to the Series A
Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which state or federally chartered banking institutions in New
York, New York are not required to be open.
"Common Stock" shall mean the common stock, $.001 par value, of the
Corporation or such shares of the Corporation's capital stock into
which such Common Stock shall be reclassified.
"Current Market Price" of publicly traded shares of Common Stock or any
other class or series of capital stock or other security of the
Corporation or of any similar security of any other issuer for any day
shall mean the last reported sale price, regular way on such day, or,
if no sale takes place on such day, the reported closing bid price,
regular way on such day, in either case as reported on the NASDAQ
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") or, if not quoted on NASDAQ, on
the principal national securities exchange on which such security is
listed or admitted for trading or, if such security is not listed or
admitted for trading on a national securities exchange or quoted on the
NASDAQ National Market, the closing bid price on such day in the
over-the-counter market as reported by NASDAQ, or, if the bid price for
such security on such day shall not have been reported through NASDAQ,
the bid price on such day as furnished by any NYSE member firm
regularly making a market in such security selected for such purpose by
the Chief Executive Officer or the Board of Directors or if any class
or series of securities are not publicly traded, the fair value of the
shares of such class as determined reasonably and in good faith by the
Board of Directors of the Corporation or other issuer.
"Dividend Payment Date" shall mean, with respect to each Dividend
Period, the last day of March, June, September and December, in each
year, commencing on September 30, 1998; provided, however, that if any
Dividend Payment Date falls on any day other than a Business Day, the
dividend payment due on such Dividend Payment Date shall be paid on the
Business Day immediately following such Dividend Payment Date.
<PAGE> 3
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding
Dividend Period (other than the initial Dividend Period, which shall
commence on the Issue Date and end on and include September 30, 1998).
"Fair Market Value" on any date shall mean the average of the daily
Current Market Price of a share of Common Stock during five (5)
consecutive Trading Days ending on the day before such date.
"Funds Available for Distribution" shall mean funds from operations
(net income, computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and sales
of property, plus depreciation and amortization) minus non-revenue
generated capital expenditures and debt principal amortization, as
determined by the Board of Directors on a basis consistent with the
policies and practices adopted by the Corporation for reporting
publicly its results of operations and financial condition.
"Issue Date" shall mean August 11, 1998.
"Junior Stock" shall have the meaning set forth in paragraph (c) of
Section 8 hereof.
"NYSE" shall mean the New York Stock Exchange.
"Parity Stock" shall have the meaning set forth in paragraph (b) of
Section 8 hereof.
"Permitted Common Stock Cash Distributions" means cash dividends and
cash distributions paid on Common Stock after December 31, 1997 not in
excess of the sum of the Corporation's cumulative undistributed net
earnings at December 31, 1997, plus the cumulative amount of Funds
Available for Distribution after December 31, 1997, minus the
cumulative amount of dividends accumulated, accrued or paid on the
Series A Preferred Stock or any other class of Preferred Stock after
January 1, 1998.
"Person" shall mean any individual, partnership, corporation or other
entity and shall include the successor (by merger or otherwise) of such
entity.
"Redemption Date" shall have the meaning set forth in paragraph (b) of
Section 6 hereof.
"Series A Preferred Stock" shall have the meaning set forth in Section
1 hereof.
"Set apart for payment" shall be deemed to include, without any action
other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which
indicates, pursuant to a declaration of dividends or other distribution
by the Board of Directors, the allocation of funds to be so paid on any
series or class of capital stock of the Corporation; provided, however,
that if any funds for any class
<PAGE> 4
or series of Junior Stock or any class or series of Parity Stock are
placed in a separate account of the Corporation or delivered to a
disbursing, paying or other similar agent, then "set apart for payment"
with respect to the Series A Preferred Stock shall mean placing such
funds in a separate account or delivering such funds to a disbursing,
paying or other similar agent.
"Trading Day," as to any securities, shall mean any day on which such
securities are traded on the NYSE or, if such securities are not listed
or admitted for trading on the NYSE, on the principal national
securities exchange on which such securities are listed or admitted or,
if such securities are not listed or admitted for trading on any
national securities exchange, on the NASDAQ National Market or, if such
securities are not quoted on the NASDAQ National Market, in the
securities market in which such securities are traded.
4.3 DIVIDENDS.
(a) The holders of Series A Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available for that purpose, cumulative dividends payable in cash in an amount
per share of Series A Preferred Stock equal to $80 per annum. Such dividends
shall be cumulative from the Issue Date, whether or not in any Dividend Period
or Periods such dividends shall be declared or there shall be funds of the
Corporation legally available for the payment of such dividends, and shall be
payable quarterly on the Dividend Payment Dates, commencing on the first
Dividend Payment Date after the Issue Date. Each such dividend shall be payable
to the holders of record of the Series A Preferred Stock, as they appear on the
stock records of the Corporation at the close of business on a record date which
shall be not more than sixty (60) days prior to the applicable Dividend Payment
Date. Accumulated, accrued and unpaid dividends for any past Dividend Periods
may be declared and paid at any time, without reference to any regular Dividend
Payment Date, to holders of record on such date, which date shall not precede by
more than forty-five (45) days the payment date thereof, as may be fixed by the
Board of Directors. The amount of accumulated, accrued and unpaid dividends on
any share of Series A Preferred Stock, or fraction thereof, at any date shall be
the amount of any dividends thereon calculated at the applicable rate to and
including such date, whether or not earned or declared, which have not been paid
in cash.
(b) The amount of dividends payable per share of Series A
Preferred Stock for each Dividend Period shall be computed by dividing the
annual dividend by four (4). The amount of dividends payable per share of Series
A Preferred Stock for the initial Dividend Period, or any other period shorter
or longer than a full Dividend Period, shall be computed ratably on the basis of
twelve (12) 30-day months and a 360-day year. Holders of Series A Preferred
Stock shall not be entitled to any dividends, whether payable in cash, property
or stock, in excess of cumulative dividends, as herein provided on the Series A
Preferred Stock. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Stock that may be in arrears.
(c) So long as any of the shares of Series A Preferred Stock
are outstanding, no dividends, except as described in the immediately following
sentence, shall be declared or paid or set
<PAGE> 5
apart for payment by the Corporation, or other distribution of cash or other
property declared or made directly or indirectly by the Corporation or any
affiliate or any person acting on behalf of the Corporation or any of its
affiliates with respect to any class or series of Parity Stock for any period,
unless dividends equal to the full amount of accumulated, accrued and unpaid
dividends have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof have been or contemporaneously are set
apart for such payment on the Series A Preferred Stock for all Dividend Periods
terminating on or prior to the Dividend Payment Date with respect to such class
or series of Parity Stock. When dividends are not paid in full or a sum
sufficient for such payment is not set apart, as aforesaid, all dividends
declared upon the Series A Preferred Stock and all dividends declared upon any
other class or series of Parity Stock shall be declared ratably in proportion to
the respective amounts of dividends accumulated, accrued and unpaid on the
Series A Preferred Stock and accumulated, accrued and unpaid on such Parity
Stock.
(d) So long as any of the shares of Series A Preferred Stock
are outstanding, no dividends (other than dividends or distributions paid in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, Junior Stock) shall be declared or paid or set apart for payment by the
Corporation, or other distribution of cash or other property declared or made
directly or indirectly by the Corporation or any affiliate or any person acting
on behalf of the Corporation or any of its affiliates with respect to any shares
of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or
otherwise acquired (other than a redemption, purchase or other acquisition of
Common Stock made for purposes of an employee incentive or benefit plan of the
Corporation or any subsidiary) for any consideration (or any moneys be paid to
or made available for a sinking-fund for the redemption of any shares of any
such stock) directly or indirectly by the Corporation or any affiliate or any
person acting on behalf of the Corporation or any of its affiliates (except by
conversion into or exchange for Junior Stock), nor shall any other cash or other
property otherwise be paid or distributed to or for the benefit of any holder of
shares of Junior Stock in respect thereof, directly or indirectly, by the
Corporation or any affiliate or any person acting on behalf of the Corporation
or any of its affiliates, unless in each case (i) the full cumulative dividends
(including all accumulated, accrued and unpaid dividends) on all outstanding
shares of Series A Preferred Stock and any other Parity Stock of the Corporation
shall have been paid or such dividends have been declared and set apart for
payment for all past Dividend Periods with respect to the Series A Preferred
Stock and all past Dividend Periods with respect to such Parity Stock, and (ii)
sufficient funds shall have been paid or set apart for the payment of the full
dividend for the current Dividend Period with respect to the Series A Preferred
Stock and the current Dividend Period with respect to such Parity Stock.
4.4 LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Stock, the holders of shares
of Series A Preferred Stock shall be entitled to receive One Thousand Dollars
($1,000.00) per share of Series A Preferred Stock, plus an amount equal to all
dividends (whether or not earned
<PAGE> 6
or declared) accumulated, accrued and unpaid thereon to the date of final
distribution to such holders. Until the holders of the Series A Preferred Stock
have been paid the liquidation preference in full, no payment will be made to
any holder of Junior Stock upon the liquidation, dissolution or winding up of
the Corporation. If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation, or proceeds thereof, distributable
among the holders of Series A Preferred Stock shall be insufficient to pay in
full the preferential amount aforesaid and liquidating payments on any other
shares of any class or series of Parity Stock, then such assets, or the proceeds
thereof, shall be distributed among the holders of Series A Preferred Stock and
any such other Parity Stock ratably in the same proportion as the respective
amounts that would be payable on such Series A Preferred Stock and any such
other Parity Stock if all amounts payable thereon were paid in full. For the
purposes of this Section 4, (i) a consolidation or merger of the Corporation
with one or more corporations, (ii) a sale or transfer of all or substantially
all of the Corporation's assets, or (iii) a statutory share exchange shall not
be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
(b) Subject to the rights of the holders of any shares of
Parity Stock, upon any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the holders of Series
A Preferred Stock and any Parity Stock, as provided in this Section 4, any other
series or class or classes of Junior Stock shall, subject to the respective
terms thereof, be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Series A Preferred Stock and any Parity
Stock shall not be entitled to share therein.
4.5 CONVERSION RIGHTS. The holders of shares of Series A Preferred
Stock shall have the right, at their option, to convert such shares into shares
of Common Stock of the Corporation at any time on and subject to the following
terms and conditions:
(a) The shares of Series A Preferred Stock shall be
convertible at the office of the transfer agent for the Common Stock or the
principal executive office of the Corporation, into fully paid and
non-assessable shares (calculated as to each conversion to the nearest 1/100th
of a share) of Common Stock of the Corporation, at the conversion price,
determined as hereinafter provided, in effect at the time of conversion, each
share of Series A Preferred Stock being taken at $1,000.00 for the purpose of
such conversion. The price at which shares of Common Stock shall be delivered
upon conversion (the "Conversion Price") shall initially be $2.00 per share of
Common Stock. The conversion price shall be adjusted in certain instances as
provided below.
(b) In order to convert shares of Series A Preferred Stock
into Common Stock, the holder thereof shall surrender at the office or offices
hereinabove mentioned the certificate or certificates therefor, duly endorsed or
assigned to the Corporation or in blank, and give written notice to the
Corporation at said office or offices that such holder elects to convert such
shares. Shares of Series A Preferred Stock surrendered for conversion during the
period from the close of business on any record date for the payment of a
dividend on the shares of Series A Preferred Stock to the opening of business on
the date for payment of such dividend shall (except in the case of shares of
Series A Preferred Stock which have been called for redemption on a redemption
date within such
<PAGE> 7
period) be accompanied by a payment of an amount equal to the dividend declared
and payable on such dividend payment date on the shares of Series A Preferred
Stock being surrendered for conversion. Except as provided in the preceding
sentence, no payment or adjustment shall be made upon any conversion on account
of any unpaid or accrued dividends on the shares of Series A Preferred Stock
surrendered for conversion or on account of any dividends on the Common Stock
issued upon conversion.
Shares of Series A Preferred Stock shall be deemed to have
been converted immediately prior to the close of business on the day of the
surrender of the certificates for such shares for conversion in accordance with
the foregoing provisions, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall issue and
shall deliver at such office a certificate or certificates for the number of
full shares of Common Stock issuable upon such conversion, together with payment
in lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same. In case shares of Series A Preferred Stock
are called for redemption, the right to convert such shares shall cease and
terminate at the close of business on the date fixed for redemption, unless
default shall be made in payment of the redemption price.
(c) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series A Preferred Stock, but, instead of any fraction
of a share which would otherwise be issuable, the Corporation shall pay a cash
adjustment in respect of such fraction in an amount equal to the same fraction
of the Closing Price (as hereinafter defined) on the date on which the
certificate or certificates for such shares were duly surrendered for
conversion, or, if such date is not a Trading Day (as hereinafter defined), on
the next Trading Day.
(d) The Conversion Price shall be adjusted from time to time
as follows:
(i) Adjustment for Issuance of Shares at Less Than
the Conversion Price. If at any time after the date of the first
issuance of Series A Preferred Stock, the Corporation shall issue any
shares of Common Stock, Convertible Securities (as hereinafter
defined), Rights (as hereinafter defined) or Related Rights (as
hereinafter defined; any such shares, Convertible Securities, Rights or
Related Rights, "Securities") without consideration or for a
consideration per share or unit less than the Conversion Price in
effect immediately prior to the issuance of such Securities, then the
Conversion Price in effect immediately prior to each such issuance
shall forthwith be reduced to the quotient obtained by dividing:
(A) an amount equal to the sum of (1) the
total number of shares of Common Stock outstanding immediately
prior to such issuance (including for this purpose the number
of shares of Common Stock into which the shares of Series A
Preferred Stock outstanding immediately prior to such issuance
are convertible on the date of such issuance in accordance
with Subsection 5(a) (without regard to Subsection 5(c)),
without giving effect to such issuance) multiplied by the
Conversion
<PAGE> 8
Price in effect immediately prior to such issuance, and (2)
the amount of consideration, if any, received by the
Corporation upon such issuance, by
(B) the total number of shares of Common
Stock (1) outstanding immediately after such issuance
(including the number of shares of Common Stock into which the
shares of Series A Preferred Stock outstanding immediately
prior to such issuance are convertible on the date of such
issuance in accordance with Subsection 5(a) (without regard to
Subsection 5(c)), without giving effect to such issuance) or
(2) into or for which any such newly issued Convertible
Securities are then convertible or exchangeable or (3)
issuable upon the exercise of any such Rights or Related
Rights).
(C) For the purpose of this Subsection 5(d),
the following definitions and procedures shall be applicable:
(1) In the case of the issuance of
options, warrants or other rights to purchase or
otherwise acquire Common Stock, whether or not at the
time exercisable ("Rights"), the total number of
shares of Common Stock issuable upon exercise of such
Rights shall be deemed to have been issued at the
time such Rights are issued, for a consideration
equal to the sum of the consideration, if any,
received by the Corporation upon the issuance of such
rights and the minimum purchase or exercise price
payable upon the exercise of such Rights for the
Common Stock to be issued upon the exercise thereof.
(2) In the case of the issuance of
any class or series of stock or any bonds,
debentures, notes or other securities or obligations
convertible into or exchangeable for Common Stock,
whether or not then convertible or exchangeable
("Convertible Securities"), or options, warrants or
other rights to purchase or otherwise acquire
Convertible Securities ("Related Rights"), the total
number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities
or exercise of such Related Rights shall be deemed to
have been issued at the time such Convertible
Securities or Related Rights are issued, for a
consideration equal to the sum of (I) the
consideration, if any, received by the Corporation
upon issuance of such Convertible Securities or
Related Rights (excluding any cash received on
account of accrued interest or dividends) and (II)
(A) in the case of Convertible Securities, the
minimum additional consideration, if any, to be
received by the Corporation upon the conversion or
exchange of such Convertible Securities or (B) in the
case of Related Rights, the sum of (x) the minimum
purchase or exercise price payable upon the exercise
of such Related Rights for Convertible Securities and
(y) the minimum additional consideration, if any, to
be received by the Corporation upon the conversion
or exchange of the Convertible Securities issued upon
the exercise of such Related Rights.
<PAGE> 9
(3) On any change in the number of
shares of Common Stock issuable upon the exercise of
Rights or Related Rights or upon the conversion or
exchange of Convertible Securities or on any change
in the minimum purchase or exercise price of Rights,
Related Rights or Convertible Securities, including,
but not limited to, a change resulting from the
anti-dilution provisions of such Rights, Related
Rights or Convertible Securities, the Conversion
Price to the extent in any way affected by such
Rights, Related Rights or Convertible Securities
shall forthwith be readjusted to be thereafter the
Conversion Price that would have been obtained had
the adjustment which was made upon the issuance of
such Rights, Related Rights or Convertible Securities
been made after giving effect to such change. No
further adjustment shall be made in respect of such
change upon the actual issuance of Common Stock or
any payment of consideration upon the exercise of any
such Rights or Related Rights or the conversion or
exchange of such Convertible Securities.
(4) On the expiration or
cancellation of any such Rights, Related Rights or
Convertible Securities, if the Conversion Price shall
have been adjusted upon the issuance thereof, the
Conversion Price shall forthwith be readjusted to
such Conversion Price as would have been obtained had
the adjustment made upon the issuance of such Rights,
Related Rights or Convertible Securities been made
upon the basis of the issuance of only the number of
shares of Common Stock actually issued upon the
exercise of such Rights or Related Rights or the
conversion or exchange of such Convertible
Securities.
(ii) Sale of Shares. In case of the issuance of
Securities for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the
gross amount of the cash paid to Corporation for such shares, before
deducting any underwriting compensation or discount in the sale,
underwriting or purchase thereof by underwriters or dealers or others
performing similar services or for any expenses incurred in connection
therewith. In case of the issuance of any Securities for a
consideration part or all of which shall be other than cash, the amount
of the consideration therefor, other than cash, shall be deemed to be
the then fair market value of the property received.
(iii) Reclassification of Shares. In case of the
reclassification of securities into shares of Common Stock, the shares
of Common Stock issued in such reclassification shall be deemed to have
been issued for a consideration other than cash. Securities issued by
way of dividend or other distribution on any class of stock of
Corporation shall be deemed to have been issued without consideration.
<PAGE> 10
(iv) Stock Dividends, Stock Splits, Subdivisions or
Combinations. In the event of a stock dividend, stock split or
subdivision of shares of Common Stock into a greater number of shares,
the Conversion Price shall be proportionately decreased, and in the
event of a combination of shares of Common Stock into a smaller number
of shares, the Conversion Price shall be proportionately increased,
such increase or decrease, as the case may be, becoming effective at
the record date.
(v) Exceptions. The adjustments provided in
Subsection 5(d)(i) shall not apply to any (A) Common Stock issued upon
the conversion of any of the Series A Preferred Stock; (B) Common Stock
issued upon exercise of any outstanding warrants, options or
debentures; (C) Common Stock issued upon exercise of outstanding
employee stock options; and (D) up to 200,000 shares of Common Stock
issuable upon exercise of employee stock options to be granted
subsequent to the date hereof.
(vi) Adjustment for Mergers and Consolidations.
(A) In the event of distribution to all
Common Stock holders of any stock, indebtedness of the
Corporation or assets (excluding cash dividends or
distributions from retained earnings) or other rights to
purchase securities or assets, then, after such event, the
shares of Series A Preferred Stock will be convertible into
the kind and amount of securities, cash and other property
which the holder of the shares of Series A Preferred Stock
would have been entitled to receive if the holder owned the
Common Stock issuable upon conversion of the shares of Series
A Preferred Stock immediately prior to the occurrence of such
event.
(B) In case of any capital reorganization,
reclassification of the stock of the Corporation (other than a
change in par value or as a result of a stock dividend,
subdivision, split up or combination of shares), the shares of
Series A Preferred Stock shall be convertible into the kind
and number of shares of stock or other securities or property
of the Corporation to which the holder of the shares of Series
A Preferred Stock would have been entitled to receive if the
holder owned the Common Stock issuable upon conversion of the
shares of Series A Preferred Stock immediately prior to the
occurrence of such event. The provisions of the immediately
foregoing sentence shall similarly apply to successive
reorganizations, reclassifications, consolidations, exchanges,
leases, transfers or other dispositions or other share
exchanges.
(C) The term "Fair Market Value," as used
herein, is the value ascribed to consideration other than cash
as determined by the Board of Directors of the Corporation in
good faith, which determination shall be final, conclusive and
<PAGE> 11
binding. If the Board of Directors shall be unable to agree as
to such fair market value, then the issue of fair market value
shall be submitted to arbitration under and pursuant to the
rules and regulations of the American Arbitration Association,
and the decision of the arbitrators shall be final, conclusive
and binding, and a final judgment may be entered thereon;
provided, however, that such arbitration shall be limited to
determination of the fair market value of assets tendered in
consideration for the issue of Common Stock.
(e) Whenever the conversion price is adjusted as herein
provided:
(i) The Corporation shall compute the adjusted
conversion price in accordance with this Section 5 and shall cause to
be prepared a certificate signed by the Corporation's treasurer setting
forth the adjusted conversion price and showing in reasonable detail
the fact upon which such adjustment is based; and
(ii) A notice stating that the conversion price has
been adjusted and setting forth the adjusted conversion price shall, as
soon as practicable, be mailed to the holders of record of outstanding
shares of Series A Preferred Stock.
(f) In case:
(i) The Corporation shall declare a dividend or
other distribution on its Common Stock payable otherwise than in cash
out of retained earnings;
(ii) The Corporation shall authorize the issuance to
the holders of its Common Stock of rights or warrants entitling them to
subscribe for or purchase any shares of capital stock of any class or
any other subscription rights or warrants; or
(iii) Of any reclassification of the capital stock of
the Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any consolidation or merger
to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required, or of the sale, transfer
or other disposition of all or substantially all of the assets of the
Corporation; or
(iv) Of the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
then the Corporation shall cause to be mailed to the holders
of record of the outstanding shares of Series A Preferred Stock, at least 20
days (or 10 days in any case specified in clause (i) or (ii) above) prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date as of which the holders of record of Common Stock to be entitled to
such dividend, distribution, rights or warrants are to be determined, or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
disposition, liquidation, dissolution or winding
<PAGE> 12
up is expected to become effective, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, disposition, liquidation, dissolution or
winding up, or the vote on any action authorizing such.
(g) The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Stock, for the purpose of issuance upon conversion of shares of Series A
Preferred Stock, the full number of shares of Common Stock then deliverable upon
the conversion of all shares of Series A Preferred Stock then outstanding.
(h) The Corporation will pay any and all taxes that may be
payable in respect of the issuance of delivery of shares of Common Stock on
conversion of shares of Series A Preferred Stock pursuant thereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that in which the shares of Series A Preferred
Stock so converted were registered, and no such issuance or delivery shall be
made unless and until the person requesting such issuance has paid to the
Corporation the amount of any such tax or has established to the satisfaction of
the Corporation that such tax has been paid.
(i) The certificate of any independent firm of public
accountants of nationally recognized standing selected by the Board of Directors
shall be presumptive evidence of the correctness of any computation made under
this Section 5.
(j) Notwithstanding the foregoing, if the volume-weighted
average closing bid price of the Common Stock, as determined by Bloomberg
Financial Markets and Commodities News, for the 21 consecutive trading days
following the Corporation's public press release of its December 31, 1998 fiscal
year-end financial results (such volume-weighted average closing bid price
herein referred to as the "1998 Conversion Price Adjustment") is a price less
than the existing Conversion Price, and the Corporation reports pre-tax income
of less than or equal to $4,400,000 excluding extraordinary gains for the
December 31, 1998 fiscal year, then the Conversion Price shall be adjusted
downward to an amount equal to 100% of the 1998 Conversion Price Adjustment. If
an adjustment is required pursuant to this section, then the Corporation shall
furnish to each of the holders of shares of Series A Preferred Stock a
statement, within ten (10) days of the occurrence thereof, signed by the Chief
Financial Officer and the Secretary of the Corporation, of the facts creating
such adjustment and specifying the resultant adjusted Conversion Price then in
effect. No holder of any shares of Series A Preferred Stock shall convert or
sell any shares of the Corporation's Common Stock during the 21 consecutive
trading days used to determine the 1998 Conversion Price Adjustment or during
the 9 trading days preceding such period.
<PAGE> 13
4.6 REDEMPTION AT THE OPTION OF THE HOLDER.
(a) At any time after the date hereof, upon notice by the
Corporation of any proposed change of any provision of the Certificate of
Incorporation or Bylaws that relates to the Board of Directors or the election
of directors or any merger or consolidation involving the Corporation or a sale
of all or substantially all of the assets of the Corporation (collectively,
"Events of Redemption"), the Series A Preferred Stock is redeemable at the
option of each holder of Series A Preferred Stock at one hundred percent (100%)
of par, together with accrued and unpaid dividends through the Redemption Date.
Notice of an Event of Redemption shall be given by the Corporation to each
holder of record of Series A Preferred Stock by first class mail, postage
prepaid, at such holder's address as the same appears on the stock records of
the Corporation. Each holder may exercise his right to require the Corporation
to redeem all, but not less than all, of the shares of Series A Preferred Stock
owned by him of record by written notice to the Corporation at the address
specified in the notice of an Event of Redemption. Such notice shall be sent by
first class mail, postage prepaid, within thirty (30) days of receipt by such
holder of the notice of an Event of Redemption.
(b) Shares of Series A Preferred Stock may be redeemed at the
option of the holder by the Corporation on the date specified in the notice of
an Event of Redemption (the "Redemption Date"). The Redemption Date selected by
the Corporation shall be sixty (60) days after the date notice of an Event of
Redemption is sent by the Corporation. As a condition precedent for such
redemption, the Corporation, by resolution of its Board of Directors, shall
declare a mandatory dividend on the Series A Preferred Stock payable in cash on
the Redemption Date in an amount equal to all accumulated, accrued and unpaid
dividends as of the Redemption Date on the Series A Preferred Stock to be
redeemed, which amount shall be added to the redemption price. If the Redemption
Date falls after a dividend payment record date and prior to the corresponding
Dividend Payment Date, then each holder of Series A Preferred Stock at the close
of business on such dividend payment record date shall be entitled to the
dividend payable on such shares on the corresponding Dividend Payment Date,
notwithstanding the redemption of such shares prior to such Dividend Payment
Date. Except as provided above, the Corporation shall make no payment or
allowance for accumulated or accrued dividends on shares of Series A Preferred
Stock to be redeemed.
(c) Neither the failure to mail any notice required by
Subsection 6(a), nor any defect therein or in the mailing thereof, to any
particular holder, shall affect the sufficiency of the notice or the validity of
the proceedings for redemption with respect to the other holders. Any notice
which was mailed in the manner herein provided shall be conclusively presumed to
have been duly given on the date mailed whether or not the holder receives the
notice. Each such mailed notice shall state, as appropriate: (1) the Redemption
Date; (2) the place or places at which certificates for such shares are to be
surrendered; and (3) that dividends on the shares of Series A Preferred Stock to
be redeemed shall cease to accrue on such Redemption Date, except as otherwise
provided herein. Notice having been mailed as aforesaid, from and after the
Redemption Date (unless the Corporation shall fail to issue and make available
at the office of the transfer agent the amount of cash necessary to effect such
redemption, including all accumulated, accrued and unpaid dividends to the
<PAGE> 14
Redemption Date, whether or not earned or declared), (i) except as otherwise
provided herein, dividends on the shares of Series A Preferred Stock to be
redeemed shall cease to accumulate or accrue on the shares of Series A Preferred
Stock to be redeemed, (ii) said shares shall no longer be deemed to be
outstanding, and (iii) all rights of the holders thereof as holders of Series A
Preferred Stock of the Corporation shall cease (except the rights to receive the
cash payable upon such redemption, without interest thereon, upon surrender and
endorsement of their certificates if so required and to receive any dividends
payable thereon).
As promptly as practicable after the surrender in accordance
with said notice of the certificates for any such shares so redeemed (properly
endorsed or assigned for transfer, if the Corporation shall so require and if
the notice shall so state), such certificates shall be exchanged for cash
(without interest thereon) for which such shares have been redeemed in
accordance with such notice.
4.7 SERIES A PREFERRED STOCK TO BE RETIRED. All shares of Series A
Preferred Stock which shall have been issued and reacquired in any manner by the
Corporation shall be restored to the status of authorized, but unissued shares
of Preferred Stock, without designation as to series. The Corporation may also
retire any unissued shares of Series A Preferred Stock, and such shares shall
then be restored to the status of authorized but unissued shares of Preferred
Stock, without designation as to series.
4.8 RANKING. Any class or series of capital stock of the
Corporation shall be deemed to rank:
(a) prior or senior to the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Series A Preferred Stock;
(b) on a parity with the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend payment
dates or redemption or liquidation prices per share thereof be different from
those of the Series A Preferred Stock, if the holders of such class of stock or
series and the Series A Preferred Stock shall be entitled to the receipt of
dividends and of amounts distributable upon liquidation, dissolution or winding
up in proportion to their respective amounts of accrued and unpaid dividends per
share or liquidation preferences, without preference or priority of one over the
other ("Parity Stock"); and
(c) junior to the Series A Preferred Stock, as to the payment
of dividends or as to the distribution of assets upon liquidation, dissolution
or winding up, if such stock or series shall be Common Stock or if the holder of
Series A Preferred Stock shall be entitled to receipt of dividends
<PAGE> 15
or of amounts distributable upon liquidation, dissolution or winding up, as the
case may be, in preference or priority to the holders of shares of such class or
series ("Junior Stock").
4.9 VOTING.
(a) The holders of Series A Preferred Stock shall be entitled
to one (1) vote per share on all matters submitted to a vote of shareholders of
the Corporation.
(b) The affirmative vote of the holders of sixty-six and
two-thirds percent (66 2/3%) of the votes entitled to be cast by holders of the
Series A Preferred Stock then outstanding, voting as a single class, in person
or by proxy, either in writing without a meeting or by vote at any meeting
called for the purpose, will be required in order to amend the Certificate of
Incorporation or Bylaws to affect materially and adversely the rights,
preferences or voting power of the holders of the Series A Preferred Stock or to
authorize, create or increase the authorized amount of, any class of stock
having rights prior or senior to the Series A Preferred Stock with respect to
the payment of dividends or amounts upon liquidation, dissolution or winding up.
However, the Corporation may create additional classes, shares or series of
Parity Stock with the consent of the holders of a majority of the outstanding
shares of Series A Preferred Stock, and may create classes of Junior Stock,
increase the authorized number of shares of Junior Stock and issue additional
series of Junior Stock, without the consent of any holder of Series A Preferred
Stock.
(c) If and whenever two (2) quarterly dividends (whether or
not consecutive) payable on the Series A Preferred Stock shall be in arrears
(which shall, with respect to any such quarterly dividend, mean that any such
dividend has not been paid in full), whether or not earned or declared, the
number of directors then constituting the Board of Directors shall be increased
by two (2), and the directors then serving shall appoint to the Board of
Directors two (2) persons designated by the holders of a majority of the then
outstanding shares of Series A Preferred Stock. The holders of shares of Series
A Preferred Stock shall thereafter be entitled to designate or elect the two (2)
additional directors to serve on the Board of Directors, by the vote of a
plurality of the votes cast by the holders of the Series A Preferred Stock at an
annual meeting of stockholders or special meeting held in place thereof, or at a
special meeting of the holders of the Series A Preferred Stock called from time
to time for the election of directors. Whenever all arrears in dividends on the
Series A Preferred Stock then outstanding shall have been paid and dividends
thereon for the current quarterly dividend period shall have been paid or
declared and set apart for payment, then the right of the holders of the Series
A Preferred Stock to elect such additional two (2) directors shall cease (but
subject always to the same provision of the vesting of such voting rights in the
case of any similar future arrearage in two (2) quarterly dividends), and the
terms of office of all persons elected as directors by the holders of the Series
A Preferred Stock shall forthwith terminate and the number of the Board of
Directors shall be reduced accordingly. At any time after such voting power
shall have been so vested in the holders of Series A Preferred Stock, if the
Board of Directors fails to appoint the two designees of the holders of the
Series A Preferred Stock, as hereinabove provided, the Secretary of the
Corporation shall, upon the written request of any holder of Series A Preferred
Stock (addressed to the Secretary at the principal office of the Corporation),
call a special meeting of the
<PAGE> 16
holders of the Series A Preferred Stock for the election of the two (2)
directors to be elected by them as herein provided, such call to be made by
notice similar to that provided in the Bylaws of the Corporation for a special
meeting of the stockholders or as required by law. If any such special meeting
required to be called, as above provided, shall not be called by the Secretary
within twenty (20) days after receipt of any such request, then any holder of
Series A Preferred Stock may call such meeting, upon the notice above provided,
and for that purpose shall have access to the stock books of the Corporation.
The directors elected at any such special meeting shall hold office until the
next annual meeting of the stockholders or special meeting held in lieu thereof
if such office shall not have previously terminated as above provided. If any
vacancy shall occur among the directors elected by the holders of the Series A
Preferred Stock, a successor shall be elected by the Board of Directors, upon
the nomination of the then remaining directors elected by the holders of the
Series A Preferred Stock or the successors of such remaining directors, to serve
until the next annual meeting of the stockholders or special meeting held in
place thereof if such office shall not have previously terminated as above
provided. Notwithstanding the foregoing, the total number of directors
designated or elected by the holders of shares of Series A Preferred Stock, as
such, pursuant to this Section 9(c) or by such holders, as such, or any
affiliate of any of them pursuant to any other agreement or instrument will not
exceed two (2), unless such other agreement or instrument expressly provides for
a greater number.
So long as any shares of Series A Preferred Stock are
outstanding, the number of directors of the Corporation shall at all times be
such that the exercise by the holders of shares of Series A Preferred Stock of
the right to designate or elect directors under the circumstance provided in
this Section 9(c) will not contravene any provisions of the Corporation's
Certificate of Incorporation or Bylaws.
4.10 RECORD HOLDERS. The Corporation may deem and treat the record
holder of any share of Series A Preferred Stock as the true and lawful owner
thereof for all purposes, and neither the Corporation nor the Transfer Agent
shall be affected by any notice to the contrary.
5. The right to cumulate votes for the purpose of electing directors of
the Company or for any other purpose is expressly denied. The pre-emptive right
of shareholders to subscribe to and purchase shares or securities in proportion
to their respective holdings of shares is expressly denied.
6. The Company is to have perpetual existence.
7. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized to make, alter or repeal
the bylaws of the Company.
8. To the extent permitted by the General Corporation Law of Delaware,
a director of the Company shall not be liable to the Company or its shareholders
for monetary damages for an act or omission in the director's capacity as a
director.
<PAGE> 17
9. Elections of directors need not be by written ballot unless the
bylaws of the Company shall so provide.
Meetings of stockholders may be held within or without the State of
Delaware, as the bylaws may provide. The books of the Company may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of directors or in the bylaws of the Company.
10. The Company reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
executed this 12th day of August, 1998.
LIFEQUEST MEDICAL, INC.
By:
----------------------------
Randall K. Boatright
Executive Vice President
and Chief Financial Officer
<PAGE> 18
LIFEQUEST MEDICAL, INC.
---------------------------
AMENDED
CERTIFICATE OF DESIGNATION AND PREFERENCES OF
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
---------------------------
DATED AS OF JANUARY 21, 1999
<PAGE> 19
LIFEQUEST MEDICAL, INC.
---------------------
AMENDED
CERTIFICATE OF DESIGNATION AND PREFERENCES OF
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
----------------------
LIFEQUEST MEDICAL, INC., a Delaware corporation, having its principal
office in San Antonio, Texas (the "Corporation"), hereby certifies to the
Secretary of State of the State of Delaware that:
Pursuant to authority expressly vested in the Board of Directors of the
Corporation by the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), the Board of Directors has duly adopted
resolutions authorizing the creation and issuance of up to One Thousand
Twenty-Five (1,025) shares of Series B Cumulative Convertible Preferred Stock,
$.001 par value, with a liquidation preference of One Thousand Dollars
($1,000.00) per share, and determining the preferences, rights, powers,
limitations, qualifications and restrictions, as follows:
SECTION 1. NUMBER OF SHARES AND DESIGNATION. This series of Preferred
Stock, $.001 par value, shall be designated as Series B Cumulative Convertible
Preferred Stock (the "Series B Preferred Stock"), and the number of shares which
shall constitute such series shall be 1,025 shares.
SECTION 2. DEFINITIONS. For purposes of the Series B Preferred Stock,
the following terms shall have the meanings indicated below:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" of a person means a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is
under common control with, the person specified.
"Board of Directors" shall mean the Board of Directors of the
Corporation or any committee authorized by such Board of Directors to
perform any of its responsibilities with respect to the Series B
Preferred Stock.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which state or federally chartered banking institutions in New
York, New York are not required to be open.
"Common Stock" shall mean the common stock, $.001 par value, of the
Corporation or such shares of the Corporation's capital stock into
which such Common Stock shall be reclassified.
"Current Market Price" of publicly traded shares of Common Stock or any
other class or series of capital stock or other security of the
Corporation or of any similar security of any other issuer for any day
shall mean the last reported sale price, regular way on such day, or,
if no sale takes place on such day, the reported closing bid price,
regular way on such day,
<PAGE> 20
in either case as reported on the NASDAQ National Market of the
National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ") or, if not quoted on NASDAQ, on the principal
national securities exchange on which such security is listed or
admitted for trading or, if such security is not listed or admitted for
trading on a national securities exchange or quoted on the NASDAQ
National Market, the closing bid price on such day in the
over-the-counter market as reported by NASDAQ, or, if the bid price for
such security on such day shall not have been reported through NASDAQ,
the bid price on such day as furnished by any NYSE member firm
regularly making a market in such security selected for such purpose by
the Chief Executive Officer or the Board of Directors or if any class
or series of securities are not publicly traded, the fair value of the
shares of such class as determined reasonably and in good faith by the
Board of Directors of the Corporation or other issuer.
"Dividend Payment Date" shall mean, with respect to each Dividend
Period, the last day of March, June, September and December, in each
year, commencing on December 31, 1998; provided, however, that if any
Dividend Payment Date falls on any day other than a Business Day, the
dividend payment due on such Dividend Payment Date shall be paid on the
Business Day immediately following such Dividend Payment Date.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding
Dividend Period (other than the initial Dividend Period, which shall
commence on the Issue Date and end on and include the day immediately
preceding the Dividend Payment Date which immediately follows the Issue
Date).
"Fair Market Value" on any date shall mean the average of the daily
Current Market Price of a share of Common Stock during five (5)
consecutive Trading Days ending on the day before such date.
"Funds Available for Distribution" shall mean funds from operations
(net income, computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and sales
of property, plus depreciation and amortization) minus non-revenue
generated capital expenditures and debt principal amortization, as
determined by the Board of Directors on a basis consistent with the
policies and practices adopted by the Corporation for reporting
publicly its results of operations and financial condition.
"Issue Date" shall mean the date upon which shares of Series B
Preferred Stock are issued.
"Junior Stock" shall have the meaning set forth in paragraph (c) of
Section 8 hereof.
"NYSE" shall mean the New York Stock Exchange.
"Parity Stock" shall have the meaning set forth in paragraph (b) of
Section 8 hereof.
2
<PAGE> 21
"Permitted Common Stock Cash Distributions" means cash dividends and
cash distributions paid on Common Stock after December 31, 1997 not in
excess of the sum of the Corporation's cumulative undistributed net
earnings at December 31, 1997, plus the cumulative amount of Funds
Available for Distribution after December 31, 1997, minus the
cumulative amount of dividends accumulated, accrued or paid on the
Series B Preferred Stock or any other class of Preferred Stock after
January 1, 1998.
"Person" shall mean any individual, partnership, corporation or other
entity and shall include the successor (by merger or otherwise) of such
entity.
"Redemption Date" shall have the meaning set forth in paragraph (b) of
Section 6 hereof.
"Series B Preferred Stock" shall have the meaning set forth in Section
1 hereof.
"Set apart for payment" shall be deemed to include, without any action
other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which
indicates, pursuant to a declaration of dividends or other distribution
by the Board of Directors, the allocation of funds to be so paid on any
series or class of capital stock of the Corporation; provided, however,
that if any funds for any class or series of Junior Stock or any class
or series of Parity Stock are placed in a separate account of the
Corporation or delivered to a disbursing, paying or other similar
agent, then "set apart for payment" with respect to the Series B
Preferred Stock shall mean placing such funds in a separate account or
delivering such funds to a disbursing, paying or other similar agent.
"Trading Day," as to any securities, shall mean any day on which such
securities are traded on the NYSE or, if such securities are not listed
or admitted for trading on the NYSE, on the principal national
securities exchange on which such securities are listed or admitted or,
if such securities are not listed or admitted for trading on any
national securities exchange, on the NASDAQ National Market or, if such
securities are not quoted on the NASDAQ National Market, in the
securities market in which such securities are traded.
SECTION 3. DIVIDENDS.
(a) The holders of Series B Preferred Stock shall
be entitled to receive, when and as declared by the Board of Directors out of
funds legally available for that purpose, cumulative dividends payable in cash
in an amount per share of Series B Preferred Stock equal to $80 per annum. Such
dividends shall be cumulative from the Issue Date, whether or not in any
Dividend Period or Periods such dividends shall be declared or there shall be
funds of the Corporation legally available for the payment of such dividends,
and shall be payable quarterly on the Dividend Payment Dates, commencing on the
first Dividend Payment Date after the Issue Date. Each such dividend shall be
payable to the holders of record of the Series B Preferred Stock, as they appear
on the stock records of the Corporation at the close of business on a record
date which shall be not more than sixty (60) days prior to the applicable
Dividend Payment Date. Accumulated, accrued and unpaid dividends for any past
Dividend Periods may be declared and paid at any time, without reference to any
regular Dividend Payment Date, to holders of record on such date, which date
shall not precede by more than
3
<PAGE> 22
forty-five (45) days the payment date thereof, as may be fixed by the Board of
Directors. The amount of accumulated, accrued and unpaid dividends on any share
of Series B Preferred Stock, or fraction thereof, at any date shall be the
amount of any dividends thereon calculated at the applicable rate to and
including such date, whether or not earned or declared, which have not been paid
in cash.
(b) The amount of dividends payable per share of
Series B Preferred Stock for each Dividend Period shall be computed by dividing
the annual dividend by four (4). The amount of dividends payable per share of
Series B Preferred Stock for the initial Dividend Period, or any other period
shorter or longer than a full Dividend Period, shall be computed ratably on the
basis of twelve (12) 30-day months and a 360-day year. Holders of Series B
Preferred Stock shall not be entitled to any dividends, whether payable in cash,
property or stock, in excess of cumulative dividends, as herein provided on the
Series B Preferred Stock. No interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment or payments on the Series B
Preferred Stock that may be in arrears.
(c) So long as any of the shares of Series B
Preferred Stock are outstanding, no dividends, except as described in the
immediately following sentence, shall be declared or paid or set apart for
payment by the Corporation, or other distribution of cash or other property
declared or made directly or indirectly by the Corporation or any affiliate or
any person acting on behalf of the Corporation or any of its affiliates with
respect to any class or series of Parity Stock for any period, unless dividends
equal to the full amount of accumulated, accrued and unpaid dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof have been or contemporaneously are set apart for such
payment on the Series B Preferred Stock for all Dividend Periods terminating on
or prior to the Dividend Payment Date with respect to such class or series of
Parity Stock. When dividends are not paid in full or a sum sufficient for such
payment is not set apart, as aforesaid, all dividends declared upon the Series B
Preferred Stock and all dividends declared upon any other class or series of
Parity Stock shall be declared ratably in proportion to the respective amounts
of dividends accumulated, accrued and unpaid on the Series B Preferred Stock and
accumulated, accrued and unpaid on such Parity Stock.
(d) So long as any of the shares of Series B
Preferred Stock are outstanding, no dividends (other than dividends or
distributions paid in shares of, or options, warrants or rights to subscribe for
or purchase shares of, Junior Stock) shall be declared or paid or set apart for
payment by the Corporation, or other distribution of cash or other property
declared or made directly or indirectly by the Corporation or any affiliate or
any person acting on behalf of the Corporation or any of its affiliates with
respect to any shares of Junior Stock, nor shall any shares of Junior Stock be
redeemed, purchased or otherwise acquired (other than a redemption, purchase or
other acquisition of Common Stock made for purposes of an employee incentive or
benefit plan of the Corporation or any subsidiary) for any consideration (or any
moneys be paid to or made available for a sinking-fund for the redemption of any
shares of any such stock) directly or indirectly by the Corporation or any
affiliate or any person acting on behalf of the Corporation or any of its
affiliates (except by conversion into or exchange for Junior Stock), nor shall
any other cash or other property otherwise be paid or distributed to or for the
benefit of any holder of shares of Junior Stock in respect thereof, directly or
indirectly, by the Corporation or any affiliate or any person acting on behalf
of the Corporation or any of its affiliates, unless in each case (i) the full
cumulative dividends (including all
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accumulated, accrued and unpaid dividends) on all outstanding shares of Series B
Preferred Stock and any other Parity Stock of the Corporation shall have been
paid or such dividends have been declared and set apart for payment for all past
Dividend Periods with respect to the Series B Preferred Stock and all past
Dividend Periods with respect to such Parity Stock, and (ii) sufficient funds
shall have been paid or set apart for the payment of the full dividend for the
current Dividend Period with respect to the Series B Preferred Stock and the
current Dividend Period with respect to such Parity Stock.
SECTION 4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, before any
payment or distribution of the assets of the Corporation (whether capital or
surplus) shall be made to or set apart for the holders of Junior Stock, the
holders of shares of Series B Preferred Stock shall be entitled to receive One
Thousand Dollars ($1,000.00) per share of Series B Preferred Stock, plus an
amount equal to all dividends (whether or not earned or declared) accumulated,
accrued and unpaid thereon to the date of final distribution to such holders.
Until the holders of the Series B Preferred Stock have been paid the liquidation
preference in full, no payment will be made to any holder of Junior Stock upon
the liquidation, dissolution or winding up of the Corporation. If, upon any
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of Series B
Preferred Stock shall be insufficient to pay in full the preferential amount
aforesaid and liquidating payments on any other shares of any class or series of
Parity Stock, then such assets, or the proceeds thereof, shall be distributed
among the holders of Series B Preferred Stock and any such other Parity Stock
ratably in the same proportion as the respective amounts that would be payable
on such Series B Preferred Stock and any such other Parity Stock if all amounts
payable thereon were paid in full. For the purposes of this Section 4, (i) a
consolidation or merger of the Corporation with one or more corporations, (ii) a
sale or transfer of all or substantially all of the Corporation's assets, or
(iii) a statutory share exchange shall not be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary, of the Corporation.
(b) Subject to the rights of the holders of any
shares of Parity Stock, upon any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the holders of Series
B Preferred Stock and any Parity Stock, as provided in this Section 4, any other
series or class or classes of Junior Stock shall, subject to the respective
terms thereof, be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Series B Preferred Stock and any Parity
Stock shall not be entitled to share therein.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series B
Preferred Stock shall have the right, at their option, to convert such shares
into shares of Common Stock of the Corporation at any time on and subject to the
following terms and conditions:
(a) The shares of Series B Preferred Stock shall be
convertible at the office of the transfer agent for the Common Stock or the
principal executive office of the Corporation, into fully paid and
non-assessable shares (calculated as to each conversion to the nearest 1/100th
of a share) of Common Stock of the Corporation, at the conversion price,
determined as hereinafter
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<PAGE> 24
provided, in effect at the time of conversion, each share of Series B Preferred
Stock being taken at $1,000.00 for the purpose of such conversion. The price at
which shares of Common Stock shall be delivered upon conversion (the "Conversion
Price") shall initially be $2.00 per share of Common Stock. The conversion price
shall be adjusted in certain instances as provided below.
(b) In order to convert shares of Series B Preferred
Stock into Common Stock, the holder thereof shall surrender at the office or
offices hereinabove mentioned the certificate or certificates therefor, duly
endorsed or assigned to the Corporation or in blank, and give written notice to
the Corporation at said office or offices that such holder elects to convert
such shares. Shares of Series B Preferred Stock surrendered for conversion
during the period from the close of business on any record date for the payment
of a dividend on the shares of Series B Preferred Stock to the opening of
business on the date for payment of such dividend shall (except in the case of
shares of Series B Preferred Stock which have been called for redemption on a
redemption date within such period) be accompanied by a payment of an amount
equal to the dividend declared and payable on such dividend payment date on the
shares of Series B Preferred Stock being surrendered for conversion. Except as
provided in the preceding sentence, no payment or adjustment shall be made upon
any conversion on account of any unpaid or accrued dividends on the shares of
Series B Preferred Stock surrendered for conversion or on account of any
dividends on the Common Stock issued upon conversion.
Shares of Series B Preferred Stock shall be deemed to
have been converted immediately prior to the close of business on the day of the
surrender of the certificates for such shares for conversion in accordance with
the foregoing provisions, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall issue and
shall deliver at such office a certificate or certificates for the number of
full shares of Common Stock issuable upon such conversion, together with payment
in lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same. In case shares of Series B Preferred Stock
are called for redemption, the right to convert such shares shall cease and
terminate at the close of business on the date fixed for redemption, unless
default shall be made in payment of the redemption price.
(c) No fractional shares of Common Stock shall be
issued upon conversion of shares of Series B Preferred Stock, but, instead of
any fraction of a share which would otherwise be issuable, the Corporation shall
pay a cash adjustment in respect of such fraction in an amount equal to the same
fraction of the Closing Price (as hereinafter defined) on the date on which the
certificate or certificates for such shares were duly surrendered for
conversion, or, if such date is not a Trading Day (as hereinafter defined), on
the next Trading Day.
(d) The Conversion Price shall be adjusted from time
to time as follows:
(i) Adjustment for Issuance of Shares at
Less Than the Conversion Price. If at any time after the date of the
first issuance of Series B Preferred Stock, the Corporation shall issue
any shares of Common Stock, Convertible Securities (as hereinafter
defined), Rights (as hereinafter defined) or Related Rights (as
hereinafter defined; any such
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shares, Convertible Securities, Rights or Related Rights, "Securities")
without consideration or for a consideration per share or unit less
than the Conversion Price in effect immediately prior to the issuance
of such Securities, then the Conversion Price in effect immediately
prior to each such issuance shall forthwith be reduced to the quotient
obtained by dividing:
(A) an amount equal to the sum of (1) the
total number of shares of Common Stock outstanding
immediately prior to such issuance (including for this
purpose the number of shares of Common Stock into which
the shares of Series B Preferred Stock outstanding
immediately prior to such issuance are convertible on
the date of such issuance in accordance with Subsection
5(a) (without regard to Subsection 5(c)), without
giving effect to such issuance) multiplied by the
Conversion Price in effect immediately prior to such
issuance, and (2) the amount of consideration, if any,
received by the Corporation upon such issuance, by
(B) the total number of shares of Common
Stock (1) outstanding immediately after such issuance
(including the number of shares of Common Stock into
which the shares of Series B Preferred Stock
outstanding immediately prior to such issuance are
convertible on the date of such issuance in accordance
with Subsection 5(a) (without regard to Subsection
5(c)), without giving effect to such issuance) or (2)
into or for which any such newly issued Convertible
Securities are then convertible or exchangeable or (3)
issuable upon the exercise of any such Rights or
Related Rights).
(C) For the purpose of this Subsection 5(d),
the following definitions and procedures shall be
applicable:
(1) In the case of the issuance of
options, warrants or other rights to purchase
or otherwise acquire Common Stock, whether or
not at the time exercisable ("Rights"), the
total number of shares of Common Stock issuable
upon exercise of such Rights shall be deemed to
have been issued at the time such Rights are
issued, for a consideration equal to the sum of
the consideration, if any, received by the
Corporation upon the issuance of such rights
and the minimum purchase or exercise price
payable upon the exercise of such Rights for
the Common Stock to be issued upon the exercise
thereof.
(2) In the case of the issuance of
any class or series of stock or any bonds,
debentures, notes or other securities or
obligations convertible into or exchangeable
for Common Stock, whether or not then
convertible or exchangeable ("Convertible
Securities"), or options, warrants or other
rights to purchase or otherwise acquire
Convertible Securities ("Related Rights"), the
total number of shares of Common Stock issuable
upon the conversion or exchange of such
Convertible Securities or exercise of such
Related Rights shall be deemed to have
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<PAGE> 26
been issued at the time such Convertible
Securities or Related Rights are issued, for a
consideration equal to the sum of (I) the
consideration, if any, received by the
Corporation upon issuance of such Convertible
Securities or Related Rights (excluding any
cash received on account of accrued interest or
dividends) and (II) (A) in the case of
Convertible Securities, the minimum additional
consideration, if any, to be received by the
Corporation upon the conversion or exchange of
such Convertible Securities or (B) in the case
of Related Rights, the sum of (x) the minimum
purchase or exercise price payable upon the
exercise of such Related Rights for Convertible
Securities and (y) the minimum additional
consideration, if any, to be received by the
Corporation upon the conversion or exchange of
the Convertible Securities issued upon the
exercise of such Related Rights.
(3) On any change in the number of
shares of Common Stock issuable upon the
exercise of Rights or Related Rights or upon
the conversion or exchange of Convertible
Securities or on any change in the minimum
purchase or exercise price of Rights, Related
Rights or Convertible Securities, including,
but not limited to, a change resulting from the
anti-dilution provisions of such Rights,
Related Rights or Convertible Securities, the
Conversion Price to the extent in any way
affected by such Rights, Related Rights or
Convertible Securities shall forthwith be
readjusted to be thereafter the Conversion
Price that would have been obtained had the
adjustment which was made upon the issuance of
such Rights, Related Rights or Convertible
Securities been made after giving effect to
such change. No further adjustment shall be
made in respect of such change upon the actual
issuance of Common Stock or any payment of
consideration upon the exercise of any such
Rights or Related Rights or the conversion or
exchange of such Convertible Securities.
(4) On the expiration or
cancellation of any such Rights, Related Rights
or Convertible Securities, if the Conversion
Price shall have been adjusted upon the
issuance thereof, the Conversion Price shall
forthwith be readjusted to such Conversion
Price as would have been obtained had the
adjustment made upon the issuance of such
Rights, Related Rights or Convertible
Securities been made upon the basis of the
issuance of only the number of shares of Common
Stock actually issued upon the exercise of such
Rights or Related Rights or the conversion or
exchange of such Convertible Securities.
(ii) Sale of Shares. In case of the
issuance of Securities for a consideration part or all of which shall
be cash, the amount of the cash consideration therefor shall be deemed
to be the gross amount of the cash paid to Corporation for such shares,
before deducting any underwriting compensation or discount in the sale,
underwriting or
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<PAGE> 27
purchase thereof by underwriters or dealers or others performing
similar services or for any expenses incurred in connection therewith.
In case of the issuance of any Securities for a consideration part or
all of which shall be other than cash, the amount of the consideration
therefor, other than cash, shall be deemed to be the then fair market
value of the property received.
(iii) Reclassification of Shares. In case
of the reclassification of securities into shares of Common Stock, the
shares of Common Stock issued in such reclassification shall be deemed
to have been issued for a consideration other than cash. Securities
issued by way of dividend or other distribution on any class of stock
of Corporation shall be deemed to have been issued without
consideration.
(iv) Stock Dividends, Stock Splits,
Subdivisions or Combinations. In the event of a stock dividend, stock
split or subdivision of shares of Common Stock into a greater number of
shares, the Conversion Price shall be proportionately decreased, and in
the event of a combination of shares of Common Stock into a smaller
number of shares, the Conversion Price shall be proportionately
increased, such increase or decrease, as the case may be, becoming
effective at the record date.
(v) Exceptions. The adjustments
provided in Subsection 5(d)(i) shall not apply to any (A) Common Stock
issued upon the conversion of any of the Series B Preferred Stock; (B)
Common Stock issued upon exercise of any outstanding warrants, options
or debentures; (C) Common Stock issued upon exercise of outstanding
employee stock options; and (D) up to 200,000 shares of Common Stock
issuable upon exercise of employee stock options to be granted
subsequent to the date hereof.
(vi) Adjustment for Mergers and
Consolidations.
(A) In the event of distribution to all
Common Stock holders of any stock, indebtedness of the
Corporation or assets (excluding cash dividends or
distributions from retained earnings) or other rights
to purchase securities or assets, then, after such
event, the shares of Series B Preferred Stock will be
convertible into the kind and amount of securities,
cash and other property which the holder of the shares
of Series B Preferred Stock would have been entitled to
receive if the holder owned the Common Stock issuable
upon conversion of the shares of Series B Preferred
Stock immediately prior to the occurrence of such
event.
(B) In case of any capital reorganization,
reclassification of the stock of the Corporation (other
than a change in par value or as a result of a stock
dividend, subdivision, split up or combination of
shares), the shares of Series B Preferred Stock shall
be convertible into the kind and number of shares of
stock or other securities or property of the
Corporation to which the holder of the shares of Series
B Preferred Stock would have been entitled to receive
if the holder owned the Common Stock issuable upon
conversion of the shares
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<PAGE> 28
of Series B Preferred Stock immediately prior to the
occurrence of such event. The provisions of the
immediately foregoing sentence shall similarly apply to
successive reorganizations, reclassifications,
consolidations, exchanges, leases, transfers or other
dispositions or other share exchanges.
(C) The term "Fair Market Value," as used
herein, is the value ascribed to consideration other
than cash as determined by the Board of Directors of
the Corporation in good faith, which determination
shall be final, conclusive and binding. If the Board of
Directors shall be unable to agree as to such fair
market value, then the issue of fair market value shall
be submitted to arbitration under and pursuant to the
rules and regulations of the American Arbitration
Association, and the decision of the arbitrators shall
be final, conclusive and binding, and a final judgment
may be entered thereon; provided, however, that such
arbitration shall be limited to determination of the
fair market value of assets tendered in consideration
for the issue of Common Stock.
(e) Whenever the conversion price is adjusted as herein
provided:
(i) The Corporation shall compute the
adjusted conversion price in accordance with this Section 5 and shall
cause to be prepared a certificate signed by the Corporation's
treasurer setting forth the adjusted conversion price and showing in
reasonable detail the fact upon which such adjustment is based; and
(ii) A notice stating that the conversion
price has been adjusted and setting forth the adjusted conversion price
shall, as soon as practicable, be mailed to the holders of record of
outstanding shares of Series B Preferred Stock.
(f) In case:
(i) The Corporation shall declare a
dividend or other distribution on its Common Stock payable otherwise
than in cash out of retained earnings;
(ii) The Corporation shall authorize the
issuance to the holders of its Common Stock of rights or warrants
entitling them to subscribe for or purchase any shares of capital stock
of any class or any other subscription rights or warrants; or
(iii) Of any reclassification of the
capital stock of the Corporation (other than a subdivision or
combination of its outstanding shares of Common Stock), or of any
consolidation or merger to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required, or
of the sale, transfer or other disposition of all or substantially all
of the assets of the Corporation; or
(iv) Of the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
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then the Corporation shall cause to be mailed to the
holders of record of the outstanding shares of Series B Preferred Stock, at
least 20 days (or 10 days in any case specified in clause (i) or (ii) above)
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date as of which the holders of record of Common Stock to be
entitled to such dividend, distribution, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, disposition, liquidation, dissolution or winding up is
expected to become effective, and the date as of which it is expected that
holders of record of Common Stock shall be entitled to exchange their shares for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, disposition, liquidation, dissolution or
winding up, or the vote on any action authorizing such.
(g) The Corporation shall at all times reserve and
keep available, free from preemptive rights, out of its authorized but unissued
Common Stock, for the purpose of issuance upon conversion of shares of Series B
Preferred Stock, the full number of shares of Common Stock then deliverable upon
the conversion of all shares of Series B Preferred Stock then outstanding.
(h) The Corporation will pay any and all taxes that
may be payable in respect of the issuance of delivery of shares of Common Stock
on conversion of shares of Series B Preferred Stock pursuant thereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock in a name other than that in which the shares of Series B Preferred
Stock so converted were registered, and no such issuance or delivery shall be
made unless and until the person requesting such issuance has paid to the
Corporation the amount of any such tax or has established to the satisfaction of
the Corporation that such tax has been paid.
(i) The certificate of any independent firm of
public accountants of nationally recognized standing selected by the Board of
Directors shall be presumptive evidence of the correctness of any computation
made under this Section 5.
(j) Notwithstanding the foregoing, if the
volume-weighted average closing bid price of the Common Stock, as determined by
Bloomberg Financial Markets and Commodities News, for the 21 consecutive trading
days following the Corporation's public press release of its December 31, 1998
fiscal year-end financial results (such volume-weighted average closing bid
price herein referred to as the "1998 Conversion Price Adjustment") is a price
less than the existing Conversion Price, and the Corporation reports pre-tax
income of less than or equal to $4,400,000 excluding extraordinary gains for the
December 31, 1998 fiscal year, then the Conversion Price shall be adjusted
downward to an amount equal to 100% of the 1998 Conversion Price Adjustment. If
an adjustment is required pursuant to this section, then the Corporation shall
furnish to each of the holders of shares of Series B Preferred Stock a
statement, within ten (10) days of the occurrence thereof, signed by the Chief
Financial Officer and the Secretary of the Corporation, of the facts creating
such adjustment and specifying the resultant adjusted Conversion Price then in
effect. No holder of any shares of Series B Preferred Stock shall convert or
sell any shares of the Corporation's Common Stock during the 21 consecutive
trading days used to determine the 1998 Conversion Price Adjustment or during
the 9 trading days preceding such period.
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SECTION 6. REDEMPTION AT THE OPTION OF THE HOLDER.
(a) At any time after the date hereof, upon notice
by the Corporation of any proposed change of any provision of the Certificate of
Incorporation or Bylaws that relates to the Board of Directors or the election
of directors or any merger or consolidation involving the Corporation or a sale
of all or substantially all of the assets of the Corporation (collectively,
"Events of Redemption"), the Series B Preferred Stock is redeemable at the
option of each holder of Series B Preferred Stock at one hundred percent (100%)
of par, together with accrued and unpaid dividends through the Redemption Date.
Notice of an Event of Redemption shall be given by the Corporation to each
holder of record of Series B Preferred Stock by first class mail, postage
prepaid, at such holder's address as the same appears on the stock records of
the Corporation. Each holder may exercise his right to require the Corporation
to redeem all, but not less than all, of the shares of Series B Preferred Stock
owned by him of record by written notice to the Corporation at the address
specified in the notice of an Event of Redemption. Such notice shall be sent by
first class mail, postage prepaid, within thirty (30) days of receipt by such
holder of the notice of an Event of Redemption.
(b) Shares of Series B Preferred Stock may be
redeemed at the option of the holder by the Corporation on the date specified in
the notice of an Event of Redemption (the "Redemption Date"). The Redemption
Date selected by the Corporation shall be sixty (60) days after the date notice
of an Event of Redemption is sent by the Corporation. As a condition precedent
for such redemption, the Corporation, by resolution of its Board of Directors,
shall declare a mandatory dividend on the Series B Preferred Stock payable in
cash on the Redemption Date in an amount equal to all accumulated, accrued and
unpaid dividends as of the Redemption Date on the Series B Preferred Stock to be
redeemed, which amount shall be added to the redemption price. If the Redemption
Date falls after a dividend payment record date and prior to the corresponding
Dividend Payment Date, then each holder of Series B Preferred Stock at the close
of business on such dividend payment record date shall be entitled to the
dividend payable on such shares on the corresponding Dividend Payment Date,
notwithstanding the redemption of such shares prior to such Dividend Payment
Date. Except as provided above, the Corporation shall make no payment or
allowance for accumulated or accrued dividends on shares of Series B Preferred
Stock to be redeemed.
(c) Neither the failure to mail any notice required
by Subsection 6(a), nor any defect therein or in the mailing thereof, to any
particular holder, shall affect the sufficiency of the notice or the validity of
the proceedings for redemption with respect to the other holders. Any notice
which was mailed in the manner herein provided shall be conclusively presumed to
have been duly given on the date mailed whether or not the holder receives the
notice. Each such mailed notice shall state, as appropriate: (1) the Redemption
Date; (2) the place or places at which certificates for such shares are to be
surrendered; and (3) that dividends on the shares of Series B Preferred Stock to
be redeemed shall cease to accrue on such Redemption Date, except as otherwise
provided herein. Notice having been mailed as aforesaid, from and after the
Redemption Date (unless the Corporation shall fail to issue and make available
at the office of the transfer agent the amount of cash necessary to effect such
redemption, including all accumulated, accrued and unpaid dividends to the
Redemption Date, whether or not earned or declared), (i) except as otherwise
provided herein, dividends on the shares of Series B Preferred Stock to be
redeemed shall cease to accumulate or
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accrue on the shares of Series B Preferred Stock to be redeemed, (ii) said
shares shall no longer be deemed to be outstanding, and (iii) all rights of the
holders thereof as holders of Series B Preferred Stock of the Corporation shall
cease (except the rights to receive the cash payable upon such redemption,
without interest thereon, upon surrender and endorsement of their certificates
if so required and to receive any dividends payable thereon).
As promptly as practicable after the surrender in
accordance with said notice of the certificates for any such shares so redeemed
(properly endorsed or assigned for transfer, if the Corporation shall so require
and if the notice shall so state), such certificates shall be exchanged for cash
(without interest thereon) for which such shares have been redeemed in
accordance with such notice.
SECTION 7. SERIES B PREFERRED STOCK TO BE RETIRED. All shares of
Series B Preferred Stock which shall have been issued and reacquired in any
manner by the Corporation shall be restored to the status of authorized, but
unissued shares of Preferred Stock, without designation as to series. The
Corporation may also retire any unissued shares of Series B Preferred Stock, and
such shares shall then be restored to the status of authorized but unissued
shares of Preferred Stock, without designation as to series.
SECTION 8. RANKING. Any class or series of capital stock of the
Corporation shall be deemed to rank:
(a) prior or senior to the Series B Preferred
Stock, as to the payment of dividends and as to distribution of assets upon
liquidation, dissolution or winding up, if the holders of such class or series
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Series B Preferred Stock;
(b) on a parity with the Series A Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock") and any other stock
designated to be Parity Stock (as defined below), as to the payment of dividends
and as to distribution of assets upon liquidation, dissolution or winding up,
whether or not the dividend rates, dividend payment dates or redemption or
liquidation prices per share thereof be different from those of the Series B
Preferred Stock, if the holders of such class of stock or series and the Series
B Preferred Stock shall be entitled to the receipt of dividends and of amounts
distributable upon liquidation, dissolution or winding up in proportion to their
respective amounts of accrued and unpaid dividends per share or liquidation
preferences, without preference or priority of one over the other ("Parity
Stock"); and
(c) junior to the Series B Preferred Stock, as to
the payment of dividends or as to the distribution of assets upon liquidation,
dissolution or winding up, if such stock or series shall be Common Stock or if
the holder of Series B Preferred Stock shall be entitled to receipt of dividends
or of amounts distributable upon liquidation, dissolution or winding up, as the
case may be, in preference or priority to the holders of shares of such class or
series ("Junior Stock").
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SECTION 9. VOTING.
(a) The holders of Series B Preferred Stock shall
be entitled to one (1) vote per share on all matters submitted to a vote of
shareholders of the Corporation.
(b) The affirmative vote of the holders of
sixty-six and two-thirds percent (66 2/3%) of the votes entitled to be cast by
holders of the Series B Preferred Stock then outstanding, voting as a single
class, in person or by proxy, either in writing without a meeting or by vote at
any meeting called for the purpose, will be required in order to amend the
Certificate of Incorporation or Bylaws to affect materially and adversely the
rights, preferences or voting power of the holders of the Series B Preferred
Stock or to authorize, create or increase the authorized amount of, any class of
stock having rights prior or senior to the Series B Preferred Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or winding
up. However, the Corporation may create additional classes, shares or series of
Parity Stock with the consent of the holders of a majority of the outstanding
shares of Series B Preferred Stock, and may create classes of Junior Stock,
increase the authorized number of shares of Junior Stock and issue additional
series of Junior Stock, without the consent of any holder of Series B Preferred
Stock.
(c) If and whenever two (2) quarterly dividends
(whether or not consecutive) payable on the Series B Preferred Stock shall be in
arrears (which shall, with respect to any such quarterly dividend, mean that any
such dividend has not been paid in full), whether or not earned or declared, the
number of directors then constituting the Board of Directors shall be increased
by two (2), and the directors then serving shall appoint to the Board of
Directors two (2) persons designated by the holders of a majority of the then
outstanding shares of Series B Preferred Stock. The holders of shares of Series
B Preferred Stock shall thereafter be entitled to designate or elect the two (2)
additional directors to serve on the Board of Directors, by the vote of a
plurality of the votes cast by the holders of the Series B Preferred Stock at an
annual meeting of stockholders or special meeting held in place thereof, or at a
special meeting of the holders of the Series B Preferred Stock called from time
to time for the election of directors. Whenever all arrears in dividends on the
Series B Preferred Stock then outstanding shall have been paid and dividends
thereon for the current quarterly dividend period shall have been paid or
declared and set apart for payment, then the right of the holders of the Series
B Preferred Stock to elect such additional two (2) directors shall cease (but
subject always to the same provision of the vesting of such voting rights in the
case of any similar future arrearage in two (2) quarterly dividends), and the
terms of office of all persons elected as directors by the holders of the Series
B Preferred Stock shall forthwith terminate and the number of the Board of
Directors shall be reduced accordingly. At any time after such voting power
shall have been so vested in the holders of Series B Preferred Stock, if the
Board of Directors fails to appoint the two designees of the holders of the
Series B Preferred Stock, as hereinabove provided, the Secretary of the
Corporation shall, upon the written request of any holder of Series B Preferred
Stock (addressed to the Secretary at the principal office of the Corporation),
call a special meeting of the holders of the Series B Preferred Stock for the
election of the two (2) directors to be elected by them as herein provided, such
call to be made by notice similar to that provided in the Bylaws of the
Corporation for a special meeting of the stockholders or as required by law. If
any such special meeting required to be called, as above provided, shall not be
called by the Secretary within twenty (20) days after receipt of any such
request, then any holder of Series B Preferred Stock may call such
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<PAGE> 33
meeting, upon the notice above provided, and for that purpose shall have access
to the stock books of the Corporation. The directors elected at any such special
meeting shall hold office until the next annual meeting of the stockholders or
special meeting held in lieu thereof if such office shall not have previously
terminated as above provided. If any vacancy shall occur among the directors
elected by the holders of the Series B Preferred Stock, a successor shall be
elected by the Board of Directors, upon the nomination of the then remaining
directors elected by the holders of the Series B Preferred Stock or the
successors of such remaining directors, to serve until the next annual meeting
of the stockholders or special meeting held in place thereof if such office
shall not have previously terminated as above provided. Notwithstanding the
foregoing, the total number of directors designated or elected by the holders of
shares of Series B Preferred Stock, as such, pursuant to this Section 9(c) or by
such holders, as such, or any affiliate of any of them pursuant to any other
agreement or instrument will not exceed two (2), unless such other agreement or
instrument expressly provides for a greater number.
So long as any shares of Series B Preferred Stock are
outstanding, the number of directors of the Corporation shall at all times be
such that the exercise by the holders of shares of Series B Preferred Stock of
the right to designate or elect directors under the circumstance provided in
this Section 9(c) will not contravene any provisions of the Corporation's
Certificate of Incorporation or Bylaws.
SECTION 10. RECORD HOLDERS. The Corporation may deem and treat the
record holder of any share of Series B Preferred Stock as the true and lawful
owner thereof for all purposes, and neither the Corporation nor the Transfer
Agent shall be affected by any notice to the contrary.
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<PAGE> 34
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
duly executed as of January 21, 1999.
LIFEQUEST MEDICAL, INC.
By:
--------------------------------------------
Randall K. Boatright
Executive Vice President and Chief Financial
Officer
<PAGE> 1
EXHIBIT 10.32
LIFEQUEST MEDICAL, INC.
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
NOVEMBER 19, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - PURCHASE AND SALE..................................................1
Section 1.1 Purchase and Sale; Purchase Price...................1
Section 1.2 Closing.............................................2
Section 1.3 Transactions at Closing.............................2
Section 1.4 Fees and Expenses...................................2
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................2
Section 2.1 Organization, Standing and Qualification............2
Section 2.2 Capitalization......................................2
Section 2.3 Validity of Stock...................................3
Section 2.4 Subsidiaries........................................3
Section 2.5 Financial Statements................................3
Section 2.6 No Material Changes.................................4
Section 2.7 Permits.............................................5
Section 2.8 Insurance...........................................5
Section 2.9 Authorization; Approvals............................5
Section 2.10 No Conflict with Other Instruments..................6
Section 2.11 Labor Agreements and Actions........................6
Section 2.12 Title to Properties; Liens and Encumbrances.........6
Section 2.13 Compliance with Law and Other Instruments...........6
Section 2.14 Patents, Trademarks and Other Intangible Assets.....7
Section 2.15 Taxes...............................................7
Section 2.16 Contracts...........................................7
Section 2.17 Litigation..........................................8
Section 2.18 Securities Laws.....................................8
Section 2.19 Fees and Commissions................................8
Section 2.20 Interested Party Transactions.......................8
Section 2.21 ERISA...............................................9
Section 2.22 Environmental and Safety Laws.......................9
Section 2.23 SEC Reports.........................................9
Section 2.24 Full Disclosure.....................................9
ARTICLE III - REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
PURCHASERS............................................................9
Section 3.1 Authorization; Approvals; No Conflicts..............9
Section 3.2 Investment Representations.........................10
Section 3.3 Investment Experience; Access to Information.......10
Section 3.4 Restrictions on Transfer...........................10
Section 3.5 Transfer Instructions..............................11
Section 3.6 Fees and Commissions...............................11
ARTICLE IV - CONDITIONS TO CLOSING OF THE PURCHASERS..........................11
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V - CONDITIONS TO CLOSING OF THE COMPANY..............................12
ARTICLE VI - REGISTRATION RIGHTS..............................................12
Section 6.1 Shelf Registration.................................12
Section 6.2 Obligations of the Company.........................12
Section 6.3 Expenses of Registration...........................13
Section 6.4 Indemnification Regarding Registration Rights......13
Section 6.5 Reports Under the Exchange Act.....................16
Section 6.6 Assignment of Registration Rights..................16
ARTICLE VII - MISCELLANEOUS...................................................17
Section 7.1 Entire Agreement...................................17
Section 7.2 Survival of Representations and Warranties.........17
Section 7.3 Notices............................................17
Section 7.4 Amendments.........................................18
Section 7.5 Waiver and Consent.................................18
Section 7.6 Successors and Assigns.............................18
Section 7.7 Rights of Purchasers...............................18
Section 7.8 Execution and Counterparts.........................19
Section 7.9 No Third Party Beneficiaries.......................19
Section 7.10 Severability.......................................19
Section 7.11 Governing Law......................................19
</TABLE>
ii
<PAGE> 4
SCHEDULES
2.2 - Security Holders
2.5 - Financial Statements
2.6 - Material Changes
EXHIBITS
A - Form of Certificate of Designation and Preferences of
Series B Cumulative Convertible Preferred Stock
B - Form of Legal Opinion of the Company's Counsel
iii
<PAGE> 5
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This AGREEMENT (the "Agreement"), dated as of November 19, 1998, is
entered into by and among LIFEQUEST MEDICAL, INC., a Delaware corporation (the
"Company"), 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 "Purchaser"
and collectively referred to as the "Purchasers").
RECITAL
WHEREAS, the Purchasers desire to purchase 1,000 shares of Series B
Cumulative Convertible Preferred Stock, par value $.001 per share, of the
Company (the "Series B Preferred Stock"), having the rights, preferences,
privileges and restrictions set forth in the Company's Certificate of
Designation and Preferences of Series B Cumulative Convertible Preferred Stock
by resolution, substantially in the form attached hereto as EXHIBIT A (the
"Certificate of Designation"), and the Company desires to sell to the Purchasers
such shares of Series B Preferred Stock on the terms and subject to the
conditions set forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements hereinafter contained and for other good and valuable consideration,
the Company and the Purchasers hereby agree as follows:
ARTICLE I - PURCHASE AND SALE
Section 1.1 Purchase and Sale; Purchase Price. Subject to the
provisions of this Agreement, at Closing (as hereinafter defined), the Company
shall sell to the Purchasers, and the Purchasers shall purchase from the Company
1,000 shares of Series B Preferred Stock at the aggregate purchase price of
$1,000,000 (the "Purchase Price"), as follows:
<TABLE>
<CAPTION>
PURCHASER PURCHASE PRICE NO. OF SHARES
--------- -------------- -------------
<S> <C> <C>
Renaissance Capital Growth & Income $500,000 500
Fund III, Inc.
Renaissance US Growth & Income Trust, PLC $500,000 500
</TABLE>
1
<PAGE> 6
Section 1.2 Closing. The purchase and sale of the Series B Preferred
Stock pursuant to Section 1.1 (the "Closing") shall take place at the offices of
Renaissance Capital Group, Inc., 8080 North Central Expressway, Suite 210,
Dallas, Texas or at such other place as may be agreed upon by the Company and
the Purchasers, at 10:00 a.m., local time, on November 19, 1998 or at such other
time and date as may be agreed upon by the Company and the Purchasers (the
"Closing Date").
Section 1.3 Transactions at Closing. At the Closing, the Company shall
deliver to the Purchasers certificates for the shares of Series B Preferred
Stock to be issued and sold to the Purchasers hereunder duly registered in the
Purchasers' names, or in such other names as the Purchasers shall have specified
in writing to the Company, against payment in full by the Purchasers of the
Purchase Price by wire transfer of immediately available funds.
Section 1.4 Fees and Expenses. At Closing:
(a) The Company shall pay to Renaissance Capital Group, Inc.
a closing fee of $20,000.
(b) The Company shall pay the legal fees and expenses of the
Purchasers in connection with the preparation and negotiation of this Agreement
and the Closing.
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers that:
Section 2.1 Organization, Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own, lease and operate its property and assets and to conduct its business as
presently conducted and as proposed to be conducted by it. The Company has all
requisite corporate power and authority to enter into and perform its
obligations under this Agreement and to carry out the transactions contemplated
hereby. The Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on its assets, properties, condition
(financial or otherwise), operating results, prospects or business. Complete and
correct copies of the Certificate of Incorporation and Bylaws of the Company
have been delivered to the Purchasers.
Section 2.2 Capitalization. On the Closing Date, the authorized capital
stock of the Company shall consist of (a) 2,000,000 shares of preferred stock,
par value $.001 per share, of which 1,170 shares have been designated "Series A
Cumulative Convertible Preferred Stock," par value $.001 per share, of the
Company (the "Series A Preferred Stock"), and are issued and outstanding at the
Closing Date, 1,000 shares will be designated "Series B Cumulative Convertible
Preferred Stock" and no shares are issued or outstanding prior to the Closing
Date, and (b) 50,000,000 shares of common stock, par value $.001 per share (the
"Common Stock"), of which 7,212,742 shares are issued and outstanding, a total
of 3,595,818 shares are reserved for issuance pursuant to outstanding options,
warrants and debentures, 585,000 shares are reserved for issuance upon
conversion of the Series A Preferred Stock and 500,000 shares are reserved for
issuance upon conversion of the Series B Preferred Stock. The outstanding shares
of Common Stock are duly authorized and validly
2
<PAGE> 7
issued, fully paid and nonassessable and not subject to preemptive rights.
Holders of shares of the Company's capital stock have no preemptive rights or
rights of first refusal. Except for the transactions contemplated by this
Agreement and as set forth in its SEC Filings (as defined in Section 2.23
herein) or on Schedule 2.2, there are (i) no outstanding warrants, options,
convertible securities or rights to subscribe for or purchase any capital stock
or other securities from the Company, (ii) no existing rights of security
holders to require the Company to register any securities of the Company or to
participate with the Company in any registration by the Company of its
securities, (iii) to the best knowledge of the Company, no agreements among
stockholders providing for the purchase or sale of the Company's capital stock
and (iv) no obligations (contingent or otherwise) of the Company to purchase,
redeem or otherwise acquire any shares of its capital stock or any interest
therein or to pay any dividend or make any other distribution in respect
thereof. The Company is not a party or subject to any agreement or
understanding, and, to the best knowledge of the Company, there is no agreement
or understanding between any persons, that affects or relates to the voting or
giving of written consents with respect to any security or the voting by a
director of the Company.
Section 2.3 Validity of Stock. The Series B Preferred Stock, when
issued, sold and delivered in accordance with the terms of this Agreement, will
be duly authorized and validly issued, fully paid and nonassessable, and will be
free of restrictions on transfer, other than restrictions on transfer under
applicable state and federal securities laws, and not subject to preemptive
rights. The Series B Preferred Stock shall have the terms, rights and
preferences set forth in the Certificate of Designation and Preferences of
Series B Cumulative Convertible Preferred Stock, which shall have been duly
executed and filed with the Secretary of State of the State of Delaware. The
Common Stock issuable upon conversion of the Series B Preferred Stock purchased
under this Agreement has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Certification of Designation, will
be duly and validly issued, fully paid, and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under applicable
state and federal securities laws.
Section 2.4 Subsidiaries. Except as set forth in its SEC Filings or on
Schedule 2.4, the Company (i) does not own or control, directly or indirectly,
any other corporation, partnership, association or business entity and (ii) is
not a participant in any joint venture, partnership, or similar arrangement.
Section 2.5 Financial Statements. The Company has furnished the
Purchasers with the Company's (i) unaudited balance sheet as of March 31, 1998
(the "Balance Sheet") and (ii) unaudited statements of income for the period
then ended (the "Statements of Income" and, together with the Balance Sheet, the
"Financial Statements"). The Financial Statements are attached hereto as
Schedule 2.5. The Financial Statements are true and correct in all material
respects, are in accordance with the books and records of the Company and have
been prepared in accordance with generally accepted accounting principles
("GAAP") consistently applied, and fairly and accurately present in all material
respects the financial position of the Company as of such date and the results
of its operations for the period then ended. Except as described in Schedule
2.5, the Company has no material liabilities, debts or obligations, whether
accrued, absolute or contingent, other than liabilities reflected or reserved
for in the Balance Sheet or disclosed in the notes to the Financial Statements.
Except as disclosed in the Financial Statements, the Company is not a guarantor
or indemnitor of any
3
<PAGE> 8
indebtedness of any other person, firm or corporation. The Company maintains and
will continue to maintain a standard system of accounting established and
administered in accordance with GAAP.
Section 2.6 No Material Changes. Since March 31, 1998, except as set
forth in its SEC Filings or on Schedule 2.6, the Company has been operated in
the ordinary and usual course of business, and there has not been:
(a) any change in the (i) assets, liabilities, condition
(financial or otherwise) or business of the Company from that reflected in the
Balance Sheet, or (ii) operating results of the Company from that reflected in
the Statements of Income, in either case, except changes in the ordinary course
of business which have not been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, condition
(financial or otherwise), operating results, prospects or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted);
(c) any waiver or compromise by the Company of a valuable
right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and which is not individually or in the aggregate material to
the assets, properties, condition (financial or otherwise), operating results,
prospects or business of the Company (as such business is presently conducted
and as it is proposed to be conducted);
(e) any change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject, other than those that have not been, individually or in the aggregate,
materially adverse to the business of the Company;
(f) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder of the Company;
(g) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any
"officer" of the Company, as such term is defined in Rule 3b-2 promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company, to the best of its knowledge, does not know of the impending
resignation or termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or
material order cancellation by, any major customer of the Company;
4
<PAGE> 9
(j) any mortgage, pledge, transfer of a security interest in,
or lien, created by the Company with respect to any of its material properties
or assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(1) any declaration, setting aside, or payment or other
distribution in respect of any of the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of such stock by the
Company;
(m) to the best knowledge of the Company, any other event or
condition of any character which might materially adversely affect the assets,
properties, condition (financial or otherwise), operating results, prospects or
business of the Company (as such business is presently conducted and as it is
proposed to be conducted); or
(n) any agreement or commitment by the Company to do any of
the things described in this Section 2.6.
Section 2.7 Permits. The Company has all franchises, permits, licenses
and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
assets, properties, condition (financial or otherwise), operating results,
prospects or business of the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
Section 2.8 Insurance. The Company has in full force and effect fire
and casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its material
properties that might be damaged or destroyed.
Section 2.9 Authorization; Approvals. All corporate action on the part
of the Company and its stockholders necessary for the authorization, execution,
delivery and performance of all its obligations under this Agreement and for the
authorization, issuance and delivery of the Series B Preferred Stock being sold
under this Agreement and of the Common Stock initially issuable upon conversion
of the Series B Preferred Stock has been (or will be) taken prior to the
Closing. This Agreement, when executed and delivered by or on behalf of the
Company, shall constitute the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The Company has
obtained or will obtain prior to the Closing Date all necessary consents,
authorizations, approvals and orders, and has made all registrations,
qualifications, designations, declarations or filings with all federal, state or
other relevant governmental authorities required on the part of the Company in
connection with the consummation of the transactions contemplated by this
Agreement, except for such filings as may be required to be made after the
Closing in order to comply with the requirements of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Securities Act") and
applicable state laws.
5
<PAGE> 10
Section 2.10 No Conflict with Other Instruments. The execution,
delivery and performance of this Agreement will not result in any violation of,
be in conflict with, or constitute, with or without the passage of time or
giving of notice or both, a default under any terms or provisions of (i) the
Certificate of Incorporation or Bylaws of the Company; (ii) any judgment, decree
or order of any court or government agency or body having jurisdiction over the
Company or its properties; (iii) any agreement, contract, understanding,
indenture or other instrument to which the Company is a party or by which it is
bound, the effect of which would have a material adverse effect on the assets,
properties, condition (financial or otherwise), operating results, prospects or
business of the Company; or (iv) any statute, rule or governmental regulation
applicable to the Company.
Section 2.11 Labor Agreements and Actions. The Company is not bound by
or subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the best knowledge
of the Company, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the
Company pending, or, to the best knowledge of the Company, threatened, which
could have a material adverse effect on the assets, properties, condition
(financial or otherwise), operating results, prospects or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted), nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any "officer," as such
term is defined in Rule 3b-2 promulgated under the Exchange Act, intends to
terminate such person's employment with the Company, nor does the Company have a
present intention to terminate the employment of any of the foregoing persons.
Section 2.12 Title to Properties; Liens and Encumbrances. Set forth in
the SEC Filings is a description of the material real and personal property of
the Company owned, leased or licensed to or by the Company. Except as set forth
in the SEC Filings, (i) the Company has good and marketable title to all of the
properties and assets, both real and personal, tangible and intangible, that it
purports to own, including the properties and assets reflected on the Balance
Sheet (except as sold or disposed of after the date thereof in the ordinary
course of business and which in any event have not individually or in the
aggregate had a material adverse affect on the assets, properties, condition
(financial or otherwise), operating results, prospects or business of the
Company), and they are not subject to any mortgage, pledge, lien, security
interest, conditional sale agreement, encumbrance or charge except routine
statutory liens securing liabilities not yet due and payable and minor liens,
encumbrances, restrictions, exceptions, reservations, limitations and other
imperfections which do not materially detract from the value of the specific
asset affected or the present use of such asset; and (ii) the Company is not in
default or in breach of any provision of its leases or licenses other than
provisions which would not permit acceleration or termination of any such lease
or license and holds a valid leasehold or licensed interest in (y) the material
property it leases or (z) the property that is licensed to it.
Section 2.13 Compliance with Law and Other Instruments. The Company is
not in violation of any provision of (i) the Certificate of Incorporation or its
Bylaws, or (ii) any judgment, decree, order, statute, rule or governmental
regulation applicable to it, the violation of which would materially and
adversely affect the assets, properties, condition (financial or otherwise),
operating results, prospects or business of the Company. The Company is not in
violation or default in any material respect of any provision of any mortgage,
indenture, agreement, instrument or contract to
6
<PAGE> 11
which it is a party or by which it is bound. To the best knowledge of the
Company, no employee of the Company is in violation of any term of any
employment contract, patent or other proprietary information, disclosure
agreement or any other contract or agreement relating to the employment of such
employee with the Company.
Section 2.14 Patents, Trademarks and Other Intangible Assets. All
material patents, patent applications, trademarks, service marks, trade names
and copyrights, and licenses and rights to the foregoing presently owned or held
by the Company are disclosed in the SEC Filings, none of which is in dispute or
in any conflict with the right of any other person or entity where an adverse
outcome would have a material adverse affect on the assets, properties,
condition (financial or otherwise), operating results, prospects or business of
the Company. Except as disclosed in the SEC Filings, the Company (i) owns or has
the unrestricted right to use, free and clear of all liens, claims and
restrictions, all patents, trademarks, service marks, trade names, copyrights
and trade secrets, including know-how, inventions, designs, processes, works of
authorship, computer programs (with the exception of normal software purchased
and sold as such) and technical data and information (collectively, the
"Intellectual Property"), and licenses and rights with respect to the foregoing,
used in the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity, including former or current
consultants, or employees and former employers of its past and present employees
and (ii) is not obligated or under any liability whatsoever to make any payments
by way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise. There are no outstanding options, licenses
or agreements of any kind relating to the foregoing, nor is the Company bound by
or a party to any options, licenses or agreements of any kind with respect to
the patents, trademarks, service marks trade names, copyrights, trade secrets,
licenses, information and proprietary rights and processes of any other person
or entity. The Company has not received any communications alleging that the
Company has violated or, by conducting its business as proposed, would violate
any of the patents, trademarks, service marks, trade names, copyrights, trade
secrets or other proprietary rights or processes of any other person or entity.
Section 2.15 Taxes. The Company has accurately and timely filed all
federal income tax returns and all state and municipal tax returns that are
required to be filed by it and has paid or made provision for the payment of all
amounts due pursuant to such returns. The federal income tax returns of the
Company have not been audited by the Internal Revenue Service, and there are no
waivers in effect of the applicable statute of limitations for any period. No
deficiency assessment or proposed adjustment of federal income taxes or state or
municipal taxes of the Company is pending and the Company has no knowledge of
any proposed liability for any tax to be imposed.
Section 2.16 Contracts. Except as set forth in its SEC Filings or on
Schedule 2.16, the Company is not a party to any contract, and has no obligation
or commitment, in each case (i) involving aggregate payments by the Company or
having an aggregate value of more than $25,000, or (ii) that is otherwise
material to the business of the Company, or (iii) that is, or is reasonably
likely to be, materially adverse to the assets, properties, condition (financial
or otherwise), operating results, prospects or business of the Company. Except
as set forth in its SEC Filings or on Schedule 2.16, the Company has no
employment or consulting contracts, deferred compensation
7
<PAGE> 12
agreements or bonus, incentive, profit-sharing or pension plans currently in
force and effect, or any understanding with respect to any of the foregoing, or
any non-competition and confidentiality agreements between the Company and any
employee of the Company, any consultant to the Company or any other entity.
Section 2.17 Litigation. Except as set forth in its SEC Filings or on
Schedule 2.17, there is no action, proceeding or governmental inquiry or
investigation pending or, to the best knowledge of the Company, threatened
against the Company or any of its officers, directors or employees (in their
capacity as such) or any of the Company's assets or properties before any court,
arbitration board or tribunal or administrative or other governmental agency.
The foregoing includes, without limiting its generality, actions pending or
known to the Company to be threatened involving (i) the prior employment of any
of the Company's employees or use by any of them in connection with the
Company's business of any information, property or techniques allegedly
proprietary to any of their former employers or (ii) any prior employees of the
Company in connection with rights to the Intellectual Property or any portion
thereof. The Company is not a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or governmental agency or
instrumentality. There is no action, suit or proceeding by the Company currently
pending, or that the Company intends to initiate.
Section 2.18 Securities Laws. Assuming the accuracy of the
representations and warranties of the Purchasers set forth in Article III
hereof, the offer, sale and issuance of the shares of Series B Preferred Stock
to the Purchasers as provided herein are and will be exempt from the
registration and prospectus delivery requirements of the Securities Act and have
been registered or qualified (or are exempt from registration or qualification)
under all applicable state registration or qualification requirements.
Section 2.19 Fees and Commissions. The Company has not retained any
finder, broker, agent, financial advisor or other intermediary (collectively
"Intermediary") in connection with the transactions contemplated by this
Agreement, and the Company shall indemnity and hold harmless the Purchasers from
liability for any compensation to any Intermediary and the fees and expenses of
defending against such liability or alleged liability.
Section 2.20 Interested Party Transactions. Except as disclosed in its
SEC Filings, no executive officer or director of the Company or holder of more
than five percent (5%) of the capital stock of the Company or, to the best of
the Company's knowledge, any "affiliate" or "associate" (as these terms are
defined in Rule 405 promulgated under the Securities Act) of any such person or
entity or the Company has or has had, either directly or indirectly, (a) an
interest in any person or entity which (i) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or sold by
the Company, or (ii) purchases from or sells or furnishes to the Company any
goods or services, or (b) a beneficial interest in any material contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as disclosed in its SEC Filings, there are no existing material
arrangements or proposed material transactions between the Company and any
officer, director or holder of more than five percent (5%) of the capital stock
of the Company, or, to the best of the Company's knowledge, any affiliate or
associate of any such person.
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Section 2.21 ERISA. The Company does not maintain, sponsor, or
contribute to any program or arrangement that is an "employee pension benefit
plan," an "employee welfare benefit plan," or a "multi-employer plan", as those
terms are defined in Sections 3(2), 3(l), and 3(37) of the Employee Retirement
Income Security Act of 1974, as amended.
Section 2.22 Environmental and Safety Laws. To the best knowledge of
the Company, the Company is not in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and no
material expenditures are or will be required in order to comply with any such
existing statute, law or regulation.
Section 2.23 SEC Reports. The Company has filed all reports,
registration or proxy statements, forms and documents with the SEC that it was
required to file since the date of the initial public offering of its Common
Stock (the "SEC Filings"), all of which have complied in all material respects
with all applicable requirements of the Securities Act and the Exchange Act. As
of their respective dates, each of the SEC Filings, including, without
limitation, any financial statements or schedules included therein, did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. None of
the Company's subsidiaries is required to file any reports, statements, forms or
other documents with the SEC.
Section 2.24 Full Disclosure. Neither the representations and
warranties or the schedules to this Agreement contain 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.
ARTICLE III - REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
PURCHASERS
The Purchasers represent and warrant to the Company that:
Section 3.1 Authorization; Approvals; No Conflicts. All corporate
action on the part of the Purchasers necessary for the authorization, execution,
delivery and performance of all their obligations under this Agreement has been
or will be taken prior to the Closing. This Agreement, when executed and
delivered by or on behalf of the Purchasers, shall constitute the valid and
binding obligation of the Purchasers, enforceable against the Purchasers in
accordance with its terms. The Purchasers have obtained or will obtain prior to
the Closing Date all necessary consents, authorizations, approvals and orders,
and have made all registrations, qualifications, designations, declarations or
filings with all federal, state or other relevant governmental authorities
required on the part of the Purchasers in connection with the consummation of
the transactions contemplated by this Agreement. The execution, delivery and
performance of this Agreement will not result in any violation of, be in
conflict with, or constitute, with or without the passage of time or giving of
notice or both, a default under any terms or provisions of (i) the respective
Certificates of Incorporation or Bylaws of the Purchasers; (ii) any judgment,
decree or order of any court or government agency or body having jurisdiction
over the Purchasers or their properties; (iii) any agreement, contract,
understanding, indenture or other instrument to which the Purchasers are a party
or by which they are bound, the effect of which would have a material adverse
effect on the assets, properties,
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condition (financial or otherwise), operating results, prospects or business of
the Purchasers; or (iv) any statute, rule or governmental regulation applicable
to the Purchasers.
Section 3.2 Investment Representations. The Purchasers are acquiring
the Series B Preferred Stock (and any Common Stock into which the Series B
Preferred Stock may be converted) for the Purchasers' own accounts, for
investment purposes and not with a view to, or for sale in connection with, any
distribution of such shares.
Section 3.3 Investment Experience; Access to Information. The
Purchasers are "accredited investors," as that term is defined in Rule 501(a)
promulgated under the Securities Act. The Purchasers have been afforded prior to
the Closing Date the opportunity to ask questions of, and to receive answers
from, the Company and to obtain any additional information, written and oral, to
the extent the Company has such information or could have acquired it without
unreasonable effort or expense, all as necessary for the Purchasers to make an
informed investment decision with respect to the purchase of the Series B
Preferred Stock.
Section 3.4 Restrictions on Transfer. The Purchasers agree that (a)
they will not offer, sell, transfer, give, pledge, hypothecate or otherwise
dispose of the Series B Preferred Stock (or the Common Stock into which it may
be converted) or make any attempt to do the foregoing unless such offer, sale,
transfer, gift, pledge, hypothecation or other disposition is (i) registered
under the Securities Act and any applicable state securities law, or (ii) in
compliance with an opinion of counsel to the Purchasers, delivered to the
Company and reasonably acceptable to counsel for the Company, to the effect that
such offer, sale, pledge, hypothecation or other disposition thereof does not
violate the Securities Act or applicable state securities law, and (b) the
certificate(s) representing the Series B Preferred Stock (and any Common Stock
into which it may be converted) shall bear a legend stating in substance:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS AND ARE
"RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144
UNDER THE ACT. NEITHER THE SHARES NOR ANY INTEREST THEREIN MAY
BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND SUCH STATE SECURITIES LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY TO THE COUNSEL FOR
THIS CORPORATION, IS AVAILABLE.
Upon request of a holder of Series B Preferred Stock (or the Common
Stock into which it has been converted), the Company shall remove the legend set
forth above from the certificates
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evidencing such Series B Preferred Stock or Common Stock or issue to such holder
new certificates therefor free of such legend, if with such request the Company
shall have received an opinion of counsel selected by the holder and reasonably
satisfactory to the Company, in form and substance reasonably satisfactory to
the Company, to the effect that such Series B Preferred Stock or Common Stock is
not required by the Securities Act to continue to bear the legend.
Section 3.5 Transfer Instructions. The Purchasers agree that the
Company may provide for appropriate transfer instructions to implement the
provisions of Section 3.4 hereof.
Section 3.6 Fees and Commissions. The Purchasers have retained no
Intermediary in connection with the transactions contemplated by this Agreement,
and the Purchasers agree to indemnify and hold harmless the Company from
liability for any compensation to any Intermediary and the fees and expenses of
defending against such liability or alleged liability.
ARTICLE IV - CONDITIONS TO CLOSING OF THE PURCHASERS
The obligation of the Purchasers on the Closing Date to purchase the
Series B Preferred Stock shall be subject to each of the following conditions
precedent, any one or more of which may be waived by the Purchasers:
(a) Representations and Warranties. The representations and
warranties made by the Company herein shall be true and accurate in all material
respects on and as of the Closing Date as if made on the Closing Date.
(b) Performance. The Company shall have performed and complied
with all agreements and conditions contained herein and other documents incident
to the transactions contemplated by this Agreement required to be performed or
complied with by it prior to or at the Closing.
(c) Consents. The Company shall have secured all permits,
consents and authorizations that shall be necessary or required lawfully to
consummate the transactions contemplated by this Agreement, to issue the Series
B Preferred Stock to be purchased by the Purchasers and to issue the Common
Stock into which the Series B Preferred Stock may be converted.
(d) Compliance Certificates. The Company shall have delivered
to the Purchasers or their representative at the Closing an Officer's
Certificate to the effect that all conditions specified in subsections (a) to
(c), inclusive, have been fulfilled.
(e) Opinion of the Company's Counsel. The Purchasers shall
have received from counsel for the Company, a legal opinion, dated the Closing
Date and satisfactory in form and substance to the Purchasers, substantially in
the form attached hereto as EXHIBIT B.
(f) Certificate of Designation. The Certificate of Designation
shall have been duly filed with the Secretary of State of the State of Delaware.
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(g) Proceedings and Documents. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement
and all documents and instruments incident to such transactions shall be
reasonably satisfactory in substance and form to the Purchasers, and the
Purchasers shall have received all such counterpart originals or certified or
other copies of such documents as the Purchasers may reasonably request.
ARTICLE V - CONDITIONS TO CLOSING OF THE COMPANY
The obligation of the Company on the Closing Date to issue and sell the
Series B Preferred Stock to be purchased under this Agreement shall be subject
to the representations and warranties made by the Purchasers herein being true
and accurate on and as of such Closing Date.
ARTICLE VI - REGISTRATION RIGHTS
Section 6.1 Shelf Registration. The Company shall file a "shelf"
registration statement on an appropriate form under the 1933 Act (the "Shelf
Registration") covering all of the Common Stock into which the Series B
Preferred Stock is convertible (the "Registrable Securities") within ninety (90)
days from the 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 Securities 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 Securities Act. The Company agrees, if
necessary, to supplement or amend the Shelf Registration, as required by the
registration form utilized by the Company or by the instructions applicable to
such registration form or by the Securities Act, and the Company agrees to
furnish to the holders of the Registrable Securities copies of any such
supplement or amendment prior to its being used.
Section 6.2 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities pursuant to this Agreement, the
Company shall, as expeditiously as reasonably possible:
(a) Furnish to the Purchasers such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them;
(b) 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
Purchasers, provided that the Company 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;
(c) Notify each Purchaser of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto and
covered by such registration statement
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is required to be delivered under the Securities 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
(d) In the event of the notification provided for in Section
6.2(c) above, the Company shall use its best efforts to prepare and file with
the SEC (and to provide copies thereof to the Purchasers) as soon as reasonably
possible an amended prospectus complying with the Securities Act.
(e) For so long as any Purchaser holds beneficially or of
record (including shares issuable upon the conversion of the Series B Preferred
Stock) five percent (5%) or more of the shares of Common Stock from time to time
outstanding, such Purchaser shall agree to any restrictions on its resale of the
Registrable Securities, whether in public or non-public transactions, for a
period not in excess of ninety (90) days in any period of twelve (12)
consecutive months, as required by the managing underwriter, representative or
selling agent of any public or private offering of securities by the Company and
shall execute and deliver to the Company and such managing underwriter,
representative or selling agent an agreement to such effect, if each other
director and executive officer of the Company and holder of five percent (5%) or
more of the shares of Common Stock from time to time outstanding likewise agrees
to such restrictions on resale and executes and delivers such an agreement.
Section 6.3 Expenses of Registration. All expenses (other than
underwriting discounts and commissions) incurred in connection with the
registration or sale of the Registrable Securities pursuant to this Section,
including, without limitation, all registration, filing and qualification fees,
printer's expenses, and accounting and legal fees and expenses of the Company,
shall be borne by the Company.
Section 6.4 Indemnification Regarding Registration Rights. If any
Registrable Securities are included in a registration statement under this
Section:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Purchaser, the officers and directors of each Purchaser
and each person, if any, who controls such Purchaser or underwriter within the
meaning of the Securities Act or the Exchange 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 to which they may become subject
under the Securities Act, the Exchange 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 the
Company 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 the Company 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 the Company of the
Securities Act, the Exchange Act, any federal or state securities law or any
rule or regulation promulgated under the
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Securities Act, the Exchange Act or any state securities law. Notwithstanding
the foregoing, the indemnity agreement contained in this Section 6.4(a) shall
not apply and the Company 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 Purchaser, 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 the Company, which consent shall not be unreasonably withheld.
(b) To the extent permitted by law, each Purchaser who
participates in a registration pursuant to the terms and conditions of this
Agreement shall indemnify and hold harmless the Company, each of its directors
and officers who have signed the registration statement, each Person, if any,
who controls the Company within the meaning of the Securities Act or the
Exchange Act, each of the Company's employees, agents, counsel and
representatives, any underwriter and any other Purchaser selling securities in
such registration statement, or any of its directors or officers, or any person
who controls such Purchaser, against any losses, claims, damages, costs,
expenses, liabilities (joint or several) to which the Company or any such
director, officer, controlling person, employee, agent, representative,
underwriter, or other such Purchaser, or director, officer or controlling person
thereof, may become subject, under the Securities Act, the Exchange 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 Purchaser expressly for use in connection with such. Each such
Purchaser will indemnify any legal or other expenses reasonably incurred by the
Company or any such director, officer, employee, agent representative,
controlling person, underwriter or other Purchaser, 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 6.4(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 Purchaser, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this
Section 6.4 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 6.4, 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 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 6.4, except
to the extent that the failure results in a failure of actual notice to the
indemnifying
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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 6.4 is
unavailable to an indemnified party under this Section 6.4 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
the Company, on the one hand and of the Purchaser, on the other, in connection
with the Violation that resulted in such losses, claims, damages, costs,
expenses, liabilities or actions. The relative fault of the Company, on the one
hand, and of the Purchaser, 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 the Company or by the Purchaser, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) The Company, on the one hand, and the Purchasers, on the
other hand, agree that it would not be just and equitable if contribution
pursuant to this Section 6.4 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 6.4, neither the Company nor the Purchasers 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 the Company or each such Purchaser 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 Securities Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
Section 6.5 Reports Under the Exchange Act. So long as the Company has
a class of securities registered pursuant to Section 12 of the Exchange Act,
with a view to making available to the Purchasers the benefits of Rule 144 under
the Securities Act and any other rule or regulation of the SEC that may at any
time permit a Purchaser to sell securities of the Company to the public without
registration or pursuant to a shelf registration on Form S-3, if applicable, the
Company agrees to use its reasonable efforts to:
(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 the Company under the Securities Act and the Exchange Act;
(c) Use its best efforts to include, upon notice of issuance,
all Common Stock covered by such registration statement on NASDAQ National
Market if the Common Stock is then
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<PAGE> 20
quoted on NASDAQ National Market; 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
National Market or listed on any national securities exchange, use its best
efforts to have such Common Stock covered by such registration statement quoted
on NASDAQ National Market or, at the option of the Company, listed on a national
securities exchange; and
(d) Furnish to any Purchaser, so long as the Purchaser owns
any Registrable Securities, (i) forthwith upon request a copy of the most recent
annual or quarterly report of the Company and such other SEC reports and
documents so filed by the Company, and (ii) such other information (but not any
opinion of counsel) as may be reasonably requested by any Purchaser seeking to
avail itself of any rule or regulation of the SEC which permits the selling of
any such securities without registration or pursuant to such form.
Section 6.6 Assignment of Registration Rights. Subject to the terms and
conditions of this Agreement, the right to cause the Company to register
Registrable Securities pursuant to this Agreement may be assigned by Purchaser
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 the Company 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 Securities Act; it being the intention that so long as
Purchaser holds any Registrable Securities hereunder, either Purchaser or its
transferee or assignee of at least ten percent may exercise the 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.
ARTICLE VII - MISCELLANEOUS
Section 7.1 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto and supersedes all prior agreements and
understandings, oral and written, between the parties hereto with respect to the
subject matter hereof. No party shall be liable or bound to any other party in
any manner by any warranties, representation, or covenants except as
specifically set forth herein or therein.
Section 7.2 Survival of Representations and Warranties. The warranties,
representations and covenants of the Company and the Purchasers contained in or
made pursuant to this Agreement shall survive the execution and delivery of this
Agreement and the Closing.
Section 7.3 Notices. All notices, requests, demands, consents and other
communications herein shall be in writing and shall be deemed, unless otherwise
specified herein, to have been duly given if personally delivered or mailed,
first-class certified mail, postage prepaid and return receipt requested or sent
by recognized overnight courier service or transmitted by telex or facsimile, as
follows:
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(a) If to the Company:
LifeQuest Medical, Inc.
12961 Park Central, Suite 1300
San Antonio, Texas 78216
Attention: Chief Financial Officer
Facsimile number: (210) 495-4441
with a copy to (which shall not constitute
effective notice to the Company):
Fulbright & Jaworski L.L.P.
300 Convent Street, Suite 2200
San Antonio, Texas 78205
Attention: Phillip M. Renfro, Esq.
Facsimile number: (210) 270-7205
(b) If to the Purchasers:
Renaissance Capital Growth & Income Fund III, Inc.
Renaissance US Growth & Income Trust, PLC
8080 North Central Expressway, Suite 210-LB59
Dallas, Texas 75206
Attention: President
Facsimile number: (214) 891-8291
with a copy to (which shall not constitute
effective notice to the Purchasers):
Wolin, Ridley & Miller LLP
3100 Bank One Center
1717 Main Street
Dallas, Texas 75201
Attn: Norman R. Miller, Esq.
Facsimile number: (214) 939-4949
or such other addresses as each of the parties hereto may provide from time to
time in writing to the party. For purposes of computing the time periods set
forth in this Section 7.3, the delivery date shall be deemed to be (i) three (3)
days after the date of mailing, (ii) the date personally delivered or sent by
telex or facsimile, or (iii) the business day after the date sent by recognized
overnight courier service.
Section 7.4 Amendments. Any term of this Agreement may be amended only
with the written consent of the Company and the Purchasers. Any amendment
effected in accordance with this paragraph shall be binding upon each holder of
Series B Preferred Stock purchased under this
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Agreement at the time outstanding (including Common Stock into which such Series
B Preferred Stock have been converted), each future holder of such securities,
and the Company.
Section 7.5 Waiver and Consent. No action taken pursuant to this
Agreement, including any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any party hereto or a breach of any representations, warranties, covenants or
agreements contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
preceding or succeeding breach, and no failure by any party to exercise any
right or privilege hereunder shall be deemed a waiver of such party's rights or
privileges hereunder or shall be deemed a waiver of such party's rights to
exercise the same at any subsequent time or times hereunder.
Section 7.6 Successors and Assigns. Except as otherwise expressly
provided in this Agreement, all of the terms of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective successors
and assigns of the parties hereto (including permitted transfers of any shares
of Series B Preferred Stock sold hereunder or any Common Stock issued upon
conversion thereof).
Section 7.7 Rights of Purchasers. The Purchasers shall have the
absolute right to exercise or refrain from exercising any right or rights that
the Purchasers may have by reason of this Agreement or any Series B Preferred
Stock, including the right to consent to the waiver of any obligation of the
Company under this Agreement and to enter into any agreement with the Company
for the purpose of modifying this Agreement or any agreement effecting any such
modification.
Section 7.8 Execution and Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original, and
all of which together shall constitute one instrument.
Section 7.9 No Third Party Beneficiaries. Except as otherwise provided,
this Agreement has been and is made solely for the benefit of and shall be
binding upon the Company and the Purchasers and no other person shall acquire or
have any rights under or by virtue of this Agreement.
Section 7.10 Severability. Any provision of this Agreement that is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or lack of authorization without invalidating the remaining
provisions hereof or affecting the validity, unenforceability or legality of
such provision in any other jurisdiction.
Section 7.11 GOVERNING LAW. THIS AGREEMENT AND THE LEGAL RELATIONS
AMONG THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ITS CONFLICTS OF LAW DOCTRINE.
18
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the date first above written.
COMPANY:
LIFEQUEST MEDICAL, INC.
By:
------------------------------------------
Randall K. Boatright
Vice President and Chief Financial Officer
PURCHASERS:
RENAISSANCE CAPITAL GROWTH & INCOME
FUND III, INC.
By:
------------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
RENAISSANCE US GROWTH & INCOME
TRUST, PLC
By: Renaissance Capital Group, Inc.,
Investment Manager
By:
---------------------------------
Name:
--------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 10.33
AMENDED EMPLOYMENT AGREEMENT
This Amended Employment Agreement is made by and between
LifeQuest Medical, Inc. (the "Company"), located at 12961 Park Central, Suite
1300, San Antonio, Texas 78216, and Richard A. Woodfield ("Employee"), whose
address is 604 Mountain View Drive, Wayne, Pennsylvania 19087, and amends the
Employment Agreement dated effective May 11, 1998 between the Company and
Employee (the "Previous Employment Agreement").
ARTICLE 1
COMPENSATION AND TERM
1.01 Basic Compensation. As compensation for the services to be
rendered hereunder, the Company shall pay Employee a salary at a rate not less
than $14,583.33 per month ("Base Salary"), subject to standard deductions, which
shall be payable in at least monthly installments during the Initial Term (as
hereinafter defined) and each Extension Term (as hereinafter defined), if any.
Such basic compensation shall be subject to annual review for possible increase
by the Compensation Committee of the Board of Directors of the Company based
upon Employee's performance, as determined at the discretion of the Company's
Compensation Committee based in part upon the achievement of goals agreed upon
by the Board of Directors of the Company and Employee, the performance of the
Company's stock price and the earnings of the Company. In addition, the Company
and the Employee have entered into a Non-Qualified Stock Option Agreement of
even date herewith pursuant to which the Company has granted to Employee
non-qualified stock options to purchase up to 350,000 shares of Common Stock,
$.001 par value, of the Company upon the terms and conditions set forth in such
agreement.
1.02 Incentive Compensation. Employee shall be eligible to receive
an annual cash bonus in an amount up to 200% of Employee's Base Salary, the
amount of which shall be determined by the Compensation Committee of the Company
in its sole discretion and shall be based upon Employee's performance, the
achievement of goals agreed upon by the Board of Directors of the Company and
Employee, the performance of the Company's stock price and the earnings of the
Company, all as determined in the sole discretion of the Company's Compensation
Committee. Any such bonus shall be paid by the Company within 90 days after the
end of each calendar year.
1.03 Term. Subject to earlier termination pursuant to Article 5
hereof, the initial term (the "Initial Term") of this Agreement shall be three
(3) years commencing as of the execution date of this Agreement and ending on
May 10, 2002; provided, however, the Initial Term shall be automatically
extended for successive periods of one (1) year each (each such one-year period,
an "Extension Term") unless either party shall have given to the other party
written notice of termination not less than sixty (60) days prior to the end of
the Initial Term or the Extension Term then in effect, as the case may be.
<PAGE> 2
ARTICLE 2
DUTIES OF EMPLOYEE
2.01 Duties. The Company hereby employs Employee to serve as
President and Chief Executive Officer of the Company or in such other capacities
as may be agreed upon by the Board of Directors of the Company and Employee from
time to time, and Employee agrees to perform the customary duties of such
offices in accordance with the bylaws of the Company and as the Board of
Directors of the Company may direct from time to time. Employee will be the
chief executive officer of the Company and, therefore, will report only to the
Board of Directors.
2.02 Other Activities. During the Initial Term and each Extension
Term, if any, Employee shall devote substantially all of his full-time efforts
to his duties hereunder and will not undertake any material business commitments
without obtaining the prior consent of the Board of Directors of the Company,
which consent may be granted or withheld in the sole discretion of the Board of
Directors of the Company.
ARTICLE 3
EMPLOYEE BENEFITS
3.01 Medical and Dental Benefits. The Company agrees to include
Employee in any hospital, surgical, medical, disability and dental benefit
plan(s) that it may adopt for its employees.
3.02 Temporary Housing Arrangements and Living Expenses. The
Company will reimburse Employee for reasonable temporary living arrangements and
living expenses for a period of up to twelve (12) months after the execution
date hereof; provided, however, the amount which shall be reimbursed by the
Company to Employee shall not exceed $2,000 per month. Arrangements for
temporary living accommodations will be made by the Company through its
administrative staff.
3.03 Attorneys' Fees. The Company will reimburse Employee for
reasonable attorneys' fees charged to Employee by the firm of Saul, Ewing,
Remick & Saul in connection with the negotiation of this Agreement.
3.04 Other Benefits. Employee shall be entitled to reasonable and
customary holidays and other benefits that are available to senior management or
key employees, including three weeks paid vacation.
ARTICLE 4
OBLIGATIONS OF THE COMPANY
4.01 Office and Support Staff. The Company shall provide Employee
with such support services as are reasonable to Employee's position or required
for the performance of his duties.
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<PAGE> 3
ARTICLE 5
TERMINATION OF EMPLOYMENT
5.01 Termination by the Company for Cause. The Company may at its
option terminate this Agreement for Cause (as hereinafter defined) by giving 10
days written notice of termination to Employee. Any such notice shall specify
with particularity the events or circumstances which the Board of Directors of
the Company has determined constituted such Cause.
The term "Cause" shall be limited to the occurrence of the following
events, as determined by the Board of Directors of the Company in its sole
judgment: (i) Employee breaches any of the material terms of this Agreement and
fails to remedy such breach within 10 days following written notice by the
Company to Employee of such breach; (ii) Employee is convicted of a felony;
(iii) Employee fails, after at least one written warning from the Company, to
perform duties assigned under this Agreement (other than a failure due to death
or physical or mental disability); (iv) Employee intentionally engages in
conduct which is demonstrably and materially injurious to the Company; (v)
Employee commits fraud or theft of personal or Company property from Company
premises; (vi) Employee falsifies Company documents or records; (vii) Employee
engages in acts of gross carelessness or willful negligence to endanger life or
property on Company premises; (viii) Employee engages in sexual harassment
involving employees of the Company or on premises of the Company or with respect
to business of the Company; (ix) Employee uses, distributes, possesses or is
under the influence of illegal drugs, alcohol or any other intoxicant on Company
premises; or (x) Employee intentionally violates state, federal or local laws
and regulations relating to the business of the Company. Any notice referred to
in the preceding sentence shall state with particularity the events or
circumstances which the Board of Directors of the Company has determined
constituted such Cause.
5.02 Option to Terminate if Employee Permanently Disabled, Etc.
The Company shall have the option to terminate this Agreement immediately by
giving written notice of termination to Employee upon the occurrence of any one
of the following events:
(a) Employee becomes permanently disabled because of sickness,
physical or mental disability, or any other reason, so that it
reasonably appears to the Board of Directors of the Company that
Employee will be unable to perform the essential aspects of his duties
under this Agreement;
(b) The death of Employee; or
(c) The continued incapacity on the part of Employee to perform
his duties for a continuous period of 60 days, unless waived by the
Company, and a reasonable determination by the Board of Directors of
the Company that Employee has not performed his duties during such
period.
5.03 Effect of Termination on Compensation. In the event of the
termination of this Agreement prior to the expiration of the Initial Term or the
Extension Term then in effect, as the case may be, pursuant to Section 5.01 or
Section 5.02, Employee shall be entitled to Employee's Base
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<PAGE> 4
Salary (subject to standard deductions) at the rate then in effect to the date
of such termination, computed pro rata up to and including that date, and
Employee shall be entitled to no further compensation after the date of such
termination.
5.04 Company's Option to Terminate. This Agreement may be
terminated by the Company immediately at any time without Cause pursuant to this
Section 5.04 upon notice given by the Company to the Employee, after due
authorization by the Board of Directors. Such notice shall specify the date when
such termination shall be effective. A notice given by the Company pursuant to
Section 1.03 to terminate this Agreement at the end of the Initial Term or any
Extension Term, as the case may be, shall be deemed to be a termination without
Cause pursuant to this Section 5.04. In the event of the termination of this
Agreement by the Company without Cause pursuant to this Section 5.04, the
Company shall continue to pay to Employee, not less frequently than monthly, his
Base Salary (subject to standard deductions) at the rate in effect as of such
termination from the date of such termination through the date which is the
latest to occur of the following: (a) the date on which the Initial Term or
Extension Term then in effect, as the case may be, expires, (b) the date which
is twelve (12) months after the date of the Company's termination of this
Agreement without Cause pursuant to this Section 5.04 or (c) the date on which
the Non-Competition Period (as hereinafter defined) expires. As used herein, the
term "Non-Competition Period" shall mean the two-year period after the
termination of this Agreement referred to in Section 6.08; provided, however, in
the event that the Company shall give notice to Employee pursuant to this
Section 5.04 that the Company shall not require Employee to comply with the
provisions of Section 6.08 after a date prior to the expiration of such two-year
period after the termination of this Agreement, the "Non-Competition Period"
shall mean the period commencing on the date of the termination of this
Agreement and ending on the date specified in the Company's notice respecting
the shortening or elimination of the period for compliance with Section 6.08, as
the case may be. The Company shall have no further obligations to Employee
hereunder after the termination of this Agreement pursuant to this Section 5.04
except for the payments of Base Salary as set forth in this Section 5.04.
5.05 Survival of Provisions. The terms and provisions of this
Article 5 shall survive the termination of this Agreement and shall be fully
enforceable despite and after any such termination.
ARTICLE 6
PROPRIETARY PROPERTY; CONFIDENTIAL
INFORMATION; NON-COMPETITION
6.01 Duties. Employee understands and agrees that, during the
Initial Term and each Extension Term, if any, Employee's duties will include the
conception of improvements and inventions (whether or not ultimately issuing as
Letters Patent in any country), the creation of confidential information
protected by the Company as trade secrets and the authoring of "works" as
defined under the copyright laws of the United States of America found in 17
United States Code. Such information is collectively referred to in this
Agreement as "Proprietary Information".
6.02 Ownership. Employee understands and agrees that for all
Proprietary Information created within the scope of Employee's employment, the
Company shall own all right,
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<PAGE> 5
title and interest thereto. In the case of works authored or created by
Employee, such works are considered a "work made for hire" under 17 United
States Code ss. 101 - the copyright laws. All Proprietary Information, if any,
created by Employee prior to his employment with the Company, and in which
Employee claims ownership, is shown in Schedule 6.02 attached hereto.
6.03 Notice and Assistance. Employee shall give adequate written
notice to the Company as soon as practicable of all Proprietary Information
created by Employee during Employee's employment with the Company, assist the
Company in evaluating the Proprietary Information for patent, trade secret and
copyright protection and sign all documents and do all things necessary at the
expense of the Company to assist the Company in the protection, development,
marketing or transfer of such Proprietary Information.
6.04 Assignment. Employee hereby assigns and agrees to assign all
right, title and interest into such Proprietary Information to the Company or
its nominee. At the request of the Company, whether during or after the
termination of Employee's employment, Employee shall timely execute or join in
executing all papers or documents required for the filing of patent applications
and copyright registrations in the United States of America and such foreign
countries as the Company may in its sole discretion select, and shall assign all
such patent applications and copyrights to the Company or its nominee, and shall
provide the Company or its agent or attorneys with all reasonable assistance in
the preparation and prosecution of patent application and copyright
registrations, including drawings, specifications, and the like, all at the
expense of the Company, and shall do all that may be necessary to establish,
protect or maintain the rights of the Company or its nominee in the inventions,
patent applications, Letters Patent and copyrights in accordance with the spirit
of this Agreement.
6.05 Confidential Information. Employee agrees to keep
confidential all information protected by the Company as trade secrets during
the Initial Term and each Extension Term, if any, (including any leaves of
absence) and will neither use nor disclose the confidential information without
written authorization by the Company for ten years thereafter. For the purposes
of this Agreement, such confidential information shall include information set
forth in any application for Letters Patent unless and until such information is
ultimately published. The Company and Employee mutually agree that the following
types of information shall not be protected by this Agreement:
(a) Information already in the public domain at the time Employee
received it;
(b) Information which although disclosed in confidence to Employee
is later disseminated by the Company into the public domain;
(c) Information which although received in confidence by Employee
is subsequently disseminated into public domain by a third party who has
not breached any duty to any other party in disseminating such information;
and
(d) Information given by the Company in confidence to Employee
which Employee is expressly authorized in writing by the Company to use or
disclose thereafter.
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<PAGE> 6
Employee also understands and agrees that he will maintain in confidence all
information known to him by reason of his employment even if such information is
included in a redacted deposit of a work filed with an application for copyright
registration, if such deposit has been abridged in order to protect the
confidentiality of the information deposited with the Copyright Office. For
purposes of this Agreement, a trade secret "...may consist of any formula,
pattern, device or compilation of information which is used in one's business,
and which gives him an opportunity to obtain an advantage over competitors who
do not know or use it. It may be a formula for a chemical compound, a process of
manufacturing, trading or preserving materials, a pattern for machine or other
device, or a list of customers..." as commonly interpreted by the courts of the
State of Texas. Upon the termination of this Agreement, regardless of how such
termination may be brought about, Employee shall deliver to the Company any and
all documents, instruments, notes, papers or other expressions or embodiments of
Proprietary Property or confidential information which are in Employee's
possession or control.
6.06 Publicity. During the Initial Term and each Extension Term,
if any, and for a period of ten years thereafter, Employee shall not, directly
or indirectly, originate or participate in the origination of any publicity,
news release or other public announcements, written or oral, whether to the
public press or otherwise, relating to this Agreement, to any amendment hereto,
to Employee's employment hereunder or to the Company, without the prior written
approval of the Company.
6.07 Fiduciary Relationship. Notwithstanding any provision of
Section 2.02 which may permit Employee to engage in business activities other
than Employee's duties hereunder, Employee, by virtue of his high position of
trust and reliance on him by the Company, understands that Employee enjoys a
fiduciary relationship with the Company in carrying out his obligations under
this Agreement. Accordingly, Employee agrees to honor his obligations under this
Agreement by conducting himself with the highest degree of fairness and trust
toward the Company.
6.08 Non-Competition. Notwithstanding any provision of Section
2.02 which may permit Employee to engage in business activities other than
Employee's duties hereunder, in consideration of the benefits of this Agreement,
including Employee's access to and limited use of proprietary and confidential
information of the Company, as well as training, education and experience
provided to Employee by the Company directly and/or as a result of work projects
assigned by the Company with respect thereto, Employee hereby covenants and
agrees that during the Initial Term and each Extension Term, if any, and for a
period of two years following termination of this Agreement, Employee shall not,
directly or indirectly, as proprietor, partner, stockholder, director, officer,
employee, consultant, joint venturer, investor or in any other capacity, engage
in, or own, manage, operate or control, or participate in the ownership,
management, operation or control, of any entity which engages, in the United
States or Canada, in any business activity in which the Company participates
during Employee's employment with the Company; provided, however, the foregoing
shall not prohibit Employee from purchasing and holding as an investment not
more than 5% of any class of publicly traded securities, or 10% of any class of
other securities, of any entity which is engaged in the design, manufacturing,
marketing, sale or distribution of minimally invasive surgery products, so long
as Employee does not participate in any way in the management, operation or
control of such entity.
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<PAGE> 7
6.09 Judicial Reformation. Employee acknowledges that, given the
nature of the Company's business, the covenants contained in Section 6.08
establish reasonable limitations as to time, geographic area and scope of
activity to be restrained and do not impose a greater restraint than is
reasonably necessary to protect and preserve the goodwill of the Company's
business and to protect its legitimate business interests. If, however, Section
6.08 is determined by any court of competent jurisdiction to be unenforceable by
reason of its extending for too long a period of time or over too large a
geographic area or by reason of it being too extensive in any other respect or
for any other reason, it will be interpreted to extend only over the longest
period of time for which it may be enforceable and/or over the largest
geographic area as to which it may be enforceable and/or to the maximum extent
in all other aspects as to which it may be enforceable, all as determined by
such court.
6.10 Customer Lists; Non-Solicitation. In consideration of the
benefits of this Agreement, including Employee's access to and limited use of
proprietary and confidential information of the Company, as well as training,
education and experience provided to Employee by the Company directly and/or as
a result of work projects assigned by the Company with respect thereto, Employee
hereby further covenants and agrees that, notwithstanding any provision of
Section 2.02 which may permit Employee to engage in business activities other
than Employee's duties hereunder, during the Initial Term and each Extension
Term, if any, and for a period of one year following the termination of this
Agreement, Employee shall not, directly or indirectly, (a) use or make known to
any person or entity the names or addresses of any clients or customers of the
Company or any other information pertaining to them, (b) call on, solicit, take
away or attempt to call on, solicit or take away any clients or customers of the
Company on whom Employee called or with whom he became acquainted during his
employment with the Company, nor (c) recruit, hire or attempt to recruit or hire
any employees of the Company.
6.11 Equitable Relief. In the event of a breach or a threatened
breach by Employee of any of the provisions contained in Article 6 of this
Agreement, Employee acknowledges that the Company will suffer irreparable injury
not fully compensable by money damages and, therefore, will not have an adequate
remedy available at law. Accordingly, the Company shall be entitled to obtain
such injunctive relief or other equitable remedy from any court of competent
jurisdiction as may be necessary or appropriate to prevent or curtail any such
breach, threatened or actual. The foregoing shall be in addition to and without
prejudice to any other rights that the Company may have under this Agreement, at
law or in equity, including, without limitation, the right to sue for damages.
6.12 Survival of Provisions. The terms and provisions of this
Article 6 shall survive the termination of this Agreement and shall be fully
enforceable despite and after any such termination.
ARTICLE 7
GENERAL PROVISIONS
7.01 Notices. All notices or other communications required under
this Agreement may be effected either by personal delivery in writing or by
certified mail, return receipt requested. Notice shall be deemed to have been
given when delivered or mailed to the parties at their respective
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<PAGE> 8
addresses as set forth above or when mailed to the last address provided in
writing to the other party by the addressee.
7.02 Entirety of Agreement. This Agreement supersedes all
other agreements, including the Previous Employment Agreement, either oral or in
writing, between the parties to this Agreement, with respect to the employment
of the Employee by the Company. This Agreement contains the entire understanding
of the parties and all of the covenants and agreements between the parties with
respect to such employment. The Previous Employment Agreement is hereby
terminated as of the date of this Agreement.
7.03 Governing Law. This Agreement shall be governed by the laws
of the State of Texas and deemed performable in Bexar County, Texas.
7.04 Binding Agreement. This Agreement shall be binding upon all
parties hereto and their respective heirs, legal representatives and successors.
EXECUTED effective the 15th day of December, 1998.
LIFEQUEST MEDICAL, INC.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-------------------------------------------
RICHARD A. WOODFIELD
-8-
<PAGE> 9
SCHEDULE 6.02
PROPRIETARY PROPERTY CLAIMED BY EMPLOYEE
Proprietary Property Claimed:*
-------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ---------------------------------------
* None, if left blank
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<PAGE> 1
EXHIBIT 10.34
LIFEQUEST MEDICAL, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
This Non-Qualified Stock Option Agreement (the "Agreement") dated
effective December 15, 1998, is entered into between LifeQuest Medical, Inc., a
Delaware corporation (the "Company"), and Richard A. Woodfield ("Optionee").
Recitals
A. The Company and Optionee are parties to a Non-Qualified Stock Option
Agreement dated May 11, 1998 (the "Previous Option Agreement"). The Company and
Optionee desire to terminate the Previous Option Agreement and replace it with
this Agreement.
B. On the date hereof, Optionee and the Company have entered into an
Amended Employment Agreement (the "Amended Employment Agreement") whereby
Optionee has agreed to become an employee of the Company, and the Company
desires to encourage Optionee to enter into the Amended Employment Agreement,
encourage the stock ownership of Optionee and create a proprietary interest of
Optionee in the Company.
C. The Company desires to grant to Optionee an option to purchase up to
350,000 shares of Common Stock, $.001 par value ("Common Stock"), of the
Company.
Agreements
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth in
this Agreement, the Company hereby grants to Optionee the option to purchase,
during the period commencing on the date of this Agreement and ending December
15, 2008, at an exercise price equal to $2.00 per share, up to, but not
exceeding in the aggregate, 350,000 shares of Common Stock, $.001 par value
("Common Stock"), of the Company (such option is hereinafter called the
"Option").
2. Non-Qualified Status. The Option is intended to be a non-qualified
stock option which does not satisfy the requirements of Section 422A of the
Internal Revenue Code of 1986, as amended. The Option is granted outside of and
therefore shall not be subject to the terms and provisions of the Company's 1989
Stock Option Plan, as amended and/or restated.
3. Vesting of Option. Subject to Paragraph 6, the Option evidenced
hereby may be exercised from time to time as to the following number of shares,
on a cumulative basis (as to options to purchase shares not previously
exercised):
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<PAGE> 2
87,500 shares on each of the following dates if, except as
otherwise provided in Paragraph 6, the Optionee is employed by
the Company on such date:
(a) May 11, 1999;
(b) May 11, 2000;
(c) May 11, 2001; and
(d) May 11, 2002.
4. Exercise of Option. The Option shall be exercised by Optionee's
delivery of written notice to the Company setting forth the number of shares
with respect to which the Option is to be exercised and the address to which the
certificates representing shares of Common Stock issuable upon the exercise of
the Option shall be mailed. In order to be effective, such written notice shall
be accompanied, at the time of its actual receipt by the Company, by payment of
the option price of such shares, which payment shall be made by check in an
amount equal to the option price of such shares. As promptly as practicable
after the receipt by the Company of (a) such written notice from Optionee
setting forth the number of shares with respect to which the Option is to be
exercised and (b) payment of the option price of such shares in the form
required by the foregoing provisions, the Company shall deliver to Optionee
certificates representing the number of shares with respect to which the Option
has been so exercised, such certificates to be registered in the name of
Optionee. Delivery of such certificates shall be considered to have been made
when such certificates shall have been mailed, postage prepaid, to Optionee at
the address specified for such purpose in such written notice from Optionee to
the Company.
5. Transferability of Option. The Option shall not be transferable by
Optionee except through his last will and testament or under the laws of descent
and distribution, and shall be exercisable, during his lifetime, only by him.
Any assignment or transfer of the Option except through his last will and
testament or under the laws of descent and distribution, whether voluntarily or
involuntarily, by operation of law or otherwise, shall not vest in the assignee
or transferee any interest or rights whatsoever, but immediately upon such
assignment or transfer the Option shall terminate and become of no further
effect.
6. Termination of Employment or Death of Optionee. The Option granted
to Optionee shall terminate on the earlier of the date of the expiration of the
Option or upon severance of the employment relationship between the Company and
Optionee for any reason, for or without cause, other than the termination of the
Employment Agreement by the Company without Cause (as defined in the Employment
Agreement) pursuant to Section 5.04 of the Employment Agreement. If the Company
terminates the Employment Agreement without Cause pursuant to Section 5.04
thereof, notwithstanding the provisions of Paragraph 3 hereinabove, Optionee
shall immediately have the right, at any time prior to its expiration, to
exercise his Option as to any and all of the 250,000 shares for which Optionee
has not previously exercised his Option. If Optionee shall die while in the
employ of the Company and before the date of expiration of his Option, his
Option shall terminate on the earlier of the date of expiration or one year
following the date of death. After the death of Optionee, his executor,
administrator or any person or persons to whom his Option may be transferred by
will
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<PAGE> 3
or by the laws of descent and distribution, shall have the right, at any time
prior to its termination, to exercise his Option to the extent Optionee could
have exercised it at the time of his death.
7. No Rights as Stockholder. Optionee shall not have rights as a
stockholder with respect to shares covered by the Option until the date of
issuance of a stock certificate for such shares; and, except as otherwise
provided in Paragraph 8 hereof, no adjustment for dividends or otherwise shall
be made if the record date therefor is prior to the date of issuance of such
certificate.
8. Changes in the Company's Capital Structure. The existence of the
Option shall not affect in any way the right or power of the Company to make or
authorize any or all adjustments, recapitalization, reorganizations or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company, or any issuance of bonds, debentures, preferred or
prior preference stock ahead or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of Common Stock outstanding, without
receiving compensation therefor in money, services or property, then (a) the
number, class and per share price of shares of stock subject to the Option
hereunder shall be appropriately adjusted in such a manner as to entitle
Optionee to receive upon exercise of the Option, for the same aggregate cash
consideration, the same total number and class of shares as he would have
received had he exercised the Option in full immediately prior to the event
requiring the adjustment; and (b) the number and class of shares then reserved
for issuance under this Agreement shall be adjusted by substituting for the
total number and class of shares of Common Stock then reserved that number and
class of shares of stock that would have been received by the owner of an equal
number of outstanding shares of each class of Common Stock as the result of the
event requiring the adjustment.
Except as provided herein, if the Company is merged or consolidated
with another corporation or if the Company is liquidated or sells or otherwise
disposes of substantially all its assets while the Option remains unexercised
under this Agreement, (x) subject to the provisions of clause (z) below, after
the effective date of such merger, consolidation, liquidation, sale or other
disposition, as the case may be, Optionee shall be entitled, upon exercise of
the Option, to receive, in lieu of shares of Common Stock, the number and class
or classes of shares of such stock or other securities or property to which
Optionee would have been entitled if, immediately prior to such merger,
consolidation, liquidation, sale or other disposition, Optionee had been the
holder of record of a number of shares of Common Stock equal to the number of
shares as to which the Option shall be so exercised; (y) the limitations set
forth in Paragraph 3 hereof may be waived by the Company, in its sole
discretion, so that the Option, from and after a date prior to the effective
date of such merger, consolidation, liquidation, sale or other disposition, as
the case may be, shall be exercisable in full; and (z) the Option may be
canceled by the Company as of the effective date of any such merger,
consolidation, liquidation, sale or other disposition, provided that (i) notice
of such cancellation shall be given to Optionee and (ii) Optionee shall have the
right to exercise the Option in full (without
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<PAGE> 4
regard to any limitations set forth in Paragraph 3 hereof) during a period set
by the Company preceding the effective date of such merger, consolidation,
liquidation, sale or other disposition and, provided further, that in the event
the Option may not be exercised in full under applicable securities laws without
registration of the shares of Common Stock issuable on exercise of the Option,
the Company may limit the exercise of the Option to such number of shares of
Common Stock, if any, as may be issued without such registration, the method of
choosing the number of shares of Common Stock for which the Option may be
exercised to be solely within the discretion of the Company.
Except as hereinbefore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number, class or price of shares of Common Stock
then subject to the Option.
9. Requirements of Law. The Company shall not be required to sell or
issue any shares under the Option if the issuance of such shares shall
constitute or result in a violation by Optionee or the Company of any provision
of any law, statute or regulation of any governmental authority. Specifically,
in connection with any applicable statute or regulation relating to the
registration of securities, upon exercise of the Option, the Company shall not
be required to issue such shares unless the Company has received evidence
satisfactory to it to the effect that Optionee will not transfer such shares
except in accordance with applicable law, including receipt of an opinion of
counsel satisfactory to the Company to the effect that any proposed transfer
complies with applicable law. The Company may, but shall in no event be
obligated to, register any shares covered hereby pursuant to applicable
securities laws of any county or political subdivision thereof. In the event the
shares issuable on exercise of the Option are not so registered, the Company may
imprint on the certificate evidencing such shares any legend that counsel for
the Company considers necessary or advisable to comply with applicable law. The
Company shall not be obligated to take any other affirmative action in order to
cause the exercise of the Option or the issuance of shares pursuant to the
Option to comply with any law or regulation of any governmental authority.
10. Notices. Every notice or other communication relating to this
Agreement shall be in writing, and shall be mailed to or delivered to the party
for whom it is intended at such address as may from time to time be designated
by such party in a notice mailed or delivered to the other party as herein
provided, provided that, unless and until some other address be so designated,
all notices or communications by Optionee to the Company shall be mailed or
delivered to the Company at:
LifeQuest Medical, Inc.
12961 Park Central, Suite 1300
San Antonio, Texas 78216
Attention: Chief Financial Officer
and all notices or communications by the Company to Optionee may be given to
Optionee personally or may be mailed to him at:
-4-
<PAGE> 5
Richard A. Woodfield
604 Mountain View Drive
Wayne, Pennsylvania 19087
11. Previous Option Agreement. The Previous Option Agreement and the
options granted therein are terminated in all respects, and this Agreement
supersedes all other agreements, whether oral or in writing, between the Company
and Optionee with respect to the subject matter hereof.
This Agreement is effective as of the date first written above.
COMPANY
LIFEQUEST MEDICAL, INC.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-------------------------------------------
RICHARD A. WOODFIELD
-5-
<PAGE> 1
EXHIBIT 11
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
(Formerly LifeQuest Medical, Inc.)
COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE:
Net loss $(2,997,127) $(1,928,890)
Preferred stock dividends -- (45,548)
----------- -----------
Net loss applicable to common stockholders $(2,997,127) $(1,974,438)
=========== ===========
WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING USED FOR COMPUTATION 6,299,592 6,989,951
=========== ===========
BASIC LOSS PER SHARE OF COMMON STOCK $ (.48) $ (.28)
=========== ===========
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss $(2,997,127) $(1,928,890)
Preferred stock dividends -- (45,548)
Interest on convertible debentures 9,616 270,000
----------- -----------
Net loss used for computation $(2,987,511) $(1,704,438)
=========== ===========
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING 6,299,592 6,989,951
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING
UPON ASSUMED CONVERSION OF OPTIONS AND OTHER
DILUTIVE SECURITIES
455,862 112,592
WEIGHTED AVERAGE INCREMENTAL SHARES OUTSTANDING
UPON ASSUMED CONVERSION OF CONVERTIBLE
DEBENTURES AND PREFERRED STOCK
26,712 1,943,795
----------- -----------
WEIGHTED AVERAGE SHARES OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING USED FOR
COMPUTATION
6,782,166 9,046,338
=========== ===========
DILUTED LOSS PER COMMON SHARE AND COMMON SHARE
EQUIVALENTS (a) $ (.44) $ (.19)
=========== ===========
</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 Statements on Form S-3 (File Nos. 333-21361, 333-49639 and
333-58849) and the Company's previously filed Registration Statement on Form S-8
(File No. 333-60629).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION OF DEXTERITY SURGICAL INC.,
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31,1998, AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,644,535
<SECURITIES> 983,714
<RECEIVABLES> 3,006,738
<ALLOWANCES> 219,829
<INVENTORY> 1,482,899
<CURRENT-ASSETS> 7,004,391
<PP&E> 1,604,043
<DEPRECIATION> 1,051,117
<TOTAL-ASSETS> 12,269,686
<CURRENT-LIABILITIES> 3,394,947
<BONDS> 3,000,000
0
2
<COMMON> 7,213
<OTHER-SE> 5,760,980
<TOTAL-LIABILITY-AND-EQUITY> 12,269,686
<SALES> 18,492,041
<TOTAL-REVENUES> 18,492,041
<CGS> 10,313,931
<TOTAL-COSTS> 10,313,931
<OTHER-EXPENSES> 404,881
<LOSS-PROVISION> 92,462
<INTEREST-EXPENSE> 330,620
<INCOME-PRETAX> (1,928,890)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,928,890)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,928,890)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
